UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ---------- to ---------
Commission File Number 0-17739
RAMTRON INTERNATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 84-0962308
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1850 Ramtron Drive, Colorado Springs, Colorado 80921
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (719) 481-7000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
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Common Stock ($.01 par value) Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes / X / No / /
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. / X /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes / / No / X /
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 25, 2003 was $40,950,630 based on the closing price of
the Company's common stock as reported on The Nasdaq Stock Market.
As of March 25, 2003, 22,135,476 shares of the Registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 2003 Annual Meeting of
Shareholders are incorporated by reference into Part III.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . 23
Item 3. Legal Proceeding . . . . . . . . . . . . . . . . . . . . 23
Item 4. Submission of Matters to a Vote of Security Holders . . 25
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . 25
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 27
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk . . . . . . . . . . . . . . . . . . . . . . 45
Item 8. Financial Statements and Supplementary Data . . . . . . 46
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . 47
PART III
Item 10. Directors and Executive Officers of the Registrant . . 47
Item 11. Executive Compensation . . . . . . . . . . . . . . . . 47
Item 12. Security Ownership of Principal Stockholders
and Management . . . . . . . . . . . . . . . . . . . . 48
Item 13. Certain Relationships and Related Management . . . . . 48
Item 14. Controls and Procedures . . . . . . . . . . . . . . . . 48
PART IV
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . 48
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PART I
Item 1. BUSINESS
COMPANY OVERVIEW
Ramtron International Corporation ("Ramtron" or the "Company") is a fabless
semiconductor company focused on creating widespread use of its proprietary
memory technologies through both direct product sales and licensing
activities with the world's leading semiconductor manufacturers. The Company
was incorporated in Delaware under the name of Amtec Securities Corporation
in January 1984. Its name was changed to Ramtron International Corporation
in January 1988.
Our headquarters facility is located at 1850 Ramtron Drive, Colorado Springs,
Colorado 80921, and our website is www.ramtron.com. Our common stock trades
on the Nasdaq National Market under the symbol "RMTR".
Ramtron designs, develops, and markets two types of specialty semiconductor
memory products; non-volatile ferroelectric random access memory ("FRAM")
devices and high-performance enhanced dynamic random access
memories("Enhanced-DRAM"). Ramtron's FRAM products are developed and
marketed by Ramtron International Corporation, while the Company's Enhanced-
DRAM products are developed and marketed through its 80% owned subsidiary,
Enhanced Memory Systems, Inc.("EMS"), and Ramtron's wholly owned subsidiary,
Mushkin Inc.("Mushkin").
Ramtron's FRAM technology integrates ferroelectric materials with standard
semiconductor chip design and manufacturing technology to provide nonvolatile
memory products with unique performance characteristics at a competitive
cost. FRAM devices are used in and in connection with such products as
utility meters, set-top boxes, RAID disk controllers, security systems, home
and office electronics, and automotive and industrial controls and
instrumentation.
The high-performance Enhanced-DRAM products the Company's EMS subsidiary has
been developing in cooperation with Cypress Semiconductor Corporation (or,
Cypress) and Hewlett Packard Corporation (or, Hewlett Packard) address the
access and retrieval speed limitations of conventional DRAMs and the low
density, high costs and high power requirements associated with high-speed
static random access memory, known as SRAM. The system performance of the
Company's Enhanced-DRAM products approach the speed of a complete SRAM memory
system but with significant cost reductions and increased density. Enhanced-
DRAM memory devices are used in and in connection with such products as
communication switches, workstations, high performance servers, radar systems
and 3-D Graphics applications.
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Mushkin markets and sells high-performance DRAM memory modules through
e-commerce and direct sales channels. Mushkin's products are built using
components secured through many of the world's leading DRAM suppliers.
Mushkin products are primarily used in OEM and end-user personal computer
systems.
The Company has a business model that derives revenue from three sources: 1)
product sales, 2) funded research and development programs and 3) licensing
and royalty revenue related to its intellectual property. The Company
focuses product sales efforts on unique, high performance applications.
Customer funded research and development program fees are generated through
new product development programs and ferroelectric technology support
programs with major semiconductor manufacturers. Fees and royalties are
derived from the licensing of the Company's intellectual property to large
semiconductor manufacturers. The Company has formed several strategic
relationships to develop and manufacture its memory products. FRAM strategic
licensees include Fujitsu, Rohm, Toshiba, Hitachi, Samsung, Infineon
Technologies, NEC and Texas Instruments. Enhanced-DRAM licensees and/or
partners now include Infineon Technologies, Cypress Semiconductor, Hewlett
Packard and NEC.
During 2002, 2001 and 2000 the Company entered into several significant
business relationships. In July 2000, the Company's FRAM business unit
entered into a 5 year volume purchase agreement with Ampy Automation Digilog,
Ltd. for the primary purpose of supplying approximately 27 million FRAM
devices into a utility meter product Ampy designed and developed for ENEL
Distribuzione SpA, a leading Italian utility company. Initial deliveries
into this program began in 2001 and are expected to continue through at least
the end of 2004. Ramtron expects to also supply FRAM products to Ampy for
use in other meters it builds. The agreement includes pricing provisions,
purchase order placement, reschedule and order cancellation provisions.
There are no order quantity or schedule guarantees.
In 2001, Texas Instruments and NEC entered into technology license agreements
with the Company's FRAM business unit. Subject to the specific terms of each
agreement, such agreements may include a license to use the Company's FRAM
technology, royalties, development assistance and/or manufacturing capacity
upon the commercialization by the licensee. Ramtron has been providing
technology development assistance to Texas Instruments since July 2001.
The Company's EMS business unit entered into customer funded research and
development programs with Cypress Semiconductor and Hewlett Packard in 2000,
to design, develop, have manufactured and sell new products for the
telecommunications and network/server markets. The agreement with
Cypress also calls for royalties payable to EMS upon any sales of covered
products to Cypress' customers. Additionally, EMS has rights to sell the
specified products to customers other than Cypress and Hewlett Packard.
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In 2001, Infineon Technologies AG acquired approximately 20% of the Company's
outstanding common stock by entering into a share purchase agreement with the
Company pursuant to which Infineon agreed to invest approximately $30 million
in the Company, $10 million in cash and $20 million in Infineon common stock
(443,488 shares), in exchange for 4,430,005 shares of the Company's common
stock The companies also entered into a separate cross-license agreement
that provides Infineon with a nonexclusive license to the Company's FRAM
memory technology, and the Company with access to certain Infineon
technologies relating to fabrication of FRAM memories. In January 2000,
Infineon entered into a stock purchase agreement with EMS pursuant to which
Infineon acquired a 20% interest in EMS in consideration for up to
$200 million per year of committed wafer manufacturing capacity using
Infineon's advanced DRAM and embedded DRAM process capabilities and access to
Infineon's design technologies. The agreement, as amended in 2002, has a
term of ten years. The agreement does not provide Infineon with rights to
EMS' technology.
In 2002, Infineon increased its investment in the Company through the
purchase of a $3 million, convertible debenture that gives Infineon the right
to acquire an additional 1,058,630 shares of the Company's common stock by
exercising the conversion features of the debenture and related common stock
warrants issued to Infineon in connection with its purchase of the debenture.
See Note 13 of the Notes to Consolidated Financial Statements for certain
financial information concerning each of the Company's operating segments and
for certain geographic financial information concerning the business of the
Company.
Discussion of certain matters contained in this Annual Report on Form 10-K
may constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"), and, as such,
may involve risks and uncertainties. These may be identified by the use of
forward-looking words or phrases such as "believe," "expect," "intend,"
"anticipate," "should," "planned," "estimated," and "potential," among
others. These forward-looking statements relate to, among other things,
expectations of the business environment in which Ramtron operates,
projections of future performance and perceived opportunities in the market.
The Company's actual results, performance and achievements may differ
materially from the results, performance and achievements expressed or
implied in such forward-looking statements. For a discussion of some of the
factors that might cause such a difference, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Expected Future Results of Operations." From time to time, the Company
details other risks with respect to its business and financial results and
conditions in its filings with the Securities and Exchange Commission.
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PRODUCTS
BACKGROUND
To date, the memory market has been divided between two classes of memory
products, volatile and nonvolatile. Nonvolatile memory refers to the ability
of an integrated circuit memory device to retain data without power, while
volatile memory loses its data in the absence of power. There are multiple
variations of products within each class because systems designers have been
forced to make various tradeoffs and compromises in their designs due to the
limitations of each.
Nonvolatile Memory. Flash memory, Electrically Erasable Programmable Read
Only Memory, or EEPROM, and Erasable Programmable Read Only Memory, or EPROM,
are the most common nonvolatile memory technologies. These read-only memory,
or ROM, devices allow limited numbers of write-cycles before wearing
out because of the high stress condition caused by write-cycles. The devices
also use a high amount of power and have write times that are much longer
than standard random access memory, or RAM, technologies. Another
nonvolatile memory device is a battery-backed SRAM, or BBSRAM. Limitations
of BBSRAMs include size and shape, cost and battery reliability. Important
limitations of current nonvolatile memory technologies include slow write
speed, limited write endurance, high power consumption, and in the case of
BBSRAM, battery reliability.
Volatile memory. DRAM and SRAM are the two fundamental integrated circuit
product categories in the volatile memory market. A microprocessor uses
random access memory to hold temporary instructions and data needed to
complete tasks. This enables a system's microprocessor to access
instructions and data stored in memory quickly. Applications for DRAM and
SRAM include personal computers, communication switches, workstations,
servers, 3-D Graphics applications and radar systems.
DRAMs are the most widely used memory device in computing applications today
because of their low cost per bit and unlimited random access read/write
capability. However, continuing significant improvements in microprocessor
speeds and increasing system complexity have created performance bottlenecks
at the system level due to two key limitations of today's DRAM technology,
slow access speeds, or latency, and limited ability for sustained data
output, or bandwidth.
SRAM performs memory functions similar to DRAM, but is much faster and does
not require the memory storage cells to be continuously re-charged. However,
the large memory cell size of the SRAM makes it significantly more expensive
and less power efficient than DRAM. Important limitations of SRAM are high
cost per memory bit and low chip density.
Most high-performance systems need combinations of small amounts of SRAM to
cache data transfers and high-speed DRAM architectures to fill the cache
quickly. Even with these techniques, the larger size of today's operating
systems and applications, and the frequent context changes required by
multitasking, create bottlenecks from limited DRAM access and retrieval
speed.
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FRAM PRODUCTS (Nonvolatile)
Ramtron was the first company to introduce ferroelectric technology in
commercial memory products, beginning with a 4-kilobit parallel interface
product in late 1992. Since demonstrating this product, the Company has
attracted a number of licensees, and has broadened its product line and
established a merchant market presence. Today, the Company offers a line of
serial and parallel interface FRAM memories that have distinct advantages
over EEPROM and BBSRAM equivalents. These products are manufactured at
Fujitsu using the Company's proprietary FRAM technology. The Company also
licenses its technology to several large semiconductor manufacturers. During
2002, 2001 and 2000, the Company sold $22.2 million, $4.5 million, and
$4.0 million, respectively, of FRAM products.
A FRAM memory cell is built using a standard CMOS process with an additional
layer of ferroelectric material, in crystal form, between two electrode
plates to form a capacitor. This capacitor construction is very similar to
that of a DRAM capacitor. Rather than storing data as charge on a capacitor
like volatile memory products, a ferroelectric memory stores data within a
crystalline structure. These crystals maintain two stable states - a '1' and
a '0'. Due to its basic RAM design, the circuit reads and writes simply and
easily. However, unlike volatile memories, the data state is stable with or
without power. The ferroelectric mechanism is completely different than the
floating gate technology used by other nonvolatile memories. FRAM memory
products do not require a periodic refresh and when power is removed or
fails, the FRAM memory retains its data. Regardless of the electrical
interface, a FRAM device is structurally designed to operate in a manner very
similar to a volatile memory product. Thus it has similar performance to a
volatile memory product for both read and write operations.
Ramtron's FRAM technology provides nonvolatile memory products with unique
performance characteristics and properties. Ramtron's FRAM devices combine
data non-volatility with the benefits of random access memory (RAM) devices
including a high number of read and write cycles, high speed for both read
and write functions and low power consumption.
In order to accelerate market acceptance, Ramtron developed FRAM serial
products based on industry standard EEPROM circuits. These products are
offered in 4-kilobit, 16-kilobit, 64-kilobit and 256-kilobit densities with
selected industry standard interfaces and industry-standard package types.
These products compete with EEPROM serial memories with identical pin
configurations. As a result of FRAM feature advantages, the Company's
products are currently able to command a price premium versus EEPROM
products in selected applications.
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In addition to serial memories, the Company offers a line of low density
parallel interface products. In order to accelerate market acceptance, these
product designs are based on industry standard SRAM circuits. The primary
market these products serve is replacement in multi-device battery-backed
SRAM applications, or BBSRAM. SRAMs are fundamentally a volatile device and
do not retain data in the absence of power. A backup battery is commonly
used to retain the stored data. FRAM parallel products offer a comparable
feature set and data retention without the requirement of a battery. Current
products include 64-kilobit and 256-kilobit products in industry standard
package types.
The Company has recently introduced two 256-kilobit density problem solver
memories. Problem solver memories integrate a FRAM memory core
with appropriate logic and other functionality on a single chip to solve a
variety of system level design requirements. FRAM problem solvers can be
designed to address generic system requirements such as basic data collection
with a time stamp, or designed for highly system-specific functions such as a
system-on-a-chip with all functions but the central processing unit. The
enhanced integration that FRAM problem solvers provide greatly simplifies
system development and reduces the complexity of debugging embedded
processors.
These products and products the Company expects to introduce in the future
will include functions that are commonly combined with nonvolatile memory at
the system level, and functions that can be improved by integration with FRAM
technology.
The Company expects to develop new serial, parallel and problem solver FRAM
memory products in densities ranging from 4-kilobit to 1-megabit during 2003.
The Company anticipates increases in its available manufacturing capacity
from its foundry partners. The manufacturing and commercialization of FRAM
technology associated with each of the Company's foundry partners depends
primarily upon each individual foundry's process and product development
activities, the timing and results of which are uncertain. The Company
intends to continue developing new products as it is able to determine the
available manufacturing processes of each of its foundry partners.
The manufacturing costs of FRAM products are presently higher than competing
EEPROM and BBSRAM products. The Company and its foundry partners are working
to reduce such manufacturing costs and, because of FRAM compatibility with
CMOS semiconductor manufacturing and the mask design of FRAM chips, the
Company believes that FRAM products are capable of being mass produced on a
cost-effective basis. During 2001, the Company completed the first step in
this process through the successful development and manufacture of a
one-transistor, one-capacitor, or 1T/1C, 256-kilobit product. Until late in
2001, FRAM products were built using 2-transistor, 2-capacitor, or 2T/2C,
cell structures. The effect of moving to 1T/1C products is to reduce the
size of the memory cell by roughly 50%, increasing the total number of
available die per wafer and lowering overall manufacturing cost.
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FRAM Strategy
The Company's goal is to be the leading worldwide supplier of FRAM
devices in specialized, high performance applications and in licensing
technologies for memory products. The Company's strategy includes the
following key elements:
Further penetrate specialized, high-performance markets. The markets in
which the Company competes are large and extremely competitive. For FRAM
technology to be successful, it must first prove its benefits and
capabilities to customers. The Company's market strategy is similar to the
strategies proven to be successful in other non-volatile memory markets,
which is to target specialized applications, gain overall market acceptance,
and introduce additional products into larger, main memory markets. The
Company's FRAM technology currently competes with EEPROM and BBSRAM
technologies. The Company believes the unlimited write cycles of its 3-volt
technology, fast write speeds and low power performance of the FRAM
technology make its products superior in performance to EEPROM technology and
will gain market share accordingly, allowing access to new opportunities and
applications. FRAM technology also provides significantly reduced printed
circuit board space requirements as compared to BBSRAM products and increased
data retention reliability because there is no reliance on a back-up battery.
The initial markets that the Company will target include the data collection
and metering market, low power and wireless communications market and the
automotive and telematics market. Telematics is an emerging market of
automotive communications technology that uses wireless communications to
provide security, information, productivity and in-vehicle entertainment
services.
Extend FRAM technology into new applications. FRAM technology has product
applications beyond stand-alone memory devices. For example, smart cards,
micro-controllers, programmable logic devices and radio frequency
identification applications often include embedded ROM and/or RAM memories in
the device. FRAM memory performance compared to alternative memory solutions
offers distinct advantages in such applications. To exploit these product
opportunities without diverting focus from the development of FRAM products,
the Company has licensed its ferroelectric technology to, and entered into
development agreements with, other companies. The Company may elect to
pursue selected business opportunities in these areas when appropriate market
conditions and suitable partners are identified. In addition, within the
Company's capital and financing constraints, the Company continues research
and development of ferroelectric material compositions with the aim of
further enhancing the performance advantages and cost position of FRAM
memories relative to alternative memory solutions (e.g., longer write
endurance, lower operational voltage and lower power consumption).
Expand sales and marketing efforts. The Company intends to increase its
marketing efforts with a plan to target OEM design and supply chain managers
by expanding its sales force with additional corporate and regional account
managers and field application engineers to provide increased sales support,
expanding its use of manufacturers' representatives and industrial
distributors to target international customers and increasing promotional
efforts to expand and heighten awareness and preference for FRAM products and
the Ramtron brand.
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Leverage Ramtron's new product development process. The Company believes its
product development expertise in the application of FRAM technology is a
unique competence. It is the Company's intention to invest to maintain this
advantage to the maximum extent it can do so within capital and financing
constraints. The Company believes its current product development process
enables it to bring FRAM based products to market faster than the competition
and minimize the cost of such product development. This expertise is
embodied in the Ramtron design methodology, which includes ferroelectric
circuit simulation, ferroelectric modeling for multiple foundry processes,
ferroelectric memory core libraries, and the institutional knowledge of such
memory design. Ramtron plans to continue investing in upgraded design
automation and product development activities that further improve
productivity and shorten time to market.
Select strategic partners. Ramtron's business objective is to maintain its
leadership role in FRAM technology and specialty products by working in
cooperation with the world's leading semiconductor manufacturers. Ramtron's
partnership strategy is allowing the Company to commercialize its products
and technologies more rapidly than if it were to rely solely on its own
resources. Ramtron maintains a preference for partners that serve a
strategic interest by providing complementary technology, production
capacity, or market access. Ramtron has license and/or development
agreements with Fujitsu, Rohm, Toshiba, Infineon, Hitachi, Samsung,
NEC and Texas Instruments. Subject to the specific terms of each agreement,
such agreements may include a license to the Company's FRAM technology,
royalties, development assistance and/or a call on manufacturing capacity.
Promote Ramtron's intellectual property as an industry standard. Ramtron's
strategy is to broadly license its intellectual property and to work with
industry leading semiconductor and electronics companies to expand the
infrastructure to support its FRAM technology. The Company intends to
capitalize on this infrastructure to establish its FRAM technology as an
industry standard. The Company generates revenue through technology
licenses, royalty payments and service fees from these relationships.
Continue to invest in research and development to maintain technology
leadership. The Company will continue to devote much of its research and
development efforts towards increasing the densities and features of its
serial, parallel and problem solver FRAM products to target new markets such
as the markets for automotive data collection systems, low power hand-held
electronic devices, wireless applications, such as blue-tooth and other
information appliances. During 2002, Ramtron continued to expand its product
line, adding three new products.
Improve the Company's technological and engineering expertise. Ramtron is
focused on using its technological and engineering expertise to develop
proprietary technologies to efficiently produce high quality, technologically
advanced products that meet the complex and diverse needs of its customer
base. Through this expertise the Company has developed patented proprietary
technologies. The Company intends to continue to leverage and expand its
technological and engineering expertise to develop new proprietary
technologies and to further expand its product offerings.
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Continue to patent new technologies. Recognizing the important role
intellectual property plays in the semiconductor industry, the Company's FRAM
product architectures are protected by worldwide intellectual property
rights. Ramtron has 132 FRAM patents issued worldwide, which include
103 U.S. patents and 29 foreign patents. Currently, 42 FRAM patents are
pending, including 22 U.S. patents and 20 foreign patents.
ENHANCED-DRAM PRODUCTS (Volatile)
The Company's 80% owned subsidiary, Enhanced Memory Systems, Inc., designs,
markets and sells high performance DRAM based products. Currently, these
products are manufactured for the Company by Infineon Technologies AG, 20%
owner of EMS, using conventional DRAM manufacturing lines. EMS has developed
a family of proprietary Enhanced-DRAM ("EDRAM", registered trademark) and
Enhanced SRAM ("ESRAM") products that capitalize on unique architectural and
design features to provide what the Company believes are the highest
performance DRAM products available. EMS began selling EDRAMs in commercial
volumes in the first quarter of 1993. During 2002, 2001 and 2000, the
Company sold $1.8 million, $1.2 million and $7.6 million, respectively, of
EMS products.
The Company's EDRAM and ESRAM components use the same packaging as
standard DRAMs. The Company also has a family of EDRAM single in-line memory
modules, "SIMM", and dual in-line memory modules, "DIMM", that use the same
form factor and connectors as standard DRAM SIMM and DIMM modules.
This allows system developers to design higher performance systems using the
same packaging and control logic technique as slower DRAMs and to design
systems which can use either memory type to provide two performance options.
Because of their low cost per bit and unlimited random access read/write
capability, DRAMs are the most widely used memory device in computing
applications. However, DRAMs operate at relatively slow speeds. Those
applications that require high speed have typically used static random access
memories ("SRAMs") to improve memory access and retrieval speed. The large
memory cell size of the SRAM makes it significantly more expensive than the
DRAM.
To alleviate the problems with DRAMs and SRAMs, alternate DRAM architectures
have been developed that interleave several memory banks. These products are
called synchronous DRAM ("SDRAM"), fast cycle DRAM ("FCRAM"), reduced latency
DRAM ("RLDRAM") and Rambus DRAM ("RDRAM"). Other DRAMs, such as extended
data output ("EDO") and burst EDO, use pipelining of data. These alternate
DRAMs do not improve the basic access or retrieval speed of the DRAM but
instead only improve peak bandwidth. Most high-performance systems require
combinations of small amounts of SRAM to "cache" data transfers and high
bandwidth DRAM architectures to fill the cache quickly. Even with these
techniques, the larger size of today's software operating systems and
applications and the frequent context changes required by multitasking create
a bottleneck limited by the DRAM access and retrieval speed.
Page-12
Drawing upon the best features of DRAM and SRAM, the Company uses, its
patented, direct mapped registers to combine very fast DRAM cores and SRAM
architectures on the same chip. Testing of Enhanced DRAM-based systems by
EMS's customers has shown system performance improvements up to 2.0 times
over similar systems with DRAM or DRAM plus SRAM cache. The Company's
patented, integrated solutions have the following benefits:
Reduced Latency. Ability to get data from memory to processor faster.
Sustained Bandwidth. Ability to deliver memory data continuously to the
processor faster.
Lower Cost. For SRAM applications EMS's products provide significantly lower
cost due to the use of DRAM cell structures.
Increased Density. EMS provides ESRAM products with 2x the density of SRAM
offerings.
Lower Power. EMS's products use less power than comparable SRAM solutions,
resulting in a lower operating cost and less heat generation.
To address the access and retrieval speed limitations of DRAMs and the high
costs associated with high-speed SRAMs, the Company developed a group of
4-megabit EDRAM and 72-megabit ESRAM products.
The Company's wholly owned subsidiary, Mushkin Inc. markets and sells high-
performance DRAM memory products. Mushkin is a supplier of high-performance
DRAM memory modules built using components secured through many of the
world's leading DRAM suppliers, such as Samsung and Infineon. Mushkin sells
its modules through direct and retail channels to personal computer system
OEMs and end users of personal computer systems. During 2002, 2001 and 2000,
the Company sold $16.3 million, $11.5 million and $6.7 million, respectively,
of Mushkin products.
Enhanced-DRAM Strategy
Target replacement of SRAM. The Enhanced-DRAM product strategy has been to
provide SRAM performance with DRAM density in products at significantly
lower pricing than SRAMs. Because of the Company's historical success in
penetrating conventional SRAM markets, the ESRAM product line is being
developed with products defined through cooperative agreements with Cypress
Semiconductor and Hewlett Packard.
Target replacement of DRAM. A secondary strategy is to provide a significant
performance upgrade option for industry standard DRAMs in the same memory
module socket. This strategy targets the high-performance segments
(communications, RAID disk control and embedded processing systems)
of the main memory marketplace. EMS strives to serve the highest performance
segments of these markets while maintaining higher margins than commodity
DRAMs. This strategy allows the business to achieve the production volumes
necessary to operate an efficient DRAM business while maximizing profit
margins in served markets.
Page-13
Provide leading edge PC memory solutions. Mushkin's product line targets
high performance needs in the commodity, main memory market. While the
majority of the main memory market is satisfied with current standard memory
performance, a growing segment of the market desires more from their memory
solution. These more aggressive users include both OEMs and end users. The
Company's participation in these markets is primarily through its Mushkin
subsidiary, whose memory module component suppliers include many of the
leading DRAM manufacturers. The Mushkin products are positioned to provide
sizable performance advantages over standard solutions at slightly increased
cost and are sold through a combination of direct, retail and e-commerce
sales.
Leverage intellectual property and technology. EMS continues to utilize its
proprietary intellectual property and technology available through its
agreement with Infineon to develop, market, and sell high performance ESRAM
products. The Company's ESRAM products are currently being developed
through product development partnerships with Cypress Semiconductor and
Hewlett Packard. Enhanced-DRAM products may also be developed through
advantageous partnerships.
Retain quality manufacturing capabilities. EMS produces its products through
its strategic alliance and foundry arrangement with Infineon as its sole
foundry. This approach avoids the high capital costs associated with DRAM
manufacturing that would have otherwise been incurred if the Company had
chosen to manufacture these products with Company-provided resources.
Leverage Infineon's DRAM process technology. EMS plans to leverage its
access to Infineon's state of the art process technology through customer
funded product design programs with Infineon. By designing products for
Infineon on their new process technologies EMS will acquire critical
knowledge of the DRAM design requirements needed to support the design and
manufacture of future EMS products.
Continue to patent new technologies. Recognizing the important role
intellectual property plays in the semiconductor industry, EMS product
architectures are protected by worldwide intellectual property rights. The
Company has 50 EMS patents issued worldwide, including 41 U.S. patents and 9
foreign patents. Currently, 13 EMS patents are pending, including 9 U.S.
patents and 4 foreign patents.
CUSTOMERS, SALES AND MARKETING
Current FRAM Markets and Customers. The current market for FRAM products
most resembles the markets for EEPROM and BBSRAM products. Ramtron sells
products into the metering and data collection sector in applications such as
utility meters, office equipment applications such as laser printers and
copiers, set-top boxes and RAID controllers; the automotive sector in
applications such as instrument clusters, airbag controllers, restraint
systems and telematic and entertainment systems; and the low power sector in
applications such as cordless telephone handsets and global positioning
Page-14
system receivers. Significant customers for the Company's products include
ENEL Distribuzione SpA, a leading Italian utility company, Siemens VDO, Ampy
Automaton, Ademco, Ricoh, Xerox, Canon, Mastsushita, Static Controls,
Actaris-Schlumberger and Holley Group. Customers of our products or license
and development partners that represented greater than 10% of total revenue
in 2002 included ENEL Distribuzione SpA and Texas Instruments. Ramtron
expects to make improvements in reducing FRAM product manufacturing costs and
expand its manufacturing capacity with strategic partners to further
penetrate existing markets and to develop new markets, customers and
technology standards.
Current Enhanced-DRAM Markets and Customers. The Company's Enhanced-DRAM
technology has been demonstrated to provide a performance advantage and
a cost effective memory solution for a variety of the highest performance
system applications including accelerator boards, multiprocessor systems,
disk controllers, embedded computer modules, communication bridge/routers and
3-D graphic systems. Very limited quantities of these products will be
shipped in 2003 as the Company's 4-megabit products have reached end-of-life.
Significant customers include Bus-Tech and Blue Wave Systems. Also, EMS is
currently involved in new product development programs with Cypress
Semiconductor and Hewlett Packard for products known as Enhanced-SRAM. If
successfully completed, these product development programs will allow EMS to
generate product sales revenue increases during the second half of 2003. The
Company currently has engineering samples and pre-production quantities of
these products available. In addition to Cypress Semiconductor and Hewlett
Packard, EMS will also market these products to other customers who require
cost effective high performance memory solutions.
Mushkin Inc. markets and sells its high-performance DRAM memory products
through direct sales and e-commerce sales to personal computer system OEMs
and end users of personal computer systems. Significant customers include
Fry's Electronics, Kingston Technology, United Technology and Axiom
Technology. During 2002, approximately 31% of Mushkin sales were e-commerce
sales, while 69% were through direct and retail sales channels.
Export product sales as a percentage of total product sales were 47%, 29%,
and 26% for the years 2002, 2001 and 2000, respectively.
As is typical in the semiconductor industry, FRAM and EMS products can
require lengthy "design-in" cycles for customer applications and extensive
application engineering support. Ramtron's internal application experts
support customer design-in activities. Such support is an important element
of the Company's sales and marketing efforts.
Sales Channels. Ramtron markets memory products through manufacturers
representatives and industrial distributors who are supported by directly
employed sales managers with regional responsibility. Such marketing
activity is conducted in major markets around the world. Customers are
distributed regionally, in size, and in end-use industry. The Company
anticipates using existing channels for the future sales and distribution of
products.
Page-15
We maintain 21 full-time sales and marketing personnel in the United States
and an additional 5 employees in Japan, Hong Kong and Europe. Ramtron has
distribution and/or representation relationships with 35 companies world-
wide, with an emphasis in North America, Europe, Japan and Asia.
BACKLOG
The rate of booking new orders varies from month to month and depends on
scheduling practices of individual customers. Cyclical industry conditions
make it difficult for many customers to enter into long-term, fixed-price
contracts. Orders are typically entered into under the condition that the
terms may be adjusted to reflect market conditions at the delivery date. For
the foregoing reasons and because of the possibility of customer changes in
delivery schedules or cancellations of orders without significant penalty,
the Company does not believe that its backlog as of any particular date is
firm or that it is a reliable indicator of actual sales for any succeeding
period.
MANUFACTURING
Ramtron is a fabless semiconductor manufacturer. The Company's manufacturing
strategy is to develop and design new products internally and through co-
development alliances, for production by third-party manufacturers.
Ramtron's agreements with third-party manufacturers are intended to enable
the Company to avoid the large capital expenditures that otherwise would be
required to manufacture FRAM products and Enhanced-DRAM products in
commercial volumes. Under the fabless business strategy, Ramtron will
continue to be dependent on other manufacturers for the manufacture of FRAM
and Enhanced-DRAM products.
FRAM Manufacturing. Ramtron has entered into arrangements with Fujitsu,
Rohm, Toshiba, Hitachi, Infineon and Texas Instruments for the development
and/or manufacture of FRAM products. Ramtron has also entered into licensing
arrangements with Samsung and NEC for the Company's ferroelectric technology,
which do not include a manufacturing agreement. The Company completed its
transition to a fabless manufacturing strategy for FRAM products in 1999.
Commercial production of FRAM products at Ramtron's Colorado Springs facility
ceased at the end of the first quarter in 1999.
Currently, Fujitsu is the sole supplier of FRAM products to the Company. The
Company and Fujitsu entered into a contract manufacturing agreement, whereby
Fujitsu agreed to supply the Company's FRAM products through at least
October 31, 2005. Any changes in Fujitsu's ability to manufacture the
Company's FRAM products could have a material adverse effect on the Company's
business.
The Company has not yet negotiated foundry supply agreements with Hitachi,
Toshiba, Infineon or Texas Instruments, but such companies are contractually
bound to enter into such agreements upon fulfillment of certain conditions,
primarily, the achievement of commercial manufacturing capabilities. There
is no assurance, however, that the Company's alliance foundry partners will
achieve commercial manufacturing capability in a timeframe sufficient to meet
the Company's capacity requirements, or at all.
Page-16
Enhanced-DRAM Manufacturing. EMS is currently dependent upon Infineon for
supply of its Enhanced-DRAM products. EMS builds its Enhanced-DRAMs on
Infineon's standard, proven manufacturing lines to which no process changes
are required.
In January 2000, Infineon acquired 20% ownership in EMS, the Company's
formerly wholly owned subsidiary, which conducts the Company's Enhanced-DRAM
business, in consideration for up to $200 million per year of committed wafer
manufacturing capacity using Infineon's advanced DRAM and embedded DRAM
process capabilities and access to Infineon's design technologies. The
agreement, as amended, has a term of ten years. Infineon does not have any
rights to the Company's EDRAM or ESRAM technology, however, the agreement
provides EMS with access to the results of Infineon's integrated circuit
research and development efforts. As the sole supplier of EMS' Enhanced-DRAM
products, any change in Infineon's ability to manufacture EMS' products could
have a material adverse effect on the Company's business.
Additionally, EMS has a license arrangement with NEC Corporation for
Enhanced-DRAM technology, which does not include a manufacturing agreement.
Mushkin Inc. secures DRAM component parts from leading DRAM manufacturers and
subcontracts, to third parties in the U.S., its memory module assembly and
test operations.
Under the fabless business strategy the Company will continue to be dependent
on other manufacturers for the manufacture of FRAM and Enhanced-DRAM
products. The Company's business may be adversely affected by the
unavailability of an individual foundry partner's capacity from time to time.
The Company believes that the raw materials and services required for the
manufacture of its products at its manufacturing foundry partners are readily
available.
As is customary in the semiconductor industry, Ramtron and its third-party
manufacturers subcontract with foreign companies to assemble and test
finished products. Manufacturing services performed by such third parties
are conducted in accordance with processes designed by Ramtron or the
third-party manufacturers and are implemented under the supervision of
Ramtron's product engineers or such third-party manufacturers. Such
subcontracted functions offer significant economic benefits, however, they
also introduce substantial risks. The Company expects to receive lower
priority from such subcontractors than do larger firms as a result of the
Company's initial limited volume of production. In addition, the Company is
exposed to all of the risks associated with using foreign subcontractors.
The Company maintains an active effort to manage these subcontracted
operations and to minimize any associated risks.
RESEARCH AND DEVELOPMENT
Development of additional FRAM and Enhanced-DRAM technologies and products
and the associated design development and manufacturing processes will
require Ramtron to continue making significant additional investments in
research and development. Current research and development activities are
focused on expanding the Company's product offerings of both the FRAM and
Enhanced-DRAM business segments. In addition, the Company continues limited
investment in ferroelectric materials and process technology development.
Page-17
During 1999, Ramtron entered into a co-development agreement with Fujitsu to
pursue an advanced FRAM manufacturing process. The agreement called for
Ramtron and Fujitsu to develop a 0.35-micron FRAM manufacturing process in
the Company's Colorado Springs facility. Fujitsu provided development
program funding over a two-year period and several pieces of wafer
fabrication equipment to be used in the development program. This program
was successfully completed during the fourth quarter of 2000 and Fujitsu is
currently integrating this process technology into its manufacturing facility
in Iwate, Japan.
Ramtron entered into a FRAM technology license and development agreement with
Texas Instruments in August 2001. Under this agreement Ramtron receives
license and development fees for a license to the Company's ferroelectric
random access memory technology and technical development services. Ramtron
and Texas Instruments are working together to create, evaluate and
demonstrate low-voltage, nonvolatile embedded FRAM technology.
Approximately 47 of the Company's employees are engaged in research and
development. In addition, manufacturing personnel were involved in research
and development through efforts to increase the manufacturing yields of our
products. Total research and development expenditures were approximately
$12.1 million in 2002, $16.7 million in 2001 and $13.4 million in 2000,
including customer-sponsored research and development expenditures of
approximately $2.1 million in 2002, $2.4 million in 2001 and $5.4 million in
2000.
COMPETITION
The semiconductor memory industry is intensely competitive. Both the
Company's FRAM and Enhanced-DRAM products experience intense competition from
numerous domestic and foreign companies. Ramtron may be at a disadvantage in
competing with many of these competitors who have significantly greater
financial, technical, manufacturing and marketing resources, as well as more
diverse product lines that can provide cash flows counter cyclical to
fluctuations in semiconductor memory operations. In addition, the Company's
foundry partners are not prohibited from selling products that compete
directly with the Company's products.
FRAM PRODUCTS. Ramtron considers its FRAM products to be competitive with
existing nonvolatile memory products such as EEPROM, BBSRAM and Nonvolatile
RAM products in low-density applications. Although nonvolatile Flash memory
products are important in the high-density memory product market, Ramtron's
products do not currently compete in that market. Both low-density and high-
density nonvolatile memory products are manufactured and marketed by major
corporations possessing worldwide wafer manufacturing and integrated circuit
production facilities such as ST-Microelectronics, Fairchild and by
specialized product companies, including Maxim Integrated Products, Atmel,
Xicor, and Rohm.
Page-18
Using the Company's FRAM technology, Ramtron introduces product performance
as a competitive factor, which has varying importance depending on the
customer and the application. Currently, Ramtron's FRAM manufacturing costs
are higher than those for conventional competing technologies resulting in a
price premium for FRAM products that, for example, compete directly with
EEPROM products. The Company is, therefore, seeking a strategy of targeting
applications where the FRAM technology advantages may offset higher product
prices. One result of this strategy is a smaller market in which FRAM
products can be sold. The Company will continue to emphasize FRAM product
benefits while the Company and its manufacturing partners work to reduce the
cost of production.
ENHANCED-DRAM PRODUCTS. DRAM products are manufactured by numerous
companies, including major corporations possessing worldwide wafer
manufacturing and integrated circuit production facilities. Because the
Company's Enhanced-DRAM products have certain higher performance
characteristics than standard DRAM products, the Company considers only high-
speed "specialty" DRAM products, such as high performance SDRAM, RDRAM,
RLDRAM, FCRAM and fast SRAM, manufactured by companies such as Mitsubishi
Electric Corporation, Rambus (through licensees), NEC Corporation, Fujitsu,
Infineon, Toshiba, Micron Technology, Inc. and Monolithic System Technology,
Inc., to be competitive with its Enhanced-DRAM products. The Company also
considers its EDRAM and ESRAM products to be competitive in certain
applications with SRAM products, which are manufactured by major
corporations, including Alliance Semiconductor Corporation, Cypress
Semiconductor, Integrated Device Technology, Inc., Motorola, Inc., Hitachi,
ST-Microelectronics, Toshiba, Fujitsu, Samsung, Infineon, Hyundai Electronics
Industries Co. Ltd., and Micron Technology, Inc.
Since the competition in this market is based on industry standard products
with multiple sources, the basis for competition is price, availability,
customer relationships and customer service. Ramtron faces intense
competition based on these factors.
Ramtron's licensees may market products, which compete with the FRAM and
Enhanced-DRAM products. Most of the Company's strategic alliance partners
have the right to manufacture and sell FRAM or Enhanced-DRAM products for
their own account. For example, as part of the Company's agreements with
Hitachi, Rohm, Toshiba, Fujitsu, Samsung, Infineon, NEC and Texas Instruments
Ramtron granted each of those companies a non-exclusive license to FRAM
technology and know-how, which includes the right to manufacture and sell
products using FRAM technology. Cypress Semiconductor and NEC were each
granted a limited license to the Company's Enhanced-DRAM product technology.
Most of these license agreements provide for the continuation of the licensed
rights to Ramtron's FRAM or Enhanced-DRAM technology and know-how after
expiration or termination of the agreements on a royalty-bearing or
royalty-free basis.
Page-19
To the extent that any of our products achieve market acceptance, there can
be no assurance that competitors will not be able to develop and offer
competitive products or implement pricing strategies for FRAM and Enhanced-
DRAM products that could adversely affect the Company's business and
operating results. The Company's ability to compete successfully depends on
its ability to develop low-cost volume production, permitting its products to
be sold at a price that is both competitive and profitable, and on its
ability to design products that successfully address customer requirements.
Ramtron's success also depends on factors beyond its control, including the
rate at which customers incorporate the Company's products into their own
products, the success of the Company's customers in selling their products,
the success of the protection of Ramtron's intellectual property, the success
of competitors' products and general market and economic conditions. Many
companies are researching and developing semiconductor memory technologies
and product configurations that could reduce or eliminate any future
competitive advantages of the Company's products. There can be no assurance
that the Company's FRAM or Enhanced-DRAM technology will not be supplanted in
the future by competing technology or that the Company will have the
technical capability or financial resources to be competitive in the
semiconductor industry with respect to the design, development or manufacture
of either FRAM or Enhanced-DRAM products.
ENVIRONMENTAL COMPLIANCE
Federal, state and local regulations impose various environmental controls on
the discharge of chemicals and gases used in the Company's manufacturing and
research and development processes. The Company believes that it has taken
all necessary steps to ensure that its activities comply with all applicable
environmental rules and regulations. While the Company's operations have not
been materially impacted by the cost of environmental compliance, there can
be no assurance that changes in such environmental rules and regulations will
not require additional investments in capital equipment and compliance
programs in the future. Any failure by the Company to comply with such
environmental rules and regulations regarding the discharge of hazardous
substances could subject it to substantial liabilities or could adversely
affect its manufacturing operations.
PATENTS AND PROPRIETARY RIGHTS
The Company relies heavily on its patents and trade secrets as a defense
against competitors introducing infringing products that will compete with
the Company's FRAM and Enhanced-DRAM products and the royalty-bearing
products of the Company's licensees. Although the Company intends to enforce
its patents and trade secrets aggressively, there can be no assurance that
such protection will be available or be enforceable in any particular
instance or that the Company will have the financial resources necessary to
adequately enforce its patent and trade secret rights, and the unavailability
or unenforceability of such protection or the inability to enforce adequately
such rights could materially adversely affect the Company's business and
operating results. See "Item 3. Legal Proceeding." The Company's strategic
Page-20
alliance partners, have access to the Company's proprietary FRAM technology
and know-how and have the right, on a royalty-paying or royalty-free basis,
to manufacture and sell ferroelectric products. The Company does not license
from others any material right covering its ferroelectric technology and does
not believe its technology infringes any known patents. The Company has,
however, entered into a cross-license agreement with Symetrix Corporation
("Symetrix") for the possible use by the Company and certain of its licensees
through sublicense rights for ferroelectric technology that may have been
developed by Symetrix. The Company is aware, because others have obtained
patents covering numerous semiconductor designs or processes, that the
Company operates in a competitive environment in which it would not be
unlikely for a third party to claim that certain of the Company's present or
future products may infringe the patents or rights of such third parties. If
any such infringements exist or arise in the future, the Company may be
exposed to liability for damages and may need to obtain licenses relating to
third-party technology incorporated into the Company's products. The
Company's inability to obtain such licenses on acceptable terms or the
occurrence of related litigation could have a material adverse affect on the
Company. See "Item 3. Legal Proceeding." The Company has been granted
patents it believes are fundamental in covering the basic architecture and
method of operation of its Enhanced-DRAM products, and the Company has other
patents and patent applications involving its Enhanced-DRAM technology
pending.
The Company holds 144 unexpired United States patents covering certain
aspects of its products and technology. Such patents will expire at various
times between November 2004 and December 2020. Three of these patents
involving FRAM technology are owned jointly by Ramtron and Seiko Epson and 10
involving DRAM technology are owned jointly by Ramtron and Nippon Steel. The
Company has applied for 31 additional United States patents covering certain
aspects of its products and technology. The Company has also taken steps to
apply for foreign patents on its products and technology. The Company holds
38 unexpired foreign patents and has 24 foreign patent applications pending.
A number of the pending foreign patents will, upon issuance, be jointly owned
by the Company and either Seiko Epson, Nippon Steel or Fujitsu.
In addition to prosecuting patent infringement, the Company protects its
proprietary technology through a trade secret program that involves
restricting access to confidential documents and information and obtaining
written confidentiality agreements with all vendors, visitors and technical
employees.
The Company believes its inventions are of fundamental importance to its
ferroelectric and Enhanced-DRAM technology and that patents that have been
issued, or allowed but not yet issued, will provide protection against
unauthorized use of the Company's inventions. There is evidence that other
companies are seeking to develop and patent technology similar to the
Company's technologies. Furthermore, other companies may seek to reverse
engineer the Company's products.
Page-21
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, and certain information about them,
are as follows:
Name Age Position(s)
- ---- --- -----------
William W. Staunton 55 Director, Chief Executive Officer
Greg B. Jones 55 Director, President-Technology Group
LuAnn D. Hanson 43 Chief Financial Officer, Vice President of
Finance and Corporate Secretary
Mr. Staunton joined the Company as a Director and the Company's Chief
Executive Officer in December 2000. Prior to joining the Company,
Mr. Staunton served as Chief Operating Officer of Maxwell Technologies, a
company which designs and manufactures multi-chip modules and board products
for commercial satellite applications, from March 1999 until December 2000.
Mr. Staunton was Executive Vice President of Valor Electronics Inc. from
April 1996 until April 1999. Valor Electronics designs and manufactures
magnetic filter products for use in local area networks and communications
products. His experience also includes serving as Vice President at Applied
Micro Circuits Corp from December 1987 until March 1996. Mr. Staunton holds
a Bachelors of Science degree in Electrical Engineering from Utah State
University.
Mr. Jones is currently a Director and the Company's President - Technology
Group. He joined the Company in January 1995, as Ramtron's Chief of
Administration. In February 1995, Mr. Jones became a Director and the
Company's President and Chief Operating Officer. Prior to joining Ramtron,
Mr. Jones was Marketing Director at Concord Services, Inc. from November 1993
until January 1995. From August 1990 until November 1993, Mr. Jones served
as Director of Vertical Reactors at ASM America, Inc. Prior to his work with
ASM America, Inc., Mr. Jones held a variety of management positions in sales,
marketing, corporate planning and project management. He holds a Bachelor of
Science degree in Engineering from the U.S. Naval Academy, Annapolis and a
Master of Science degree in Management Sciences from Stanford University.
Ms. Hanson joined the Company in September 1993 as Assistant Controller. In
April 1995 she was named Controller and served in that capacity until January
1999 when she was named Vice President of Finance and Corporate Controller.
In February 2000, Ms. Hanson was named Chief Financial Officer and Vice
President of Finance. Ms. Hanson is a certified public accountant and has
over 21 years of professional finance experience including 17 years of
semiconductor industry experience. Before joining the Company, Ms. Hanson
held various positions at Carniero, Chumney & Co., certified public
accountants, and various positions in accounting with United Technologies
Microelectronics Center. Ms. Hanson attended the University of Northern Iowa
earning a Bachelor of Arts degree in Accounting and a Master of Business
Administration degree in Finance and Accounting from Regis University.
Page-22
EMPLOYEES
The Company has 116 employees, including 15 in management and administration,
47 in research and development, 28 in manufacturing and 26 in marketing and
sales. The Company's ability to attract and retain qualified personnel is
essential to its continued success. The majority of the Company's employees
have been granted options to purchase common stock pursuant to either the
Company's Amended and Restated 1986 Stock Option Plan, the 1989 Non-statutory
Stock Option Plan, the 1995 Stock Option Plan, as amended, or the 1999 Stock
Option Plan. None of the Company's employees are represented by a collective
bargaining agreement, nor has the Company ever experienced any work stoppage.
None of the Company's employees other than William W. Staunton, the Company's
Chief Executive Officer; Greg B. Jones, the Company's President-Technology
Group; and LuAnn D. Hanson, the Company's Chief Financial Officer and Vice
President of Finance, have an employment agreement with the Company, and none
of the Company's employees has a post-employment non-competition agreement
with the Company. The Company believes that its employee relations are good.
OTHER EVENTS
On March 31, 2003, the Company signed an agreement with Wells Fargo Business
Credit, Inc. to provide a secured $3.0 million revolving line of credit. The
credit facility provides for interest at a floating rate equal to the prime
lending rate plus .50% per annum and a term of 3 years. Security for the
credit facility includes the Company's non-European accounts receivable and
inventories.
Item 2. PROPERTIES
The Company owns a 69,000-square foot building in Colorado Springs, Colorado,
which serves as its principal executive offices and as a research and
development facility. The facility has a small Class 10 semiconductor clean
room that currently is used in ferroelectric research and development
activities related to advanced FRAM manufacturing process and materials
development. The Company believes that its existing facilities are adequate
for its needs in the foreseeable future.
Item 3. LEGAL PROCEEDING
PATENT INTERFERENCE PROCEEDING. A patent interference proceeding, which was
declared in 1991 in the United States Patent and Trademark Office (the
"Patent Office") between the Company, National Semiconductor Corporation
("National") and the Department of the Navy in regard to one of the Company's
issued United States patents, is continuing. The patent involved covers a
basic ferroelectric memory cell design invention the Company believes is of
fundamental importance to its FRAM business in the United States. An
interference is declared in the Patent Office when two or more parties each
claim to have made the same invention. The interference proceeding is
therefore conducted to determine which party is entitled to the patent rights
covering the invention. In the present interference contest, the Company is
Page-23
the "senior" party, which means that it is in possession of the issued
United States Patent and retains all rights associated with such patent. The
other two parties involved in the interference are the "junior" parties, and
each has the burden of proof of convincing the Patent Office by a
preponderance of the evidence that it was the first to invent the subject
matter of the invention and thus is entitled to the corresponding patent
rights. Only the Company and National filed briefs in this matter. Oral
arguments were presented before the Patent Office on March 1, 1996.
The Patent Office decided the interference on May 6, 1997, holding that all
of the claims were patentable to National, one of the "junior" parties. The
other "junior" party, the Department of the Navy, was not granted any patent
claims pursuant to the interference proceedings. On June 20, 1997, the
Company filed a Request for Reconsideration with the Patent Office concerning
the interference decision. Pursuant to the Request for Reconsideration, the
Company requested that five separate issues be reconsidered because, from the
Company's perspective, they were either ignored or misconstrued in the
original decision. A decision on the Request for Reconsideration was issued
on November 19, 1998, again holding that all of the claims were patentable to
National. On January 9, 1999, the Company appealed the decision of the
Patent Office on one of the interference counts directly to the Court of
Appeals for the Federal Circuit. On February 2, 2000, the Court of Appeals
vacated and remanded the decision of the Patent Office for further
proceedings. The Company also filed complaints in Federal District Court
seeking a review of the decision of the Patent Office on the remaining
interference counts. The Company remains in possession of the issued United
States Patent and retains all rights associated with such patent while it
pursues its appeal options. The "junior" party has received no rights
associated with this patent decision and will not receive any such rights as
long as the appeal process continues. Under a Patent Office decision on
August 13, 2001, the Company was found to be the first to invent, however,
the Patent Office concluded that the enablement and best-mode requirements
for patent issuance had not been met by the Company.
In October 2001, both the Company and National filed a Request for
Reconsideration with the Patent Office. In November 2002, the Patent
Office informed the Company and National that it will not change its August
2001 decision. In December 2002, the Company appealed this decision to the
District Court of the District of Columbia.
If the Company's patent rights that are the subject of the interference
proceeding are ultimately lost or significantly compromised, the Company
would be precluded from producing FRAM products in the United States using
the Company's existing design architecture, absent being able to obtain a
suitable license to exploit such rights. If such patent rights are
ultimately awarded to National, and if a license to such rights is not
subsequently entered into by the Company with National, National could use
the patent to prevent the manufacture, use or sale by the Company, and/or its
licensees, within the United States of any products that come within the
scope of such patent rights, which would include all FRAM products as
Page-24
currently designed, and which would materially adversely affect the Company.
The Company has vigorously defended its patent rights in this interference
contest and will continue such efforts. The Company is uncertain as to the
ultimate outcome of the interference proceeding, as well as to the resulting
effects upon the Company's financial position or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2002.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock trades on the National Market tier of The
Nasdaq Stock Market under the symbol "RMTR." The following table sets forth
the 2002 and 2001 ranges of the high and low closing sales prices for the
common stock as reported on The Nasdaq Stock Market.
High Low
------ ------
2002
- ----
First Quarter . . . . . . . . . . . . . . . . . . $4.74 $2.75
Second Quarter . . . . . . . . . . . . . . . . . . $3.87 $1.70
Third Quarter . . . . . . . . . . . . . . . . . . $3.54 $1.80
Fourth Quarter . . . . . . . . . . . . . . . . . . $4.38 $1.82
2001
- ----
First Quarter . . . . . . . . . . . . . . . . . . $8.88 $3.63
Second Quarter . . . . . . . . . . . . . . . . . . $5.25 $2.42
Third Quarter . . . . . . . . . . . . . . . . . . $3.18 $1.48
Fourth Quarter . . . . . . . . . . . . . . . . . . $5.07 $1.36
The prices set forth above reflect transactions in the over-the-counter
market at inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions. On
March 25, 2003, the last reported sale of the Company's common stock was
$1.85 per share. As of March 25, 2003, there were approximately 2,271 record
holders of the Company's common stock.
DIVIDEND POLICY
The Company has not paid any dividends since its inception and does not
intend to pay any cash dividends in the foreseeable future. The Company
intends to retain any earnings to finance its operations.
Page-25
The following table summarizes information as of December 31, 2002, relating
to equity compensation plans of the Company pursuant to which common stock is
authorized for issuance:
Equity Compensation Plan Information
Number of
securities Weighted-
to be average
issued upon exercise Number of
exercise of price of securities
outstanding outstanding remaining available
options, options, for future issuance
warrants and warrants and under equity
Plan category rights rights compensation plans
- ------------- ------------ ------------ -------------------
Equity
compensation
plans approved
by security
holders 4,034,320 $6.78 946,977
Equity
compensation
plans not
approved by
security
holders(1) 506,904 $4.53 327
--------- ----- -------
Total 4,541,224 $6.53 947,304
========= ===== =======
- -----------
(1) On August 17, 1999, the Board of Directors of the Company adopted the
1999 Stock Option Plan under which a total of 700,000 shares of the
Company's Common Stock were authorized for issuance pursuant to the
exercise of stock options granted there under. The exercise price of
all non-qualified stock options must be equal to at least 95% of the
fair market value of the common stock on the date of grant and the
maximum term of each grant is ten years. Options granted become
exercisable in full or in installments pursuant to the terms of each
grant. Directors and officers of the Company are not eligible to
participate in the 1999 Plan.
Page-26
Item 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with, and
are qualified in their entirety by, the consolidated financial statements and
related notes thereto and "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations" included herein.
Year Ended December 31,
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(in thousands, except per share data)
Revenue $50,545 $22,856 $26,079 $24,871 $18,554
Gross margin, product
sales 12,275 2,835(1) 6,263 3,992(2) 7,158(3)
Operating loss (1,031) (20,970) (12,925) (5,825) (12,985)
Net loss applicable to
common shares (1,923) (33,151) (14,497) (2,035) (19,141)
Net loss per share - basic
and diluted (0.09) (1.57) (0.88) (0.16) (2.23)
Working capital 11,502 4,112 6,943 7,285 5,246
Total assets 40,942 35,819 38,362 29,380 33,347
Total long-term debt 5,175 -- 6,314 5,766 --
Redeemable preferred stock -- 1,078 920 914 --
Stockholders' equity 20,154 19,039 21,501 13,323 17,062
Cash dividends per
common share(4) -- -- -- -- --
- -----------------
(1) Includes provision for inventory write-off of $912,000.
(2) Includes provision for inventory write-off of $1.2 million.
(3) Excludes loss on manufacturing contract of $1.2 million.
(4) The Company has not declared any cash dividends on its common stock and
does not expect to pay any such dividends in the foreseeable future.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis is intended to provide greater details
of the results of operations and financial condition of the Company. The
following discussion should be read in conjunction with the information under
"Item 6. Selected Financial Data" and the Company's consolidated financial
statements and notes thereto and other financial data included elsewhere
herein. Certain statements under this caption constitute "forward-looking
Page-27
statements" under the Reform Act which are subject to certain risks and
uncertainties. These may be identified by the use of forward-looking words
or phrases such as "believe," "expect," "intend," "anticipate," "should,"
"planned," "estimated," and "potential," among others. The Company's actual
results may differ significantly from the results discussed in such forward-
looking statements. Factors that might cause such a difference include but
are not limited to: (i) the timely completion of the development and
qualification for manufacturing of the Company's new Enhanced-DRAM and FRAM
products; (ii) broader customer acceptance of its EDRAM and ESRAM products
and FRAM products; (iii) the Company's ability to manufacture its products on
a cost-effective and timely basis at its alliance foundry partners; (iv) the
Company's ability to perform under existing alliance and joint development
agreements and to develop new alliance and foundry relationships; (v) the
Company's ability to introduce timely new technologies and products and
market acceptance of such technologies and products; (vi) the success of the
Company's on-going cost-reduction efforts; (vii)the timing and availability
of manufacturing resources provided by the Company's manufacturing and
alliance partners for the production of our products; (viii) the alliance
partners' willingness to continue development activities as they relate to
their license agreements with the Company; (ix) the availability and related
cost of future financing; (x) the retention of key personnel; (xi) the
outcome of the Company's patent interference litigation proceedings; (xii)
factors not directly related to the Company, such as competitive pressures on
pricing, marketing conditions in general, competition, technological
progression, product obsolescence and the changing needs of potential
customers and the semiconductor industry in general; and (xiii) global
economic and political conditions related to on-going military actions
against terrorism. For additional information concerning these and other
factors, see "Expected Future Results of Operations" in this Item 7.
Since its inception, the Company has been primarily engaged in the research
and development of ferroelectric technology and the design, development and
commercialization of FRAM products and Enhanced-DRAM products. Revenue has
been derived from the sale of the Company's FRAM and Enhanced-DRAM products
beginning in 1992. The Company has also generated revenue under license and
development agreements entered into with a limited number of established
semiconductor manufacturers and involving the development of specific
applications of the Company's technologies. Accordingly, fluctuations in the
Company's revenue have resulted primarily from the timing of significant
product orders, the timing of the signing of license and development
agreements, and the achievement of related performance milestones.
For 2002, 2001 and 2000, FRAM product sales represented approximately 55%,
26% and 22% of total product sales revenue, respectively, EMS product sales
accounted for 4%, 7% and 42%, respectively, while Mushkin product sales
represented 41%, 67% and 36% for the same periods. During these periods,
product sales revenue accounted for approximately 80%, 75% and 70%,
respectively, of total revenue, the remainder of which were generated
principally from license and development fees, royalties and customer-
sponsored research and development revenue. As a result of the Company's
limited revenue as compared to its substantial ongoing product research and
development costs and high manufacturing costs for certain of its products,
the Company has incurred losses on a consolidated basis in each fiscal year
since its inception and has required substantial capital infusions in the
form of debt and equity financing.
Page-28
The Company has entered into development and/or licensing arrangements with
several major semiconductor manufacturers, namely Hitachi, Rohm, Toshiba,
Fujitsu, Cypress Semiconductor, Hewlett Packard, Infineon and Texas
Instruments, to advance the development of both its FRAM products and
Enhanced-DRAM products and to provide the Company with access to advanced
semiconductor manufacturing processes and capacity for such products. The
Company has also entered into license agreements with Samsung and NEC,
although such arrangements do not include any development activities between
the Company and the licensee or the availability of manufacturing capacity to
the Company. In March 1999, the Company entered into a two year joint
development agreement with Fujitsu to pursue the development of advanced FRAM
manufacturing processes. This agreement provided the Company with research
and development funding and wafer fabrication processing equipment supplied
by Fujitsu and was successfully completed during the fourth quarter of 2000.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 AS COMPARED TO
2001
REVENUE. Total revenue for 2002 increased $27.7 million, or 121% from 2001.
Revenue from product sales increased $23.1 million, or 134%, from 2001. FRAM
product revenue for 2002 increased $17.7 million to $22.2 million, from 2001.
Increased FRAM product revenue is primarily attributable to increased
shipments into the Ampy/ENEL utility meter program as this program moved to
full production. During 2002, approximately 75% of FRAM product revenue was
attributable to the Ampy/ENEL program.
Product revenue at our Mushkin business unit for 2002 was $16.3 million, an
increase of $4.8 million, or 42%, as compared to 2001. Increases in Mushkin
product revenue is primarily attributable to progress in penetrating larger
accounts through the addition of direct sales staff.
EMS product revenue for 2002 increased $614,000, as compared to 2001. Low
product sales volume is the result of the Company's 4-megabit product line
reaching end-of-life. The Company is no longer manufacturing its
4-megabit product and sold substantially all of its remaining inventories of
these products during 2002.
License and development fees for 2002 were $6.8 million, as compared to $2.7
million for 2001. This increase is primarily related to a FRAM licensing and
technology development program with Texas Instruments, Inc. that began in
July 2001.
The Company recognized royalty revenue of $398,000 in 2002. In 2001,
$295,000 of royalty revenue was recognized. Such royalty income was
primarily attributable to FRAM licensing agreements with existing licensees.
Page-29
The Company recognizes royalty revenue when our technology licensees
sell products which include our technology to their customers. The timing
and amounts of future royalties are uncertain and there is no guarantee that
our licensees will be successful in selling products that incorporate our
technology on which royalties will be payable.
Customer-sponsored research and development revenue for 2002 increased
$365,000 to $3.0 million as compared to the same period in 2001. This
increase resulted primarily from EMS' product development programs with
Cypress Semiconductor, Hewlett Packard and Infineon. The amount of
customer sponsored research and development revenue recognized during a given
period is dependent on the specific programs the Company is working on, the
development stage of each program, the costs incurred during the period and
the amount of work remaining to complete the program. For 2002, profit
related to customer funded research and development revenue totaled
$927,000 as compared to $206,000 during 2001. This improvement is primarily
attributable to a reduction in the estimated costs to complete our product
development contract with Hewlett Packard and may not be representative of
profit margins on customer funded research and development revenue to be
recognized in future periods.
COST OF SALES. Overall cost of product sales as a percentage of product
revenue during 2002 decreased from 84% to approximately 70% as compared with
2001. Cost of sales associated with the Company's FRAM products decreased
from 91% in 2001, to approximately 57% in 2002. FRAM cost of sales declined
as the Company improved manufacturing yields, shipped a more economical
version of the product used in the Ampy/ENEL metering program and realized
cost reductions at the Company's subcontract manufacturers. During 2001 the
Company recorded expenses of $450,000 for excess and obsolete FRAM
inventories which are included in cost of product sales. Excluding this
charge, FRAM cost of product sales as a percentage of revenue in 2001 was
81%. EMS's cost of product sales for 2002 decreased to 59% from 89% in 2001.
EMS 2001 cost of product sales included $462,000 of inventory write-downs of
excess and obsolete inventories. Excluding this charge EMS cost of product
sales as a percentage of product revenue in 2001 was 49%. Cost of sales as a
percentage of product revenue at our Mushkin subsidiary increased to 88% in
2002 as compared to 80% in 2001. This increase is the result of sustained
price decreases in the DRAM industry during the last year.
RESEARCH AND DEVELOPMENT. Combined research and development expenses for the
year 2002 decreased $4.6 million to $12.1 million, a decrease of 28% as
compared with the same period in 2001. This decrease is primarily due to
decreased contract design support services, photo mask and wafer costs for
the development of new Enhanced-DRAM products, and an increased allocation of
engineering resources to manufacturing activities.
Page-30
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses for 2002 decreased $1.3 million to $11.5 million, a
decrease of 10% as compared to the same period in 2001. This decrease is
primarily attributable to new accounting standards that eliminated the
amortization of goodwill beginning January 1, 2002. During 2002 and 2001,
the Company recorded $0 and $1.5 million, respectively, of goodwill
amortization.
STOCK-BASED COMPENSATION. During 2001, the Company recognized $0 of
non-cash expenses for stock-based compensation as compared to $202,000 in
2001. In September 1999, certain officers of the Company were granted
options to purchase common stock of the Company at $2.25 per share (the
closing price on the date of grant), subject to stockholder approval to amend
the Company's 1995 Stock Option Plan. These options vested 50% on March 31,
2000 and 50% on March 31, 2001. The Company's shareholders approved the
amendment to the 1995 Plan on December 22, 1999. On that date, the intrinsic
value of the options of $2,578,000 was recorded as deferred compensation.
During the first quarter of 2001 the Company recognized the remaining
compensation expense of $202,000. All stock based compensation charges are
allocable to sales, general and administrative expenses.
INTEREST EXPENSE, RELATED PARTY. Related party interest expense in 2002
decreased $874,000, to $308,000, primarily due to the November 2002
retirement of the Company's credit facility with the National Electrical
Benefit Fund. Related party interest expense in 2002 results from interest
charges related to a convertible debenture issued to Infineon in March 2002.
INTEREST EXPENSE, OTHER. Other interest expense increased $524,000 in 2002
primarily due to interest expense related to the convertible debentures
issued to Halifax Fund, L.P. and Bramwell Capital Corporation on April 1,
2002.
MINORITY INTEREST IN SUBSIDIARY. Minority interest in losses of the
Company's EMS subsidiary of approximately $267,000 were recognized in 2001 as
compared to $0 in 2002. The minority interest reflects Infineon's share of
EMS losses for 2001.
LOSS ON DISPOSITION OF MARKETABLE EQUITY SECURITIES. During 2001, the
Company sold 443,488 shares of Infineon common stock owned by the Company,
consisting of all of the shares obtained through the share purchase agreement
with Infineon dated December 14, 2000. During 2001, the Company recorded a
loss of $11.4 million on the disposition and impairment of these securities.
No such losses occurred in 2002.
NET LOSS APPLICABLE TO COMMON SHARES. During 2002, combined preferred stock
dividends, and accretion of redeemable preferred stock decreased by $67,000
to $96,000. This decrease is attributable to the maturity and redemption of
all of the remaining redeemable preferred stock on July 31, 2002.
Page-31
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO
2000
REVENUE. Total revenue for 2001 decreased $3.2 million, or 12%, from 2000.
Revenue from product sales decreased $1.0 million, or 6%, for 2001, as
compared to 2000. FRAM product revenue for 2001 increased $553,000 to
$4.5 million, an increase of 14%, as compared to 2000. This increase is
attributable in part to a wider product portfolio. During 2001, the Company
introduced seven new FRAM products. At the end of 2001, the FRAM product
portfolio contained seventeen products in multiple package configurations
serving both 3-volt and 5-volt product applications and density ranges of
4-kilobit to 256-kilobit.
Product revenue from the Company's EMS subsidiary decreased $6.4 million for
2001, to $1.2 million, a decrease of 85% as compared to 2000. The decrease
in EMS product sales is primarily attributable to a substantial decline in
4-megabit product sales as this product line approached end-of-life. The
Company is no longer manufacturing its 4-megabit product.
During 2001, the Company's Mushkin subsidiary, which was acquired in June
2000, generated $11.5 million in product revenue. Mushkin's product revenue
during the six months of Ramtron ownership in 2000 was $6.7 million. During
2001, Mushkin experienced a significant increase in unit sales at the same
time it was experiencing severe declines in average selling prices consistent
with world-wide trends in DRAM memory markets.
The Company recognized $2.7 million in license and development fee revenue
during 2001 as compared to $2.0 million in 2000. License and development fee
revenue in 2001 resulted from license and development partner agreements the
Company entered into with Texas Instruments and NEC during 2001. License and
development partner revenue in 2000 resulted from the achievement of
contractual milestones in existing licensee and development partner
agreements.
During 2001, the Company recognized royalty revenue related to FRAM license
and development partner agreements of $295,000 compared with $188,000
recorded in 2000.
Customer-sponsored research and development revenue for 2001 decreased by
$3.0 million to $2.6 million, a decrease of 53% as compared to 2000. During
2000, the Company was engaged with Fujitsu for the purpose of developing a
0.35 micron advanced FRAM manufacturing process, which generated revenue of
$4.0 million. The Fujitsu program was successfully completed in the fourth
quarter of 2000. In addition, the Company recognized customer-sponsored
research and development revenue in 2001 and 2000 from product development
agreements with Cypress Semiconductor and Hewlett Packard for the
development of next generation Enhanced-DRAM products.
Page-32
During 2001, quarterly revenue was $3.5 million, $3.4 million, $7.5 million
and $8.5 million for the first, second, third and fourth quarters,
respectively. Significant increases in revenue during the third and fourth
quarters as compared to the first and second quarters are the result of
increased product sales from our FRAM and Mushkin business units and
increased license and development fee revenue related to engaging with Texas
Instruments on a technology license and development agreement during the
third quarter. Our FRAM business unit product revenue increased as a result
of a wider product portfolio and the initial shipments into the Ampy metering
program. Product sales at our Mushkin business unit increased during the
second half of 2001 as a result of adding sales personnel to facilitate
direct customer sales, expanding our sales channels beyond internet sales.
COST OF SALES. Overall cost of product sales as a percentage of product
revenue during 2001 increased from 66% to approximately 84% as compared with
2000. Cost of sales associated with the Company's FRAM products increased to
91% in 2001 compared to 74% in 2000. This increase is primarily attributable
to high production costs for initial deliveries of product into the Ampy/ENEL
metering program, a major customer program to replace 27 million utility
meters in Italy. The pre-production phase of this program was completed in
2001 with the production ramp beginning in the first quarter of 2002. A
design revision to reduce costs is complete and production wafers are
currently being manufactured. The Company expects to consume the remaining
high cost units and begin delivery of the lower cost parts during the first
quarter of 2002. During 2001 the Company also recorded expenses of $450,000
for excess and obsolete inventories which are included in cost of product
sales. Excluding this charge, FRAM cost of product sales as a percentage of
revenue was 81% EMS cost of product sales as a percentage of product revenue
increased to 89% from 49% in 2000 as a result of inventory write-downs of
excess and obsolete inventories totaling approximately $462,000. Excluding
this charge EMS cost of product sales as a percentage of product revenue was
49%. Mushkin cost of product sales as a percentage of product revenue
increased from 77% to 80% when compared to 2000. The increase in Mushkin's
cost of product sales as a percentage of product revenue is principally due
to decreases in the average selling prices per megabit of memory, due to
extreme pricing pressure in world-wide commodity DRAM markets during 2001.
During 2001, the Company experienced increases in the costs of sales as a
percentage of product revenue for its FRAM, EMS and Mushkin business
units. Quarterly increases in FRAM cost of sales as a percentage of product
revenue is primarily attributable to high production costs for initial
deliveries of product into the Ampy metering program. During the fourth
quarter EMS cost of sales increased substantially as a percentage of product
revenue due to a charge for excess and obsolete inventories. Our
Mushkin business unit also experienced increased cost of sales as a
percentage of product revenue during 2001, primarily because of decreases in
the average selling prices per megabit of memory, due to extreme pricing
pressure in world-wide commodity DRAM markets during 2001.
Page-33
RESEARCH AND DEVELOPMENT. During 2001 research and development costs
(including customer-sponsored research and development) increased $3.2
million to $16.6 million as compared to $13.4 million in 2000. During 2001
and 2000 the Company incurred research and development expenses related to
new product development programs in both the Company's FRAM and Enhanced-DRAM
business units. Throughout 2000 the Company was engaged in a 0.35 micron
advanced FRAM manufacturing process development program with Fujitsu. This
development program provided the Company with research and development
funding and wafer fabrication processing equipment supplied by Fujitsu and
was successfully completed in the fourth quarter of 2000. Funding to Ramtron
in 2000 from this agreement totaled $4.0 million.
SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative
("SG&A") expenses (including stock-based compensation) for 2001 decreased
$801,000 to $12.8 million, a decrease of 6% as compared to 2000. This
decrease is primarily attributable to a reduction of stock-based compensation
(see "Stock-Based Compensation" below) of $2.0 million. This decrease is
offset by incremental general and administrative costs and goodwill
amortization related to the Company's Mushkin subsidiary, which was acquired
in June 2000. Mushkin selling, general and administrative expenses for 2001
were $3.5 million, including $1.3 million related to goodwill amortization.
During 2000 Mushkin's selling, general and administrative expenses were $1.4
million, including $700,000 related to goodwill amortization. Increases in
SG&A expenses related to our Mushkin subsidiary are offset by reductions in
consulting fees, foreign withholding tax payments on licensing revenue and
sales commissions to outside sales representatives as EMS product revenue
declined year over year.
STOCK-BASED COMPENSATION. During 2001, the Company recognized $202,000 of
non-cash expenses for stock-based compensation as compared to $2.2 million in
2000. In September 1999, certain officers of the Company were granted
options to purchase common stock of the Company at $2.25 per share (the
closing price on the date of grant), subject to stockholder approval to amend
the Company's 1995 Stock Option Plan. These options vested 50% on March 31,
2000 and 50% on March 31, 2001. The Company's shareholders approved the
amendment to the 1995 Plan on December 22, 1999. On that date, the intrinsic
value of the options of $2,578,000 was recorded as deferred compensation.
During the first quarter of 2001 the Company recognized the remaining
compensation expense of $202,000. All stock based compensation charges are
allocable to sales, general and administrative expenses.
INTEREST EXPENSE. Related party interest expense in 2001 increased $21,000,
totaling $1.2 million, and was primarily related to non-cash amortization of
a note payable discount for the valuation of stock warrants issued in
connection with the amendment of the Company's credit facility with the
National Electrical Benefit Fund.
Page-34
MINORITY INTEREST IN SUBSIDIARY. Minority interest in losses of the
Company's EMS subsidiary of approximately $267,000 was recognized in 2001 as
compared to $706,000 in 2000. The minority interest reflects Infineon's
share of EMS losses for 2001 and 2000. Minority interest in net losses of
EMS were not recorded after March 31, 2001, due to the minority interest
balance being reduced to zero on that date.
LOSS ON DISPOSITION OF MARKETABLE EQUITY SECURITIES. During 2001, the
Company sold 443,488 shares of Infineon common stock the Company held,
consisting of all of the shares obtained through the share purchase agreement
with Infineon dated December 14, 2000. The Company received proceeds of $8.6
million from these sales. During 2001, the Company recorded a loss of $11.4
million on the disposition and impairment of these securities. Loss on sales
and impairments were $11.9 million in the third quarter 2001 and a gain on
sales of $563,000 in the fourth quarter 2001.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. In December 1999, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue
Recognition" ("SAB No. 101"), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. As a result,
effective January 1, 2000, the Company changed its method of recognizing
revenue on certain payments resulting from technology licensing activities.
In prior years the Company recognized non-refundable technology license
agreement payments when billed in accordance with contractual arrangements.
In accordance with SAB No. 101's guidance, the Company now recognizes revenue
related to technology licensing agreements over the licensing and/or royalty
bearing period. The effect of this change in revenue recognition was
to increase income before the cumulative effect of the accounting change by
approximately $135,000 or $0.01 per share in 2001 and $150,000 or $0.01 per
share in 2000. The cumulative effect of retroactively applying this change
in accounting principle to periods prior to 2000 resulted in a one-time non-
cash charge of $1.5 million and is included in net loss for the year ended
December 31, 2000.
NET LOSS APPLICABLE TO COMMON SHARES. During 2001, combined preferred stock
dividends, and accretion of redeemable preferred stock increased by $40,000
to $163,000. This increase is attributable to a 2% increase in the dividend
rate as a result of the Company's election to pay required dividends in the
Company's preferred stock instead of cash.
EXPECTED FUTURE RESULTS OF OPERATIONS
The Company's ability to significantly increase product sales and achieve
profitability will depend on several factors, including: (i) the completion
of the development and qualification for manufacturing of new FRAM products;
(ii) the completion of the development and qualification for manufacturing of
the Company's new Enhanced-DRAM products; (iii) participation the in
Ampy/ENEL utility meter program throughout the life of such program; (iv)
wider customer acceptance of its FRAM and Enhanced-DRAM products; (v) market
acceptance and adoption of our customer's products; (vi) market acceptance of
Page-35
new FRAM and Enhanced-DRAM products which may be developed; (vii) the
Company's ability to manufacture its products on a cost-effective and timely
basis through alliance foundry operations and third-party foundry sources;
(viii) the availability and related cost of future financing; (ix) factors
not directly related to the Company, including market conditions,
competition, technological progression, product obsolescence and the changing
needs of potential customers and the semiconductor industry in general; (x)
memory market conditions and competitive forces which may negatively impact
average selling prices of the Company's products; (xi) negative trends in
the global economy, and (xii) political conditions related to on-going
military actions against terrorism.
The Company is continuing its efforts to improve and increase commercial
production and sales of its FRAM and Enhanced-DRAM products, decrease the
cost of producing such products and develop and commercialize new FRAM and
Enhanced-DRAM products. The Company expects revenue will continue to be
sporadic in the foreseeable future until the Company's products gain wider
market acceptance, milestones under existing customer-sponsored product
development programs are achieved, new customer-sponsored research and
development programs are entered into, new license arrangements are entered
into and milestones under the Company's existing and any new license and
development agreements are achieved.
Product revenue growth in 2003 will be highly dependent upon product sales to
one or more key customers. In June 2000, the Company entered into a five
year volume purchase agreement with Ampy Automaton Digilog, Ltd. for the
primary purpose of supplying approximately 27 million units of FRAM product
over a 3 to 4 year period for a utility meter replacement program at ENEL
SpA, a leading supplier of power in Italy. Ramtron will also supply FRAM
product to Ampy for use in other meters it builds. The agreement includes
pricing provisions, purchase order placement, reschedule and order
cancellation provisions. There are no order quantity or schedule guarantees.
During 2002 the Company supplied approximately 8 million units into the
production phase of this program and expects this program to represent a
significant portion of the Company's 2003 FRAM product revenue. The
Company's EMS business unit has been engaged with Cypress Semiconductor and
Hewlett Packard to develop ESRAM products. The Company's ESRAM products will
be available for sale in 2003 and will be the primary source of product
revenue for EMS. Hewlett Packard is expected to use the ESRAM in a new line
of server products and is expected to be the primary customer for the ESRAM
products during 2003. Any delay in the production ramp of these programs
could significantly reduce revenue growth below current expectations for
2003.
To gain access to advanced CMOS manufacturing processes and facilities,
Ramtron has entered into manufacturing alliances and licensing agreements for
FRAM products with companies having or constructing advanced memory products
manufacturing capability, including Rohm, Hitachi, Toshiba, Fujitsu, Infineon
and Texas Instruments. Since the purchase or construction of an advanced
manufacturing facility capable of mass producing memory devices would require
a capital outlay well beyond the Company's current capital resources, the
Company believes that the most suitable alternative is this strategic-
Page-36
alliance approach, which the Company believes will enable it to develop,
manufacture and sell FRAM products more rapidly and cost effectively than any
other available alternative. Ramtron's intention is to utilize current and
future alliance relationships as foundry sources for FRAM products in order
to provide the Company with low-cost, high-volume, high-quality FRAM products
for resale to customers.
Currently, the Company's FRAM products are being manufactured under a foundry
supply agreement with Fujitsu. From 1998 through August 2001 certain FRAM
products were manufactured at Rohm. The Company has not yet negotiated
foundry supply agreements with Hitachi, Toshiba, Infineon or Texas
Instruments, but such companies are contractually bound to enter into such
agreements upon fulfillment of certain conditions, primarily, the achievement
of commercial manufacturing capabilities. There is no assurance, however,
that the Company's alliance foundry partners will achieve commercial
manufacturing capability in a timeframe sufficient to meet the Company's
capacity requirements, or at all.
Currently, the Company's Enhanced-DRAM products are being manufactured under
a foundry agreement with Infineon that extends through January 2010. This
agreement allows the Company access to Infineon's most advanced DRAM
processing technologies while avoiding the high capital costs associated with
operating a DRAM manufacturing facility that would have otherwise been
incurred by the Company if it had chosen to manufacture these products with
Company-provided resources.
As a result of industry wide oversupply of semiconductor memory products,
significant price decreases within the industry have occurred during the past
several years. Historically, the semiconductor memory industry has
experienced declining average selling prices, and the Company believes these
declines will continue to affect the Company. Accordingly, the Company's
ability to increase revenue and margins on its products depends on the
Company's ability to increase unit sales volumes and to introduce new
products with higher margins or further reduce its manufacturing costs to
offset the declines in average selling prices. Absent these actions,
declining average selling prices would have an adverse effect on the
Company's gross profit margins and the overall financial performance of the
Company. There can be no assurance that the Company will be able to increase
unit sales volumes, introduce new, higher margin products or reduce its
manufacturing costs in the future.
In addition, the Company periodically writes-down its inventory for estimated
obsolescence or lack of marketability. During 2002, 2001 and 2000, the
Company recorded charges of $258,000, $912,000 and $195,000, respectively,
for such losses. There can be no assurance that the Company will not record
write-downs for obsolescence or lack of marketability in future periods.
Such write-downs, if material, could have an adverse effect on the Company's
results of operations and financial position.
Page-37
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, because revenue generated from operations and licensing
has been insufficient to fund operations, the Company has depended for
funding principally on its ability to raise equity capital through private
placements of stock and lines of credit.
In 1995, the Company entered into a loan facility, bearing interest at 12%,
with the National Electrical Benefit Fund (the "Fund"), an investment fund
established for the purpose of providing retirement and related benefits to
employees in the electrical contracting and related industries. During 1999,
the Company and the Fund agreed to amend the terms of the credit facility
extending the maturity date to March 15, 2002, decreasing the interest rate
to 8% and requiring the Company maintain certain financial ratios, as defined
in the loan document. In July 2001, the note was again amended to extend the
maturity date to July 12, 2002. The Company's borrowings under the Fund's
credit facility totaled approximately $7.0 million. On August 22, 2001, the
Company exercised the prepayment provision of the note by notifying the Fund
of the Company's intention to prepay the balance due no later than January 2,
2002. On November 9, 2001, the Fund elected to accept payment in lieu of a
conversion to the Company's common stock. All principal and accrued interest
due, totaling approximately $7.1 million, was paid to the Fund on
November 15, 2001.
The Company raised funds through the private placement of preferred and
common stock in 1993, 1997, 1998 and 1999. Also, the Company and Infineon
entered into a share purchase agreement dated December 14, 2000 pursuant to
which Infineon agreed to invest approximately $30 million in the Company, $10
million in cash and $20 million in Infineon common stock (443,488 shares), in
exchange for 4,430,005 shares of the Company's common stock. The initial
closing occurred February 2, 2001, providing the Company with $10 million in
exchange for 1,476,668 shares of common stock. The final closing was
completed on March 30, 2001, providing the Company 443,488 Infineon shares.
All 443,488 Infineon shares were sold by the Company during 2002, generating
approximately $8.6 million in cash.
On March 2002, the Company issued $8.0 million of 5 year, 5% fixed rate,
convertible debentures to Infineon, Halifax Fund, managed by The Palladin
Group, L.P. and Bramwell Capital Corporation, managed by Cavallo Capital.
The debentures are convertible into the Company's common stock at a fixed
conversion price of $3.77, which is equal to the five-day volume weighted
average price ("VWAP") of the Company's common stock prior to the transaction
signing. The Company may force conversion of the debenture after 18 months,
provided the VWAP of the Company's common stock is at least 200% of the
conversion price for 20 or more of 30 consecutive trading days. The
debenture is secured by a Deed of Trust on the Company's headquarters
facility in Colorado Springs, Colorado and certain accounts receivable. In
addition, 700,435, 5-year common stock warrants were issued to the investors
at an exercise price of $4.28 per share.
Page-38
The debenture agreement requires the Company to meet certain financial
covenants. For 2003, those covenants include: (1) capital expenditures
not to exceed 3% of gross revenue from sales; (2) EBITDA Earnings of $750,000
for each six month period ending June 30, 2003, September 30, 2003 and
December 31, 2003; and (3) EBITDA Earnings for any fiscal quarter in 2003
not to exceed negative $500,000.
Cash and cash equivalents decreased by $37,000 in 2002 to $3.2 million.
Cash flow used for operations decreased from $15.0 million in 2001 to
$5.0 million in 2002. Cash generated by operating income, after non-cash
charges was $752,000 in 2002 compared to a use of cash of $16.5 million in
2001. Additionally, working capital requirements increased approximately
$7.2 million as compared to 2001, primarily due to growth in accounts
receivable and inventories to support a 134% growth in product sales during
2002.
Accounts receivable increased $3.7 million in 2002 from $5.2 million at the
end of 2001 as a result of increased product revenue in the fourth quarter of
2002 as compared to product revenue in 2001 and $2.6 million in accounts
receivable from third quarter 2002 shipments to a subcontract manufacturer on
the Ampy/ENEL program who has delayed payment to the Company. During the
first quarter of 2003 the Company collected approximately 56% of the
outstanding balance due from this customer. Based on the subsequent payments
and other information available to management, the Company believes the
remaining balance will ultimately be collected and, as such, no reserves have
been recorded related to this outstanding balance. The amount the Company
will ultimately receive in future payments from this customer could differ
materially from the amounts recorded as of December 31, 2002 and could
require additional charges for uncollectible accounts receivable.
Inventories increased by 20% in 2002 from $7.5 million at the end of 2001 to
$9.0 million at the end of 2002. This increase is due to a fourth quarter
slow-down in shipments into the Ampy/ENEL program as ENEL depleted some
excess inventories. The Company expects to deplete the increased inventory
quantities during the first 4 or 5 months of 2003.
Accounts payable and accrued liabilities increased on a year-over-year
basis from $4.9 million at the end of 2001 to $7.1 million at the end of
2002. This increase is primarily attributable to increased FRAM inventory
purchases in the fourth quarter of 2002 as compared to the same period in
2001.
Deferred revenue decreased $2.8 million from $10.8 million at the end of 2001
to $8.0 million at the end of 2002. This decrease is primarily related to
earning previously deferred revenue related to the Texas Instruments
licensing and technology development agreements the Company entered into
during 2001. Additionally, the Company recorded $1.5 million of deferred
revenue related to a FRAM technology license milestone payment from an
existing licensee. Deferred revenue related to this milestone will be
amortized into revenue over the 9 year remaining life of such technology
license.
Page-39
Cash used in investing activities was $1.2 million in 2002, compared to
$7.6 million of cash generated by investing activities in 2001. In 2001, the
Company generated approximately $8.6 million from the sale of 443,488 shares
of Infineon common stock. Capital expenditures were $706,000 in 2002
compared to $433,000 in 2001. Expenditures for intellectual property
remained relatively flat at $527,000 in 2002 and $558,000 in 2001.
Cash provided by financing activities was $6.2 million in 2002. The Company
generated net proceeds of approximately $7.2 million from the sale of
convertible debentures to Infineon, Halifax Fund, L.P. and Bramwell Capital
Corporation pursuant to a share purchase agreement dated March 14, 2002. The
Company used $1.2 million to redeem the remaining outstanding convertible
preferred stock on July 31, 2002, its maturity date. In 2001, net cash
provided by financing activities was $3.4 million, which was raised from the
issuance of $10.0 million common stock to Infineon and offset by the
repayment of a $7.0 million note payable to the National Electrical Benefit
Fund.
Equipment and plant expenditures are expected to be minimal during 2003.
The Company has incurred net losses from operations since inception. The
Company's ability to achieve profitable operations is subject to significant
risks and uncertainties including, but not limited to, success in raising
additional financing to fund operations, achieving forecasted revenue growth,
maintaining gross profit margins and entering into additional license and
research and development arrangements. There is no guarantee that the
Company will be successful in addressing such risks.
The Company's current business plan contemplates revenue growth in 2003 due
to increasing market penetration of the Company's FRAM products and the
introduction of new Enhanced-DRAM products.
In addition, the Company obtained a $3 million line of credit with Wells
Fargo in March 2003 that is secured by certain accounts receivable and the
Company's inventories (see Note 18 to the consolidated financial statements).
The Company believes these factors, along with cash on hand as of
December 31, 2002, will be sufficient to fund its operations at least through
December 31, 2003.
In view of the Company's expected future working capital requirements in
connection with the design, manufacturing and sale of its FRAM and Enhanced-
DRAM products, the Company's projected continuing research and development
expenditures, other projected operating expenditures and the results of
pending patent litigation, the Company may be required to seek additional
equity or debt financing. There is no assurance, however, that the Company
will be able to obtain such financing on terms acceptable to the Company, or
at all. Any issuance of common or preferred stock to obtain additional
funding would result in further dilution of existing stockholders' interests
in Ramtron. The inability to obtain additional financing when needed would
have a material adverse effect on our business, financial condition and
operating results and could adversely affect the Company's ability to
continue business operations.
Page-40
CONTRACTUAL COMMITMENTS. For more information on the Company's contractual
obligations on operating leases and contractual commitments, see Notes 5 and
6 of the Notes to Consolidated Financial Statements. At December 31, 2002,
the Company's commitments under these obligations were as follows (in
thousands):
Operating NEBF Convertible
Leases Consulting Fee* Debenture Total
------ --------------- ----------- ------
2003 $ 987 $ 80 $ -- $ 1,067