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, 2004
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:
Common Stock ($.01 par value)
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(Title of Each Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), 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 / X / No / /
The aggregate market value of common stock held by non-affiliates of the
registrant as of June 30, 2004 was $101,459,667 based on the closing price
of our common stock as reported on The Nasdaq Stock Market.
As of March 9, 2005, 22,420,126 shares of the Registrant's common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . 19
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Security Holders . . 21
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities . . . . .. . . . . . . . . . . . . . . . . . 21
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation . . . . . . . . . . 23
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk . . . . . . . . . . . . . . . . . . . . . . 46
Item 8. Financial Statements and Supplementary Data . . . . . . 47
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . 50
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . 50
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . 51
PART III
Item 10. Directors and Executive Officers of the Registrant . . 52
Item 11. Executive Compensation . . . . . . . . . . . . . . . . 56
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . 59
Item 13. Certain Relationships and Related Transactions . . . . 62
Item 14. Principal Accountant Fees and Services . . . . . . . . 62
PART IV
Item 15. Exhibits and Financial Statement Schedules. . . . . . . 63
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This Annual Report on Form 10-K and certain information incorporated herein
by reference contain forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, and, as such, may involve risks
and uncertainties. All statements included or incorporated by reference in
this Annual Report on Form 10-K, other than statements that are purely
historical, are forward-looking statements. Forward-looking statements may
be identified by the use of forward-looking words or phrases such as "will,"
"may," "believe," "expect," "intend," "anticipate," "could," "should,"
"anticipate," "plan," "estimate," and "potential," or other similar words.
Forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties that could cause actual results to differ
materially from the results contemplated by the forward-looking statements.
The forward-looking statements in this Annual Report on Form 10-K are subject
to additional risks and uncertainties further discussed under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - Factors that May Affect Future Results" and are based on
information available to us on the date hereof. We assume no obligation to
update any forward-looking statements. Readers are cautioned not to place
undue reliance on forward-looking statements, which speak only as of the date
of this Annual Report on Form 10-K. Readers should also consult the
forward-looking statements and risk factors listed from time to time in our
Reports on Forms 10-Q, 10-K, and in our Annual Reports to Shareholders.
PART I
The following information should be read in conjunction with the Consolidated
Financial Statements and notes thereto included in "Item 8. Financial
Statements and Supplementary Data" of this Annual Report on Form 10-K.
Unless otherwise indicated by the context, we use the terms "Ramtron,"
"Company," "we," "us," and "our," on the basis of consolidation described in
"Item 8. Financial Statements and Supplementary Data - Note 1 of the Notes
to Consolidated Financial Statements."
Item 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Ramtron International Corporation (Ramtron or the Company) is a Delaware
corporation and was founded in 1984. Ramtron is a fabless semiconductor
company that designs, develops and markets specialized semiconductor memory
and integrated products used by our customers for a wide range of
applications. We provide non-volatile ferroelectric random access memory
(FRAM) devices and high-performance dynamic random access memory (DRAM)
modules. 2004 was a pivotal year for the transformation of Ramtron from a
technology- and product-driven company to a market-driven company. In 2003,
we initiated this transformation by executing a fundamental shift in our
product development and marketing strategy, realigning our core business
units around this strategy, and instituting operational measures to control
costs and expenses to achieve profitable revenue growth. As a result, we
recorded net income for 2004.
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Our FRAM product portfolio includes serial and parallel non-volatile memories
and mixed-signal and integrated FRAM devices, which are developed and
marketed by us. Sales to ENEL Distribuzione SpA (ENEL), a leading Italian
utility company, represented approximately, 46%, 60% and 74% of our FRAM
product revenue during 2004, 2003 and 2002, respectively. Our "core FRAM"
business, which excludes sales to ENEL, grew 86% in 2004. The increased
sales are a result of continued expansion of the FRAM customer base, deeper
penetration of existing customers, and our expanding FRAM product portfolio.
All geographic territories registered significant year-over-year growth.
Gross margin on FRAM products increased 3% points year over year due to
product shrinks and other routine cost-reduction activities. FRAM product
sales have continued to contribute an increased dollar amount of gross margin
for us on a year-over-year basis. FRAM product gross margin contributions
were $20.1 million in 2004 and $13.8 million in 2003. We began selling our
first FRAM-based Processor Companion products in 2004; these products
contributed more than $560,000, or about 4.4%, of the 2004 core FRAM revenue
within a year of their introduction. Revenue from new products, that is
products introduced in 2003 and later, contributed approximately 7% of our
core FRAM revenue.
Our DRAM products are developed and marketed by our wholly owned
subsidiary, Mushkin Inc. (Mushkin). Mushkin acquires its DRAM modules
through assembly and test subcontractors with components supplied by leading
DRAM suppliers worldwide and sells them through retail, e-commerce and direct
sales channels. These products are deployed principally in original
equipment manufacturer (OEM) and end-user personal computer systems.
We discontinued the operations of our other DRAM subsidiary, Enhanced Memory
Systems, Inc. (EMS), in the first quarter of 2004 and realigned our business
units accordingly. Subsequently, during 2004, we sold substantially all of
the remaining assets of EMS, including the sale of EMS' patent portfolio on
April 20, 2004. Proceeds from the sale were $1.5 million. Due to a
write-down of the carrying value of the patent portfolio to its estimated
fair value of $1.5 million at March 31, 2004 of $364,000, there was no gain
or loss recorded on the finalization of the sale.
On April 6, 2004, the Company and National Semiconductor Corporation
(National) entered into an agreement to settle our long standing patent
interference dispute, which began in 1991. We believe that with the
assignments and cross-license arrangements for this intellectual property, we
are in a position now, insofar as our ability to use the technology in
dispute is concerned, that is at least as favorable as our position prior to
this resolution. See "Item 3. Legal Proceedings," below for further details.
FINANCIAL INFORMATION BY SEGMENT
See "Item 8. Financial Statements and Supplementary Data - Note 12 of the
Notes to Consolidated Financial Statements" for certain financial information
concerning each of our operating segments.
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OVERVIEW OF BUSINESS SEGMENTS
Our continuing operations are conducted through two business segments, our
FRAM business and our DRAM business. Our FRAM business is our primary
business segment that develops, manufactures and sells ferroelectric
nonvolatile random access memory products and licenses the technology related
to such products (FRAM Segment). Our secondary business segment is our
wholly owned subsidiary, Mushkin Inc., that distributes high-speed DRAM
module products in the aftermarket through both direct, retail, and
e-commerce sales channels (DRAM Segment).
FRAM SEGMENT
Our FRAM Segment uses its FRAM technology to integrate ferroelectric
materials with standard semiconductor chip design and fabrication techniques
to provide nonvolatile memory and mixed-signal and integrated FRAM devices
with unique performance characteristics. FRAM devices are used in a wide
variety of applications in the metering, computing and information systems,
automotive, communications, consumer and industrial, scientific and medical
markets.
As a fabless semiconductor manufacturer, our FRAM Segment avoids the large
capital expenditures required to develop and fabricate our FRAM products by
entering into strategic relationships with established semiconductor
companies. Our technology and license agreements entitle Ramtron to royalties
and/or development support and manufacturing capacity for our FRAM technology
and products. Our current licensees include Fujitsu, Ltd. (Fujitsu), Toshiba
Corporation (Toshiba), Samsung Electronics Company, Ltd. (Samsung), Infineon
Technologies AG (Infineon), NEC Corporation (NEC) and Texas Instruments, Inc.
(Texas Instruments).
Our FRAM Segment's primary revenue source is sales of our FRAM products for
high-performance applications in target markets. Our FRAM Segment markets
our products through electronics distributors and more than 60 manufacturers'
representatives worldwide, focused on the major markets of the Americas,
Europe, Japan, and Asia. Our FRAM Segment maintains regional sales and
marketing managers in the United States, Europe, Japan, Hong Kong, South
Korea, and China.
In July 2000, our FRAM Segment 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. Initial deliveries into this program
began in 2001 and are expected to continue through 2005. This program
represented approximately 46%, 60%, and 74% of FRAM product sales during
2004, 2003 and 2002, respectively. While there are no order quantity or
schedule guarantees our FRAM Segment believes, based on volume projections
from ENEL, it will supply approximately 3.3 to 4 million units into the ENEL
metering program through 2005.
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Additional revenue sources include customer-funded research and
development programs for FRAM technology with major semiconductor
manufacturers and licensing of our FRAM Segment's intellectual property to
such manufacturers. Customer-funded research and development program fees
are primarily generated through ferroelectric technology support programs
with major semiconductor manufacturers. Fees are derived from the licensing
of our FRAM Segment's intellectual property to large semiconductor
manufacturers. Royalties result from the sales of FRAM products by those
licensees.
FRAM SEGMENT PRODUCTS
General Background
The memory market is divided into two classes of 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. Our FRAM Segment conducts business in the
nonvolatile memory market.
The most common nonvolatile memory technologies are Flash memory,
Electrically Erasable Programmable Read Only Memory (EEPROM), and Erasable
Programmable Read Only Memory (EPROM) These technologies evolved from
read-only memory (ROM), and such devices allow only a million or less
write-cycles before wearing out because of the high stress condition caused
by write-cycles. Also, relative to volatile random access memories (RAM),
these nonvolatile memory technologies use a high amount of power to write
data and have much longer write times. FRAM technology produces a
nonvolatile memory product with many of the favorable attributes of RAM such
as fast write, long endurance and low power.
The ferroelectric mechanism is completely different than the floating gate
technology used by other nonvolatile memories. A FRAM memory cell is built
using a standard complementary metal oxide semiconductor (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. However, 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 which may be sensed as a "1" or a "0" by the integrated
circuit. Due to its basic RAM design, the circuit reads and writes simply,
easily and quickly. However, unlike volatile memories, the data state is
stable with or without power.
Page-7
Semiconductor products are typically classified as digital, analog, or mixed
signal. Digital semiconductor products, such as memory or microprocessors,
are integrated circuits that process information that is represented in
binary code as a "0" or "1." Analog semiconductor products are integrated
circuits that sense, regulate, control and manage continuously varying
voltage and current levels in a system. Mixed-signal semiconductor products
incorporate both analog and digital circuit functions into a single
integrated circuit. Our FRAM Segment's mixed-signal and integrated FRAM
devices integrate features such as a real-time clock, system supervisor,
event counter and other commonly needed peripherals with the digital circuits
of our standard FRAM memory.
Products
Our FRAM Segment participates in two primary semiconductor markets. These
are the memory market and the mixed-signal and integrated devices market.
Certain products overlap markets by containing both memory and mixed-signal
features. During 2004, 2003 and 2002, our FRAM Segment had FRAM product
sales of $37.2 million, $26.6 million and $22.2 million, respectively.
FRAM serial and parallel interface memory products are offered in 4-kilobit,
16-kilobit, 64-kilobit 256-kilobit and 1-megabit densities with selected
industry standard interfaces and industry-standard package types. Our serial
FRAM products may compete with EEPROM serial memories with identical pin
configurations. As a result of FRAM feature advantages, our FRAM Segment's
products are able to command a price premium over EEPROM products
in selected applications.
FRAM parallel interface products compete with battery-backed static RAM
(SRAM) products, 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 FRAM
parallel products include 64-kilobit, 256-kilobit and 1-megabit devices with
industry standard interfaces and package types.
In 2003, our FRAM Segment introduced mixed-signal and integrated FRAM devices
with a variety of analog and mixed-signal functions combined with a FRAM
memory device on a single chip. FRAM memory of up to 256-kilobits is
included in these devices. These products, as well as products that we
expect to introduce in the future, include functions that are commonly
combined with nonvolatile memory at the system level, or functions that can
be improved by integration with FRAM technology. Mixed-signal and integrated
FRAM devices are expected to increase our FRAM Segment's share of the various
semiconductor devices that comprise electronic systems or products by
integrating functions which currently require the customer to use multiple
devices. Analog and mixed-signal functions that our FRAM Segment has
integrated with its FRAM memories include data collection with a time stamp,
system reset requirements, notification of impending power failure, event
logging and configuration data storage. These new integrated products can
provide greatly simplified system development, reduced printed circuit board
space, improved reliability and an overall cost savings to the customer.
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FRAM SEGMENT MARKETS
Our FRAM Segment targets six primary markets: metering, automotive, computing
and information systems, consumer, communications and ISM (industrial
scientific and medical). These markets are large and diverse. Our FRAM
Segment has identified target applications in each market segment, some of
which are shown in the table below. They include established applications
that can benefit from our FRAM Segment's technology and this benefit provides
an opportunity for our FRAM Segment to engage customers in close
relationships. Our FRAM Segment believes that an application and market
focus, rather than a commodity memory focus, is key to expanding the served
opportunity, improving product margins, and developing more integrated and
competitive products in the future.
FRAM Segment Markets and Selected Applications
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Meters Computing and Information Systems
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Electric, Gas, Water RAID systems
Automated Meter Reading Keyboard, video, mouse switches
Taxi Servers
Flow Network attached storage
Postage Storage area networks
Printers and copiers
Electronic shelf labels
Communications Automotive
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Short message system phones Restraint systems
Cell base stations Smart airbag systems
DSL line cards Body controls
Portable GPS Car radio/DVD/Navigation systems
Instrumentation clusters
Consumer Industrial, Scientific and Medical
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Plasma TV Medical instruments
LCD TV Test equipment
Set top box Motor controls
Home automation RF/ID data logging
FRAM SEGMENT MANUFACTURING
Our FRAM Segment is a fabless semiconductor manufacturer that designs
and develops new products internally for production by third-party
manufacturers. We completed our transition to fabless manufacturing in 1999.
Our FRAM Segment's agreements with third-party manufacturers are intended to
enable our FRAM Segment to avoid the large capital expenditures that
would otherwise be required to manufacture FRAM products in commercial
volumes.
Page-9
Under the fabless business strategy, our FRAM Segment is dependent on other
manufacturers for the manufacture of FRAM products. Although our FRAM
Segment has entered into license agreements with Fujitsu, Rohm, Toshiba,
Infineon and Texas Instruments that provide for the development and/or
manufacture of FRAM products, Fujitsu is currently the sole supplier of FRAM
products to our FRAM Segment. Our FRAM Segment has also entered into
licensing agreements with Samsung and NEC for our FRAM Segment's
ferroelectric technology, but these agreements do not include manufacturing
services.
The manufacturing costs of FRAM products are presently higher than competing
EEPROM and BBSRAM products when compared on a cost per bit of memory.
Therefore, our FRAM Segment focuses its product development, marketing and
sales effort on those applications where the advantages of the FRAM features
outweigh the cost premium or where, as in the case of our FRAM Segment's
mixed-signal and integrated FRAM devices, it can offer a cost effective
system solution by replacing multiple chips with a single chip solution.
Our FRAM Segment continues to work to reduce manufacturing costs. The
purpose of moving from a FRAM memory cell architecture of two transistors and
two capacitors (2T/2C) to a 1T/1C architecture was 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. Another step in our FRAM
Segment's cost reduction efforts was completed in 2003 with the introduction
of a 0.35 micron manufacturing process at our FRAM Segment's foundry partner,
Fujitsu. Using the 0.35 micron manufacturing process resulted in
approximately 50% more die per wafer as compared to the 0.5 micron
manufacturing process. A majority of our FRAM Segment's new products are
expected to be developed using the 0.35 micron manufacturing process. Legacy
products are expected to continue to be fabricated on the 0.5 micron
manufacturing process and will be evaluated on a case by case basis for
migration to the 0.35 micron process.
Our FRAM Segment has not yet negotiated foundry supply agreements with
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 our FRAM Segment's licensees will achieve
commercial manufacturing capability in a timeframe sufficient to meet our
FRAM Segment's capacity requirements, or at all. Our FRAM Segment has a
manufacturing agreement with Rohm that is not currently active. Fujitsu is
required to notify our FRAM Segment at least two years in advance of any
change in its ability, or intention, to continue manufacturing our FRAM
Segment's FRAM products. Any changes in Fujitsu's ability to manufacture the
FRAM Segment's FRAM product wafers could have a material adverse effect on
our FRAM Segment's and the Company's business. Our FRAM Segment is currently
evaluating alternative sources of wafer supply in order to minimize this
risk.
Page-10
As is customary in the semiconductor industry, our FRAM Segment subcontracts
with foreign companies to assemble and test finished products. Manufacturing
services performed by such third parties are conducted in accordance with
processes designed by our FRAM Segment or the third-party manufacturers and
are implemented under the supervision of our FRAM Segment's product engineers
or such third-party manufacturers. While such subcontracted functions offer
significant economic benefits, they also introduce certain risks. For
example, our FRAM Segment may receive lower priority from such subcontractors
as compared to larger firms as a result of our FRAM Segment's smaller volume
of production. We believe that our relationships with these subcontractors
are sound, and we actively manage these operations through quality audits,
management visits and routine exchange of information to minimize adverse
impacts on our FRAM Segment's business.
FRAM SEGMENT PATENTS AND PROPRIETARY RIGHTS
Our FRAM Segment holds 107 unexpired United States patents covering certain
aspects of its products and technology. Such patents will expire at various
times between May 2005 and February 2022. Our FRAM Segment has applied for
13 additional United States patents covering certain aspects of its products
and technology. Our FRAM Segment has also taken steps to apply for foreign
patents on its products and technology. Our FRAM Segment holds 12 unexpired
foreign patents and has 12 foreign patent applications pending. A number of
the pending United States patents will, upon issuance, be jointly owned by
our FRAM Segment and Fujitsu.
In addition to prosecuting patent infringement, our FRAM Segment 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.
Our FRAM Segment believes its inventions are of fundamental importance to its
business. Patents and trade secrets that we own provide a defense against
competitors introducing infringing products that will compete with our FRAM
Segment's FRAM products and the royalty-bearing products of our FRAM
Segment's licensees. Although our FRAM Segment intends to enforce its
patents and trade secrets vigorously and aggressively, there can be no
assurance that such protection will be available or be enforceable in any
particular instance or that our FRAM Segment will have the financial
resources necessary to adequately enforce its patent and trade secret rights.
The unavailability or unenforceability of such protection or the inability to
enforce adequately such rights could have a material adverse affect our FRAM
Segment's and the Company's business and operating results.
Page-11
Our FRAM Segment's strategic alliance partners, have access to our FRAM
Segment's proprietary FRAM technology and know-how and have the right to
manufacture and sell ferroelectric products. Our FRAM Segment does not
license from third parties any material rights relating to ferroelectric
technology and does not believe its technology infringes any known patents.
Our FRAM Segment has, however, entered into a cross-license agreement with
Symetrix Corporation for the possible use by our FRAM Segment, and certain of
its licensees through available sublicense rights, for ferroelectric
technology that may have been developed by Symetrix. Our FRAM Segment is
aware, because others have obtained patents covering numerous semiconductor
designs or processes, that our FRAM Segment operates in a competitive
environment in which it would not be unlikely for a third party to claim that
certain of our FRAM Segment'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, our FRAM Segment may be exposed to liability for damages
and may need to obtain licenses relating to third-party technology
incorporated into our FRAM Segment's products.
FRAM SEGMENT SEASONAL NATURE OF BUSINESS
Our FRAM segment does not consider its operations to be seasonal.
SEGMENT CUSTOMERS AND SALES
Segment Product Revenue ($ thousands)
2004 2003 2002
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FRAM Segment $37,231 $26,593 $22,224
DRAM Segment 18,334 11,446 16,313
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Total $55,565 $38,039 $38,537
======= ======= =======
FRAM SEGMENT CUSTOMERS AND SALES
FRAM Segment Customers. Sales to ENEL, a leading Italian utility company,
represented 46%, 60% and 74% of FRAM product revenue during 2004, 2003 and
2002, respectively, and is the only FRAM customer that represented greater
than 10% of total FRAM revenue.
Our FRAM Segment grew its core FRAM business 86% in 2004. Our FRAM
Segment began selling its first FRAM-based Processor Companion products,
which contributed more than $560,000, or about 4.4%, of the 2004 core FRAM
revenue within a year of their introduction. Gross margin on our FRAM
products increased 3% points year over year due to product shrinks and other
routine cost-reduction activities. Revenue from new products, that is
products introduced in 2003 and later, contributed approximately 7% of
core FRAM revenue.
Page-12
FRAM Segment Product Revenue ($ thousands)
2004 2003 2002
------- ------- -------
ENEL $17,214 $15,857 $16,409
Core FRAM 20,017 10,736 5,815
------- ------- -------
Total $37,231 $26,593 $22,224
======= ======= =======
As is typical in the semiconductor industry, FRAM products can require
lengthy "design-in" cycles for customer applications, as well as extensive
application engineering support. Our FRAM Segment's internal application
experts are a vital element in our marketing and sales efforts. Our FRAM
Segment expects to continue to expand its product portfolio by introducing
new serial, parallel, analog and mixed-signal integrated FRAM products, by
reducing FRAM product manufacturing costs, by expanding our manufacturing
capacity with strategic partners, and by further penetrating our existing
markets.
Our FRAM Segment's export sales as a percentage of total sales were 88%, 93%,
and 72% for the years 2004, 2003 and 2002, respectively. Export sales in
2004 declined as a percentage over 2003 due to faster growth in the United
States than in other markets. The decline was offset by an increase in ENEL
shipments and by an increase in the FRAM Segment's Canadian distributor
sales, which is classified as export though a significant portion of that
distributor's customers are in the U.S. Export sales for 2003 increased as a
percentage over 2002 due to the reduction in license payments.
FRAM Segment Sales Channels. Our FRAM Segment markets its products through
manufacturer representatives and electronics distributors who are supported
by our FRAM Segment's 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. Our FRAM
Segment anticipates using existing channels for the future sales and
distribution of products.
Our FRAM Segment maintains full-time sales and marketing personnel in the
United States, Japan, Europe, Hong Kong, South Korea, and China. Our FRAM
Segment has distribution and/or representation relationships with more than
60 companies worldwide, including North America, Europe, Japan and Asia.
FRAM SEGMENT 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. Delivery dates are adjusted at customers' request. For the
foregoing reasons and because of the possibility of customer changes in
delivery schedules or cancellations of orders without significant penalty,
we do not believe that our backlog as of any particular date is firm or that
it is a reliable indicator of actual sales for any succeeding period.
Page-13
FRAM SEGMENT COMPETITION
The semiconductor memory industry is intensely competitive. All of the
FRAM Segment's FRAM products experience intense competition from numerous
domestic and foreign companies. Our FRAM Segment 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 flow during downturns in the
semiconductor industry.
Our FRAM Segment considers its FRAM products to be competitive with existing
nonvolatile memory products such as EEPROM and BBSRAM products in low-density
applications. Although nonvolatile Flash memory products are important in
the high-density, nonvolatile memory product market, our FRAM Segment'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 N.V. and by
specialized product companies, like Atmel Corporation, Intersil Corp. and
Integrated Silicon Solution Inc.
Our FRAM Segment can use the unique performance characteristics of FRAM
technology as a competitive factor. This has varying degrees of
importance to customers and their applications. Currently, our
FRAM Segment's FRAM manufacturing costs are higher than those for
conventional competing technologies resulting in a price premium for FRAM
products that, for example, may compete directly with EEPROM products.
Therefore, our FRAM Segment is executing a strategy of targeting applications
where FRAM products offer additional operating and feature advantages to
offset higher product prices. One result of this strategy is a smaller
market than the total commodity market in which FRAM products can be sold.
However, it can also result in higher margins. Our FRAM Segment will
continue to emphasize FRAM product benefits while our FRAM Segment and its
manufacturing partners work to reduce the cost of production.
Our FRAM Segment also faces competition from industry standard products
available from multiple sources, where the basis for competition is price,
availability, customer relationships, quality and customer service. Our FRAM
Segment faces intense competition based on these factors.
Our FRAM Segment's licensees may market products that compete with our FRAM
Segment's FRAM products. Most of our FRAM Segment's licensees have the right
to manufacture and sell FRAM for their own account. For example, as part of
the agreements with Rohm, Toshiba, Fujitsu, Samsung, Infineon, NEC and Texas
Instruments, our FRAM Segment granted each of those companies a non-exclusive
license to FRAM technology, which includes the right to manufacture and
sell products using FRAM technology. Most of these license agreements
provide for the continuation of the license rights to our FRAM Segment's
technology and know-how after expiration or termination of the agreements.
Page-14
FRAM SEGMENT RESEARCH AND DEVELOPMENT
Our FRAM Segment uses its technological and engineering expertise to develop
proprietary technologies for high quality, technologically advanced products
that meet the complex and diverse needs of its customer base. Our FRAM
Segment intends to continue to leverage and expand its technological and
engineering expertise to develop new proprietary technologies and to expand
its product offerings to our targeted markets.
Our FRAM Segment will continue to make additional investments in research and
development of additional FRAM technologies and products. Current research
and development activities are focused on expanding our FRAM Segment's
product offerings and an additional foundry line to meet the future needs of
our FRAM Segment.
Our FRAM Segment seeks to maintain its leadership role in FRAM technology
development by working in cooperation with the world's leading semiconductor
manufacturers to further the development of our FRAM Segment's proprietary
FRAM technology. Our FRAM Segment maintains relationships with its FRAM
partners that serve our strategic interest by providing funded technology
development support. Currently, Texas Instruments is compensating our FRAM
Segment to provide support of process and product technology development.
Our FRAM Segment and Texas Instruments are working under a joint development
agreement to demonstrate low-voltage, embedded FRAM technology at technology
process nodes of 0.13 micron and below. Under this agreement, our FRAM
Segment receives license and development fees for a license to our FRAM
Segment's FRAM technology and technical development services.
Approximately 34 of our FRAM Segment's employees are engaged in research and
development. In addition, manufacturing personnel are involved in research
and development through efforts to increase the manufacturing yields of its
products. Our FRAM Segment invested approximately $6.4 million in 2004, $6.4
million in 2003 and $6.6 million in 2002, in new product and technology
development. Included in such research and development expenses is customer-
sponsored research and development expenditures of approximately $0.8 million
in 2004, $1.0 million in 2003 and $0.4 million in 2002.
FRAM SEGMENT ENVIRONMENTAL COMPLIANCE
Federal, state and local regulations impose various environmental controls on
the discharge of chemicals and gases used in our FRAM Segment's prototype
manufacturing and research and development processes. Our FRAM Segment
believes that it has taken all necessary steps to ensure that its activities
comply with all applicable environmental rules and regulations. Our FRAM
Segment is not party to any known violation of environmental controls. A
future failure by our FRAM Segment 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 limited
manufacturing operations. Our FRAM Segment believes that the risk of a
future failure or violation are remote due to the nature of its current
operations.
Page-15
FRAM SEGMENT EMPLOYEES
Our FRAM Segment has 81 employees, including 34 in research and development,
16 in manufacturing, 17 in marketing and sales, and 14 in administration.
None of our FRAM Segment's employees are represented by a collective
bargaining agreement, nor has our FRAM Segment ever experienced any work
stoppage. None of our FRAM Segment's non-executive employees currently have
employment contracts or post-employment non-competition agreements with our
FRAM Segment. Our FRAM Segment believes that its employee relations are
good.
DRAM SEGMENT
Our DRAM Segment is a supplier of high-performance DRAM memory modules and
other storage products for speed-intensive PC applications, such as gaming
and video processing. Our DRAM memory module products are fabricated using
components secured from many of the world's leading DRAM suppliers, such
as Samsung and Infineon. Our DRAM Segment sells its products through direct
and retail channels to small personal computer system manufacturers and
end-users of personal computer systems interested in after-market system
upgrades.
DRAM SEGMENT PRODUCTS
General Background
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 quickly access instructions and data stored in
memory. DRAMs are the most widely used memory device in computing and
information system applications today because of their low cost per memory
bit, large storage capacity, and unlimited random access read/write
capability.
DRAM memory devices are attached to a specifically designed circuit board
that together comprise the module product. A "dual inline memory module
(DIMM)" refers to the pins on the module that allows the module to plug into
another the circuit board.
Products
Our DRAM Segment's product line serves the main memory market. While the
majority of the main memory market is satisfied with the performance of
current standard memory products, a growing segment of the market demands
higher performance memory solutions. This segment is comprised of both
computer system manufacturers and end users. The high-end DRAM products are
positioned to provide performance advantages over standard solutions at
increased cost. Examples of applications that use DRAM memory modules are
desktop and laptop computers, servers, desktop computers optimized for
gaming, video processing, and other demanding applications.
Page-16
DRAM SEGMENT MARKETS
Our DRAM Segment sells its products through direct, internet and retail
channels to small personal computer system manufacturers and end users of
personal computer systems interested in after-market system upgrades. During
2004, 2003 and 2002, our DRAM Segment sold product totaling $18.3 million,
$11.4 million and $16.3 million, respectively.
DRAM SEGMENT MANUFACTURING
Our DRAM Segment secures high performance memory modules either through
turn-key relationships with primary DRAM suppliers or by purchasing high
performance components directly and assembling modules at third party
facilities. All modules use components specified by our DRAM Segment to meet
performance requirements that exceed industry standards. Our DRAM Segment
believes that the raw materials and packaging required for manufacturing its
products by third parties is readily available from multiple sources to such
third parties.
DRAM SEGMENT PATENTS AND PROPRIETARY RIGHTS
None
DRAM SEGMENT SEASONAL NATURE OF BUSINESS
Our DRAM Segment does not consider its operations to be seasonal.
DRAM SEGMENT CUSTOMERS AND SALES
DRAM Segment Customers. Fry's Electronics (Fry's), a computer and
electronics retailer, represented approximately 31% and 50% of total DRAM
Segment sales revenue for 2004 and 2003, respectively. ABS Computer
Technologies (ABS), a system-building and internet retailer of computer
products, represented approximately 37% and 10% of total DRAM Segment sales
revenue for 2004 and 2003, respectively. These were the only two DRAM
Segment customers that represented greater than 10% of total DRAM Segment
revenue. During 2004, approximately 95% of DRAM Segment sales were through
direct and retail sales channels, while 5% were sold through e-commerce
channels.
DRAM Segment Product Revenue ($ thousands)
2004 2003 2002
------- ------- -------
Fry's $ 5,653 $ 5,751 $ 6,714
ABS 6,771 1,136 1,013
Other 5,910 4,559 8,586
------- ------- -------
Total $18,334 $11,446 $16,313
======= ======= =======
Page-17
Our DRAM Segment's export sales as a percentage of total sales were 8%, 9%,
and 5% for the years 2004, 2003 and 2002, respectively. Export sales from
2002 to 2004 as a percentage of overall sales has increased modestly due to
an increased marketing effort in Europe. Export sales for 2004 grew
proportionally to overall sales and thus, is in line with 2003 as a
percentage of overall sales.
DRAM Segment Sales Channels. Our DRAM Segment markets its products through
three channels in the U.S market: electronic or computer retailers,
resellers, and directly to consumers via the internet. Outside the U.S., our
DRAM Segment uses resellers and distributors. Retailers and resellers are
supported by employed sales personnel and outside sales representatives. Our
DRAM Segment anticipates broadening existing channels and adding marketing
channels for OEM customers.
Our DRAM Segment maintains full-time sales and marketing personnel in the
United States. Our DRAM Segment has relationships with over 50 resellers
worldwide, with emphasis in North America and Europe.
DRAM SEGMENT 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. Delivery dates are adjusted at customers' request. For the
foregoing reasons and because of the possibility of customer changes in
delivery schedules or cancellations of orders without significant penalty,
we do not believe that our backlog as of any particular date is firm or that
it is a reliable indicator of actual sales for any succeeding period.
DRAM SEGMENT COMPETITION
Our DRAM memory industry is intensely competitive. All of our DRAM Segment's
DRAM module products experience intense competition from numerous domestic
and foreign companies. Our DRAM Segment 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 flow during downturns in our DRAM
market. Our DRAM Segment maintains a very cost competitive structure by
leveraging strong relationships with major chip and module suppliers. Our
DRAM Segment competes mainly in the "high-end" segment of the market where it
has established itself as one of the suppliers of high-performance memory
modules. In addition, the suppliers of our DRAM Segment's products are also
competitors in the DRAM Segment's marketplace.
DRAM SEGMENT RESEARCH AND DEVELOPMENT
Our DRAM Segment operation has limited research and development requirements.
Performance screening of chips and modules is the primary function in
introducing new products.
Page-18
DRAM SEGMENT ENVIRONMENTAL COMPLIANCE
Our DRAM Segment is not party to any violation of environmental controls.
Our DRAM Segment feels that the risk of a future failure or violation are
remote due to the nature of its current operations.
DRAM SEGMENT EMPLOYEES
Our DRAM Segment has 13 employees, including 3 in marketing and sales, 7 in
operations, and 3 in administration. None of our DRAM Segment's employees
are represented by a collective bargaining agreement, nor has our DRAM
Segment ever experienced any work stoppage. None of DRAM Segment's
employees currently have employment contracts or post-employment
non-competition agreements with our DRAM Segment. Our DRAM Segment believes
that its employee relations are good.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
See "Item 8. Financial Statements and Supplementary Data - Note 12 of the
Notes to Consolidated Financial Statements" for certain financial information
concerning geographic area information.
AVAILABLE INFORMATION
We make available financial information, new releases, news releases and
other information on our website at www.ramtron.com. There is a direct link
from the website to our Securities and Exchange Commission (SEC) filings via
the EDGAR database, where our annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and any amendments to those
reports are filed. Such reports are available free of charge as soon as
reasonably practicable after we file such reports and amendments with or
furnish them to the SEC, by contacting Investor Relations, 1850 Ramtron
Drive, Colorado Springs, Colorado 80921. Stockholders can obtain such
reports directly from the SEC at no charge at the SEC's website
(www.sec.gov).
Item 2. PROPERTIES
We own a building in Colorado Springs, Colorado, which serves as our world
headquarters and principal executive offices for our FRAM Segment. The
building has a testing facility to support research and development,
prototype manufacturing, advanced FRAM materials development and customer
quality assurance and failure analysis support for our FRAM Segment. The
building is encumbered.
Leased space within the United States is as follows:
California
Colorado, Denver
Page-19
Leased space outside the United States is as follows:
United Kingdom
Japan
The leased office space in Colorado is occupied by our DRAM Segment. All
other leased locations are sales offices of our FRAM Segment.
We believe that our existing facilities are adequate for our needs in the
foreseeable future. If additional leased space is required in the future,
such leased space is readily available.
Item 3. LEGAL PROCEEDINGS
PATENT INTERFERENCE PROCEEDING
On April 6, 2004, the Company and National Semiconductor Corporation
(National) entered into an agreement to settle our long standing patent
interference dispute, which began in 1991 as a patent interference proceeding
that was declared in the United States Patent and Trademark Office (the
Patent Office) in regard to one of our issued United States patents. The
patent involved covers a basic ferroelectric memory cell design invention
that we believe is of fundamental importance to our FRAM business in the
United States.
Under the terms of the settlement agreement we have abandoned four of the
five claims in our existing patent, two of National's patent applications
relating to the interference claims have been assigned to us and two
others were retained by National. National and Ramtron have agreed to
cross license any and all future patents that may be issued from the four
applications at no additional cost to either company. As consideration for
the assigned patent applications and cross license provisions of the
agreement, we will pay National $2.5 million in equal annual installments of
$250,000 through 2013. We have not recorded an impairment of the existing
patents held for the technology in dispute since we believe, as a consequence
of the assignments and cross-license arrangements discussed previously, we
are in a position now, insofar as our ability to use the technology in
dispute is concerned, that is at least as favorable as our position prior to
this resolution. In addition, we believe the amounts capitalized related to
these patents and licenses will be recovered through future cash proceeds.
The fifth remaining count of interference has been sent to a Special Master
for a final ruling. We believe our business would not be materially
affected by an adverse judgment by the Special Master on the remaining count
of interference. The disposition of this matter, expected in 2005, is not
expected to have a material adverse effect on our business, financial
condition or results of operations.
Page-20
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 2004.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the National Market tier of The Nasdaq Stock
Market under the symbol "RMTR." The following table sets forth the 2004 and
2003 ranges of the high and low closing sales prices for the common stock as
reported on The Nasdaq Stock Market.
High Low
------ ------
2004
- ----
First Quarter . . . . . . . . . . . . . . . . . . $3.59 $2.61
Second Quarter . . . . . . . . . . . . . . . . . . $5.86 $3.03
Third Quarter . . . . . . . . . . . . . . . . . . $4.54 $2.73
Fourth Quarter . . . . . . . . . . . . . . . . . . $4.30 $2.83
2003
- ----
First Quarter . . . . . . . . . . . . . . . . . . $3.26 $1.58
Second Quarter . . . . . . . . . . . . . . . . . . $2.69 $1.75
Third Quarter . . . . . . . . . . . . . . . . . . $2.93 $2.00
Fourth Quarter . . . . . . . . . . . . . . . . . . $2.82 $2.18
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. As of
March 9, 2005, there were approximately 2,171 record holders of our
common stock.
We have not paid any dividends since our inception and do not intend to pay
any cash dividends in the foreseeable future. We intend to retain any
earnings to finance operations.
Page-21
The remaining information called for by this item relating to "Securities
Authorized for Issuance under Equity Compensation Plan" is reported in Part
III, "Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters" of this Annual Report on Form 10-K.
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 contained in "Item 8. Financial Statements and
Supplementary Data" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation" included herein.
Year Ended December 31,
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(in thousands, except per share data)
Revenue $57,828 $40,179 $46,343 $18,952 $17,397
Gross margin, product
sales 22,464 15,481 11,379 2,674 2,473
Income (loss) from
continuing operations 3,934 (4,234) 1,643 (24,983) (12,153)
Loss from discontinued
operation (332) (5,271) (3,470) (8,005) (2,221)
Net income (loss) applicable
to common shares 3,602 (9,505) (1,923) (33,151) (14,497)
Income (loss) per share from
continuing operations:
- basic $ 0.18 $ (0.19) $ 0.07 $ (1.18) $ (0.74)
- diluted $ 0.17 $ (0.19) $ 0.07 $ (1.18) $ (0.74)
Net income (loss) per
share - basic $ 0.16 $ (0.43) $ (0.09) $ (1.57) $ (0.88)
Net income (loss) per
share - diluted $ 0.15 $ (0.43) $ (0.08) $ (1.57) $ (0.88)
Working capital 12,858 8,727 11,961 6,327 7,643
Total assets 33,653 29,645 40,942 30,038 30,214
Total long-term debt 4,914 2,669 5,728 -- 6,314
Stockholders' equity 15,192 11,042 20,154 19,039 21,501
Cash dividends per
common share(1) -- -- -- -- --
- ----------
(1) We have not declared any cash dividends on our common stock and
do not expect to pay such dividends in the foreseeable future. In
addition, we are restricted from paying dividends as long as amounts are
outstanding under our convertible debentures.
Page-22
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion and analysis is intended to provide greater details
of our results of operations and financial condition. The following
discussion should be read in conjunction with the information under "Item 6.
Selected Financial Data" and "Item 8. Financial Statements and Supplementary
Data." Certain statements under this caption constitute "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange
Act of 1934, and, as such, are based on current expectations and are subject
to certain risks and uncertainties. The reader should not place undue
reliance on these forward-looking statements for many reasons including those
risks discussed under "Factors that May Affect Future Results" and elsewhere
in this Annual Report on Form 10-K. Forward-looking statements may be
identified by the use of forward-looking words or phrases such as "will,"
"may," "believe," "expect," "intend," "anticipate," "could," "should,"
"anticipate," "plan," "estimate," and "potential," or other similar words.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue
and expenses, and related disclosure of contingent assets and liabilities. On
an on-going basis, we evaluate our estimates, including those related to bad
debts, inventories, long-lived assets, income taxes, and contingencies and
litigation. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions. Our significant accounting policies are discussed
under "Item 8. Financial Statements and Supplementary Data - Note 1 of the
Notes to Consolidated Financial Statements"; critical estimates inherent in
these accounting policies are discussed in the following paragraphs.
REVENUE RECOGNITION. Revenue from product sales to direct customers is
recognized upon shipment as we generally do not have any post-shipment
obligations or allow for any acceptance provisions. We defer recognition of
sales to distributors when we are unable to make a reasonable estimate of
product returns due to insufficient historical product return information.
The revenue recorded is dependent upon estimates of expected customer returns
and sales discounts.
Revenue from licensing programs is recognized over the period we are
required to provide services under the terms of the agreement. Revenue from
research and development activities that are funded by customers are
recognized as the services are performed.
Page-23
Revenue from royalties is recognized upon the notification to us of shipment
of product from our technology license partners to direct customers.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS. While we maintain a stringent credit
approval process, significant judgments are made by management in assessing
our customers' ability to pay at the time of shipment. Despite this
assessment, from time to time, customers are unable to meet their payment
obligations. We continue to monitor customers' credit worthiness, and
use judgment in establishing the estimated amounts of customer receivables
which will ultimately not be collected. A significant change in the
liquidity or financial position of customers could have a material adverse
impact on the collectibility of accounts receivable and future operating
results.
INVENTORY VALUATION. We write-down our inventory for estimated obsolescence
or lack of marketability for the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and
market conditions. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be required.
LONG-LIVED ASSETS. We review the carrying values of long-lived assets
whenever events or changes in circumstances indicate that such carrying
values may not be recoverable. Under current standards, the assets must be
carried at historical cost if the projected cash flows from their use
will recover their carrying amounts on an undiscounted basis and without
considering interest. However, if projected cash flows are less than their
carrying value, the long-lived assets must be reduced to their estimated fair
value. Considerable judgment is required to project such cash flows and, if
required, estimate the fair value of the impaired long-lived asset. The
estimated future cash flows are based upon, among other things, assumptions
about expected future operating performance and may differ from actual cash
flows. There can be no assurance that future long-lived asset impairments
will not occur.
GOODWILL. Goodwill represents the excess of the purchase price over the fair
value of identifiable net tangible and intangible assets acquired in a
business combination. Goodwill is required to be tested for impairment
annually, or more frequently if events or changes in circumstances indicate
that goodwill may be impaired. We performed our annual goodwill impairment
testing as of December 31, 2004, and determined that no impairment existed
at that date. This assessment requires estimates of future revenue,
operating results and cash flows, as well as estimates of critical valuation
inputs such as discount rates, terminal values and similar data. We continue
to perform periodic and annual impairment analyses of goodwill resulting from
acquisitions. As a result of such impairment analyses, impairment charges
may be recorded and may have a material adverse impact on our financial
position and operating results. Additionally, we may make strategic business
decisions in future periods which impact the fair value of goodwill, which
could result in significant impairment charges. There can be no assurance
that future goodwill impairments will not occur.
Page-24
DEFERRED INCOME TAXES. We record deferred tax assets and liabilities for the
estimated future tax effects of temporary differences between the tax basis
of assets and liabilities and amounts recorded in the consolidated financial
statements, and for operating loss and tax credit carryforwards. Realization
of the recorded deferred tax assets is dependent upon us generating
sufficient taxable income in the appropriate tax jurisdiction in future years
to obtain benefit from the reversal of net deductible temporary differences
and from tax credit and operating loss carryforwards. A valuation allowance
is provided to the extent that management deems it more likely than not that
the net deferred tax assets will not be realized. The amount of deferred tax
assets considered realizable is subject to adjustment in future periods if
estimates of future taxable income are changed.
RESULTS OF OPERATIONS
OVERVIEW
Since our inception, we have been engaged primarily in the research and
development of ferroelectric technology and the design, development and
commercialization of FRAM products and DRAM products. Revenue has been
derived from the sale of our FRAM and DRAM products since 1992. We have also
generated revenue under license and development agreements for specific
applications of our technologies with a limited number of established
semiconductor manufacturers. Accordingly, fluctuations in our 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.
Our total revenue grew 44% from 2003 to 2004, and decreased 13% from 2002 to
2003. Total FRAM business revenue grew 37% from 2003 to 2004, and decreased
4% from 2003 to 2002. FRAM revenue growth was primarily due to increased
sales to core FRAM revenue customers as well as increased sales of new
products. The decrease in FRAM revenue from 2002 to 2003 was primarily due
to a $6.3 million decrease in license & development fees from Texas
Instruments that was partially offset by a 20% increase in FRAM product
revenue. The increase in FRAM product revenue was primarily due to increased
sales to core FRAM revenue customers. FRAM product sales have increased
proportionally as a source of revenue due to an expanding FRAM customer base,
a deeper penetration of existing customers, an expanding line of FRAM
products, and our participation in the utility meter replacement program at
ENEL, which began in late 2001.
Since 2003, we have generated average quarterly revenue of approximately
$4 million from our ENEL meter replacement program. In 2005, we expect ENEL
to contribute $5 million to $6 million in revenue, down from $17 million in
2004. Based on our current estimates, first quarter 2005 ENEL shipments are
anticipated to be down sharply but increase the second quarter, with the
balance of ENEL shipments trending lower in the third and fourth quarters of
2005. We expect some residual shipments during the first quarter of 2006.
We have been able to significantly increase revenue from other FRAM
customers, also called core FRAM revenue, during each of the last three
years, with product revenue totaling approximately $20.0 million, $10.7
million and $5.8 million in 2004, 2003 and 2002, respectively. Core FRAM
product revenue grew 85% in 2003, and 86% in 2004. For 2005, we anticipate
that our core FRAM product revenue will grow between 25% and 35% over 2004.
Page-25
Since we built our cost structure to offset the roll off of sales to ENEL,
our current operating plan anticipates that we will be profitable for
full-year 2005. We have publicly stated that it will take a few quarters to
completely replace the historical revenue from ENEL, but with our core FRAM
product business poised for additional growth in 2005, we believe we are in a
good position to make the transition as the ENEL program becomes a smaller
portion of our FRAM revenue.
DRAM revenue increased 60% from 2003 to 2004. Economic conditions improved
in the DIMM market, which resulted in increased revenue. This is the
opposite of what happened in the DIMM market in 2003 when Mushkin's revenue
decreased 30% from 2002 to 2003. During this period, Mushkin's business
transitioned from generating revenue predominately from e-commerce sources to
a business with a substantial retail presence primarily through Fry's
Electronics (Fry's) and ABS Computer Technologies (ABS). Currently, Fry's
and ABS's sales represent approximately 68% of Mushkin's annual revenue.
Also, during the latter part of 2002, Mushkin began focusing on lower volume,
higher margin sales opportunities to improve its overall financial
performance. This focus reduced revenue but improved adjusted income
(exclusive of goodwill impairment charges) in 2003. We anticipate Mushkin's
2005 revenue to remain flat with that of 2004.
During the first quarter of 2004, we committed to a plan to sell
substantially all of the remaining assets of EMS. The remaining assets
consisted primarily of EMS' patent portfolio. We completed the sale
of EMS' patent portfolio on April 20, 2004, the proceeds of which were $1.5
million. Due to a write-down of the carrying value of the patent portfolio
to its estimated fair value at March 31, 2004, there was no gain or loss
recorded on the finalization of the sale.
Our costs and expenses grew 22% in 2004, compared to a 2% decline from 2002
to 2003. Components of this spending are explained below.
Our gross margin in 2004 was 40%, compared with 41% in 2003, and 30% in 2002.
The improvement in gross margin in 2003 resulted primarily from a change in
our product sales mix. FRAM product sales grew in 2003, while sales in our
Mushkin segment declined. Since FRAM products have a higher gross margin the
shift in the product mix resulted in increased gross margin. FRAM product
gross margin during 2004 was 54% compared with 51% in 2003, and 43% in 2002.
Improvements in FRAM gross margin are attributable to product shrinks and
other routine cost-reduction activities. In 2003, FRAM gross margin improved
as manufacturing yields improved, we shipped a more economical FRAM product
into the ENEL metering program, and we realized cost reductions at our
subcontract manufacturers. Mushkin product gross margin during 2004 was 13%,
compared with 17% in 2003, and 12% in 2002. The Mushkin margin improvement
from 2002 to 2003 resulted primarily from higher average selling prices for
Mushkin products. The Mushkin margin deterioration from 2004 to 2003
resulted primarily from increased competition, which was detrimental to our
prices and product margins.
Page-26
Research and development expenses, including customer-sponsored research and
development, were basically flat from 2002 to 2004. These expenses, as a
percentage of total sales were 11% in 2004, compared with 16% in 2003, and
14% in 2002. We have held research and development expenses flat to bring
our spending in line with our revenue.
Sales, general and administrative expenses were 23% of total revenue in 2004,
26% in 2003, and 22% in 2002. Sales, general and administrative spending was
flat from 2002 to 2003, again to bring our spending in line with our revenue.
Increased spending from $10.3 million in 2003, to $13.0 million in 2004,
primarily relates to increased sales commissions, sales bonuses, management
bonuses, and the costs implementing programs, processes, and external audit
fees associated with the compliance requirements of Section 404 of the
Sarbanes-Oxley legislation.
We plan to introduce new products in 2005 including a new Processor Companion
line and new Application Specific Standard Products (ASSPs). Our first ASSP
was developed in partnership with two outside companies. We have delivered
samples and they have acknowledged that the product meets its specifications.
The three companies in partnership will market a complete system-level
solution including necessary IP. We believe that end-customers in the
automotive and industrial markets can benefit from this offering.
In addition, we have begun development work on our next ASSP, which will be
targeted for one of our strongest markets. We benefit from a close working
relationship with our strategic customers and may seek such partnerships
for the development of other ASSPs.
We have recently increased customer sampling of our one-megabit FRAM
memory product and continue to work on higher-density FRAM products through
our joint development program with Texas Instruments.
We may establish new foundry partners in the future to ensure broad support
for our product plans. To establish our proprietary FRAM process at a new
foundry partner, we may acquire certain capital equipment.
During the first half of 2003, a sustained downturn in DRAM market conditions
resulted in lower than expected revenue and profitability of our Mushkin
Segment. Because we believed the downturn was likely to continue and cause
lower than expected sales and profitability for some time into the future, we
believed it was appropriate to review the fair value of goodwill related to
Mushkin. The result of our review was a charge of $3.8 million for
impairment of goodwill during 2003.
For 2005, we anticipate that our Mushkin Segment revenue will be
approximately flat with 2004 revenue. We are focusing our efforts on
activities that may serve to improve the product margins on Mushkin sales by
increasing our efforts to sell higher-end memory modules to the PC
enthusiast, gamer and over clocking markets. We expect margin pressures to
remain in the retail segment of Mushkin's business, which makes it difficult
to predict the level of future margin improvements if any.
Page-27
RESULTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 2004 AS COMPARED TO 2003
Our total revenue was $57.8 million for the year ended December 31,
2004 and $40.2 million for the year ended December 31, 2003. This was a
year-over-year revenue growth rate of 44%. Overall cost of product sales as a
percentage of product revenue were approximately the same when compared to
the prior year. Our costs and expenses were $52.6 million during the year
ended December 31, 2004, compared with $43.1 million for the same period in
2003. The resulting income from continuing operations in 2004 was $3.9
million, which compares to a loss from continuing operations of $4.2 million
in 2003. The $8.1 million increase in operating results is due, in part, to
an impairment of goodwill of $3.8 million in 2003 and, in 2004, holding
spending levels for research and development, and sales, general and
administrative expenses to a level consistent with profitability. The
combination of revenue growth and careful spending in 2004 resulted in the
first profitable year since our inception. Our current plans anticipate that
we will be profitable, on an annual basis in 2005.
FRAM product sales have continued to contribute an increased dollar amount of
gross margin for us on a year-over-year basis. FRAM product gross margin
contributions were $20.1 million in 2004 and $13.8 million in 2003. This is
a result of improved gross margin percentages (54% in 2004 compared to 51% in
2003), coupled with increased sales. The increased sales are a result of the
continued expansion of our FRAM customer base, deeper penetration to
understand the current and future needs of our customers, expanding FRAM
product portfolio, and our continued participation in the utility meter
replacement program at ENEL.
We have communicated to investors that the revenue from the ENEL program is
expected to ramp down in 2005 as the program nears completion. ENEL product
revenue in 2004 was $17.2 million and in 2003 it was $15.9 million. We expect
this program to contribute approximately $5 to $6 million to our FRAM revenue
throughout 2005. We have been able to significantly increase revenue from
other FRAM customers; our core FRAM product revenue totaled approximately
$20.0 million and $10.7 million during 2004 and 2003, respectively. This is
a year-over-year growth rate of 86%.
Product revenue at Mushkin increased to $18.3 million in 2004 from $11.5
million in 2003. Mushkin product gross margin for the year 2004 and 2003
decreased, and was 13% and 17%, respectively. While Mushkin experienced
increasing revenue, the product margin percentages decreased and the
resulting product margin contribution was $2.4 million in 2004 compared to
$2.0 million in 2003. Economic conditions in our DRAM market improved and
resulted in increased revenue in 2004, but increased competition was
detrimental to our prices and product margins.
Page-28
In non-product revenue, during 2004, we experienced $0.3 million in increased
royalty revenue and $0.2 million in increased license revenue, but these were
offset by a $0.4 million reduction in customer-sponsored research and
development revenue. The increased royalty revenue are a result of increased
royalty payments from a major FRAM licensee due to continued growth in its
revenue stream. The increase in the license and development fees resulted
from a final installment on a license agreement. Customer-sponsored research
and development decreased because of a reduction in support provided to Texas
Instruments. We expect to see slight increases in royalty payments, and
continued reductions in customer-sponsored research and development revenue
in 2005.
Combined research and development expenses for 2004 remained flat when
compared to 2003, but decreased to 11% of revenue from 16% of revenue in
2003. Sales, general and administrative expenses for the year increased $2.7
million year over year, but decreased from 26% of revenue in 2003 to 23% of
revenue in 2004. The increase in 2004 results primarily from increased
incentives relating to performance plans. In 2005, we plan to increase
spending to fund additional research and development, increase spending in
sales and marketing and reduce the percentage of revenue spent for general
and administrative functions.
In 2003, we recorded an impairment to goodwill of $3.8 million relating to
our DRAM Segment, Mushkin. A sustained downturn in DRAM market conditions
resulted in lower than expected actual and projected revenue and
profitability of Mushkin during the first half of 2003. Because we believed
the downturn would likely continue to cause lower than expected sales and
profitability for some time into the future, we believed it was appropriate
to review the fair value of goodwill related to Mushkin as of June 30, 2003.
The result of our review was a charge of $3.8 million for impairment of
goodwill in the quarter ended June 30, 2003. In calculating the impairment
charge, the fair value was estimated using a discounted cash flow methodology
and market comparisons. There can be no assurance that future goodwill
impairments will not occur.
Loss From Discontinued Operation. During the three months ended March 31,
2004, we committed to a plan to sell substantially all of the remaining
assets of our subsidiary, EMS. In accordance with SFAS No. 144, our
consolidated financial statements have been recast to present this business
as a discontinued operation. The $0.3 million operating loss in 2004 of the
discontinued operation is primarily the result of an impairment of the
carrying value of EMS' patent portfolio to its estimated fair value at
March 31, 2004. The decrease from the operating loss of $5.3 million in 2003
is primarily due to the reduction in activities at EMS beginning in April
2004.
Page-29
RESULTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 2003 AS COMPARED TO 2002
REVENUE. Total revenue for 2003 was $40.2, a decrease $6.1 million from
2002.
FRAM product revenue for 2003 increased $4.4 million to $26.6 million, from
2002. Increased FRAM product revenue is primarily attributable to increased
shipments to core FRAM customers. During 2003, approximately 60% of FRAM
product revenue was attributable to the ENEL program. Additionally, we
recorded revenue of approximately $950,000 related to a change in our
estimate of returns from distributors during 2003. We historically recorded
all shipments to distributors as deferred revenue until shipped to the end
customer because we did not believe we had adequate historical data to make a
reasonable estimate of the amount of future returns as required under
Statement of Financial Accounting Standard No. 48 ("FAS No. 48"), "Revenue
Recognition When Right of Return Exists." During the first quarter of 2003,
we concluded that we had sufficient shipment and return experience to allow
for the recognition of revenue on shipments to certain distributors at the
time of shipment, along with a reserve for estimated returns. Accordingly,
during the first quarter of 2003, we recognized an additional $950,000 in
product sales revenue that would have been deferred prior to this change in
estimate. The impact on gross margins from this additional revenue was
approximately $450,000 during 2003.
Product revenue at Mushkin for 2003 was $11.4 million, a decrease of $4.9
million, or 30%, as compared to 2002. Decreases in Mushkin product revenue
is the result of focusing on lower volume, higher margin sales opportunities
to improve its overall financial performance, reducing revenue but improving
net income. Additionally, during the first quarter of 2003, Mushkin
recognized $311,000 of revenue related to a change in the estimated amount of
distributor product returns as discussed above. The impact on gross margin
from this additional revenue was approximately $40,000 in 2003.
License and development fees for 2003 were $0.5 million, as compared to $6.8
million for 2002. The decline of $6.3 million resulted from recognizing the
remaining revenue related to our Texas Instruments FRAM license and
development agreement during 2002.
We recognized royalty revenue of $0.5 million in 2003. In 2002,
$0.4 million of royalty revenue was recognized. This royalty income was
primarily attributable to FRAM licensing agreements with existing licensees.
Customer-sponsored research and development revenue during 2003 is primarily
attributable to our FRAM technology development program with Texas
Instruments. We recognized customer-sponsored research and development
revenue of $1.2 million and $0.6 million 2003 and 2002, respectively. The
amount of customer sponsored research and development revenue recognized
during a given quarter is dependent on the specific programs we are working
on, the development stage of each program, the costs incurred during the
quarter and the amount of work remaining to complete the program.
Page-30
Gross Margin as a percentage of product revenue during 2003 were 41% and
30% in 2002. Gross margin associated with our FRAM products increased from
43% in 2002, to 52% in 2003. FRAM gross margin improved as we improved
manufacturing yields, shipped a more economical version of the product used
in the ENEL metering program and realized cost reductions at our subcontract
manufacturers. Gross margin as a percentage of product revenue at our
Mushkin subsidiary increased to 17% in 2003, as compared to 12% in 2002.
Mushkin margin improvements are primarily the result of improved average
selling prices for Mushkin's products.
Research and Development expenses for 2003 ($6.4 million) essentially stayed
flat with 2002 (a decrease of $0.3 million). This was due to reduced
spending to bring our spending in line with our revenue during such period.
Sales, General and Administrative expenses for 2003 of $10.3 million
increased $0.2 million from $10.1 million in 2002. Again, these were
somewhat flat due to a focus on reduced spending to bring our spending in
line with our revenue.
Impairment of Goodwill, as previously discussed, from a mid-year review of
goodwill associated with our Mushkin subsidiary resulted in a charge of
$3.8 million for impairment of goodwill in 2003.
Related party interest expense increased $0.2 million to $0.5 million for
2003, as compared to $0.3 million in 2002, primarily due to increases in
interest expense related to the convertible debenture issued to Infineon in
March 2002.
Other interest expense increased $0.3 million to $0.9 million for 2003, from
$0.6 million primarily due to interest expense related to convertible
debentures issued to Halifax Fund, L.P. (Halifax) and Bramwell Capital
Corporation (Bramwell) in April 2002 and minimum interest charges related to
our credit facility with Wells Fargo Business Credit, Inc. (Wells Fargo).
Loss from the discontinued operation increased to $5.3 million in 2003
compared to $3.5 million in 2002. This increase was primarily due to a
$1.7 million impairment charge related to intangible assets that occurred in
2003.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $1.6 million in 2004 to $6.4 million.
Cash flow provided by operations decreased by $3.9 million to $3.1 million as
compared to 2003, when we generated $7.0 from operations. Cash generated by
operating income, after non-cash charges, which is net income adjusted by
deprecation and amortization, the loss from discontinued operation, loss on
abandonment of patents, provisions for inventory write-offs, and impairment
charges, was $6.2 million, compared to $2.0 million in 2003. The adjustments
in 2003 included $3.8 million of impairment charges and a $5.3 million loss
from discontinued operation. During 2004, we had no impairment charges and
$0.3 million in losses from the discontinued operation.
Page-31
Additionally, working capital requirements increased $8.1 million as compared
to 2003 primarily due to an increase of $4.2 million in accounts receivable
and $3.6 million in inventories. These increases were the result of
increases in our 2004 sales compared to 2003. During 2003, we collected
delinquent payments totaling $2.4 million from a subcontract manufacturer on
the ENEL program.
Accounts payable and accrued liabilities increased on a year-over-year basis
from $5.0 million at the end of 2003 to $6.7 million at the end of 2004.
This increase is primarily attributable to increased purchases related to the
increased sales in 2004 compared to 2003 as well as amounts accrued during
2004 relating to incentive compensation programs.
Deferred revenue decreased $1.1 million from $7.4 million at the end of 2003
to $6.3 million at the end of 2004. This decrease is primarily related to
earning previously deferred revenue related to a FRAM technology license.
This deferred revenue is being amortized into revenue over the 7-year
remaining life of such technology license.
Cash used in investing activities was $4.1 million in 2003, compared to
$0.4 million provided by investing activities in 2004. This change is
primarily related to the discontinued operations which used $2.5 million in
2003. During 2004, $0.9 million was generated from the discontinued
operation, which included the impact of selling the remaining patents in
2004 for $1.5 million.
In 2004, the change in net cash used in financing activities was an increase
of $0.6 million. This is primarily due to increased principal payments on
our promissory notes of $0.9 million in 2004 offset by increased cash
received for the exercise of stock options of $0.3 million.
We have $4.5 million of convertible debentures that mature in March of 2007.
We have several alternatives to fund this obligation, including the
refinancing of these debentures. It is possible that the stock price will
reach a price that will result in the conversion of these debentures to
common stock or we may undertake a private placement or public offering to
raise funds sufficient to retire these obligations.
We have entered into a credit and security agreement with Wells Fargo
Business Credit, Inc. to provide a secured $3 million revolving line of
credit. The credit facility currently provides for interest at a floating
rate equal to the prime lending rate plus 1.75% per annum, minimum interest
charges of $120,000 per year and a term of three years ending on March 31,
2006. Security for the credit facility includes our non-European accounts
receivable and inventories. The inclusion of any foreign receivable in the
borrowing base requires foreign "receivables insurance." The current cost to
us is approximately $50,000 per year. We may use the credit facility for
working capital requirements. Borrowing limits are subject to available
collateral balances. At December 31, 2004, the amount available under the
revolving line of credit was $3.0 million. There were no borrowings on this
facility at December 31, 2004. In the first half of 2004, we borrowed and
repaid $750,000 on this agreement. We are exploring other credit
arrangements that may provide a higher line of credit, or reduced costs for
the availability of the credit facility.
Page-32
On April 6, 2004, we entered into an agreement to settle our long standing
patent interference proceeding with National Semiconductor Corporation (see
"Item 8. Financial Statements and Supplementary Data - Note 14 of the Notes
of Consolidated Financial Statements"). As a result of the settlement,
beginning April 2004 we are required to pay National $250,000 annually
through 2013.
In the future, the primary source of operating cash flows is expected to
product sales from our FRAM and DRAM product lines.
We had $6.4 million in cash and cash equivalents at December 31, 2004. We
believe we have sufficient resources to fund our operations through at least
2005. If this is not sufficient to meet our cash requirements, we may use
the credit facility mentioned above or any other credit facility we may
obtain. In view of our expected future working capital requirements in
connection with the design, manufacturing and sale of our FRAM products, and
our projected expenditures, we may be required to seek additional equity or
debt financing. There is no assurance, however, that we will be able to
obtain such financing on terms acceptable to us, or at all. Any issuance of
common or preferred stock to obtain additional funding would result in
dilution of existing stockholders' interests in us. 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 our ability to continue our business operations.
CONTRACTUAL COMMITMENTS
For more information on our contractual obligations on operating leases and
contractual commitments, see "Item 8. Financial Statements and Supplementary
Data - Notes 5 and 6 of the Notes to Consolidated Financial Statements." At
December 31, 2004, our commitments under these obligations were as follows
(in thousands):
After
2005 2006 2007 2008 2009 2009 Total
------ ------ ------ ------ ------ ------ -------
Long-term debt(1) $ 597 $ 507 $4,842 $ 250 $ 250 $1,000 $ 7,446
Operating leases 345 193 52 56 -- -- 646
Purchase
obligations(2) 4,112 -- -- -- -- -- 4,112
------ ------ ------ ------ ------ ------ -------
Total $5,054 $ 700 $4,894 $ 306 $ 250 $1,000 $12,204
====== ====== ====== ====== ====== ====== =======
- ----------
(1) Includes required principal and interest payments for outstanding
debentures held by Infineon, Halifax and Bramwell, the National
Settlement and minimum interest charges related to our revolving line of
credit with Wells Fargo.
Page-33
(2) Our purchase obligations are amounts committed under legally enforceable
contracts or purchase orders for goods and services with defined terms
as to price, quantity, delivery and termination liability and are the
result of purchase orders placed but not yet fulfilled by Fujitsu, our
semiconductor wafer supplier.
LEGAL MATTERS
On April 6, 2004, the Company and National Semiconductor Corporation
(National) entered into an agreement to settle our long standing patent
interference dispute, which began in 1991 as a patent interference proceeding
that was declared in the United States Patent and Trademark Office (the
Patent Office) in regard to one of our issued United States patents. The
patent involved covers a basic ferroelectric memory cell design invention
that we believe is of fundamental importance to our FRAM business in the
United States.
Under the terms of the settlement agreement we have abandoned four of the
five claims in our existing patent, two of National's patent applications
relating to the interference claims have been assigned to us and two others
were retained by National. National and Ramtron have agreed to cross
license any and all future patents that may be issued from the four
applications at no additional cost to either company. As consideration for
the assigned patent applications and cross license provisions of the
agreement, we will pay National $2.5 million in equal annual installments of
$250,000 through 2013. We have not recorded an impairment of the existing
patents held for the technology in dispute since we believe, as a consequence
of the assignments and cross-license arrangements discussed previously, we
are in a position now, insofar as our ability to use the technology in
dispute is concerned, that is at least as favorable as our position prior to
this resolution. In addition, we believe the amounts capitalized related to
these patents and licenses will be recovered through future cash proceeds.
The fifth remaining count of interference has been sent to a Special Master
for a final ruling. We believe our business would not be materially
affected by an adverse judgment by the Special Master on the remaining count
of interference. The disposition of this matter, expected in 2005, is not
expected to have a material adverse effect on our business, financial
condition or results of operations.
We are party to legal proceedings arising in the ordinary course of
our business. Although the outcomes of any such legal actions cannot be
predicted, our management believes that there is no pending legal proceeding
against or involving us for which the outcome is likely to have a material
adverse effect upon our financial position or results of operations.
Page-34
NEW ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." This
Standard addresses the accounting for transactions in which a company
receives employee services in exchange for (a) our equity instruments
or (b) liabilities that are based on the fair value of our equity instruments
or that may be settled by the issuance of such equity instruments. This
Standard also eliminates the ability to account for share-based compensation
transactions using Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and requires that such transactions be
accounted for using a fair-value-based method. The Standard is effective for
periods beginning after June 15, 2005. We are currently assessing our
valuation options allowed in this Standard. Even though we have not
quantified the dollar amount of this new accounting standard at this time,
the result will have a negative impact on our earnings starting with the
accounting period beginning July 1, 2005.
FORWARD-LOOKING STATEMENTS
The following information should be read in conjunction with "Part I, Item 1.
Business," "Part II, Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation," and "Part II, Item 8.
Financial Statements and Supplementary Data." This Annual Report on
Form 10-K and certain information incorporated herein by reference contain
forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements in this Annual
Report on Form 10-K include, without limitation:
- - The statements under the heading "Item 1. Business - Overview of Business
Segments" concerning our belief that we will continue to supply
approximately 3.3 to 4 million units into the ENEL metering program
through 2005, which statements are subject to various risks and
uncertainties, including, without limitation, the failure of our
expectations regarding the volume and timing of future orders related to
the ENEL metering program and our ability to timely and profitably fulfill
such orders;
- - The statements under the heading "Item 1. Business - FRAM Segment
Products" concerning our beliefs and expectations that (1) certain
products we intend to introduce in the future will contain mixed-signal
functions combined with non-volatile memory and that these functions can
be improved by integration with our FRAM technology; (2) our foundry
partners will increase their fabrication capacity; (3) our ability to
develop new products which are suitable to the available fabrication
processes of our foundry partners; (4) the potential migration of existing
products to Fujitsu's 0.35 micron process; (5) our belief that an
application and market focus is key to expanding our served opportunity
and developing more integrated and competitive products, which statements
are subject to various risks and uncertainties, including, but not limited
to, the inaccuracy of our assessment of the value of integrating mixed
signal functions with FRAM memories and such products ability to increase
our served opportunity, the time and complexities involved in developing
new products with mixed-signal functionality, or migrating our legacy
products to newer manufacturing processes, and the ability of our foundry
partners to sufficiently increase fabrication capacity;
Page-35
- - The statements under the heading "Item 1. Business - FRAM Segment
Customers and Sales and DRAM Segment Customers and Sales"
concerning (1) our ability to expand our product portfolio through the
introduction of new serial, parallel and mixed-signal integrated FRAM
products; (2) the reduction of FRAM product manufacturing costs; (3)
increasing manufacturing capacity with strategic partners; (4) our belief
that Europe, Asia and Japan are early adopters of new technologies; (5)
our expected use of existing sales channels for future sales and
distribution of our products, which statements are subject to
various risks and uncertainties, including, but not limited to, our
failure to introduce new serial, parallel and mixed-signal FRAM
products and/or reduce product manufacturing costs, the failure of our
strategic partners to sufficiently and timely increase manufacturing
capacity to meet our production requirements, inaccuracies of our
assessment of new technology adoption patterns in Europe, Japan and Asia,
and our ability to use our existing channels for product sales and
distribution;
- - The statement under the heading "Item 1. Business - FRAM Segment Backlog
and DRAM Segment Backlog" concerning our ability to accurately assess
whether backlog as of any particular date is a reliable indicator of
future sales, which statement is subject to various risks and
uncertainties, including, but not limited to, periodic downturns in the
semiconductor industry and the economy in general, our ability to timely
manufacture our products, the ability of our customers to accurately
project their requirements for our products and our ability to accurately
assess competitive factors, including pricing pressures on existing
products;
- - The statements under the heading "Item 1. Business - FRAM Segment
Manufacturing and DRAM Segment Manufacturing" concerning our belief that
(1) the raw materials and packaging required for the manufacture of our
products at our foundry partners are readily available from multiple
sources; and (2) our limited volume of production will lower the priority
we receive from our subcontract manufacturers as compared to other
customers of such subcontract manufacturers, which statements are subject
to various risks and uncertainties, including, without limitation, the
possible occurrence of a disruption or termination of raw material
suppliers, the termination of any of our subcontract manufacturing
partners and our inability to establish relationships with alternative
subcontract manufacturers;
- - The statement under the heading "Item 1. Business - FRAM Segment Research
and Development" concerning our intention to use our technological and
engineering expertise to develop new proprietary technologies to further
expand our FRAM product offerings in our target markets, which statement
is subject to various risks and uncertainties, including, but not limited
to, our ability to fund the investment required to develop proprietary
technologies and overcome the technological challenges inherent in the
development of any new product or technology;
Page-36
- - The statement under the heading "Item 1. Business - FRAM Segment
Environmental Compliance and DRAM Segment Environmental Compliance"
concerning our belief that we have taken all necessary steps to
ensure our activities are in compliance with all applicable environmental
rules and regulations, which statement is subject to various risks and
uncertainties, including, but not limited to, our ability to accurately
assess the compliance requirements of environmental provisions;
- - The statement under the heading "Item 1. Business - FRAM Segment Patents
and Proprietary Rights" concerning our beliefs and intentions (1) to
pursue the legal protection of our technology primarily through patent and
trade secret protection; (2) to vigorously protect our intellectual
property rights; (3) that our technology does not infringe on any known
patents; and(4) that current and pending patent applications will provide
protection against unauthorized use of our inventions, which statements
are subject to various risks and uncertainties, including, but not limited
to, the absence of assurance that patents will be issued from any of our
pending applications or that any claims allowed from existing or pending
patents will be sufficient to protect our technology, the fact that
litigation could result in substantial cost and adverse determinations
that could result in a loss of our proprietary rights, subject us to
significant liabilities to third parties, require us to seek licenses from
third parties or prevent us from manufacturing or selling our products;
- - The statement under the heading "Item 2. Properties" concerning our belief
that our current properties will be sufficient to meet our requirements
for the foreseeable future is subject to various risks and uncertainties,
including, without limitation, growth in net sales placing unexpected
strains on our resources and properties;
- - The statement under the heading "Item 3. Legal Proceedings" and "Item 8.
Financial Statements and Supplementary Data - Note 14 of the Consolidated
Financial Statements regarding the outcome of, and the impact on our
business, financial condition, or results of operations of the National
Semiconductor Corporation patent interference litigation, which statement
is subject to various uncertainties, including without limitation, our
inability to accurately predict the determination of complex issues of
fact and law;
- - The statements under the heading "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operation - Critical
Accounting Policies" regarding the calculation of allowances, reserves,
and other estimates that are based on historical experience, the judgment
of management, and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources, our beliefs about
critical accounting policies, and the significant judgments and estimates
used in the preparation of our consolidated financial statements, which
statements are subject to risks, including, among others, the inaccuracy
of our beliefs regarding actual product failure rates, inventory usage,
actual default rates of our customers or other estimates, requiring
revisions to our estimated accounts receivable allowances, additional
inventory write-downs, warranty and other reserves; and
Page-37
- - The statements under the heading "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operation - Results of
Operations" regarding our expected (1) revenue including any from the ENEL
metering program and the significance of such revenue to our overall
financial performance, revenue and gross margin levels; (2) growth of
core FRAM revenue and anticipated changes in our FRAM revenue mix; (3)
introductions of new products; (3) establishing new foundry partners, if
possible; and (4) sufficiency of resources to fund our operations through
at least 2005, which statements are subject to various risks and
uncertainties, including, but not limited to, general economic conditions
and conditions specific to the semiconductor industry, the demand for our
products and the products of our principal FRAM customer, order
cancellations or reduced bookings, product mix, competitive factors such
as pricing pressures on existing products and the timing and market
acceptance of new product introductions, our ability to secure and
maintain an appropriate amount of low-cost foundry production capacity
from our sole foundry source in a timely manner, our foundry partner's
timely ability to successfully manufacture products for us, our foundry
partner's ability to supply increased orders for FRAM products in a timely
manner using our proprietary technology, any disruptions of our foundry or
test and assembly contractor relationships, the ability to continue
effective cost reductions, unexpected design and manufacturing
difficulties, and the timely development and introduction of new products
and processes.
- - The statements under the heading "Item 7A. Quantitative and Qualitative
Disclosures About Market Risk" regarding the Company's belief that near-
term changes in interest rates, currency exchange rate fluctuations,
inflation and other price pressures will not have a material effect on
future earnings, fair values or cash flows of the Company, are subject
to the risk, among other risks, that we have inaccurately assessed the
degree of expected change in interest rates, currency exchange rates,
inflation and price pressures;
FACTORS THAT MAY AFFECT FUTURE RESULTS
Until the 2004, we have not been profitable; we have historically incurred
losses from operations since our inception and our continued profitability is
uncertain.
Our ability to maintain our profitable operations is subject to significant
risks and uncertainties, including, but not limited to, our ability to
successfully sell our products at prices that are sufficient to cover our
operating costs, entering into additional license and research and
development arrangements and success in raising additional financing to fund
operations as necessary. There is no guarantee that we will be successful in
addressing such risks.
Page-38
We recognized net income of $3.6 million in 2004. We incurred net losses
during 2003 of $9.5 million and $1.9 million in 2002. As of December 31,
2004, we had an accumulated deficit of $220.5 million. We have spent
substantial amounts of money in developing our FRAM and DRAM products and in
our efforts to develop commercial manufacturing capabilities for those
products. Our ability to increase revenue or achieve profitability in the
future will depend substantially on our ability to increase sales of our
products by gaining new customers and increasing our penetration of existing
customers, reduce manufacturing costs, significantly increase sales of
existing products and successfully introduce and sell new products.
Fluctuations in our historical operating results, in part, have been due to
unpredictable product order flows, a limited customer base, manufacturing and
other fixed costs. These issues may impact us in the future. Factors
affecting the demand for our products include, the time required for
incorporating our products into customers' product designs, and the ability
of our customers' products to gain substantial market acceptance. These
factors also make it difficult for us to predict our future revenue. Because
we base our operating expenses on anticipated revenue trends, which results
in a substantial percentage of our expenses being fixed in the short term,
our difficulty in predicting future revenue could affect our ability to
achieve future profitability and result in fluctuations in operating results.
Factors that may cause our operating results to vary significantly in the
future include:
- - our ability to timely develop and qualify for manufacturing new FRAM
products;
- - customer acceptance of our products;
- - the timing and volume of customer orders;
- - our ability to manufacture our products on a cost-effective and timely
basis through alliance foundry operations and contract manufacturers and
the sensitivity of our production costs to the manufacturing yields
achieved by our strategic licensees and contract manufacturers; and
- - factors not directly related to us, such as market conditions,
competition, pricing pressures, technological developments, product
obsolescence, the availability of supplies and raw materials, and changing
needs of potential customers in the semiconductor industry in general.
Our products have achieved some market acceptance, and if our products do not
achieve continued growth in market acceptance, we may be unable to increase
our revenue.
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Our success depends on the market acceptance of our FRAM and DRAM module
products and the time required to achieve market acceptance. If one or more
of our products fails to achieve market acceptance or if market acceptance is
delayed, our revenue may not increase and our cash flows and financial
condition could be harmed. We must design products that successfully address
customer requirements if our products are to be widely accepted by the
market. Potential customers will be reluctant to integrate our products into
their systems unless our products are reliable, available at competitive
prices, and address our customers' current systems requirements.
Additionally, potential customers need assurances that their demand for our
new products can be met in a timely manner.
We may not be able to replace our expected reduced revenue from ENEL in a
timely manner, if at all, which could significantly reduce our revenue; our
anticipated ENEL revenue may not be achieved.
In 2004, 2003, and 2002, approximately 46%, 60%, and 74%, respectively, of
our FRAM product sales were generated from one customer, ENEL. Because our
FRAM customer base is concentrated, and because FRAM product sales
represented more than 67% of our total product sales in 2004, the anticipated
reduced business from this customer without a corresponding increase in
revenue from core FRAM customers, may result in significant decreases in our
revenue, which would also harm our cash flows, operating results and
financial condition. In addition, there is no assurance that our anticipated
revenue from ENEL will be achieved.
If we do not continually develop new generations of FRAM and DRAM module
products that achieve broad market acceptance, we will be unable to compete
effectively.
Among other factors, our future success is dependent on our ability to
develop, manufacture and market FRAM and DRAM module products that address
customer requirements and compete effectively in the market with respect to
price, performance and reliability. If we do not compete effectively, we
could suffer price reductions, reduced revenue, reduced gross margin and
reduced market share. New product development, which includes both our
development of new products and the need to "design-in" such new products to
customers' systems, is time-consuming and costly. This new product
development requires a long-term forecast of market trends and customer
needs, and often a substantial commitment of capital resources, with no
assurance that products will be commercially viable.
In particular, we need to develop new product designs, new process technology
and continue ferroelectric materials development. Our current FRAM products
are designed at our Colorado Springs facility and manufactured at our
partner's manufacturing facilities using 0.5 and 0.35 micron manufacturing
processes. We believe that our ability to compete in the markets in which we
expect to sell our FRAM products will depend, in part, on our ability to
produce FRAM products in smaller feature sizes and also our ability to
effectively incorporate mixed-signal functions with our memory products. Our
inability to successfully produce FRAM products with analog and mixed-signal
functions would harm our ability to compete and our operating results.
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Although we have recently developed mixed-signal products incorporating our
FRAM memory solutions to supplement our traditional memory product offerings,
we have a limited operating history in these markets and has had limited
success. If we fail to introduce new products in a timely manner or are
unable to successfully manufacture such products, or if our customers do not
successfully introduce new systems or products incorporating our products, or
market demand for our new products does not develop as anticipated, our
business, financial condition and results of operations could be seriously
harmed.
Our continued ability to generate revenue from the sale of DRAM products will
depend on our successful development, manufacture and marketing of new DRAM
module products with improved price-performance characteristics, and we
cannot provide any assurance that we will be successful in accomplishing the
foregoing.
If we do not keep pace with rapid technological changes and frequent new
product introductions, our products may become obsolete, and we may not be
competitive.
The semiconductor memory industry is characterized by rapid technological
changes and product obsolescence, price erosion and variations in
manufacturing yields and efficiencies. To be competitive we need to
continually improve our products and keep abreast of new technology. Other
companies, many of which have greater financial, technological and research
and development resources than we do, are researching and developing
semiconductor memory technologies and product configurations that could
reduce or eliminate any future competitive advantages our products may
currently have. We cannot provide any assurance that our ferroelectric
technology will not be supplanted in the future by competing technology or
that we will have the technical capability and financial resources to be
competitive in the semiconductor industry with respect to the continued
design, development and manufacture of either FRAM or DRAM module products.
If we fail to protect our intellectual property, or if others use our
proprietary technology without authorization, our competitive position may
suffer.
Our future success and competitive position depend in part upon our ability
to obtain and maintain proprietary technology used in our products. We
attempt to protect our intellectual property rights through a combination of
patent, trademark, copyright and trade secret laws, as well as licensing
agreements and employee and third-party nondisclosure and assignment
agreements. We cannot be assured that any of our patent applications will be
approved or that any of the patents that we own will not be challenged,
invalidated or circumvented by others or be of sufficient scope or strength
to provide us with any meaningful protection or commercial advantage.
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Policing the unauthorized use of our intellectual property is difficult, and
we cannot be certain that the steps we have taken will prevent the
misappropriation or unauthorized use of our technologies, particularly in
foreign countries where the laws may not protect our proprietary rights as
fully as in the United States. In addition, we cannot be certain that we
will be able to prevent other parties from designing and marketing FRAM-based
products or that others will not independently develop or otherwise acquire
the same or substantially equivalent technologies as ours.
We may be subject to intellectual property infringement claims that result in
costly litigation and could harm our business and ability to compete.
Our industry is characterized by the existence of a large number of patents
and frequent claims and related litigation regarding patents and other
intellectual property rights. In particular, many leading semiconductor
memory companies have extensive patent portfolios with respect to
semiconductor memory technology, manufacturing processes and product designs.
We may be involved in litigation to enforce our patents or other intellectual
property rights, to protect our trade secrets and know-how, to determine the
validity of property rights of others, or to defend against claims of
invalidity. This type of litigation can be expensive, regardless of whether
we win or lose. Also, we cannot be certain that third parties will not make
a claim of infringement against us or against our semiconductor company
licensees or OEMs in connection with their use of our technology. Any
claims, even those without merit, could be time consuming to defend, result
in costly litigation and diversion of technical and management personnel, or