-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PlFV2J86048TT6b7LMN4kVSPdEEGTgWNqYgZvhBCIdDF6F3OIiHSmj6oUiIcvuEu lrEJB4QdM9pG8XoaG50UFA== 0000849502-05-000015.txt : 20050510 0000849502-05-000015.hdr.sgml : 20050510 20050510132039 ACCESSION NUMBER: 0000849502-05-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050510 DATE AS OF CHANGE: 20050510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAMTRON INTERNATIONAL CORP CENTRAL INDEX KEY: 0000849502 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 840962308 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17739 FILM NUMBER: 05815152 BUSINESS ADDRESS: STREET 1: 1850 RAMTRON DR CITY: COLORADO SPRINGS STATE: CO ZIP: 80921 BUSINESS PHONE: 7194817000 MAIL ADDRESS: STREET 1: 1850 RAMTRON DR CITY: COLORADO SPRINGS STATE: CO ZIP: 80921 10-Q 1 f10q-033105.txt FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 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 - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 84-0962308 - ------------------------------------------------------------------------------ (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1850 Ramtron Drive, Colorado Springs, CO 80921 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (719) 481-7000 Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 Par Value - 22,420,126 shares as of May 6, 2005. Page-1 TABLE OF CONTENTS Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements: (a) Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004 . . . . . . . . . . . . . . . . . . . . 3 (b) Consolidated Statements of Operations for the Three Months ended March 31, 2005 and 2004 . . . . . . . 4 (c) Consolidated Statements of Cash Flows for the Three Months ended March 31, 2005 and 2004 . . . . . . . 5 (d) Notes to Financial Statements . . . . . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 33 Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . 34 PART II - OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 36 Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Page-2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS RAMTRON INTERNATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) (Amounts in thousands, except par value and share amounts) Mar. 31, Dec. 31, 2005 2004 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 3,812 $ 6,384 Restricted cash 48 219 Accounts receivable, less allowances of $122 and $181, respectively 7,272 8,606 Inventories 6,599 5,769 Other current assets 428 441 --------- --------- Total current assets 18,159 21,419 Property, plant and equipment, net 4,174 3,991 Goodwill, net 4,020 4,020 Intangible assets, net 3,892 3,797 Other assets 379 426 --------- --------- Total assets $ 30,624 $ 33,653 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,926 $ 3,765 Accrued liabilities 1,659 2,957 Deferred revenue 1,224 1,350 Current portion of long-term promissory notes 250 250 Liabilities of discontinued operation 239 239 --------- --------- Total current liabilities 6,298 8,561 Deferred revenue 4,697 4,986 Long-term promissory notes net of unamortized discount of $1,024 and $1,151, respectively 5,067 4,914 --------- --------- Total liabilities 16,062 18,461 --------- --------- Stockholders' equity: Common stock, $.01 par value, 50,000,000 authorized; 22,420,126 and 22,380,126 shares issued and outstanding, respectively 224 224 Additional paid-in capital 235,548 235,455 Accumulated deficit (221,210) (220,487) --------- --------- Total stockholders' equity 14,562 15,192 --------- --------- Total liabilities and stockholders' equity $ 30,624 $ 33,653 ========= ========= See accompanying notes to consolidated financial statements. Page-3 RAMTRON INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED March 31, 2005 AND 2004 (Unaudited) (Amounts in thousands, except per share amounts) 2005 2004 --------- --------- Revenue: Product sales $ 12,494 $ 12,953 License and development fees 179 179 Royalties 231 208 Customer-sponsored research and development 125 142 --------- --------- 13,029 13,482 --------- --------- Costs and expenses: Cost of product sales, exclusive of provision for inventory write-off and warranty charge 8,219 7,714 Provision for inventory write-off and warranty charge 872 60 Research and development 1,711 1,365 Customer-sponsored research and development 166 141 General and administrative 992 1,156 Sales and marketing 1,517 1,521 --------- --------- 13,477 11,957 --------- --------- Operating income (loss) (448) 1,525 Interest expense, related party (81) (144) Interest expense, other (210) (217) Other income, net 16 5 --------- --------- Income (loss) from continuing operations (723) 1,169 Loss from discontinued operation -- (333) --------- --------- Net income (loss) $ (723) $ 836 ========= ========= Net income (loss) per share: Basic: Income (loss) from continuing operations $ (0.03) $ 0.05 Loss from discontinued operation -- (0.01) --------- --------- Total $ (0.03) $ 0.04 ========= ========= Diluted: Income (loss) from continuing operations $ (0.03) $ 0.05 Loss from discontinued operation -- (0.01) --------- --------- Total $ (0.03) $ 0.04 ========= ========= Weighted average shares outstanding: Basic 22,415 22,195 ========= ========= Diluted 22,415 23,121 ========= ========= See accompanying notes to consolidated financial statements. Page-4 RAMTRON INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (Unaudited) (Amounts in thousands) 2005 2004 --------- --------- Cash flows from operating activities: Net income (loss) $ (723) $ 836 Adjustments used to reconcile net income (loss) to net cash used in operating activities: Loss from discontinued operation -- 333 Depreciation and amortization 328 342 Amortization of debt discount 127 196 Imputed interest on note payable 26 -- Provision for inventory write-off and warranty charge 872 60 Loss on abandonment of patents 13 13 Gain on disposition of equipment (149) (30) Stock options issued for services 16 -- Changes in assets and liabilities: Accounts receivable 1,334 (2,019) Inventories (1,363) (95) Accounts payable and accrued liabilities (2,476) (240) Deferred revenue (415) (400) Other 60 39 --------- --------- Net cash used in operating activities (2,350) (965) --------- --------- Cash flows from investing activities: Purchase of property, plant and equipment (464) (11) Proceeds from sale of assets 162 130 Change in restricted cash 171 207 Payments for intellectual property (168) (19) Net cash used in discontinued operation -- (135) --------- --------- Net cash (used in) provided by investing activities (299) 172 --------- --------- Cash flows from financing activities: Proceeds from line of credit -- 750 Principal payments on promissory notes -- (600) Issuance of common stock 77 12 --------- --------- Net cash provided by financing activities 77 162 --------- --------- Net decrease in cash and cash equivalents (2,572) (631) Cash and cash equivalents, beginning of period 6,384 4,798 --------- --------- Cash and cash equivalents, end of period $ 3,812 $ 4,167 ========= ========= Supplemental disclosure of cash flow information: Cash paid for interest $ 85 $ 43 ========= ========= Cash paid for income taxes $ 60 $ -- ========= ========= See accompanying notes to consolidated financial statements. Page-5 RAMTRON INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 - ------------------------------------------------------------------------------ NOTE 1. BASIS OF PRESENTATION The accompanying consolidated financial statements at March 31, 2005 and December 31, 2004 and for the three months ended March 31, 2005 and 2004 have been prepared from the books and records of Ramtron International Corporation, (the "Company"), without audit. The statements reflect all normal recurring adjustments, which in the opinion of the Company's management, are necessary for the fair presentation of financial position, results of operations and cash flows for the periods presented. Certain information and disclosures normally included in financial statements have been omitted under Securities and Exchange Commission regulations. It is suggested that the accompanying financial statements be read in conjunction with the Company's annual report on Form 10-K for the year ended December 31, 2004. The results of operations for the period ended March 31, 2005 are not necessarily indicative of the operating results for the full year. NOTE 2. RECLASSIFICATIONS Certain 2004 balances have been reclassified to conform to the current year presentation. NOTE 3. NEW ACCOUNTING PRONOUNCEMENTS 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) equity instruments of the Company or (b) liabilities that are based on the fair value of the Company's 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 January 1, 2006. The Company is currently assessing its valuation options allowed in this Standard. Even though the Company has not quantified the dollar amount of this new accounting standard, the result will have a negative impact on the Company's earnings starting with the accounting period beginning January 1, 2006. Page-6 NOTE 4. STOCK-BASED COMPENSATON The Company accounts for employee stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees" and related interpretations. All options granted to employees under these plans have an exercise price equal to the market value of the underlying common stock on the date of grant, therefore no stock-based compensation is reflected in net income or loss. Had compensation cost for these plans been determined consistent with SFAS No. 123, "Accounting for Stock-Based Compensation" as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123," the Company's net income (loss) for the three month periods ended March 31, 2005 and 2004 would have changed to the following adjusted amounts: Three Months Ended March 31, ------------------------- 2005 2004 -------- -------- (in thousands, except per share amounts) Net income (loss) as reported $ (723) $ 836 Stock-based employee compensation cost included in net income (loss) as reported -- -- Stock-based employee compensation cost that would have been included in net income (loss) if the fair value method has been applied to all awards 439 379 -------- -------- Pro forma net income (loss) as if the fair value method had been applied to all awards $(1,162) $ 457 ======== ======== Net income (loss) per share: Basic - as reported $ (0.03) $ 0.04 ======== ======== Basic - pro forma $ (0.05) $ 0.02 ======== ======== Diluted - as reported $ (0.03) $ 0.04 ======== ======== Diluted - pro forma $ (0.05) $ 0.02 ======== ======== Page-7 For disclosure purposes, the fair value of stock based compensation was computed using the Black-Scholes option pricing model with the following weighted average assumptions used for grants during the three months ended March 31, 2005 and 2004: 2005 2004 ---------- ---------- Risk free interest rate 4.17% 3.00% Expected dividend yield 0% 0% Expected lives 4.0 years 4.0 years Expected volatility 93% 109% The weighted average fair value per share of shares granted during the three months ended March 31, 2005 and 2004 was $2.65 and $2.36, respectively. NOTE 5. INVENTORIES Inventories consist of: Mar. 31, Dec. 31, 2005 2004 --------- -------- (in thousands) Finished goods $2,926 $3,973 Work in process 3,946 2,136 Obsolescence reserve (273) (340) ------- ------- $6,599 $5,769 ======= ======= During the quarter ended March 31, 2005, the Company's FRAM Segment took a provision for inventory write-downs of approximately $872,000 due to low startup yields on our 0.35-micron manufacturing line. In connection with the low yields, we recently discovered that under very unique application conditions, one of our 0.35 products had an operating sensitivity that may cause it to not perform as expected. The provision for inventory write-off includes, among other things, actual and anticipated costs to re-screen our existing inventory as well as potential warranty costs associated with product that has been purchased by customers that may be subject to the re-screening process. NOTE 6. EARNINGS PER SHARE We calculate income (loss) per share pursuant to Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128). Under SFAS No. 128, basic net income (loss) per share is computed by dividing reported net income (loss) available to common stockholders by weighted average shares outstanding. Diluted net income (loss) per share reflects the potential dilution assuming the issuance of common shares for all dilutive potential common shares outstanding during the period. In periods where we recorded a net loss, all potentially dilutive securities, including warrants and stock options, would be anti-dilutive and thus, are excluded from diluted loss per share. Page-8 The following table sets forth the calculation of net income (loss) per common share for the three months ended March 31, 2005 and 2004 (in thousands, except per share amounts): Three Months Ended March 31, 2005 2004 -------- -------- Net income (loss) $ (723) $ 836 ======== ======== Common shares outstanding: Historical common shares outstanding at beginning of period 22,380 22,191 Weighted average common shares issued during period 35 4 -------- -------- Weighted average common shares at end of period - basic 22,415 22,195 Effect of other dilutive securities: Options -- 673 Warrants -- 253 -------- -------- Weighted average common shares at end of period - diluted 22,415 23,121 ======== ======== Net income (loss) per share: - basic $ (0.03) $ 0.04 ======== ======== - diluted $ (0.03) $ 0.04 ======== ======== As of March 31, 2005, we had several equity instruments or obligations that could create future dilution to the Company's common stockholders and are not currently classified as outstanding common shares of the Company. The following table details the shares of common stock that are excluded from the calculation of earnings per share (prior to the application of the treasury stock method) due to their impact being anti-dilutive: Three Months Three Months Ended Ended March 31, 2005 March 31, 2004 -------------- -------------- (in thousands) Warrants 2,331 2,331 Options 4,995 4,500 Convertible debentures 1,203 1,592 Page-9 NOTE 7. CONTINGENCIES PATENT INTERFERENCE PROCEEDING. On April 6, 2004, the Company and National Semiconductor Corporation (National) entered into an agreement to settle their 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 its FRAM business in the United States. Under the terms of the settlement agreement Ramtron has abandoned four of the five claims in its existing patent, two of National's patent applications relating to the interference claims have been assigned to Ramtron and two others were retained by National. National and Ramtron have agreed to cross license any and all future patents that may mature 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, Ramtron will pay National $2.5 million in equal annual installments of $250,000 through 2013. At March 31, 2004, we recorded an intangible asset and current and long-term debt of approximately $1,955,000, the present value of the annual installment payments. We have not recorded an impairment of the existing patents held for the technology in dispute as we believe, with 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 flows. 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. NOTE 8. LONG-TERM DEBT On March 14, 2002, we signed an agreement to issue $8.0 million of 5 year, 5% fixed rate, convertible debentures. The debentures are convertible into the Company's common stock at a fixed conversion price of $3.769, which is equal to 110% of the five-day volume weighted average price (VWAP) of the Company's common stock prior to the transaction signing, and is convertible at any time up to the maturity date of March 28, 2007. The debentures are secured by a Deed of Trust on our headquarters facility in Colorado Springs, Colorado and by a security interest in certain of our accounts receivable and patents. Page-10 In addition, 700,435, 5-year common stock warrants were issued to the investors with an initial exercise price of $4.28 per share. The warrants were valued using the Black-Scholes option pricing model with a resulting total value of approximately $1,773,000 at March 28, 2002. This amount is accounted for as a discount to the outstanding debentures and is being amortized over the remaining life of the debentures as a charge to interest expense. The unamortized discount pertaining to the outstanding debentures as of March 31, 2005 and December 31, 2004 as a result of the issuance of the warrants is approximately $679,000 and $763,000, respectively. As a result of the conversion terms of these debentures, a beneficial conversion feature of $900,000 was created. This beneficial conversion feature was recorded as an increase to additional paid-in capital and as a debt discount to the outstanding debentures. This discount is being amortized over the remaining life of the debentures as a charge to interest expense. The unamortized discount pertaining to the outstanding debentures as of March 31, 2005 and December 31, 2004 as a result of the beneficial conversion feature is approximately $345,000 and $388,000, respectively. The debentures contain covenants including, without limitation, achieving a minimum amount of earnings before interest, taxes, depreciation and amortization (EBITDA), as defined in the debenture agreements. As of June 30, 2003, the Company failed to meet the minimum EBITDA covenant under the debenture agreements, which by the terms of the debentures became an event of default on July 30, 2003 (the Default). On August 18, 2003, we entered into a Waiver and Amendment to Debenture Agreement (the Waiver Agreement) with the debenture holders. The Waiver Agreement provided for a waiver of the Default as well as a waiver of all remaining EBITDA covenants during 2003. In addition, the Waiver Agreement required that we make quarterly principal payments to the debenture holders over the following six quarters. Through December 31, 2004, we had made principal payments totaling approximately $3.5 million. To fulfill our Waiver Agreement obligations we made a final quarterly principal payment of $125,000 on December 31, 2004. As of March 31, 2005 and December 31, 2004, $4,535,000 were outstanding on these debentures. In addition, the Waiver Agreement provided for lowering the exercise price of the 700,435 common stock warrants held by the debenture holders from $4.28 to a price equal to 150% of the average closing bid price for the Company's common stock for the 5-trading days immediately preceding the effective date of the Waiver Agreement ($3.04) and an extension of the exercise period for one year. The adjustment to the original terms of the warrants created an additional non-cash increase to debt discount and additional paid-in capital of approximately $179,000, which was recorded during the quarter ended September 30, 2003 and is included in the unamortized debt discount balances disclosed above. This increase to debt discount is being amortized into interest expense over the remaining life of the debentures. As of March 31, 2005, we were in compliance with all covenants of the debentures. Page-11 On April 6, 2004, we entered into an agreement to settle our long standing patent interference proceeding with National Semiconductor Corporation (see Note 7 of these Notes of Consolidated Financial Statements above). As a result of the settlement, beginning April 2004, we are required to pay National $250,000 annually through 2013. As of March 31, 2005, the present value of this promissory note is $1,806,000, which is being discounted at 5.75%. On March 31, 2003, we signed an agreement with Wells Fargo Business Credit, Inc. to provide a secured $3.0 million revolving line of credit. The credit facility provided for interest at a floating rate equal to the prime lending rate plus 1.75% per annum and a term of 3 years. Security for the credit facility included the Company's non-European accounts receivable and inventories. As of March 31, 2005, there were no amounts outstanding on this line of credit. On April 1, 2005, we terminated our agreement with Wells Fargo Business Credit, Inc. On April 1, 2005, we entered into a $4 million revolving secured credit facility ("New Credit Facility") with Silicon Valley Bank, a subsidiary of Silicon Valley Bancshares. The New Credit Facility provides for a $4 million secured revolving credit facility. The New Credit Facility replaces the existing $3.0 million line of credit with Wells Fargo Business Credit, Inc. The New Credit Facility provides for interest at a floating rate equal to the prime lending rate plus 0.50% per annum, a minimum interest rate of 6.00% per year and a term of two years. Security for the credit facility includes all of our assets except for our intellectual property, European receivables, and real estate. The Credit Facility contains terms and covenants typically found in such agreement and is subject to the terms of the definitive loan agreement. NOTE 9. SEGMENT INFORMATION The Company's reportable segments are those that are based on the Company's method of internal reporting, which generally segregates the strategic business units based upon differences in products and distribution channels. 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. Our secondary business segment is our wholly owned subsidiary, Mushkin Inc., which distributes high-speed DRAM module products in the aftermarket through both direct, retail, and e-commerce sales channels. The accounting policies for determining segment net income are the same used in the consolidated financial statements. There are no internal sales between segments. Page-12 The following table presents segment information for the three months ended March 31, 2005 and 2004. 2005 2004 ----------------------------- ----------------------------- FRAM DRAM Total FRAM DRAM Total ----------------------------- ----------------------------- (in thousands) Revenue: Product sales $ 7,493 $ 5,001 $12,494 $ 8,427 $ 4,526 $12,953 License and development fees 179 -- 179 179 -- 179 Royalties 231 -- 231 208 -- 208 Customer-sponsored research and development 125 -- 125 142 -- 142 -------- -------- -------- -------- -------- -------- 8,028 5,001 13,029 8,956 4,526 13,482 Costs and expenses 8,374 5,103 13,477 7,586 4,371 11,957 -------- -------- -------- -------- -------- -------- Segment income (loss) $ (346) $ (102) $ (448) $ 1,370 $ 155 $ 1,525 ======== ======== ======== ======== ======== ========
Segment income excludes interest income, interest expense and miscellaneous charges on a total basis of $(275,000) and $(356,000) in 2005 and 2004, respectively, not allocated to business segments. NOTE 10. GOODWILL AND OTHER INTANGIBLE ASSETS Accounting for goodwill and intangible assets requires that goodwill no longer be amortized but be tested for impairment at least annually at the reporting unit level in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets (SFAS No. 142)." Recognized intangible assets with determinable useful lives should be amortized over their useful life and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144)." At least annually, we complete an analysis of the fair value of goodwill to determine if there is an indicated impairment of our goodwill. The determination of impairment of goodwill and other intangible assets requires significant judgments and estimates. There was no change in the carrying amount of goodwill for the three-month period ended March 31, 2005. Page-13 Included in intangible assets on the Company's Consolidated Balance Sheets are intangible assets with determinable lives as follows: March 31, December 31, 2005 2004 ------------ ------------ (in thousands) Amortizable intangible assets: Patents $ 6,275 $ 6,124 Accumulated amortization (2,383) (2,327) -------- -------- Total $ 3,892 $ 3,797 ======== ======== Amortization expense for intangible assets for the three months ended March 31, 2005 and 2004, was approximately $60,000 and $107,000, respectively. Estimated amortization expense for intangible assets, is $252,000 annually in 2005 through 2009 and $2.6 million thereafter. NOTE 11. DISCONTINUED OPERATION 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. Pursuant to the terms of the Security Agreement with Infineon, we were required to seek a release from Infineon for the sale of EMS' patent portfolio. This release required that all amounts due to Infineon in 2004 under the Waiver Agreement (see Note 8 of these Notes of Consolidated Financial Statements above) be paid upon receipt of the proceeds from the sale of EMS' patent portfolio. In accordance with SFAS No. 144, our consolidated financial statements have been recast to present this business as a discontinued operation. Accordingly, the revenue, costs and expenses and assets and liabilities of the discontinued operation have been excluded from the respective captions in the Consolidated Statements of Operations and Balance Sheets and have been reported in the various statements under the caption, "Loss from discontinued operation," "Assets of discontinued operation" and "Liabilities of discontinued operation" for all periods. In addition, certain of the Notes to Consolidated Financial Statements have been recast for all periods to reflect the discontinuance of this operation. Page-14 Summary results for the discontinued operation are as follows (in thousands): For the three months ended March 31, -------------------------- 2005 2004 -------- -------- Operating results: Revenue $ -- $ 295 Costs and expenses -- (264) Impairment of patents -- (364) -------- -------- Loss from discontinued operation $ -- $ (333) ======== ======== Amounts included in the March 31, 2005 and December 31, 2004 Consolidated Balance Sheets for the discontinued operation are as follows (in thousands): March 31, December 31, 2005 2004 -------- ------------ Liabilities of discontinued operation: Accounts payable $ 239 $ 239 ======== ======== ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS; FACTORS AFFECTING FUTURE RESULTS The following discussion and analysis is intended to provide greater details of the results of operations and financial condition of the Company. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto and other financial data included elsewhere herein. Certain statements under this caption constitute "forward- looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, and, as such, are based on current expectations and are subject to certain risks and uncertainties. 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 document. Forward-looking statements may be identified by the use of forward-looking words or phrases such as "will," "may," "believe," "expect," "intend," "anticipate," "could," "should," "plan," "estimate," and "potential," or other similar words. Page-15 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. The Company's significant accounting policies are discussed in Note 1 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004; critical estimates inherent in these accounting policies are discussed in the following paragraphs. 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. In the event a situation occurs to create a post- shipment obligation, we would defer revenue recognition until the specific obligation was satisfied. We defer recognition of sales to distributors when we are unable to make a reasonable estimate of product returns due to insufficient historical product return information. The revenue recorded is dependent upon estimates of expected customer returns 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 is recognized as the services are performed. Revenue from royalties is recognized upon the notification to us of shipment of product from our technology license partners to direct customers. 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 that will ultimately not be collected. A significant change in the liquidity or financial position of customers could have a material adverse impact on our ability to collect 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. Page-16 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. 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 depends on our ability to generate 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. Page-17 RESULTS OF OPERATIONS OVERVIEW We have been engaged primarily in the research and development of ferroelectric technology and the design, development and commercialization of FRAM products and the reselling of DRAM memory modules. 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 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. Our secondary business segment is our wholly owned subsidiary, Mushkin Inc., which distributes high-speed DRAM module products in the aftermarket through direct, retail, and e-commerce sales channels. Our revenue was $13.0 million and $13.5 million for the three month periods ended March 31, 2005 and 2004, respectively. We reported a net loss of $723,000 for the first quarter of 2005, or a loss of $0.03 per diluted share, compared with net income of $836,000 that included a loss from our discontinued operation, or $0.04 per diluted share, for the first quarter of 2004. For the three month periods ending March 31, 2005 and 2004, FRAM product sales represented approximately 60% and 65% of total product sales revenue, respectively, while DRAM product sales represented 40% and 35% for the same periods. During these periods, product sales revenue accounted for approximately 96% of total revenue, the remainder of which was generated principally from license and development fees, royalties and customer- sponsored research and development revenue. First-quarter revenue from continuing operations decreased 3% to $13 million from the same period a year ago. Product sales decreased 4% from the first quarter of 2004, with total FRAM product sales decreasing 11%. Core FRAM, or non-ENEL, product revenue was up 46% from a year ago, while ENEL product revenue decreased 66% and represented 19% of total FRAM product revenue in the first quarter of 2005. We shipped approximately 900,000 units into the ENEL metering program during the quarter and approximately 7.4 million units to all other customers. Product revenue of $5.0 million at our Mushkin business unit increased $475,000, or 10%, from the same quarter of 2004. DRAM product revenue resulted from its substantial retail presence primarily through Fry's Electronics (Fry's) and ABS Computer Technologies (ABS). Currently, Fry's and ABS's sales represent approximately 72% of Mushkin's first quarter revenue, compared to 70% for the same period in 2004. Page-18 Our costs and expenses were $13.5 million during the three months ended March 31, 2005, compared with $12.0 million for the same period in 2004. Cost of product sales as a percentage of product revenue, including provision for inventory write-off, were 73% and 60% for the three month periods ending March 31, 2005 and 2004, respectively. Correspondingly, gross margin rates were 27% and 40% for the same periods of 2005 and 2004. FRAM product gross margins during the three months ending March 31, 2005 were 41%, compared with 54% during the same period of 2004. During the quarter ended March 31, 2005, the Company's FRAM Segment took a provision for inventory write-downs of approximately $872,000 due to low startup yields on our 0.35-micron manufacturing line. In connection with the low yields, we recently discovered that under very unique application conditions, one of our 0.35 products had an operating sensitivity that may cause it to not perform as expected. When we discovered the problem, we took aggressive action to re-screen the product, which will result in a lower yield for that device. The provision for inventory write-off includes, among other things, actual and anticipated costs to re-screen our existing inventory as well as potential warranty costs associated with product that has been purchased by customers that may be subject to the re-screening process. The reported loss for the first quarter of 2005 is primarily attributable to provision for inventory write-off taken during the quarter. DRAM product gross margins during the three months ending March 31, 2005 and 2004 were 7% and 15%, respectively. QUARTER ENDED MARCH 31, 2005 COMPARED TO THE QUARTER ENDED MARCH 31, 2004. REVENUE. Total revenue for the quarter ended March 31, 2005 was $13.0 million, a decrease of $453,000, or 3%, from the quarter ended March 31, 2004. Product sales decreases in our FRAM product line resulted in a 4% decrease in product revenue for the quarter ended March 31, 2005. Compared with the quarter ended March 31, 2004, FRAM product revenue decreased 11% to $7.5 million. This decrease resulted primarily from a $2.8 million decrease in revenue from ENEL. Shipments into the ENEL program were $1.4 million and $4.3 million, or approximately 19% and 51% of total FRAM product revenue for the quarters ended March 31, 2005 and 2004, respectively. Reduced revenue from the ENEL program resulted primarily from declining meter installation requirements by ENEL as the program nears its expected completion. Shipments to FRAM customers other than ENEL, or core FRAM customers, were $6.1 million and $4.1 million, or approximately 81% and 49% of total FRAM product revenue for the quarters ended March 31, 2005 and 2004, respectively. This 46% increase over the same period in 2004 resulted primarily from increased demand from an expanding customer base in our target markets for our portfolio of stand alone memory and integrated FRAM products. Page-19 DRAM product revenue increased approximately $475,000 to $5.0 million during the three months ended March 31, 2005 compared to the same period in 2004 and is primarily the result of stable economic conditions in the retail and OEM markets Mushkin serves. We recognized $179,000 in license and development fee revenue during the quarters ended March 31, 2005 and 2004, respectively. License and development fee revenues are the result of recognizing license fees over the term of the license agreement, which is generally ten years. We recognized royalty revenue of $231,000 and $208,000 in the quarters ended March 31, 2005 and 2004, respectively. Royalty revenue in 2005 and 2004 is attributable to FRAM licensing agreements with existing licensees. Customer-sponsored research and development revenue is primarily attributable to our technology development program with Texas Instruments. The Company recognized customer-sponsored research and development revenue of $125,000 and $142,000 during the quarters ended March 31, 2005 and 2004, respectively. The amount of customer-sponsored research and development revenue recognized during a given quarter depends upon 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. COST OF SALES. Overall cost of product sales, including inventory provision, as a percentage of product revenue during the first quarter of 2005 was 73% compared with 60% for the same period in 2004. Cost of sales associated with our FRAM products increased during the quarter from 46% in 2004 to approximately 59% in 2005. FRAM cost of sales increased due to low yields and provisions for inventory write-off. Cost of sales as a percentage of product revenue for our Mushkin subsidiary were 93% and 85% for the quarters ended March 31, 2005 and 2004, respectively. This increase is attributable to changes in the spot market pricing of DRAM components used to manufacture DRAM products and a lower of cost or market inventory adjustment recorded in 2005. RESEARCH AND DEVELOPMENT. Combined research and development expenses for the quarter ended March 31, 2005 increased to $1.9 million, an increase of $371,000, or 25%, compared with the same period in 2004. These expenses, as a percentage of total sales were 14% in 2005, compared with 11% in 2004. The increase in research and development expenses was the result of increased expenses relating to design software maintenance contracts and increased headcount. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the quarter ended March 31, 2005 decreased $164,000 to $992,000 compared with the same period in 2004. This change is primarily the result of gains recorded on asset sales, which we classify as part of general and administrative expenses. Page-20 SALES AND MARKETING EXPENSES. Sales and marketing expenses for the quarter ended March 31, 2005 were $1.5 million, equivalent to the same period in 2004. INTEREST EXPENSE, RELATED PARTY. Related party interest expense decreased $63,000 to $81,000 for the quarter ended March 31, 2005, compared with the same period in 2004, primarily due to $1.6 million in principal payments made in 2004. INTEREST EXPENSE, OTHER. Other interest expense decreased $7,000 to $210,000 for the three months ended March 31, 2005, primarily due to principal payments made in 2004 offset by interest amortization relating to our National Semiconductor Note. 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. There was no activity in our discontinued operation during the first quarter of 2005. LIQUIDITY AND CAPITAL RESOURCES Cash flows used in operations for the three months ended March 31, 2005 increased $1.4 million from the same period in 2004. The primary reason for this increase is attributable to our loss for the quarter ended March 31, 2005 of $723,000 offset by our inventory provision of $872,000 compared to prior year's quarter net income of $836,000. Accounts receivable decreased $1.3 million from the prior year end, thus increasing our cash flow from operating activities due primarily to a corresponding decrease in FRAM and DRAM revenue for the prior quarter. Offsetting the accounts receivable decrease was an increase in our inventory of $1.4 million in anticipation of increased sales in the next quarter coupled with a decrease of $2.5 million in accounts payable and accrued liabilities primarily relating to payments made for management bonus and sales commissions during the quarter ended March 31, 2005. Cash used in investing activities was $299,000 for the three months ended March 31, 2005 compared with cash provided by $172,000 for the same period in 2004. We purchased $464,000 of capital equipment during the quarter ended March 31, 2005 compared to $11,000 in the same period in 2004. Also, our payments for intellectual property increased by $149,000 compared to the same period in 2004. Page-21 Cash provided by financing activities during the three months ended March 31, 2005 decreased $85,000 from the same period in 2004 due primarily to a decrease in proceeds from line of credit offset by principal payments on promissory notes in the prior comparable quarter. We made a $250,000 principal payment in April 2005 relating to our note with National Semiconductor Corporation and no further principal payments are due for the remainder of 2005. We entered into a credit and security agreement with Wells Fargo Business Credit, Inc. to provide a secured $3 million revolving line of credit. As of March 31, 2005, there were no amounts outstanding on this line of credit. On April 1, 2005, we terminated our agreement with Wells Fargo Business Credit, Inc. On April 1, 2005, we entered into a $4 million revolving secured credit facility ("New Credit Facility") with Silicon Valley Bank, a subsidiary of Silicon Valley Bancshares. The New Credit Facility provides for a $4 million secured revolving credit facility. The New Credit Facility replaces the existing $3.0 million line of credit with Wells Fargo Business Credit, Inc. The New Credit Facility provides for interest at a floating rate equal to the prime lending rate plus 0.50% per annum, a minimum interest rate of 6.00% per year and a term of two years. Security for the credit facility includes all of the Company's assets except for its intellectual property, European receivables, and real estate. On April 6, 2004, we entered into an agreement to settle our long standing patent interference proceeding with National Semiconductor Corporation (see Note 7 of these 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 be product sales from our FRAM and DRAM product lines. We had $3.8 million in cash and cash equivalents at March 31, 2005. We believe we have sufficient resources to fund our operations through at least March 31, 2006. If this is not sufficient to meet our cash requirements, we may use the credit facility mentioned above or any other financing source 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. Page-22 CONTRACTUAL COMMITMENTS. For more information on the Company's contractual obligations on operating leases and contractual commitments, see Notes 5 and 6 of the Notes to Consolidated Financial Statements included in the Company's 2004 Form 10-K. At March 31, 2005, the Company's commitments under these obligations were as follows for the years ended December 31 (in thousands): Operating NEBF Debt(2) Purchase Leases Consulting Fee(1) Agreements Obligations(3) Total --------- ----------------- ----------- -------------- -------- 2005 $262 $ 45 $ 471 $ 3,384 $ 4,162 2006 193 60 498 -- 751 2007 52 60 4,842 -- 4,954 2008 56 60 250 -- 366 2009 -- 60 250 -- 310 After 2009 -- 60 1,000 -- 1,060 ------ ------ ------ ------- ------- Total $563 $345 $7,311 $ 3,384 $11,603 ====== ====== ====== ======= ======= - ----------- (1) These consulting fees are required to be paid to the National Electrical Benefit Fund (NEBF) as long as NEBF owns at least 5% of the outstanding shares of the Company. (2) 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 Silicon Valley Bank. (3) 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. OUTLOOK We are engaged primarily in the research and development of ferroelectric technology and the design, development and commercialization of FRAM products and the reselling of DRAM memory modules. We derive revenue from the sale of our FRAM and DRAM products. We also generate 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. Product revenue for the second quarter ending June 30, 2005 is currently anticipated to be between $12.5 million and $13.5 million. Other revenue for the second quarter, including license and development fees, royalties and customer-sponsored research and development, is expected to be approximately $500,000. Gross margin for the second quarter is currently anticipated to be between 34% and 38%; operating expenses are expected to be between $4.2 million and $4.7 million. Page-23 In 2005, we expect ENEL to contribute $5 million to $6 million in revenue, down from $17 million in 2004. First quarter 2005 ENEL shipments were $1.4 million. We anticipate that second quarter ENEL revenue will increase over the first quarter of 2005, and the balance of ENEL shipments will lower in the third and fourth quarters of the year. We also expect some residual shipments during the first quarter of 2006. We have been able to significantly increase revenue from customers other than ENEL, also called core FRAM revenue, which has contributed to an 80% compound annual growth rate for core FRAM product revenue since the first quarter of 2003. As a result, we anticipate that our core FRAM product revenue in 2005 will grow between 25% and 35% over 2004. For 2005, we anticipate that our DRAM revenue will remain flat with 2004 revenue. We are focusing our efforts on activities that may serve to improve the product margins on DRAM 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. FORWARD-LOOKING STATEMENTS The following information should be read in conjunction with "Part I, Item 1. Financial Statements," "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk" included in the Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q include, without limitation: - The statements under the heading "Part 1, Item 1. Financial Statements - Note 7" concerning (1) we believe our business would not be materially affected by an adverse judgment by the Special Master on the remaining count of interference which statements are subject to various risks and uncertainties including the inaccuracy of our assessment on the impact of receiving a judgment adverse to us on the remaining count of interference; - The statements under the heading "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results Of Operations" regarding our expected (1) revenue from the ENEL metering program and the significance of such revenue to our overall financial performance, revenues and gross margin levels; (2)cost increases in DRAM components used in Mushkin's DRAM modules and anticipated lower overall sales volume, and possible lower selling prices at Mushkin; (3) level of equipment and plant expenditures during 2005; (4) use of our credit facility for working capital requirements; (5) source of operating cash Page-24 flows from its FRAM and DRAM product lines; (6) sufficiency of cash resources to fund our operations through at least March 31, 2006, 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 Ramtron's products and the products of its 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, Ramtron's ability to secure and maintain an appropriate amount of low-cost foundry production capacity from its sole foundry source in a timely manner, foundry partner's timely ability to successfully manufacture products for Ramtron, foundry partner's ability to supply increased orders for FRAM products in a timely manner using Ramtron's proprietary technology, any disruptions of Ramtron's 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 "Part I, Item 3. 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 We reported a net loss of $723,000 for the first quarter of 2005. For the quarter ended December 31, 2004, we had net income of $836,000. We have historically incurred losses from operations since our inception and our achievement of and continued profitability is uncertain. Our ability to achieve and 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. 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. Page-25 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. 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, which could significantly reduce our revenue; our anticipated ENEL revenue may not be achieved. Page-26 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, 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. 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 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. Page-27 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 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. 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. Page-28 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 require us to enter into royalty or licensing agreements. These royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all. A successful claim of infringement against us or one of our semiconductor manufacturing licensees in connection with our use of our technology could harm our business. We depend on a small number of suppliers for the supply of our products. Problems in their performance can seriously harm our financial results. We currently rely on a single unaffiliated foundry at Fujitsu to manufacture all of our products. Reliance on this foundry involves several risks, including capacity constraints or delays in the timely delivery of our products, reduced control over delivery schedules and the cost of our products, manufacturing yields, quality assurance and the loss of production due to seismic activity, weather conditions and other factors. Although we continuously evaluate sources of supply and may seek to add additional foundry capacity, there can be no assurance that such additional capacity can be obtained at acceptable prices, if at all. The occurrence of any supply or other problem resulting from these risks could have a material adverse effect on our results of operations. We also rely on domestic and foreign subcontractors for die assembly and testing of products, and is subject to risks of disruption in adequate supply of such services and quality problems with such services. To address our wafer supply concerns, we plan to continue working on expanding our primary foundry capability at Fujitsu and to acquire secondary foundry capability. Even if we enter into a secondary foundry relationship such manufacturing capacity is not likely to be available for at least 12 to 24 months after reaching an agreement due to significant effort required to develop and qualify for manufacturing a FRAM technology process. Our financial condition and results of operations could be materially adversely affected by the loss of Fujitsu as a supplier or our inability to obtain additional foundry capacity. International sales comprise a significant portion of our product sales, which exposes us to foreign political and economic risks. Page-29 For fiscal 2004, 2003, and 2002, international sales comprised approximately 62%, 69% and 48%, respectively, of our net revenue. The increase in export sales as a percentage of total sales is primarily the result of increasing FRAM product sales primarily to Europe, Asia and Japan, in part, because of increased offshore manufacturing activity by U.S.-based companies. We also believe Europe, Asia and Japan are early adopters of new technologies. We expect that international sales will continue to represent a significant portion of our product sales in the future. As a result of the large foreign component of our revenue, we are subject to a number of risks resulting from such operations. Such risks include political and economic instability and changes in diplomatic and trade relationships, foreign currency fluctuations, unexpected changes in regulatory requirements, delays resulting from difficulty in obtaining export licenses for certain technology, tariffs and other barriers and restrictions, and the burdens of complying with a variety of foreign laws. There can be no assurance that such factors will not adversely impact our results of operations in the future or require us to modify our current business practices. Our business is subject to other risks generally associated with doing business with foreign subcontractors including, but not limited to foreign government regulations and political and financial unrest which may cause disruptions or delays in shipments to our customers or access to our inventories. Our business, financial condition and results of operations may be materially adversely affected by these or other factors related to our international operations. We have been unable to fulfill all our FRAM customers' orders according to the schedules originally requested due to constraints in our wafer supply. Due to the lead time constraints in our wafer supply, from time to time we have been unable to fulfill all our customers' orders according to the schedules originally requested. Although we attempt to maintain an adequate supply of wafers and communicate to our customers delivery dates that we believe that we can reasonably expect to meet, our customers may not accept the alternative delivery date or may cancel their outstanding orders. Reductions in orders received or cancellation of outstanding orders results in lower revenue and net income, and potentially excess inventories and increased inventory reserves. We must build products based on demand forecasts; if such forecasts are inaccurate, we may incur significant losses. We must order products and build inventory substantially in advance of product shipments, and there is a risk that because demand for our products is volatile and subject to fluctuation, we will forecast incorrectly and produce excess or insufficient inventories of particular products. Our customers' ability to reschedule or cancel orders without significant penalty could adversely affect our liquidity, as we may be unable to adjust our purchases from independent foundries to match such customer changes and cancellations. We have in the past produced excess quantities of certain products, which has had a material adverse effect on our results of operations for such period. There can be no assurance that in the future we will not produce excess quantities of any of our products. To the extent we produce excess or insufficient inventories of particular products, our results of operations could be adversely affected. Page-30 The markets in which we participate are intensely competitive, and if we do not compete successfully, our revenue and ability to maintain profitability would suffer. The semiconductor industry is intensely competitive and our FRAM and DRAM module products face intense competition from numerous domestic and foreign companies. We may be at a disadvantage in competing with many of our competitors that have significantly greater financial, technical, manufacturing and marketing resources, as well as more diverse product lines that can provide cash flows counter-cyclical to fluctuations in semiconductor memory operations. Our ability to compete also depends on factors beyond our control, including the rate at which customers incorporate our products into their own products, our customers' success in selling their products, the successful protection of our intellectual property, the success of competitors' products and general market and economic conditions. Our competitors or customers may offer new products based on new technologies, industry standards or end-user or customer requirements, including products that have the potential to replace or provide lower-cost or higher-performance alternatives to our products. The introduction of new products by our competitors or customers could render our existing and future products obsolete or unmarketable. We compete in various markets with our FRAM strategic licensees and contract manufacturers, which may reduce our product sales. Our strategic licensees may market products which compete with our FRAM products. Most of our strategic partners have the right to manufacture and sell FRAM products for their own account with or without the payment of royalties, depending upon the terms of their agreements with us. Because our strategic licensees may manufacture and market FRAM products themselves, they may give the development and manufacture of their own FRAM products a higher priority than the development and manufacture of our products. Any delay in market penetration by our products, or any competition in the marketplace from FRAM products manufactured and marketed by our strategic licensees, could reduce our product sales and harm our operating results. We depend on a relatively small number of key personnel, and if we are unable to attract additional personnel or retain our key personnel, our business will suffer. Our future success depends, among other factors, on the continued service of our key technical and management personnel and on our ability to continue to attract and retain qualified employees. We are particularly dependent on the highly skilled design, process, materials and test engineers involved in the development and manufacture of our FRAM products and processes. The competition for these personnel is intense, and the loss of key employees, including executive officers, or our inability to attract additional qualified personnel in the future, could have both an immediate and a long-term adverse effect on us. There can be no assurance that we can retain them in the future. In addition, none of our employees have entered into post-employment non-competition agreements with us and, therefore, our employees are not contractually restricted from providing services to our competitors. Page-31 Our business is subject to strict environmental regulations and legal uncertainties, which could impose unanticipated requirements on our business in the future and subject us to liabilities. Federal, state and local regulations impose various environmental controls on the discharge of chemicals and gases used in our strategic licensees' and contract manufacturer manufacturing processes. Compliance with these regulations can be costly. Increasing public attention has been focused on the environmental impact of semiconductor operations. Any changes in environmental rules and regulations may impose the need for additional investments in capital equipment and the implementation of compliance programs in the future. Any failure by us or our strategic licensees or contract manufacturers to comply with present or future environmental rules and regulations regarding the discharge of hazardous substances could subject us to serious liabilities or cause us to suspend manufacturing operations, which could seriously harm our business, financial condition and results of operations. Earthquakes, other natural disasters and power shortages or interruptions may damage our business. Some of our major contract manufacturers' facilities are located near major earthquake faults. If a major earthquake or other natural disaster occurs which damages those facilities or restricts their operations, our business, financial condition and results of operations would be materially adversely affected. Similarly, a major earthquake or other natural disaster near one or more of our major suppliers, like the one that occurred near Fujitsu's manufacturing facility in Iwate, Japan in May 2003, could disrupt the operations of those suppliers, which could limit the supply of our products and harm our business. We have limited cash flows, and we may have limited ability to raise additional funds to finance our operations and to meet required principal payments to our lenders. In view of our expected future working capital requirements in connection with the manufacture and sale of our FRAM and DRAM module products, our projected research and development and other operating expenditures, we may be required to seek additional equity or debt financing. We cannot be sure that any additional financing or other sources of capital will be available to us on acceptable terms, or at all. The inability to obtain additional financing when needed would have a material adverse effect on our business, financial condition and operating results and could adversely affect our ability to continue our business operations. If additional financing is obtained, any issuance of common or preferred stock to obtain funding would result in further dilution of our existing stockholders' interests. Page-32 The majority of our revenue, expense and capital purchasing activities is transacted in U.S. dollars. However, because a portion of our operations consists of activities outside of the United States, we are considering commencing certain transactions in other currencies, primarily the Japanese yen. As part of our risk management strategy, we frequently evaluate our foreign currency exchange risk by monitoring market data and external factors that may influence exchange rate fluctuations. As a result, we may in the future engage in transactions involving the short-term hedging of foreign currencies, with maturities generally not exceeding two years to hedge assets, liabilities, revenue and purchases dominated in foreign currencies. 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 January 1, 2006. 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 January 1, 2006. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows of the Company due to adverse changes in financial and commodity market prices and rates. The Company is exposed to market risk in the areas of changes in United States interest rates and changes in foreign currency exchange rates as measured against the United States dollar. These exposures are directly related to its normal operating activities. The Company currently has no derivative financial instruments. Interest payable on the Company's convertible debentures is fixed at 5% over the term of the debentures. As such, changes in interest rates will not affect future earnings or cash flows. The Company manages interest rate risk by investing its excess cash in cash equivalents bearing variable interest rates, which are tied to various market indices. The Company does not believe that near-term changes in interest rates will result in a material effect on future earnings, fair values or cash flows of the Company. The net effect of a 10% change in interest rates on outstanding cash and cash equivalents at March 31, 2005 would have less than a $100,000 effect on the Company's earnings or cash flows in 2005. Page-33 The Company has a wholly owned subsidiary located in Japan. The operating costs of this subsidiary are denominated in Japanese Yen, thereby creating exposures to exchange rate variations. To date, this subsidiary has had only limited operations and is expected to continue to have limited operations in the foreseeable future, and, therefore, the Company does not believe any changes in exchange rates will have a material effect on future earnings, fair values or cash flows of the Company. The Company does not believe that reasonably possible near-term variations in exchange rates will result in a material effect on future earnings, fair values or cash flows of the Company, and therefore, the Company has chosen not to enter into foreign currency hedging instruments. There can be no assurance that such an approach will be successful, especially in the event of a significant and sudden change in Japanese currency valuation. The Company recently formalized a process for FRAM wafer purchase price adjustments related to fluctuations in Japanese Yen currency exchange rates with its supplier, Fujitsu. Under this agreement, Ramtron's FRAM wafer purchase price in US dollars will be adjusted quarterly to reflect the previous quarter's average Japanese Yen to US dollar exchange rate. The Company does not believe near-term variations in exchange rates that are reasonably possible will result in a material effect on future earnings, fair value, or cash flows of the Company; therefore, the Company has chosen not to enter into foreign currency hedging instruments. There can be no assurance that such an approach will be successful, especially in the event of a significant and sudden change in Japanese currency valuation. Average selling prices of the Company's products have not increased significantly as a result of inflation during the past several years, primarily due to intense competition within the semiconductor industry. The effect of inflation on the Company's costs of production has been minimized through improvements in production efficiencies. The Company anticipates that these factors will continue to minimize the effects of any foreseeable inflation and other price pressures within the industry and markets in which the Company participates. ITEM 4 - CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate, to allow timely decisions regarding required disclosure. In connection with the preparation of this Quarterly Report on Form 10-Q, as of March 31, 2005, an evaluation was performed under the supervision and with the participation of the Company's management, including the CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on its assessment, management concluded that the Company maintained effective internal control over financial reporting as of the end of the period covered by this Quarterly Report on Form 10-Q. Page-34 Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rules 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We continuously evaluate our internal controls and make changes to improve them as necessary. Our intent is to maintain our disclosure controls as dynamic systems that change as conditions warrant. Remediation Steps to Address Material Weaknesses Reported for the period ended December 31, 2004 - Under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, our management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2004 based on the criteria established in a report entitled Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2004 because of the following material weaknesses: (1) Company policies and procedures did not require matching of customer order documents with shipping and invoice documents prior to recording revenue, nor were appropriate information technology access controls present as part of the authorization of revenue process. The absence of these controls could have resulted in misstatements to revenue and accounts receivable, and (2) Company policies and procedures did not provide for adequate controls over the approval of cash disbursements at its Mushkin subsidiary. The absence of these controls could have resulted in misstatement and misclassification of recorded costs and expenses. We implemented the following controls subsequent to December 31, 2004 to correct the identified material weaknesses in the internal control over financial reporting, discussed above. (a) Information technology access controls were modified to ensure proper segregation of duties at our headquarters. (b) A new ERP system was purchased and installed at Mushkin. Access security to ensure proper segregation of duties was developed as part of the implementation plan and reviewed by management. (c) Two signatures are now required for all checks written from Mushkin's accounts. Page-35 (d) The three way matching of accounts payable is now performed at the Company's headquarters and not at Mushkin. PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS Information required by this item is incorporated by reference from the information contained under the caption "Part I, Item 3, Legal Proceedings" in the Company's Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange Commission. ITEMS 2-5 - NONE ITEM 6 - EXHIBITS (a) Exhibits: 10.1 Credit Facility between Silicon Valley Bank, Ramtron International Corporation and Mushkin Inc. dated April 1, 2005. 31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer. 31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer. 32.1 Certification Pursuant to 18 U.S.C. Section 1350 of Principal Executive Officer. 32.2 Certification Pursuant to 18 U.S.C. Section 1350 of Principal Financial Officer. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RAMTRON INTERNATIONAL CORPORATION (Registrant) May 9, 2005 /s/ Eric A. Balzer ------------------------- Eric A. Balzer Chief Financial Officer (Principal Accounting Officer) Page-36 EX-10 3 f10qex10-1.txt CREDIT FACILITY Exhibit 10.1 Silicon Valley Bank 4410 Arapahoe Avenue, Suite 200 Boulder, CO 80303 303-938-0484 April 1, 2005 Mr. Eric Balzer, Chief Financial Officer Ramton International Corporation 1850 Ramtron Drive Colorado Springs, CO 80921 Dear Eric, Silicon Valley Bank ("Bank") has formally approved certain loans ("Loans") to Ramtron International Corporation and Mushkin, Inc., ("Borrowers") under the terms and conditions in this letter. This letter is not meant to be, nor shall it be construed as, an attempt to define all the terms and conditions of the Loans. SECURED WORKING CAPITAL LOAN - ---------------------------- Facility: $4,000,000 Formula Line of Credit Purpose: Working capital Borrowing Formula: Advances on the Facility will be limited to the lesser of: 1) $4,000,000, or 2) an 80% advance rate against Eligible Accounts Receivable. The Advance Rate will be subject to a field audit to be conducted within 30 days of loan closing. Advance rates are typically based on the quality of the Accounts Receivable and attendant dilution. Eligible Accounts Receivable are those which contain selling terms acceptable to Bank and those in which the Bank has been granted a valid security interest. Eligible Accounts will exclude accounts over 90 days from invoice date, government accounts, intercompany accounts, contra accounts, foreign accounts*, credit balances, accounts in excess of 25% of total receivables, and accounts with more than 50% over 90 days from invoice date. *Foreign accounts will be considered as eligible up to a maximum of $2,000,000. Advances will be limited to $500,000 subject to the satisfactory results of the intial field audit. Maturity: Two years from close of documentation or concurrent with the maturity of the Convertible Subordinated Debentures (3/28/07), whichever is sooner. Page-1 Repayment: Interest due monthly with principal plus interest due upon Maturity. Interest Rate: Prime + 0.50%, which yields a current interest rate of 6.00%. The Facility will maintain a minimum interest rate of 6.00%. Loan Fee: $20,000 due initially and $20,000 on the first anniversary of the facility. Non-utilization Fee: A fifteen (15.0) basis point quarterly, non-usage fee in arrears. Non-usage fee calculated as follows: fifteen (15.0) basis points of the difference between the committed amount of the Facility and the average daily outstanding balance during the prior quarter, due within 20 days after each quarter end. Early Termination Fee: 1% of the committed facility if terminated by Borrower prior to the first anniversary date of the documents. 0.5% of the committed facility if terminated between the first anniversary date of the documents and the maturity date. Provided however that such fees shall be waived in the event that Borrower refinances with Bank, or Bank's affiliate. Collateral: To secure the Facility, the Bank will require a first perfected security interest in all of Borrowers assets, excluding intellectual property, European receivables and real estate. Subordination: All other indebtedness will be subordinated as to liens and right of payment on terms acceptable to Bank. Borrowers will notify Bank of any additional debt to be raised by the Borrowers. Financial Reporting: All financial reporting will be in accordance to Generally Accepted Accounting Principles, and will include: 1. Borrowers to provide quarterly financial statements (10Q) together with a Compliance Certificate, signed by a responsible officer of Borrower, within five (5) days of filing with the SEC. 2. Borrowers to provide annual audited financial statements (10K) together with an unqualified opinion of the financial statement provided by an independent certified public accounting firm, within five (5) days of filing with the SEC. 3. Borrowers to provide aged listings of Accounts Receivable (by invoice date) and Accounts Payable, together with a Borrowing Base Certificate, within 20 days of month-end unless there are no borrowings under the Line of Credit, in which case the above reporting will be due within 30 days of month-end; Page-2 Financial Covenants: To be monitored quarterly, Borrowers to maintain: 1. Minimum Quick Assets to Current Liabilities, net of Current Deferred Revenue, of at least 1.75:1.00. Quick Assets to be defined as non-restricted Cash and Equivalents at Bank plus Net Accounts Receivable; 2. Minimum Tangible Net Worth + formally subordinated debt of $8,000,000 + 50% of quarterly net income after taxes beginning March 31, 2005. Other: 1. Borrower will agree to maintain the majority of its operating and depository accounts with Bank. As to any deposit accounts and investment accounts maintained with another institution, Borrower shall cause such institution to enter into a control agreement in form acceptable to Bank in its good faith business judgment in order to perfect Bank's first priority security interest in said deposit accounts and investment accounts. 2. Restrictions on additional debt financing, guarantees, mergers and acquisitions (Purchase Money Indebtedness is excluded from the preceding debt restriction). Provided however, that non-cash acquisitions will be allowed up to 49% of the Borrower's Tangible Net Worth (TNW) and cash acquisitions will be allowed up to 30% of Borrower's TNW, to the extent such acquisitions would not otherwise cause an event of default. 3. Borrower will be responsible for collateral audit costs plus out of pocket expenses. There will be an initial collateral exam of the Borrowers and, going forward, audits will occur as warranted with a minimum occurrence of annually. 4. Borrower to pay all of Lender's legal fees and other costs incurred in connection with the preparation and negotiation of loan documents and closing of transaction. Confidential: This letter is delivered to you with the understanding that neither it nor its substance shall be disclosed publicly or privately to any third person except those who are in a confidential relationship to you (such as your legal counsel), or where the same is required by law and then only on a basis that it not be further disclosed. Good Faith Deposit: A Good Faith Deposit of $20,000 is required by the Bank to initiate its due diligence review process. This deposit is refundable if the Bank does not approve the transaction (which approval is is at Bank's sole discretion). Should the transaction be approved, any portion of the deposit not utilized to pay Legal expenses will be applied towards the Commitment Fee. If, subsequent to the Bank's approval, the Borrower does not proceed with this transaction, or fails to execute final documents with Bank, the deposit shall be retained by the Bank. Page-3 Insurance: Borrower will be required to provide insurance against loss or damage to the equipment and commercial general liability insurance, both with terms and companies satisfactory to the Bank. Documents: The Bank will provide its standard Loan & Security Agreement and related Loan Documents. These documents will be conformed to the specific terms of this proposal. Expenses: Borrower shall pay all of the Bank's fees and charges in connection with the Facility, including fees of Bank's counsel. If the basic terms and conditions are acceptable, please so indicate by returning an executed copy of this Commitment letter to Silicon Valley Bank, 4410 Arapahoe Ave., Suite 200, Boulder, CO 80303, Attn: Frank Amoroso, April 8, 2005 or by such later date agreed upon by the Bank in writing. The proposal will constitute your instructions to the Bank to commence documentation which shall supersede this letter. This letter is intended to set forth the proposed terms of the Loan which have been approved by Bank for Borrowers. It is intended that all legal rights will be set forth in the signed definitive loan documents. Notwithstanding this, if formal documentation is not agreed on by May 31, 2005, this commitment will expire unless such later date is agreed upon by the Bank in writing. With Best Regards, SILICON VALLEY BANK /s/ Mike Devery /s/ Frank Amoroso - ---------------- ----------------- Mike Devery Frank Amoroso Senior Relationship Manager Relationship Manager AGREED & ACCEPTED, this 1st day of April, 2005. Ramtron International Corporation Mushkin Inc. /s/ Eric A. Balzer - ------------------ Eric A. Balzer By: Eric A. Balzer Its: Chief Financial Officer Page-4 EX-31 4 f10qex31-1.txt CEO SECTION 302 CERTIFICATION Exhibit 31.1 CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, As Amended CERTIFICATIONS FOR FORM 10-Q I, William W. Staunton, III, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Ramtron International Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, concluding its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Page-1 d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ William W. Staunton, III - ---------------------------- William W. Staunton, III Chief Executive Officer Date: May 9, 2005 Page-2 EX-31 5 f10qex31-2.txt CFO SECTION 302 CERTIFICATION Exhibit 31.2 CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, As Amended CERTIFICATIONS FOR FORM 10-Q I, Eric A. Balzer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Ramtron International Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, concluding its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Page-1 d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Eric A. Balzer - ---------------------------- Eric A. Balzer Chief Financial Officer (Principal Accounting Officer) Date: May 9, 2005 Page-2 EX-32 6 f10qex32-1.txt CEO SECTION 906 CERTIFICATON Exhibit 32.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Quarterly Report on Form 10-Q of RAMTRON INTERNATIONAL CORPORATION for the quarter ended March 31, 2005, I, William W. Staunton, III, Chief Executive Officer of RAMTRON INTERNATIONAL CORPORATION, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that: (1) such Quarterly Report on Form 10-Q of RAMTRON INTERNATIONAL CORPORATION for the quarter ended March 31, 2005, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in such Quarterly Report on Form 10-Q of RAMTRON INTERNATIONAL CORPORATION for the quarter ended March 31, 2005, fairly presents, in all material respects, the financial condition and results of operations of RAMTRON INTERNATIONAL CORPORATION. By: /s/ William W. Staunton, III ------------------------------- WILLIAM W. STAUNTON, III Chief Executive Officer May 9, 2005 A signed original of this written statement required by Section 906 has been provided to Ramtron International Corporation and will be retained by Ramtron International Corporation and furnished to the Securities and Exchange Commission or its staff upon request. Page-1 EX-32 7 f10qex32-2.txt CFO SECTION 906 CERTIFICATION Exhibit 32.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Quarterly Report on Form 10-Q of RAMTRON INTERNATIONAL CORPORATION for the quarter ended March 31, 2005, I, Eric A. Balzer, Chief Financial Officer of RAMTRON INTERNATIONAL CORPORATION, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that: (1) such Quarterly Report on Form 10-Q of RAMTRON INTERNATIONAL CORPORATION for the quarter ended March 31, 2005, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in such Quarterly Report on Form 10-Q of RAMTRON INTERNATIONAL CORPORATION for the quarter ended March 31, 2005, fairly presents, in all material respects, the financial condition and results of operations of RAMTRON INTERNATIONAL CORPORATION. By: /s/ Eric A. Balzer ------------------------ ERIC A. BALZER Chief Financial Officer (Principal Accounting Officer) May 9, 2005 A signed original of this written statement required by Section 906 has been provided to Ramtron International Corporation and will be retained by Ramtron International Corporation and furnished to the Securities and Exchange Commission or its staff upon request. Page-1 -----END PRIVACY-ENHANCED MESSAGE-----