XNAS:TSRA Tessera Technologies Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

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, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-50460

 

 

TESSERA TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   16-1620029

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

3025 Orchard Parkway, San Jose, California   95134
(Address of Principal Executive Offices)   (Zip Code)

(408) 321-6000

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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 checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter time period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x    Accelerated  filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No  x

As of April 20, 2012, 51,894,667 shares of the registrant’s common stock were outstanding.

 

 

 


Table of Contents

TESSERA TECHNOLOGIES, INC.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTER ENDED MARCH 31, 2012

TABLE OF CONTENTS

 

           Page  
  

PART I

  
Item 1.   

Financial Statements (unaudited)

     3   
  

Condensed Consolidated Balance Sheets – March 31, 2012 and December 31, 2011

     3   
  

Condensed Consolidated Statements of Operations – Three Months Ended March 31, 2012 and 2011

     4   
  

Condensed Consolidated Statements of Comprehensive Income (Loss) – Three Months Ended March 31, 2012 and 2011

     5   
  

Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2012 and 2011

     6   
  

Notes to Condensed Consolidated Financial Statements

     7   
Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     20   
Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     30   
Item 4.   

Controls and Procedures

     30   
  

PART II

  
Item 1.   

Legal Proceedings

     31   
Item 1A.   

Risk Factors

     40   
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     53   
Item 3.   

Defaults Upon Senior Securities

     53   
Item 4.   

Mine Safety Disclosures

     53   
Item 5.   

Other Information

     53   
Item 6.   

Exhibits

     53   
Signatures      54   
Exhibit Index      55   

 

2


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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

TESSERA TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for par value)

(unaudited)

 

     March 31,
2012
    December 31,
2011
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 78,913      $ 55,758   

Short-term investments

     411,519        436,687   

Accounts receivable, net of allowance for doubtful accounts of $43 at each period end

     7,920        8,599   

Inventories

     1,635        1,574   

Short-term deferred tax assets

     1,891        1,892   

Other current assets

     15,823        13,664   
  

 

 

   

 

 

 

Total current assets

     517,701        518,174   

Property and equipment, net

     35,544        36,319   

Intangible assets, net

     135,115        141,326   

Long-term deferred tax assets

     18,223        18,223   

Other assets

     2,345        2,484   
  

 

 

   

 

 

 

Total assets

   $ 708,928      $ 716,526   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 5,408      $ 7,203   

Accrued legal fees

     5,897        6,110   

Accrued liabilities

     12,894        20,824   

Dividend payable

     5,192        —     

Deferred revenue

     5,145        2,610   
  

 

 

   

 

 

 

Total current liabilities

     34,536        36,747   

Long-term deferred tax liabilities

     4,083        4,083   

Other long-term liabilities

     5,017        5,017   

Commitments and contingencies (Note 12)

    

Stockholders’ equity:

    

Preferred stock: $0.001 par value; 10,000 shares authorized and no shares issued and outstanding

     —          —     

Common stock: $0.001 par value; 150,000 shares authorized; 52,528 and 52,221 shares issued, respectively, and 51,883 and 51,576 shares outstanding, respectively

     52        52   

Additional paid-in capital

     470,331        462,697   

Treasury stock at cost: 645 shares of common stock at each period end

     (10,505     (10,505

Accumulated other comprehensive income

     283        24   

Retained earnings

     205,131        218,411   
  

 

 

   

 

 

 

Total stockholders’ equity

     665,292        670,679   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 708,928      $ 716,526   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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TESSERA TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

     Three Months Ended  
     March 31,
2012
    March 31,
2011
 

Revenues:

    

Royalty and license fees

   $ 43,264      $ 62,258   

Product and service revenues

     3,409        5,515   
  

 

 

   

 

 

 

Total revenues

     46,673        67,773   
  

 

 

   

 

 

 

Operating expenses:

    

Cost of revenues

     5,760        5,512   

Research, development and other related costs

     23,445        18,613   

Selling, general and administrative

     24,611        19,464   

Litigation expense

     3,492        5,996   

Restructuring charges

     —          2,059   
  

 

 

   

 

 

 

Total operating expenses

     57,308        51,644   

Operating income (loss)

     (10,635     16,129   

Other income and expense, net

     668        608   
  

 

 

   

 

 

 

Income (loss) before taxes

     (9,967     16,737   

Provision for (benefit from) income taxes

     (1,879     5,525   
  

 

 

   

 

 

 

Net income (loss)

   $ (8,088   $ 11,212   
  

 

 

   

 

 

 

Basic and diluted net income (loss) per share:

    

Net income (loss) per share-basic

   $ (0.16   $ 0.22   
  

 

 

   

 

 

 

Net income (loss) per share-diluted

   $ (0.16   $ 0.22   
  

 

 

   

 

 

 

Cash dividends declared per share

   $ 0.10      $ —     
  

 

 

   

 

 

 

Weighted average number of shares used in per share calculations-basic

     51,738        50,823   
  

 

 

   

 

 

 

Weighted average number of shares used in per share calculations-diluted

     51,738        51,267   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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TESSERA TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

     March 31,
2012
    March 31,
2011
 

Net income (loss)

   $ (8,088   $ 11,212   

Other comprehensive income:

    

Net unrealized gains on available-for-sale-securities, net of tax

     259        147   
  

 

 

   

 

 

 

Other comprehensive income:

     259        147   
  

 

 

   

 

 

 

Comprehensive income (loss)

   $ (7,829   $ 11,359   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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TESSERA TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Three Months Ended  
     March 31,
2012
    March 31,
2011
 

Cash flows from operating activities:

    

Net income (loss)

   $ (8,088   $ 11,212   

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation and amortization of property and equipment

     2,684        2,492   

Amortization of intangible assets

     6,373        4,092   

Loss (gain) on property and equipment

     5        (2

Stock-based compensation expense

     4,056        6,064   

Deferred income tax, net

     1        2   

Amortization of premium/discount on investments

     623        —     

Changes in operating assets and liabilities, net of acquisitions:

    

Accounts receivable, net

     679        4,213   

Inventories

     (61     258   

Other assets

     (2,020     2,608   

Accounts payable

     (1,795     (2,628

Accrued legal fees

     (213     1,286   

Accrued liabilities

     (5,931     (8,175

Deferred revenue

     2,535        (1,850

Income tax payable

     —          2,447   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (1,152     22,019   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (1,926     (1,524

Proceeds from sale of property and equipment

     13        874   

Purchases of short-term available-for-sale investments

     (55,623     (75,025

Proceeds from maturities and sales of short-term and and long-term investments

     80,427        90,006   

Purchases of intangible assets

     (2,162     (1,000
  

 

 

   

 

 

 

Net cash provided by investing activities

     20,729        13,331   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from exercise of stock options

     1,553        1,531   

Proceeds from employee stock purchase program

     2,025        2,443   
  

 

 

   

 

 

 

Net cash provided by financing activities

     3,578        3,974   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     23,155        39,324   

Cash and cash equivalents at beginning of period

     55,758        69,268   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 78,913      $ 108,592   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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TESSERA TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION

Tessera Technologies, Inc. (the “Company”) is a holding company with operating subsidiaries in two segments: Intellectual Property (formerly Micro-electronics) and DigitalOptics (formerly Imaging and Optics). The Intellectual Property business, comprised of engineering, licensing, account administration and litigation teams, generates revenue from patented innovations through license agreements with semiconductor companies and outsourced semiconductor assembly and test companies. The DigitalOptics business delivers innovation in imaging and optics with products and capabilities that enable expanded functionality in increasingly smaller devices. DigitalOptics’ miniaturized camera module solutions provide cost-effective, high-quality camera features, including extended depth of field, zoom, image enhancement, optical image stabilization and Micro-Electro Mechanical Systems (“MEMS”) based auto-focus. These technologies can be applied to mobile phones and other consumer electronic products.

The accompanying interim unaudited condensed consolidated financial statements as of March 31, 2012 and 2011, and for the three months then ended, have been prepared by the Company in accordance with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) for interim financial information. The amounts as of December 31, 2011 have been derived from the Company’s annual audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary (consisting of normal recurring adjustments) to state fairly the financial position of the Company and its results of operations and cash flows as of and for the periods presented. These financial statements should be read in conjunction with the annual audited financial statements and notes thereto as of and for the year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed on February 17, 2012 (the “Form 10-K”).

The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2012 or any future period and the Company makes no representations related thereto.

Reclassification

Certain reclassifications have been made to prior period balances in order to conform to current period’s presentation.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no significant changes in the Company’s significant accounting policies with the exception of those described below during the three months ended March 31, 2012, as compared to the significant accounting policies described in the Form 10-K.

Property and equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Equipment held under capital lease is stated at the fair market value of the related asset at the time of lease origination and is amortized on a straight-line basis over the term of the lease. The Company held no significant equipment under capital lease agreements in the periods presented. Repair and maintenance costs are charged to expense as incurred.

The depreciation and amortization useful life periods for property and equipment are as follows:

 

Furniture and equipment    One to ten years
Buildings    Seven, eight and 39 years
Leasehold improvements    Shorter of five years or the remaining term of the lease

Variable Interest Entity

In October 2011, a subsidiary of the Company entered into a limited liability company agreement (“Agreement”) to form a new entity (“Entity”), with the Entity’s primary objective to define strategies and related business plans to accelerate the development and commercialization of the Company’s current and future advanced packaging and interconnect technology. The subsidiary of the Company is the sole contributor of capital to the Entity and has contributed $4 million of the total possible capital contribution of up to $5 million, as of March 31, 2012. In accordance with the Agreement, all net profits and losses are allocated to such subsidiary of the Company since it is the sole contributor of capital. The Entity has net assets of approximately $3.0 million as of March 31, 2012 which is consolidated with the Company’s operating results.

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

Adopted

In June 2011, the Financial Accounting Standards Board (the “FASB”) and International Accounting Standards Board issued an update to the authoritative guidance for fair value measurement. This update does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within U.S. GAAP or International Financial Reporting

 

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Standards. This update changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, this update clarifies the FASB’s intent about the application of existing fair value measurements. This update is effective for interim and annual periods beginning after December 15, 2011 and shall be applied prospectively. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial position, results of operations or cash flows.

Issued

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosure about Offsetting Assets and Liabilities, which requires an entity to include additional disclosures about financial instruments and transactions eligible for offset in the statement of financial position, as well as financial instruments subject to a master netting agreement or similar arrangement. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this ASU is not expected to have a material impact on our financial statements.

NOTE 4 – COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

Accounts receivable, net consisted of the following (in thousands):

 

     March 31,
2012
    December 31,
2011
 

Trade and other receivables

   $ 7,963      $ 8,642   

Allowance for doubtful accounts

     (43     (43
  

 

 

   

 

 

 
   $ 7,920      $ 8,599   
  

 

 

   

 

 

 

Inventories consisted of the following (in thousands):

 

     March 31,
2012
     December 31,
2011
 

Raw materials

   $ 498       $ 516   

Work in process

     437         435   

Finished goods

     700         623   
  

 

 

    

 

 

 
   $ 1,635       $ 1,574   
  

 

 

    

 

 

 

Property and equipment, net consisted of the following (in thousands):

 

     March 31,
2012
    December 31,
2011
 

Furniture and equipment

   $ 50,640      $ 48,960   

Land and buildings

     21,314        21,314   

Leasehold improvements

     5,465        5,460   
  

 

 

   

 

 

 
     77,419        75,734   

Less: Accumulated depreciation and amortization

     (41,875     (39,415
  

 

 

   

 

 

 
   $ 35,544      $ 36,319   
  

 

 

   

 

 

 

Accrued liabilities consisted of the following (in thousands):

 

     March 31,
2012
     December 31,
2011
 

Employee compensation and benefits

   $ 8,278       $ 11,852   

Other

     4,616         8,972   
  

 

 

    

 

 

 
   $ 12,894       $ 20,824   
  

 

 

    

 

 

 

Accumulated other comprehensive income consisted of the following (in thousands):

 

     March 31,
2012
     December 31,
2011
 

Unrealized gain on available-for-sale securities, net of tax

   $ 283       $ 24   
  

 

 

    

 

 

 
   $ 283       $ 24   
  

 

 

    

 

 

 

 

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NOTE 5 – FINANCIAL INSTRUMENTS

The following is a summary of marketable securities at March 31, 2012 and December 31, 2011 (in thousands):

 

     March 31, 2012  
     Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair
Values
 

Available-for-sale securities

          

Corporate notes and bonds

   $ 163,214       $ 208       $ (84   $ 163,338   

Municipal bonds and notes

     147,696         160         (11     147,845   

Treasury and agency notes and bills

     73,522         39         (29     73,532   

Commercial paper

     26,986         3         (4     26,985   

Money market funds

     21,401         —           —          21,401   

Certificate of deposit

     9,815         3         (2     9,816   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 442,634       $ 413       $ (130   $ 442,917   
  

 

 

    

 

 

    

 

 

   

 

 

 

Reported in:

          

Cash and cash equivalents

           $ 31,398   

Short-term investments

             411,519   
          

 

 

 

Total marketable securities

           $ 442,917   
          

 

 

 
     December 31, 2011  
     Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair
Values
 

Available-for-sale securities

          

Corporate bonds and notes

   $ 168,294       $ 99       $ (322   $ 168,071   

Municipal bonds and notes

     151,887         203         (15     152,075   

Treasury and agency notes and bills

     87,684         84         (14     87,754   

Commercial paper

     30,899         7         (15     30,891   

Money market funds

     13,269         —           —          13,269   

Certificate of deposit

     9,820         3         (6     9,817   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 461,853       $ 396       $ (372   $ 461,877   
  

 

 

    

 

 

    

 

 

   

 

 

 

Reported in:

          

Cash and cash equivalents

           $ 25,190   

Short-term investments

             436,687   
          

 

 

 

Total marketable securities

           $ 461,877   
          

 

 

 

At March 31, 2012 and December 31, 2011, the Company had $490.4 million and $492.4 million, respectively, in cash, cash equivalents and short-term investments. The majority of these amounts were held in marketable securities, as shown above. The remaining balance of $47.5 million and $30.5 million at March 31, 2012 and December 31, 2011, respectively, was cash held in operating accounts not included in the tables above.

The gross realized gains and losses on sales of marketable securities were not significant during the three months ended March 31, 2012 and 2011. Net unrealized gains of $0.3 million, net of tax, as of March 31, 2012, were related to a temporary increase in value of the remaining available-for-sale securities and were due primarily to changes in interest rates and market and credit conditions of the underlying securities. For those investments with a temporary decline in value, the declines are not considered to be other-than-temporarily impaired as of March 31, 2012 because the Company has the ability to hold these investments to allow for recovery, does not anticipate having to sell these securities with unrealized losses and continues to receive interest at the maximum contractual rate. For the three months ended March 31, 2012 and 2011, the Company did not record any impairment charges.

 

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The following table summarizes the fair value and gross unrealized losses related to individual available-for-sale securities at March 31, 2012 and December 31, 2011, which have been in a continuous unrealized loss position, aggregated by investment category and length of time (in thousands):

 

March 31, 2012

   Less Than 12 Months     12 Months or More      Total  
     Fair Value      Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
     Fair Value      Gross
Unrealized
Losses
 

Corporate bonds and notes

   $ 56,156       $ (84   $ —         $ —         $ 56,156       $ (84

Municipal bonds and notes

     20,356         (4     —           —           20,356         (4

Treasury and agency notes and bills

     14,908         (29     —           —           14,908         (29

Commercial Paper

     10,988         (11     —           —           10,988         (11

Certificate of deposit

     1,013         (2     —           —           1,013         (2
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 103,421       $ (130   $ —         $ —         $ 103,421       $ (130
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

   Less Than 12 Months     12 Months or More      Total  
     Fair Value      Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
     Fair Value      Gross
Unrealized
Losses
 

Corporate bonds and notes

   $ 96,895       $ (322   $ —         $ —         $ 96,895       $ (322

Municipal bonds and notes

     21,610         (15     —           —           21,610         (15

Commercial Paper

     16,402         (15     —           —           16,402         (15

Treasury and agency notes and bills

     14,391         (14     —           —           14,391         (14

Certificate of deposit

     3,514         (6     —           —           3,514         (6
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 152,812       $ (372   $ —         $ —         $ 152,812       $ (372
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

The estimated fair value of marketable securities by contractual maturity at March 31, 2012 is shown below (in thousands). Actual maturities may differ from contractual maturities because issuers may have the right to call or redeem certain securities.

 

     Estimated
Fair  Value
 

Due in one year or less

   $ 289,411   

Due in one to two years

     153,506   
  

 

 

 

Total

   $ 442,917   
  

 

 

 

NOTE 6 – FAIR VALUE

The Company follows the authoritative guidance for fair value measurements and the fair value option for financial assets and financial liabilities. The guidance for fair value measurements establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. The guidance for the fair value option for financial assets and financial liabilities provides companies the irrevocable option to measure many financial assets and liabilities at fair value with changes in fair value recognized in earnings.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, or an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The established fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

 

Level 1    Quoted prices in active markets for identical assets.
Level 2    Observable inputs other than Level 1 prices, such as quoted prices for similar assets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets.
Level 3    Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

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The following is a list of the Company’s assets required to be measured at fair value on a recurring basis and where they were classified within the hierarchy as of March 31, 2012 (in thousands):

 

     Fair Value      Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets

           

Marketable Securities

           

Money market funds (1)

   $ 21,401       $ 21,401       $ —         $ —     

Corporate bonds and notes (2)

     163,338         —           163,338         —     

Municipal bonds and notes (2)

     147,845         —           147,845         —     

Treasury and agency notes and bills (2)

     73,532         —           73,532         —     

Commercial paper (3)

     26,985         —           26,985         —     

Certificate of deposit (2)

     9,816         —           9,816         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 442,917       $ 21,401       $ 421,516       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

The following footnotes indicate where the noted items were recorded in the Condensed Consolidated Balance Sheet at March 31, 2012:

 

(1) Reported as cash and cash equivalents.
(2) Reported as short-term investments.
(3) Reported as either cash and cash equivalents or short-term investments.

The following is a list of the Company’s assets required to be measured at fair value on a recurring basis and where they were classified within the hierarchy as of December 31, 2011 (in thousands):

 

     Fair Value      Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets

           

Marketable Securities

           

Money market funds (1)

   $ 13,270       $ 13,270       $ —         $ —     

Corporate bonds and notes (2)

     168,071         —           168,071         —     

Municipal bonds and notes (2)

     152,075         —           152,075         —     

Treasury and agency notes and bills (2)

     87,754         —           87,754         —     

Commercial paper (3)

     30,890         —           30,890         —     

Certificate of deposit (2)

     9,817         —           9,817         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 461,877       $ 13,270       $ 448,607       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

The following footnotes indicate where the noted items were recorded in the Condensed Consolidated Balance Sheet at December 31, 2011:

 

(1) Reported as cash and cash equivalents.
(2) Reported as short-term investments.
(3) Reported as either cash and cash equivalents or short-term investments.

NOTE 7 – GOODWILL AND IDENTIFIED INTANGIBLE ASSETS

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and identified intangible assets acquired under a business combination. The Company did not have any goodwill at either period ended March 31, 2012 or December 31, 2011. Identified intangible assets consist of acquired patents/core technology, existing technology, trade names, assembled workforce and non-compete agreements resulting from business combinations, and acquired patents under asset purchase agreements. Except for intangible assets used in in-process research and development which have indefinite useful lives until the completion or abandonment of the associated research and development efforts, identified intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from two to 15 years.

There was no impairment of long-lived assets for the three months ended March 31, 2012 and 2011. The Company has incurred significant operating losses from the DigitalOptics segment. If the anticipated future results of the DigitalOptics segment do not materialize as expected, then the related intangible assets could be subject to an impairment charge in the future. See Note 13 — “Segment and Geographic Information” for additional detail.

 

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Identified intangible assets consisted of the following (in thousands):

 

          March 31, 2012      December 31, 2011  
     Average
Life
(Years)
   Gross
Assets
     Accumulated
Amortization
    Net      Gross
Assets
     Accumulated
Amortization
    Net  

Acquired patents/ core technology

   3-15    $ 132,715       $ (26,097   $ 106,618       $ 132,553       $ (21,901   $ 110,652   

Existing technology

   5-10      54,196         (33,761     20,435         54,196         (32,032     22,164   

Customer contracts

   3-9      11,900         (7,164     4,736         11,900         (6,808     5,092   

Trade name

   4-10      3,620         (2,194     1,426         3,620         (2,102     1,518   

In-process research and development

   Indefinite      1,900         —          1,900         1,900         —          1,900   

Non-competition agreements

   2      1,400         (1,400     —           1,400         (1,400     —     

Assembled workforce

   4      300         (300     —           300         (300     —     
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
      $ 206,031       $ (70,916   $ 135,115       $ 205,869       $ (64,543   $ 141,326   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense for the three months ended March 31, 2012 and 2011 amounted to $6.4 million and $4.1 million, respectively. As of March 31, 2012, the estimated future amortization expense of intangible assets, excluding the in-process research and development, is as follows (in thousands):

 

2012 (remaining 9 months)

   $ 18,416   

2013

     23,927   

2014

     22,117   

2015

     20,934   

2016

     17,239   

Thereafter

     30,582   
  

 

 

 
   $ 133,215   
  

 

 

 

NOTE 8 – NET INCOME (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):

 

     Three Months Ended  
     March 31,
2012
    March 31,
2011
 

Numerator:

    

Net income (loss)

   $ (8,088   $ 11,212   

Denominator:

    

Weighted average common shares outstanding

     51,770        50,907   

Less: Unvested common shares subject to repurchase

     (32     (84
  

 

 

   

 

 

 

Total common shares-basic

     51,738        50,823   

Effect of dilutive securities:

    

Stock awards

     —          143   

Restricted stock awards and units

     —          301   
  

 

 

   

 

 

 

Total common shares-diluted

     51,738        51,267   
  

 

 

   

 

 

 

Net income (loss) per common share-basic

   $ (0.16   $ 0.22   
  

 

 

   

 

 

 

Net income (loss) per common share-diluted

   $ (0.16   $ 0.22   
  

 

 

   

 

 

 

Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding during the period, excluding any unvested restricted stock awards that are subject to repurchase. Diluted net income (loss) per share is computed using the treasury stock method to calculate the weighted average number of shares of common stock and, if dilutive, potential shares of common stock outstanding during the period. Potential dilutive shares of common stockinclude unvested restricted stock awards and units and incremental shares of common stock issuable upon the exercise of stock options, less shares from assumed proceeds. The assumed proceeds calculation includes actual proceeds to be received from the employee upon exercise, the average unrecognized stock compensation cost during the period and any tax benefits that will be credited upon exercise to additional paid in capital.

 

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For the three months ended March 31, 2012 and 2011, the Company excluded from net loss per share calculations approximately 5.8 million and 5.2 million shares of common stock, respectively, subject to stock options, restricted stock awards and units because their effect on net loss per share was anti-dilutive.

NOTE 9 – STOCKHOLDERS’ EQUITY

Stock Repurchase Programs

In August 2007, the Company’s board of directors (the “Board”) authorized a plan to repurchase up to a maximum total of $100.0 million of the Company’s outstanding shares of common stock dependent on market conditions, share price and other factors. As of March 31, 2012 and December 31, 2011, the Company had repurchased a total of 645,000 shares of common stock since inception of the plan, at an average price of $16.26 per share for a total cost of $10.5 million. The shares repurchased are recorded as treasury stock and are accounted for under the cost method. No expiration date has been specified for this plan. As of March 31, 2012, the total amount available for repurchase was $89.5 million. The Company may continue to execute authorized repurchases from time to time under the plan.

Stock Option Plans

The 1996 Plan and the 1999 Plan

In December 1996, the Board adopted the 1996 Stock Option Plan (“1996 Plan”). In February 1999, the Board of Directors adopted the 1999 Stock Option Plan (“1999 Plan”) which was approved by the stockholders in May 1999. Under the 1996 Plan and the 1999 Plan, incentive stock options may be granted to the employees of the Company or its subsidiaries at an exercise price of no less than 100% of the fair value on the date of grant, and nonstatutory stock options may be granted to the employees of the Company or its subsidiaries, non-employee directors and consultants at an exercise price of no less than 85% of the fair value. In both cases, when the optionees own stock representing more than 10% of the voting power of all classes of stock of the Company, the exercise price shall be no less than 110% of the fair value on the date of grant. For options granted with an exercise price below fair market value, a stock-based compensation charge has been determined. Options granted under these plans generally have a term of ten years from the date of grant and vest over a four-year period. Shares issued in connection with the exercise of unvested options are subject to repurchase by the Company until such options vest. After February 1999, no further options were granted from the 1996 Plan. After December 2000, no further options were granted from the 1999 Plan. The Company has no intention of issuing additional grants under these plans. As of March 31, 2012, there were no shares reserved for grant under these plans and only cancellations under the 1999 Plan are recorded as available for grant. Based on a Board decision, cancellations under the 1996 Plan are not considered available for grant.

The 2003 Plan

In February 2003, the Board adopted and the Company’s stockholders approved the 2003 Equity Incentive Plan (“2003 Plan”). Under the 2003 Plan, incentive stock options may be granted to the employees of the Company or its subsidiaries at an exercise price of no less than 100% of the fair value on the date of grant, and nonstatutory stock options may be granted to the employees of the Company or its subsidiaries, non-employee directors and consultants at an exercise price of no less than 85% of the fair value. In both cases, when the optionees own stock representing more than 10% of the voting power of all classes of stock of the Company, the exercise price shall be no less than 110% of the fair value on the date of grant. Options, restricted stock awards, and restricted stock units granted under this plan generally have a term of ten years from the date of grant and vest over a four-year period. Restricted stock, performance awards, dividend equivalents, deferred stock, stock payments and stock appreciation rights may also be granted under the 2003 Plan either alone, in addition to, or in tandem with any options granted thereunder. Restricted stock awards and units are full-value awards that reduce the number of shares reserved for grant under this plan by one and one-half shares for each share granted. The vesting criteria for restricted stock awards and units is generally the passage of time or meeting certain performance-based objectives, and continued employment through the vesting period generally over four years. As of March 31, 2012, there were 5,345,000 shares reserved for future grant under this plan.

A summary of the stock option activity is presented below (in thousands, except per share amounts):

 

     Shares Outstanding  
     Number of
Shares
    Weighted
Average
Exercise
Price Per
Share
 

Balance at December 31, 2011

     6,819      $ 20.16   

Options granted

     381        17.78   

Options exercised

     (98     15.88   

Options cancelled / forfeited / expired

     (591     26.53   
  

 

 

   

Balance at March 31, 2012

     6,511      $ 20.16   
  

 

 

   

 

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Information with respect to outstanding restricted stock awards and units as of March 31, 2012 is as follows (in thousands, except per share amounts):

 

     Restricted Stock  
     Number of  Shares
Subject to Time-
based Vesting
    Number of  Shares
Subject to
Performance-
based  Vesting
    Total Number
of  Shares
    Weighted Average
Grant  Date Fair
Value Per Share
 

Balance at December 31, 2011

     730        261        991      $ 17.60   

Awards and units granted

     48        —          48      $ 18.18   

Awards and units vested / earned

     (31     (30     (61   $ 19.00   

Awards and units cancelled / forfeited

     (29     (81     (110   $ 19.78   
  

 

 

   

 

 

   

 

 

   

Balance at March 31, 2012

     718        150        868      $ 17.06   
  

 

 

   

 

 

   

 

 

   

Performance Awards and Units

Performance awards and units may be granted to employees or consultants based upon, among other things, the contributions, responsibilities and other compensation of the particular employee or consultant. The value and the vesting of such performance awards and units are generally linked to one or more performance goals or other specific performance goals determined by the Company, in each case on a specified date or dates or over any period or periods determined by the Company, and range from zero to 100 percent of the grant.

Employee Stock Purchase Plan

In August 2003, the Board adopted the 2003 Employee Stock Purchase Plan, which was approved by the Company’s stockholders in September 2003. The Company initially reserved 200,000 shares of common stock for issuance under the 2003 Employee Stock Purchase Plan. The reserve will automatically increase on the first day of each fiscal year during the term of the 2003 Employee Stock Purchase Plan by an amount equal to the lesser of (1) 200,000 shares, (2) 1.0% of the Company’s outstanding shares on such date or (3) a lesser amount determined by the Board. Subsequently, the Board adopted the International Employee Stock Purchase Plan in June 2008 which reserves 200,000 shares of common stock for issuance under this plan. The 2003 Employee Stock Purchase Plan and the International Employee Stock Purchase Plan (collectively, “ESPP”) are designed to allow eligible employees residing in the U.S. or internationally to purchase shares of common stock, at semi-annual intervals, with their accumulated payroll deductions.

The ESPP has a series of consecutive, overlapping 24-month offering periods. The first offering period commenced February 1, 2004, the effective date of the ESPP, as determined by the Board.

Individuals who own less than 5% of the Company’s voting stock, are scheduled to work more than 20 hours per week and whose customary employment is for more than five months in any calendar year may join an offering period on the first day of the offering period or the beginning of any semi-annual purchase period within that period. Individuals who become eligible employees after the start date of an offering period may join the ESPP at the beginning of any subsequent semi-annual purchase period.

Participants may contribute up to 20% of their cash earnings through payroll deductions, and the accumulated deductions will apply to the purchase of shares on each semi-annual purchase date. The purchase price per share will equal 85% of the fair market value per share on the participant’s entry date into the offering period or, if lower, 85% of the fair market value per share on the semi-annual purchase date.

An eligible employee’s right to buy shares of the Company’s common stock under the ESPP may not accrue at a rate in excess of $25,000 of the fair market value of such shares per calendar year for each calendar year of an offering period.

If the fair market value per share of the Company’s common stock on any purchase date is less than the fair market value per share on the start date of the 24-month offering period, then that offering period will automatically terminate and a new 24-month offering period will begin on the next business day. All participants in the terminated offering will be transferred to the new offering period.

In the event of a proposed sale of all or substantially all of the Company’s assets, or merger with or into another company, the outstanding rights under the ESPP will be assumed or an equivalent right substituted by the successor company or its parent or subsidiary. If the successor company or its parent refuses to assume the outstanding rights or substitute an equivalent right, then all outstanding purchase rights will automatically be exercised prior to the effective date of the transaction. The purchase price will equal 85% of the market value per share on the participant’s entry date into the offering period in which an acquisition occurs or, if lower, 85% of the fair market value per share on the date the purchase rights are exercised.

The ESPP will terminate no later than the tenth anniversary of the ESPP’s initial adoption by the Board.

As of March 31, 2012, there were 438,000 shares reserved for grant under the ESPP.

 

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NOTE 10 – STOCK-BASED COMPENSATION EXPENSE

The effect of recording stock-based compensation expense for the three months ended March 31, 2012 and 2011 is as follows (in thousands):

 

     Three Months Ended  
     March 31,
2012
     March 31,
2011
 

Cost of revenues

   $ 150       $ 143   

Research, development and other related costs

     1,712         2,446   

Selling, general and administrative

     2,194         3,475   
  

 

 

    

 

 

 

Total stock-based compensation expense

   $ 4,056       $ 6,064   
  

 

 

    

 

 

 

Stock-based compensation expense categorized by various equity components for the three months ended March 31, 2012 and 2011 is summarized in the table below (in thousands):

 

     Three Months Ended  
     March 31,
2012
     March 31,
2011
 

Employee stock options

   $ 2,762       $ 3,347   

Restricted stock awards and units

     790         2,174   

Employee stock purchase plan

     504         543   
  

 

 

    

 

 

 

Total stock-based compensation expense

   $ 4,056       $ 6,064   
  

 

 

    

 

 

 

The Company uses the Black-Scholes option pricing model to determine the estimated fair value of stock-based awards. The fair value of each option grant is determined on the date of grant and the expense is recorded on a straight-line basis. The assumptions used in the model include expected life, volatility, risk-free interest rate, and dividend yield. The Company’s determinations of these assumptions are outlined below.

Expected life – The expected life assumption is based on analysis of the Company’s historical employee exercise patterns. The expected life of options granted under the ESPP represents the offering period of two years.

Volatility – Volatility is calculated using the historical volatility of the Company’s common stock for a term consistent with the expected life. Historical volatility of the Company’s common stock is also utilized for the ESPP.

Risk-free interest rate – The risk-free interest rate assumption is based on the U.S. Treasury rate for issues with remaining terms similar to the expected life of the options.

Dividend yield – Expected dividend yield is calculated by annualizing the cash dividend declared by the Board for the current quarter and dividing that result by the average closing price of the Company’s common stock for the quarter. Cash dividends are not paid on options, restricted stock units or unvested restricted stock awards.

In addition, the Company estimates forfeiture rates. Forfeitures are estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. Historical data is used to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest.

The following assumptions were used to value the options granted:

 

     Three Months Ended  
     March 31,
2012
    March 31,
2011
 

Expected life (in years)

     3.70        3.70   

Risk-free interest rate

     0.8     1.8

Dividend yield

     2.2     0.0

Expected volatility

     66.4     76.7

NOTE 11 – INCOME TAXES

The benefit from income taxes for the three months ended March 31, 2012 was $1.9 million and was largely comprised of a tax benefit for domestic losses as offset by foreign withholding and income taxes. The provision for income taxes for the three months ended March 31, 2011 was $5.5 million and was comprised of domestic income tax and foreign income and withholding taxes. The Company’s provision for income taxes is based on its worldwide estimated annualized effective tax rate, except for jurisdictions for which a loss is expected for the year and no benefit can be realized for those losses, and the tax effect of discrete items occurring during the period. The tax for jurisdictions for which a loss is expected for the year is based on actual withholding tax for the quarter. The tax benefit for the three months ended March 31, 2012 as compared to the prior year period tax expense is largely attributable to the loss incurred in the three months ended March 31, 2012.

As of March 31, 2012, unrecognized tax benefits approximated $3.8 million, of which $2.5 million would affect the effective tax rate if recognized. At December 31, 2011, unrecognized tax benefits were $3.8 million of which $2.5 million would affect the effective tax rate if recognized. It is reasonably possible that unrecognized tax benefits may decrease by a range of $0.1 million to $0.2 million in the next 12 months due to the expected lapse of a foreign statute of limitation relating to tax incentives and the conclusion of a foreign tax examination.

 

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It is the Company’s policy to classify accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. For the three months ended March 31, 2012 and 2011, the Company recognized an insignificant amount of interest and penalties related to unrecognized tax benefits. At March 31, 2012 and December 31, 2011, the Company has accrued $0.3 million and $0.3 million, respectively, of interest and penalties related to unrecognized tax benefits.

At March 31, 2012, the Company’s 2007 through 2011 tax years were open and subject to potential examination in one or more jurisdictions. In addition, in the U.S., any net operating losses or credits that were generated in prior years but utilized in an open year may also be subject to examination. The Company is currently under Internal Revenue Service examination related to its 2008 and 2009 tax returns and under review in Israel on a 2007 subsidiary liquidation. The Company is not currently under state income tax examination.

NOTE 12 – COMMITMENTS AND CONTINGENCIES

Lease and Purchase Commitments

The Company and its subsidiaries lease office and research facilities and office equipment under operating leases which expire at various dates through 2016. Under lease agreements that contain escalating rent provisions, lease expense is recorded on a straight-line basis over the lease term. In addition, the Company and its subsidiaries have agreements containing non-cancelable, non-refundable payment terms with third parties to purchase services. Rent expense for the three months ended March 31, 2012 and 2011, was $0.8 million at each period end.

As of March 31, 2012, future minimum lease payments and purchase obligations are as follows (in thousands):

 

     Lease
Obligations
     Purchase
Obligations
     Total  

2012 (remaining 9 months)

   $ 2,312       $ 1,410       $ 3,722   

2013

     2,819         280         3,099   

2014

     2,285         —           2,285   

2015

     1,083         —           1,083   

2016

     2         —           2   

Thereafter

     —           —           —     
  

 

 

    

 

 

    

 

 

 
   $ 8,501       $ 1,690       $ 10,191   
  

 

 

    

 

 

    

 

 

 

Contingencies

The Company cannot predict the outcome of any of the proceedings described below. An adverse decision in any of these proceedings could significantly harm the Company’s business and consolidated financial position, results of operations or cash flows.

Powertech Technology Inc. v. Tessera, Inc., Civil Action No. 10-00945 (N.D. Cal.) and U.S. Court of Appeals for the Federal Circuit Case No. 2010-1489

On March 5, 2010, Powertech Technology Inc. (“PTI”) filed a complaint against Tessera, Inc. in the United States District Court for the Northern District of California seeking a declaratory judgment of noninfringement and invalidity of Tessera, Inc.’s U.S. Patent No. 5,663,106. On March 22, 2010, the case was related to Siliconware Precision Industries Co., Ltd. v. Tessera, Inc., Civil Action No. 08-03667 (N.D. Cal.), and assigned to the judge presiding over that action.

On April 1, 2010, Tessera, Inc. filed a motion to dismiss the complaint for lack of subject matter jurisdiction. On June 1, 2010, the judge granted Tessera, Inc.’s motion, and dismissed the action.

On June 29, 2010, PTI filed a motion seeking reconsideration of the June 1, 2010 order dismissing the action. On August 3, 2010, PTI’s motion was denied.

On August 6, 2010, PTI filed a notice of appeal with the U.S. Court of Appeals for the Federal Circuit. On September 30, 2011, the Federal Circuit issued an opinion reversing and remanding the case to the district court, determining that there was declaratory judgment jurisdiction. Tessera, Inc. filed a petition for rehearing on November 14, 2011. The Federal Circuit denied Tessera, Inc.’s petition for rehearing on January 5, 2012. On January 19, 2012, the Federal Circuit issued a judgment reversing and remanding the case to the district court. On December 15, 2011, the district court case was related to Powertech Technology Inc. v. Tessera, Inc., Civil Action No. 11-06121 (N.D. Cal.), discussed below.

The district court held a Case Management Conference on January 4, 2012. The court issued a Minute Order and Case Management Order dated January 4, 2012, setting, among other things, a fact discovery cut-off date of January 18, 2013 and a trial date of April 7, 2014.

Powertech Technology Inc. v. Tessera, Inc., Civil Action No. 11-06121 (N.D. Cal.)

On December 6, 2011, PTI filed a complaint against Tessera, Inc. in the U.S. District Court for the Northern District of California. PTI’s complaint seeks a declaratory judgment that PTI has the right to terminate its license with Tessera, Inc. as of December 6, 2011. The complaint

 

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also seeks damages for breach of contract in the amount of all royalties paid to Tessera, Inc. since December 7, 2007, purportedly totaling at least $200 million, in addition to an accounting of PTI’s damages, an accounting of Tessera, Inc.’s revenue from PTI, prejudgment interest, costs and fees, and other relief deemed proper. Tessera, Inc. disagrees with the assertions made by PTI in the complaint regarding breach of contract, and believes the likelihood that Tessera, Inc. will be required to return already-paid royalties is remote.

On December 15, 2011, the case was related to Powertech Technology Inc. v. Tessera, Inc., Civil Action No. 10-00945 (N.D. Cal.), discussed above.

On December 30, 2011, Tessera, Inc. filed a motion to dismiss and motion to strike PTI’s complaint.

The district court held a Case Management Conference on January 4, 2012. The court issued a Minute Order and Case Management Order dated January 4, 2012, setting, among other things, a fact discovery cut-off date of January 18, 2013 and a trial date of April 7, 2014.

Other Litigation Matters

In addition to the foregoing matters, the Company and its subsidiaries are involved in other litigation matters and claims in the normal course of business. In the past, the Company and its subsidiaries have litigated to enforce their respective patents and other intellectual property rights, to enforce the terms of license agreements, to protect trade secrets, to determine the validity and scope of the proprietary rights of others and to defend against claims of infringement or invalidity. The Company expects it or its subsidiaries will be involved in similar legal proceedings in the future, including proceedings regarding infringement of its patents and proceedings to ensure proper and full payment of royalties by licensees under the terms of its license agreements.

These existing and any future legal actions may harm either or both of the Company’s business segments, and may hinder the Company’s ability to independently optimize each business segment. For example, they could cause an existing licensee or strategic partner to cease making royalty or other payments to the Company, or to challenge the validity and enforceability of patents owned by the Company’s subsidiaries or the scope of license agreements with the Company’s subsidiaries, and could significantly damage the Company’s relationship with such licensee or strategic partner and, as a result, prevent the adoption of the Company’s other Intellectual Property or DigitalOptics technologies by such licensee or strategic partner. Litigation could also severely disrupt or shut down the business operations of licensees or strategic partners of the Company’s subsidiaries, which in turn would significantly harm ongoing relations with them and cause the Company to lose royalty revenues.

The costs associated with legal proceedings are typically high, relatively unpredictable and not completely within the Company’s control. These costs may be materially higher than expected, which could adversely affect the Company’s operating results and lead to volatility in the price of its common stock. Whether or not determined in the Company’s favor or ultimately settled, litigation diverts managerial, technical, legal and financial resources from the Company’s business operations. Furthermore, an adverse decision in any of these legal actions could result in a loss of the Company’s proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from others, limit the value of the Company’s licensed technology or otherwise negatively impact the Company’s stock price or its business and consolidated financial position, results of operations or cash flows.

NOTE 13 – SEGMENT AND GEOGRAPHIC INFORMATION

The Company has two reportable segments: Intellectual Property and DigitalOptics. In addition to these reportable segments, the Corporate Overhead category includes certain operating amounts that are not allocated to the reportable segments because these operating amounts are not considered in evaluating the operating performance of the Company’s business segments.

In 2011, the Company appointed a new President and Chief Executive Officer who is also the Chief Operating Decision Maker (“CODM”) as defined by the authoritative guidance on segment reporting. Also in 2011, the Company appointed a new President of DigitalOptics Corporation and a new President of Tessera Intellectual Property Corp. At the end of 2011, the Company reorganized its reporting units to align with how the Company’s management views and evaluates the Company’s operations, such as the inclusion of development and product commercialization efforts related to the silent air cooling technology in the DigitalOptics segment instead of the Intellectual Property segment. Prior year amounts have been reclassified to conform to current year presentation.

The Intellectual Property segment is managed by Tessera Intellectual Property Corp., including managing the patent, licensing and litigation portfolios of Tessera, Inc. and Invensas Corporation. The Company’s Intellectual Property segment, comprised of engineering, licensing, account administration and litigation teams, generates revenue from patented innovations through license agreements with semiconductor companies and outsourced semiconductor assembly and test companies.

The DigitalOptics segment is operated by DigitalOptics Corporation and its subsidiaries (“DOC”). DOC delivers innovation in imaging and optics with products and capabilities that enable expanded functionality in increasingly smaller devices. DOC’s miniaturized camera module solutions provide cost-effective, high-quality camera features, including MEMS based auto-focus, extended depth of field, zoom, image enhancement and optical image stabilization. These technologies can be applied to consumer electronic products. The segment also offers customized micro-optic lenses from diffractive and refractive optical elements to integrated micro-optical subassemblies and will be offering silent air cooling products.

 

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The Company does not identify or allocate assets by reportable segment, nor does the CODM evaluate reportable segments using discrete asset information. Reportable segments do not record inter-segment revenues and accordingly there are none to report. The Company does not allocate other income and expense to reportable segments. Although the CODM uses operating income to evaluate reportable segments, operating costs included in one segment may benefit other segments.

The following table sets forth the Company’s segment revenues, operating expenses and operating income (loss) for the three months ended March 31, 2012 and 2011 (in thousands):

 

     Three Months Ended March 31,  
     2012     2011  

Revenues:

    

Intellectual Property Segment

    

Royalty and license fees

   $ 39,028      $ 53,615   

Product and service revenues

     —          —     
  

 

 

   

 

 

 

Total Intellectual Property revenues

     39,028        53,615   

DigitalOptics:

    

Royalty and license fees

     4,236        8,643   

Product and service revenues

     3,409        5,515   
  

 

 

   

 

 

 

Total DigitalOptics revenues

     7,645        14,158   
  

 

 

   

 

 

 

Total revenues

     46,673        67,773   
  

 

 

   

 

 

 

Operating expenses:

    

Intellectual Property Segment

     20,091        17,028   

DigitalOptics Segment

     24,652        23,713   

Corporate Overhead

     12,565        10,903   
  

 

 

   

 

 

 

Total operating expenses

     57,308        51,644   

Operating income (loss):

    

Intellectual Property Segment

     18,937        36,587   

DigitalOptics Segment

     (17,007     (9,555

Corporate Overhead

     (12,565     (10,903
  

 

 

   

 

 

 

Total operating income (loss)

   $ (10,635   $ 16,129   
  

 

 

   

 

 

 

A significant portion of the Company’s revenues is derived from licensees headquartered outside of the U.S., principally in Asia and Europe, and it is expected that these revenues will continue to account for a significant portion of total revenues in future periods. The table below lists the geographic revenue information for the periods indicated (in thousands, except for percentages):

 

     Three Months Ended March 31,  
     2012     2011  

U.S.

   $ 17,981         38   $ 19,549         29

Asia Pacific

     26,394         57     43,352         64

Europe and other

     2,298         5     4,872         7
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 46,673         100   $ 67,773         100
  

 

 

    

 

 

   

 

 

    

 

 

 

For the three months ended March 31, 2012 and 2011, three and two customers, respectively, each accounted for 10% or more of total revenues.

 

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As of March 31, 2012 and December 31, 2011, property and equipment, net, by geographical area are presented below (in thousands):

 

     March 31,
2012
     December 31,
2011
 

U.S.

   $ 34,085       $ 35,082   

Romania

     776         605   

Other

     683         632   
  

 

 

    

 

 

 

Total

   $ 35,544       $ 36,319   
  

 

 

    

 

 

 

NOTE 14 – RELATED PARTY TRANSACTION

Since 2008, Tessera, Inc. has engaged 3LP Advisors LLC (“3LP”) to assist with the identification and acquisition of patents. In 2011 and 2012, 3LP expanded its advisory services by providing strategic advice to Invensas Corporation and Tessera Intellectual Property Corp. as well. A managing partner of 3LP, Mr. Kevin G. Rivette, is a member of the Board and has a 33.3% ownership interest in 3LP. For the three months ended March 31, 2012 and 2011, the Company recognized operating expense of $0.8 million and $0.6 million, respectively, related to these engagements. At March 31, 2012 and December 31, 2011, the accounts payable balance due to 3LP was $0.3 million and $2.0 million, respectively.

In May 2011, Tessera, Inc. engaged IRT, Inc. (“IRT”) to provide outside administrative services for a stated hourly rate plus reimbursement for incurred expenses. IRT is solely owned by Robert A. Young, the Company’s President and Chief Executive Officer. For the three months ended March 31, 2012, operating expenses recognized related to these services were not significant. At March 31, 2012, the accounts payable balance due to IRT was not significant.

NOTE 15 – RESTRUCTURING AND OTHER CHARGES

In January 2011, the Company announced a reorganization of its DigitalOptics segment to focus on key growth opportunities including extended depth of field, zoom and MEMS-based auto-focus and a reduction of DigitalOptics employees by up to 15% of the Company’s worldwide employee base along with certain headquarters support functions. In August 2011, the Company announced a commitment to undertake a workforce reduction at its Yokohama, Japan development facility and to close that facility in order to optimize the Company’s operations. Expenses incurred as a result of these activities consisted of severance, costs related to the continuation of certain employee benefits and expenses related to the closure of the facility and termination of the operating lease, and are recorded in restructuring and other charges on the statement of operations. Total restructuring and other charges related to these activities was $5.2 million, all of which were expensed in the year ended December 31, 2011. These restructuring activities were substantially complete as of March 31, 2012.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto, and with our audited financial statements and notes thereto for the fiscal year ended December 31, 2011 found in our Annual Report on Form 10-K, filed on February 17, 2012.

This Quarterly Report contains forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “anticipates,” “plans,” “believes,” “seeks,” “estimates,” “could,” “would,” “may,” “intends,” “targets” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Quarterly Report. The identification of certain statements as “forward-looking” is not intended to mean that other statements not specifically identified are not forward-looking. All statements other than statements about historical facts are statements that could be deemed forward-looking statements, including, but not limited to, statements that relate to our future revenues, product development, demand, acceptance and market share, growth rate, competitiveness, gross margins, levels of research, development and other related costs, expenditures, the outcome or effects of and expenses related to litigation and administrative proceedings related to our patents, our intent to enforce our intellectual property, our ability to license our intellectual property, tax expenses, cash flows, our ability to liquidate and recover the carrying value of our investments, our management’s plans and objectives for our current and future operations, management’s plans for repurchasing our common stock pursuant to the authorization of our Board of Directors, the levels of customer spending or research and development activities, general economic conditions, the sufficiency of financial resources to support future operations and capital expenditures.

Although forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks, uncertainties, and changes in condition, significance, value and effect, including those discussed below under the heading “Risk Factors” within Part II, Item 1A of this Quarterly Report and other documents we file from time to time with the Securities and Exchange Commission (the “SEC”), such as our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from those expressed herein and in ways not readily foreseeable. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report and are based on information currently and reasonably known to us. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

 

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Corporate Information

Our principal executive offices are located at 3025 Orchard Parkway, San Jose, California 95134. Our telephone number is (408) 321-6000. We maintain a website at www.tessera.com. The reference to our website address does not constitute incorporation by reference of the information contained on this website.

Tessera, the Tessera logo, µBGA, OptiML, DigitalOptics Corporation, the DigitalOptics Corporation logo, Invensas, the Invensas logo and SHELLCASE are trademarks or registered trademarks of the Company or its affiliated companies in the United States (“U.S.”) and other countries. All other company, brand and product names may be trademarks or registered trademarks of their respective companies.

In this Quarterly Report, the “Company,” “we,” “us” and “our” refer to Tessera Technologies, Inc. which operates its business through its subsidiaries. Unless specified otherwise, the financial results in this Quarterly Report are those of the Company and its subsidiaries on a consolidated basis.

Business Overview

Tessera Technologies, Inc. is a holding company with operating subsidiaries in two segments: Intellectual Property and DigitalOptics.

Our Intellectual Property segment is managed by Tessera Intellectual Property Corp., including managing the patent and licensing portfolios of our subsidiaries, Tessera, Inc. and Invensas Corporation (“Invensas”). Our Intellectual Property business, comprised of engineering, licensing, account administration and litigation teams, generates revenue from patented innovations through license agreements with semiconductor companies and outsourced semiconductor assembly and test companies.

Our DigitalOptics segment is operated by DigitalOptics Corporation and its subsidiaries (“DOC”). DOC delivers innovation in imaging and optics with products and capabilities that enable expanded functionality in increasingly smaller devices. DOC’s miniaturized camera module solutions provide cost-effective, high-quality camera features, including Micro Electro Mechanical Systems (“MEMS”)-based auto-focus, extended depth of field (“EDoF”), zoom, image enhancement and optical image stabilization. These technologies can be applied to mobile phones and other consumer electronic products. DOC also offers customized micro-optic lenses from diffractive and refractive optical elements to integrated micro-optical subassemblies.

Our segments were determined based upon the manner in which our management viewed and evaluated our operations for the period reported. As our business grows and evolves, our management may change their views of our business operations. Segment information in Note 13 — “Segment and Geographic Information” in the Notes to Condensed Consolidated Financial Statements is incorporated herein by reference and is presented per the authoritative guidance for segment reporting. At the end of 2011, we renamed our segments in and have reclassified our segment results to reflect the inclusion of our silent air cooling program in our DigitalOptics segment. Prior to that time, that program was included in our Intellectual Property segment.

Intellectual Property Segment

Research and development by our Tessera, Inc. subsidiary led to significant innovations in semiconductor packaging technology. Semiconductor packaging creates the mechanical and electrical connection between semiconductor chips and systems such as computers and communication equipment, often via connection to printed circuit boards. We patented these innovations, often referred to as chip-scale packaging, which were widely adopted in the industry. We have developed significant capabilities in licensing, technical analysis, reverse engineering, license administration and litigation as we have sought reasonable royalties from companies that adopted our technologies.

DigitalOptics Segment

DigitalOptics offers mobile camera module solutions in three main categories: actuator technologies, image enhancement solutions and wafer-level optics. DOC’s solutions help meet growing consumer demand for smaller size, lower cost and greater functionality in mobile phones and other consumer electronic products.

Actuator technologies:

DOC’s silicon solutions improve image quality and enhance, extend and simplify picture taking for mobile and portable camera devices. One example is DOC’s MEMS solutions, which offer superior auto-focus and shutter capabilities in a low power, small form factor solution for continuous focus video, saving time and money. MEMS Auto-Focus (AF) actuator uses MEMS technology to precisely position and move a lens inside the camera optics to focus. Positioning precision and repeatability capabilities are achieved through DOC’s unique and proprietary MEMS silicon designs.

DOC’s zoom solution eliminates certain drawbacks of conventional zoom technologies while significantly advancing what is possible in a mobile device. By combining a custom lens design with innovative image processing, it enables 3X zoom capabilities.

Image Enhancement Solutions:

DOC licenses software solutions for digital and video photography image enhancement. Examples include:

 

   

Face Tools, which provide face-oriented imaging technology such as face tracking/detection, smile/blink detection, face recognition and face beautification. When combined with our hardware acceleration technology, the performance of these applications for both video and still images is enhanced.

 

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  Portrait Enhancement, which brings professional photo capabilities to all camera or video-enabled products without requiring separate, post-editing software. It works in real time, with either still images or video.

 

  Panorama, which enables users to easily and automatically create panoramic images in a single step, without using a PC or editing software.

 

  Video Tools, which combine image enhancement software and hardware acceleration to provide real-time video image stabilization and face beautification.

Wafer Level Optics:

DOC uses the latest semiconductor manufacturing techniques to develop and deliver its micro-optic lenses, including Diffractive Optical Elements (“DOEs”), Refractive Optical Elements (“ROEs”) and Integrated Micro-Optical Subassemblies (“IMOS”). DOC uses wafer-level processing to fabricate the DOEs and/or ROEs on one or two sides of the wafer, resulting in a high-precision, high-efficiency, cost effective products. The products are manufactured in DOC’s state-of-the-art ISO-registered facility.

Results of Operations

Acquisitions

We have grown our business partly through acquisitions. On March 1, 2012, we entered into a Stock and Asset Purchase Agreement, pursuant to which DOC will acquire from Flextronics International Ltd. (“Flextronics”) all the outstanding equity interests in Vista Point Electronic Technologies (Zhuhai) Co. Ltd., a company organized under the laws of the People’s Republic of China (the “Zhuhai Entity”), and acquire certain other assets from Flextronics related to its camera module business (collectively, the “Zhuhai Transaction”). The initial closing of the Zhuhai Transaction, including the acquisition of the Zhuhai Entity, is anticipated to occur by the third quarter of this fiscal year. The costs incurred related to the Zhuhai Transaction during the three months ended March 31, 2012 have been included in the following discussion. If the Zhuhai Transaction is completed, we anticipate that we will need to make substantial additional capital expenditures, employ additional working capital and undertake additional acquisitions in order to succeed in our business plans for the DigitalOptics segment. We also anticipate that we will incur greater operating expenses in future periods than in the past, due to the manufacturing operations and additional personnel being acquired with the Zhuhai Entity.

Revenues

Our revenues are generated from royalty and license fees, past production payments, and product and service revenues. Royalty and license fees include revenues from license fees and royalty payments generated from licensing the right to use our technologies or intellectual property. Licensees generally report shipment information 30 to 60 days after the end of the quarter in which such activity takes place. Since there is no reliable basis on which we can estimate our royalty revenues prior to obtaining these reports from the licensees, we recognize royalty revenues on a one quarter lag. The timing of revenue recognition and the amount of revenue actually recognized for each type of revenues depends upon a variety of factors, including the specific terms of each arrangement, our ability to derive fair value of the element and the nature of our deliverables and obligations. In addition, our royalty revenues will fluctuate based on a number of factors such as: (a) the timing of receipt of royalty reports; (b) the rate of adoption and incorporation of our technology by licensees; (c) the demand for products incorporating semiconductors that use our licensed technology; (d) the cyclicality of supply and demand for products using our licensed technology; and (e) the impact of economic downturns.

Some of our license agreements have fixed expiration dates. We need to renew or replace these agreements prior to their expiration in order to maintain our current revenue base. For example, our license agreement with Micron Technology, Inc. will expire in May 2012. We may not be able to continue licensing customers on terms favorable to us, under the existing terms or at all, which would harm our results of operations.

In 2005, Tessera, Inc. provided two major DRAM manufacturers with volume based pricing adjustments. The effect of the volume pricing adjustments has caused our aggregate annual DRAM royalty revenues to grow less rapidly than annual growth in overall unit shipments in the DRAM segment. An additional effect has been quarter-to-quarter fluctuations in growth in our revenues from the DRAM segment, depending on the relative DRAM market share enjoyed by these two DRAM manufacturers in a given calendar quarter and their royalty payments within a calendar year.

Tessera, Inc. is in litigation with PTI, one of two customers representing 10% or more of our revenue in 2011, as described in Part II, Item 1—Legal Proceedings. If PTI stops making payments, reduces payments, or if we receive an adverse determination in that case, it may have a substantial adverse impact on our royalty revenue in the short term.

In the past, we or our subsidiaries have engaged in litigation and arbitration proceedings to directly or indirectly enforce our intellectual property rights and the terms of our license agreements, including proceedings to ensure proper and full payment of royalties by our current licensees and by third parties whose products incorporate our intellectual property rights. We believe that similar future proceedings may result in fluctuations in our revenue and expenses.

 

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The following table sets forth our operating results for the periods indicated as a percentage of revenues:

 

     Three Months Ended  
     March 31,
2012
    March 31,
2011
 

Revenues:

    

Royalty and license fees

     93     92

Product and service revenues

     7        8   
  

 

 

   

 

 

 

Total revenues

     100        100   

Operating expenses:

    

Cost of revenues

     12        8   

Research, development and other related costs

     50        27   

Selling, general and administrative

     53        29   

Litigation expense

     8        9   

Restructuring charges

     —          3   
  

 

 

   

 

 

 

Total operating expenses

     123        76   

Operating income (loss)

     (23     24   

Other income and expense, net

     2        1   
  

 

 

   

 

 

 

Income (loss) before taxes

     (21     25   

Provision for (benefit from) income taxes

     (4     8   
  

 

 

   

 

 

 

Net income (loss)

     (17 )%      17
  

 

 

   

 

 

 

The following table sets forth our revenues by type (in thousands, except for percentages):

 

     Three Months Ended  
     March 31,
2012
    March 31,
2011
    Increase
(Decrease)
    %
Change
 

Royalty and license fees

   $ 43,264         93   $ 62,258         92   $ (18,994     (31 )% 

Product and service revenues

     3,409         7        5,515         8        (2,106     (38
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

   $ 46,673         100   $ 67,773         100   $ (21,100     (31 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

For the three months ended March 31, 2012, revenues were $46.7 million as compared to $67.8 million for the three months ended March 31, 2011, a decrease of $21.1 million, or 31%. The overall decrease in revenues in the three months ended March 31, 2012 as compared to the same period in 2011 was primarily due to the impact of lower royalty-bearing units reported by our licensees, the timing of $2.8 million from multi-year license revenues for our DigitalOptics technologies entered into in the prior year, and a decrease of $1.8 million in lithography sales in our micro-optics products.

Cost of Revenues

Cost of revenues primarily consists of direct compensation, materials, amortization of intangible assets related to acquired technologies, supplies and depreciation expense. Amortization of certain acquired intangible assets and depreciation expense of property and equipment are generally classified as a component of cost of revenues from research, development and other related costs when an in-process development project reaches commercialization. Excluding amortization of acquired intangible assets, cost of revenues relates primarily to product and service revenues. For each associated period, cost of revenues as a percentage of total revenues varies based on the rate of adoption of our technologies, the product and service revenues component of total revenues, the mix of product sales to semiconductor, optics and communications industries and the timing of property and equipment being placed in service.

Cost of revenues for the three months ended March 31, 2012 was $5.8 million, as compared to $5.5 million for the three months ended March 31, 2011. Cost of revenues for the three months ended March 31, 2012 slightly increased as compared to the same periods in 2011 as increases in depreciation and amortization of acquired intangible assets were mostly offset by lower personnel related costs and material costs on lower product sales.

Research, Development and Other Related Costs

Research, development and other related costs consist primarily of compensation and related costs for personnel, as well as costs related to patent applications and examinations, amortization of intangible assets, materials, supplies and equipment depreciation. Research and development is conducted primarily in-house and targets development of chip-scale, circuitry design, 3D architecture, high-density substrate, thermal management technology, image enhancement technology, including MEMS-based products, and micro-optic lens solutions such as diffractive and refractive optical elements to integrated micro-optical subassemblies. All research, development and other related costs are expensed as incurred.

 

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Research, development and other related costs for the three months ended March 31, 2012 were $23.4 million, as compared to $18.6 million for the three months ended March 31, 2011, an increase of $4.8 million, or 26%. The increase was primarily due to increases in material costs of $1.4 million, patent prosecution, application and examination expenses of $1.3 million, consulting fees of $0.9 million and amortization of intangible assets of $0.6 million, offset by lower stock-based compensation of expenses of $0.7 million.

We believe that a significant level of research and development expenses will be required for us to remain competitive in the future.

Selling, General and Administrative

Selling expenses consist primarily of compensation and related costs for sales and marketing personnel, marketing programs, public relations, promotional materials, travel, trade show expenses, and stock-based compensation expense. General and administrative expenses consist primarily of compensation and related costs for general management, information technology, finance and accounting personnel, legal expenses, facilities costs, stock-based compensation expense, and professional services. Our general and administrative expenses, other than facilities related expenses, are not allocated to other expense line items.

Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2012 were $24.6 million, as compared to $19.5 million for the three months ended March 31, 2011, an increase of $5.1 million, or 26%. The increase was primarily attributable to increases in outside service and legal fees of $3.6 million which were related to the expense associated with our acquisition activities, amortization of intangible assets of $1.4 million, and personnel related expense of $1.6 million, offset by a decrease in stock-based compensation expenses of $1.3 million.

Litigation Expense

Litigation expense for the three months ended March 31, 2012 was $3.5 million, as compared to $6.0 million for the three months ended March 31, 2011, a decrease of $2.5 million, or 42%. The decrease was primarily attributable to the decrease in case activities in our legal proceedings related to our arbitration with Amkor.

We expect that litigation expense will continue to be a material portion of our operating expenses in future periods, and may fluctuate significantly in some periods, because of our ongoing litigation, as described in Part II, Item 1 — Legal Proceedings, and because of litigation initiated from time to time in the future in order to enforce and protect our intellectual property and contract rights.

Upon expiration of the current terms of our customers’ licenses, if those licenses are not renewed, litigation may become a necessary element of a campaign to secure payment of reasonable royalties for the use of our patented technology. Were we to initiate such litigation, our future litigation expenses would increase.

Restructuring and Other Charges

We did not incur any restructuring and other charges for the three months ended March 31, 2012, as compared to $2.1 million for the three months ended March 31, 2011. In January 2011, we announced a reorganization of our DigitalOptics segment to focus on key growth opportunities including EDoF, Zoom and MEMS-based auto-focus and a reduction of DigitalOptics employees by up to 15% of our worldwide employee base along with certain headquarters support functions. Restructuring and other charges primarily consisted of severance, costs related to the continuation of certain employee benefits, and expenses related to the closure of facilities that are not expected to be recurring.

Stock-based Compensation Expense

The following table sets forth our stock-based compensation expense for the three months ended March 31, 2012 and 2011 (in thousands):

 

     Three Months Ended  
     March 31,
2012
     March 31,
2011
 

Cost of revenues

   $ 150       $ 143   

Research, development and other related costs

     1,712         2,446   

Selling, general and administrative

     2,194         3,475   
  

 

 

    

 

 

 

Total stock-based compensation expense

   $ 4,056       $ 6,064   
  

 

 

    

 

 

 

Stock-based compensation expense categorized by various equity components for the three months ended March 31, 2012 and 2011 is summarized in the table below (in thousands):

 

     Three Months Ended  
     March 31,
2012
     March 31,
2011
 

Employee stock options

   $ 2,762       $ 3,347   

Restricted stock awards and units

     790         2,174   

Employee stock purchase plan

     504         543   
  

 

 

    

 

 

 

Total stock-based compensation expense

   $ 4,056       $ 6,064   
  

 

 

    

 

 

 

 

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Stock-based compensation awards included employee stock options, restricted stock awards and units and employee stock purchases. Stock-based compensation expense for the three months ended March 31, 2012 and 2011 was $4.1 million and $6.1 million, respectively. The overall decrease from the three months ended March 31, 2011 was primarily related to decreases resulting from fully amortized expense as shares become vested, cancellations of restricted stock awards and units, and lower expenses related to modification of stock awards. Future stock-based compensation expense will vary due to volatility in our stock price, number and type of stock awards granted and timing of modifications to stock awards, if any.

Other Income and Expense, Net

Other income and expense, net for the three months ended March 31, 2012 was $0.7 million as compared to $0.6 million for the three months ended March 31, 2011.

Provision for (Benefit from) Income Taxes

The benefit from income taxes for the three months ended March 31, 2012 was $1.9 million and was largely comprised of a tax benefit for domestic losses as offset by foreign withholding and income taxes. The provision for income taxes for the three months ended March 31, 2011 was $5.5 million and was comprised of domestic income tax and foreign income and withholding taxes. The Company’s provision for income taxes is based on its worldwide estimated annualized effective tax rate, except for jurisdictions for which a loss is expected for the year and no benefit can be realized for those losses, and the tax effect of discrete items occurring during the period. The tax for jurisdictions for which a loss is expected for the year is based on actual withholding tax for the quarter. The tax benefit for the three months ended March 31, 2012 as compared to the prior year period tax expense is largely attributable to the loss incurred in the three months ended March 31, 2012.

Segment Operating Results

We have two reportable segments: Intellectual Property and DigitalOptics. In addition to these reportable segments, the Corporate Overhead category includes certain operating amounts that are not allocated to the reportable segments because these operating amounts are not considered in evaluating the operating performance of our business segments.

Our Intellectual Property segment is managed by Tessera Intellectual Property Corp., including managing the patent and license portfolios of our subsidiaries, Tessera, Inc. and Invensas. Our Intellectual Property business, comprised of engineering, licensing, account administration and litigation teams, generates revenue from patented innovations through license agreements with semiconductor companies and outsourced semiconductor assembly and test companies.

Our DigitalOptics segment is operated by DigitalOptics Corporation and its subsidiaries (“DOC”). DOC delivers innovation in imaging and optics with products and capabilities that enable expanded functionality in increasingly smaller devices. DOC’s miniaturized camera module solutions provide cost-effective, high-quality camera features, including MEMS-based auto-focus, extended depth of field, zoom, image enhancement and optical image stabilization. These technologies can be applied to mobile phones and other consumer electronic products. This segment also offers customized micro-optic lenses from diffractive and refractive optical elements to integrated micro-optical subassemblies and will be offering silent air cooling products. The costs incurred related to the Zhuhai Transaction during the three months ended March 31, 2012 have been included in the results for DigitalOptics segment, as the acquired business and assets will be included in that segment when the Zhuhai Transaction closes.

Our reportable segments were determined based upon the manner in which our management views and evaluates our operations. Segment information below and in Note 13 — ”Segment and Geographic Information” of the Notes to Condensed Consolidated Financial Statements is presented in accordance with the authoritative guidance on segment reporting.

 

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The following table sets forth our segments’ revenues, operating expenses and operating income (loss) for the three months ended March 31, 2012 and 2011 (in thousands):

 

     Three Months Ended
March 31,
 
     2012     2011  

Revenues:

    

Intellectual Property Segment

    

Royalty and license fees

   $ 39,028      $ 53,615   

Product and service revenues

     —          —     
  

 

 

   

 

 

 

Total Intellectual Property revenues

     39,028        53,615   

DigitalOptics:

    

Royalty and license fees

     4,236        8,643   

Product and service revenues

     3,409        5,515   
  

 

 

   

 

 

 

Total DigitalOptics revenues

     7,645        14,158   
  

 

 

   

 

 

 

Total revenues

     46,673        67,773   
  

 

 

   

 

 

 

Operating expenses:

    

Intellectual Property Segment

     20,091        17,028   

DigitalOptics Segment

     24,652        23,713   

Corporate Overhead

     12,565        10,903   
  

 

 

   

 

 

 

Total operating expenses

     57,308        51,644   

Operating income (loss):

    

Intellectual Property Segment

     18,937        36,587   

DigitalOptics Segment

     (17,007     (9,555

Corporate Overhead

     (12,565     (10,903
  

 

 

   

 

 

 

Total operating income (loss)

   $ (10,635   $ 16,129   
  

 

 

   

 

 

 

Revenues and operating income amounts in this section have been presented on a basis consistent with U.S. GAAP applied at the segment level. Corporate Overhead expenses which have been excluded are primarily support services, human resources, legal, finance, IT, corporate development, procurement activities, and insurance expenses. For the three months ended March 31, 2012, Corporate Overhead expenses were $12.6 million as compared to $10.9 million for the three months ended March 31, 2011, an increase of 1.7 million. The increase is primarily due to increases in legal and other outside services related to a pending acquisition.

Intellectual Property Segment

 

     Three Months Ended  
     March 31,
2012
     March 31,
2011
     Increase
(Decrease)
    %
Change
 

Revenues:

          

Intellectual Property:

          

Royalty and license fees

   $ 39,028       $ 53,615       $ (14,587     (27 )% 

Product and service revenues

        —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Intellectual Property revenues

     39,028         53,615         (14,587     (27

Operating expenses:

          

Cost of revenues

     196         207         (11     100   

Research, development and other related cost

     9,163         6,835         2,328        34   

Selling, general and administrative

     6,994         3,883         3,111        80   

Litigation expense

     3,738         5,928         (2,190     (37

Restructuring charges

     —           175         (175     100   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total operating expenses

     20,091         17,028         3,063        18   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total operating income

   $ 18,937       $ 36,587       $ (17,650     (48 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

For the three months ended March 31, 2012, Intellectual Property revenues were $39.0 million as compared to $53.6 million for the three months ended March 31, 2011, a decrease of $14.6 million, or 27%. The overall decrease in revenues in the three months ended March 31, 2012 as compared to the same period in 2011 was primarily due to lower royalties reported by our licensees.

Intellectual Property revenues consist primarily of royalties received from our licensees.

 

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Operating expenses for the three months ended March 31, 2012 were $20.1 million and consisted primarily of research, development and other related costs of $9.2 million, SG&A expenses of $7.0 million and litigation expense of $3.7 million. The increase of $3.1 million, or 18%, in total operating expense as compared to $17.0 million for the three months ended March 31, 2011, was primarily attributable to increases in amortization of intangible assets of $2.3 million, consulting fees of $1.8 million and patent prosecution, application and examination expenses of $1.5 million, offset by lower litigation expense of $2.2 million.

We expect that litigation expense will continue to be a material portion of our operating expenses in future periods, and may fluctuate significantly in some periods, because of our ongoing litigation, as described in Part II, Item 1— Legal Proceedings, and because of litigation initiated from time to time in the future in order to enforce and protect our intellectual property and contract rights.

Operating income for the three months ended March 31, 2012 and 2011 was $18.9 million and $36.6 million, respectively, which represented a decrease of $17.7 million, or 48%, for the reasons stated above.

DigitalOptics Segment

 

     Three Months Ended  
     March 31,
2012
    March 31,
2011
    Increase
(Decrease)
    %
Change
 

Revenues:

        

DigitalOptics:

        

Royalty and license fees

   $ 4,236      $ 8,643      $ (4,407     (51 )% 

Product and service revenues

     3,409        5,515        (2,106     (38
  

 

 

   

 

 

   

 

 

   

 

 

 

Total DigitalOptics revenues

     7,645        14,158        (6,513     (46

Operating expenses:

        

Cost of revenues

     5,564        5,305        259        5   

Research, development and other related costs

     14,282        11,778        2,504        21   

Selling, general and administrative

     4,806        4,746        60        1   

Restructuring charges

     —          1,884        (1,884     100   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     24,652        23,713        939        4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating loss

   $ (17,007   $ (9,555   $ (7,452     78
  

 

 

   

 

 

   

 

 

   

 

 

 

DigitalOptics revenues for the three months ended March 31, 2012 were $7.6 million as compared to $14.2 million for the three months ended March 31, 2011, a decrease of $6.6 million, or 46%. The decrease in DigitalOptics revenues in the three months ended March 31, 2012 as compared to the same period in 2011 was primarily due to the timing of $2.8 million from multi-year license agreements entered into in the prior year, $1.8 million in lower lithography sales in our micro-optics products and $0.6 million in one-time royalty payments in the prior year.

In January 2011, we announced a reorganization of our DigitalOptics segment to focus on key growth opportunities including EDoF, Zoom and MEMS-based auto-focus. We also announced a reduction of DigitalOptics employees by up to 15% of our worldwide employee base along with certain headquarters support functions. Restructuring and other charges primarily consisted of severance and costs related to the continuation of certain employee benefits that are not expected to be recurring.

Operating expenses for the three months ended March 31, 2012 were $24.7 million and consisted of cost of revenues of $5.6 million, research, development and other related costs of $14.3 million and SG&A expenses of $4.8 million, an increase of $1.0 million, or 4%, in total operating expenses as compared to $23.7 million for the three months ended March 31, 2011. The increase was primarily due to increases in personnel related expenses of $1.4 million, material costs of $1.2 million, patent prosecution, application and examination expenses of $0.4 million, and depreciation expense of $0.3 million, offset by non-recurring restructuring and other related expenses of $1.9 million.

Operating loss for the three months ended March 31, 2012 was $17.0 million. Operating loss for the three months ended March 31, 2011 was $9.6 million which represented an increased loss of $7.4 million, or 77%, for the reasons stated above.

We have incurred significant operating losses from the DigitalOptics segment. If the anticipated future results of the DigitalOptics segment do not materialize as expected, then the related intangible assets could be subject to an impairment charge in the future.

 

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Liquidity and Capital Resources

 

(in thousands, except for percentages)    As of
March 31,
2012
    As of
December 31,
2011
 

Cash and cash equivalents

   $ 78,913      $ 55,758   

Short-term investments

     411,519        436,687   
  

 

 

   

 

 

 

Total cash, cash equivalents, short-term and long-term investments

   $ 490,432      $ 492,445   
  

 

 

   

 

 

 

Percentage of total assets

     69     69
     Three Months Ended  
     March 31,
2012
    March 31,
2011
 

Net cash provided by (used in) operating activities

   $ (1,152   $ 22,019   

Net cash provided by investing activities

   $ 20,729      $ 13,331   

Net cash provided by financing activities

   $ 3,578      $ 3,974   

Cash generated from operations is our primary source of liquidity and capital resources. Our investment portfolio is also available for future cash requirements. Cash, cash equivalents and investments were $490.4 million at March 31, 2012, a decrease of $2.0 million from $492.4 million at December 31, 2011. Cash and cash equivalents were $78.9 million at March 31, 2012, an increase of $23.2 million from $55.8 million at December 31, 2011. The increase in cash and cash equivalents was primarily the result of $20.7 million in cash provided by investing activities and $3.6 million in cash provided by financing activities, offset by $1.2 million net cash used in operating activities.

Cash flows used in operating activities were $1.2 million for the three months ended March 31, 2012, primarily due to net loss of $8.1 million, adjusted for non-cash items of depreciation and amortization of $9.1 million and stock-based compensation expense of $4.1 million, offset by a net decrease in the changes in operating assets and liabilities of $6.8 million.

Cash flows provided by operations were $22.0 million for the three months ended March 31, 2011, primarily due to net income of $11.2 million, adjusted for non-cash items of depreciation and amortization of $6.6 million, stock-based compensation expense of $6.1 million, offset by a net decrease in the changes in operating assets and liabilities of $1.8 million.

Net cash provided by investing activities was $20.7 million for the three months ended March 31, 2012, primarily related to proceeds from maturities and sales of investments of $80.4 million, offset by purchases of short-term investments of $55.6 million, purchases of property and equipment of $1.9 million and purchases of intangible assets of $2.2 million.

Net cash provided by investing activities was $13.3 million for the three months ended March 31, 2011, primarily related to proceeds from maturities and sales of investments of $90.0 million, offset by purchases of short-term investments of $75.0 million, purchases of property and equipment of $1.5 million and purchases of intangible assets of $1.0 million.

The primary objectives of our investment activities are to preserve principal and to maintain liquidity while at the same time capturing a market rate of return. To achieve these objectives, we maintain a diversified portfolio of debt securities including municipal bonds and notes, corporate bonds and notes, commercial paper, treasury and agency notes and bills, certificates of deposit and money market funds. We invest excess cash predominantly in high-quality investment grade debt securities with less than two years to maturity. Our marketable securities are classified as available-for-sale and are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income. The fair values for our securities are determined based on quoted market prices as of the valuation date and observable prices for similar assets.

We evaluate our investments periodically for possible other-than-temporary impairment and review factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, our intent to hold and whether we will not be required to sell the security before its anticipated recovery, on a more likely than not basis. If declines in the fair value of the investments are determined to be other-than-temporary, we report the credit loss portion of such decline in other income and expense, net, and the remaining noncredit loss portion in accumulated other comprehensive income. For the three months ended March 31, 2012 and 2011, no impairment charges were recorded.

In August 2007, our Board of Directors authorized a plan to repurchase up to a maximum total of $100.0 million of our outstanding shares of common stock dependent on market conditions, share price and other factors. No expiration has been specified for this plan. Repurchases may take place in the open market or through private transactions. As of March 31, 2012, we have repurchased a total of 645,000 shares of common stock at a total cost of $10.5 million under this plan at an average price of $16.26. As of March 31, 2012, the total amount available for repurchase was $89.5 million. We may continue to execute authorized repurchases from time to time under the plan.

Net cash from financing activities was $3.6 million for the three months ended March 31, 2012 which represents proceeds from the issuance of common stock under our employee stock option programs and employee stock purchase plans.

Net cash from financing activities was $4.0 million for the three months ended March 31, 2011 which represents proceeds from the issuance of common stock under our employee stock option programs and employee stock purchase plans.

 

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We believe that based on current levels of operations and anticipated growth, our cash from operations, together with cash, cash equivalents and short-term investments currently available, will be sufficient to fund our operations, anticipated growth and acquisition funding needs for at least the next twelve months. Poor financial results, unanticipated expenses, unanticipated acquisitions of technologies or businesses or unanticipated strategic investments could give rise to additional financing requirements sooner than we expect. There can be no assurance that equity or debt financing will be available when needed or, if available, that such financing will be on terms satisfactory to us and not dilutive to our then-current stockholders.

Contractual Cash Obligations

 

     Payments Due by Period  
     Total      Less than
1 Year
     1-3
Years
     4-5
Years
     Thereafter  
     (In thousands)  

Operating lease obligations

   $ 8,501       $ 2,192       $ 5,224       $ 1,085       $ —     

Purchase obligations

     1,690         1,530         160         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,191       $ 3,722       $ 5,384       $ 1,085       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The amounts reflected in the table above for obligations represent aggregate future minimum lease payments under non-cancellable facility and equipment operating leases. In addition, we have agreements containing non-cancelable, nonrefundable payments terms with third parties to purchase services. For our facilities leases, rent expense charged to operations differs from rent paid because of scheduled rent increases. Rent expense is calculated by amortizing total rental payments on a straight-line basis over the lease term.

We have recognized approximately $4.1 million in the liability for unrecognized tax benefits, including accrued interest and penalties. It is reasonably possible that unrecognized tax benefits will decrease by a range of $0.1 million to $0.2 million during 2012 due to a lapse in a foreign statute of limitations relating to various tax incentives. At this time, we are unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time. As a result, this amount is not included in the table above.

Refer to Note 12— Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements for additional detail.

Off-Balance Sheet Arrangements and Related Party Transactions

As of March 31, 2012, we did not have any off-balance sheet arrangements as defined in item 303(a)(4)(ii) of Regulation S-K.

Since 2008, Tessera, Inc. has engaged 3LP Advisors LLC (“3LP”) to assist with the identification and acquisition of patents. In 2011 and 2012, 3LP expanded its advisory services by providing strategic advice to Invensas Corporation and Tessera Intellectual Property Corp. as well. A managing partner of 3LP, Mr. Kevin G. Rivette, is a member of the Company’s Board of Directors and has a 33.3% ownership interest in 3LP. For the three months ended March 31, 2012 and 2011, the Company recognized operating expense of $0.8 million and $0.6 million, respectively, related to these engagements. At March 31, 2012 and December 31, 2011, the accounts payable balance due to 3LP was $0.3 million and $2.0 million, respectively.

In May 2011, Tessera, Inc. engaged IRT, Inc. (“IRT”) to provide outside administrative services for a stated hourly rate plus reimbursement for incurred expenses. IRT is solely owned by Robert A. Young, the Company’s President and Chief Executive Officer. For the three months ended March 31, 2012, operating expenses recognized related to these services were not significant. At March 31, 2012, the accounts payable balance due to IRT was not significant.

We provide indemnification of varying scope to certain customers against claims of intellectual property infringement made by third parties arising from the use of our technologies. In accordance with authoritative guidance for accounting for guarantees, as interpreted by the authoritative guidance for guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others, we evaluate estimated losses for such indemnification. We consider such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, no such claims have been filed against us and, as a result, no liability has been recorded in our financial statements.

Critical Accounting Policies and Estimates

During the three months ended March 31, 2012 there were no significant changes in our critical accounting policies. See Note 2— “Summary of Significant Accounting Policies” of the Notes to the Condensed Consolidated Financial Statements for additional detail. For a discussion of our critical accounting policies and estimates, see Part II, Item 7— Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2011 Annual Report on Form 10-K, filed on February 17, 2012.

Recent Accounting Pronouncements

See Note 3 — “Recent Accounting Pronouncements” of the Notes to the Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

For a discussion of the Company’s market risk, see Item 7A— Quantitative and Qualitative Disclosures About Market Risk in our 2011 Annual Report on Form 10-K, filed on February 17, 2012.

Item 4. Controls and Procedures

Attached as exhibits to this Form 10-Q are certifications of the Company’s Chief Executive Officer and Chief Financial Officer, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Evaluation of Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to 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 our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report (the evaluation date). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures were effective to provide reasonable assurance that the information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Change in Internal Control over Financial Reporting. There have been no changes in the Company’s internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We cannot predict the outcome of any of the proceedings described below. An adverse decision in any of these proceedings could significantly harm our business and our consolidated financial position, results of operations or cash flows.

Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal.)

On October 7, 2005, Tessera, Inc. filed a complaint for patent infringement against Advanced Micro Devices, Inc. (“AMD”) and Spansion LLC in the United States District Court for the Northern District of California, alleging infringement of U.S. Patent Nos. 5,679,977, 5,852,326, 6,433,419 and 6,465,893 arising from AMD’s and Spansion LLC’s respective manufacture, use, sale, offer to sell and/or importation of packaged semiconductor components and assemblies thereof. Tessera, Inc. seeks to recover damages, up to treble the amount of actual damages, together with attorney’s fees, interest and costs. Tessera, Inc. also seeks other relief, including enjoining AMD and Spansion LLC from continuing to infringe these patents.

On December 16, 2005, Tessera, Inc. added Spansion Inc. and Spansion Technology, Inc. to the lawsuit.

On January 31, 2006, Tessera, Inc. added claims for breach of contract and/or patent infringement against new defendants, including Advanced Semiconductor Engineering, Inc., ASE (U.S.) Inc., ChipMOS Technologies, Inc., ChipMOS U.S.A., Inc., Siliconware Precision Industries Co. Ltd and Siliconware USA Inc. (collectively “SPIL”), STMicroelectronics N.V., STMicroelectronics, Inc., STATS ChipPAC Ltd., STATS ChipPAC, Inc. and STATS ChipPAC Ltd. (BVI). The defendants in this action have asserted affirmative defenses to Tessera, Inc.’s claims, and some of them have brought related counterclaims alleging that the Tessera, Inc. patents at issue are invalid, unenforceable and not infringed, and/or that Tessera, Inc. is not the owner of the patents.

These actions were stayed pending completion of Investigation No. 337-TA-605, including appeals, before the International Trade Commission (“ITC”). That stay was lifted on January 4, 2012.

On January 4, 2012 the court set a fact discovery cut-off date of January 18, 2013, a hearing on claim construction and certain dispositive motions on December 5, 2013, and a trial date of April 7, 2014.

Tessera Technologies, Inc. v. Hynix Semiconductor Inc. et. al, Case No. 1-06-CV-076688 (Cal. Super. Ct.)

On December 18, 2006, Tessera Technologies, Inc. filed a complaint against Hynix Semiconductor Inc. and Hynix Semiconductor America, Inc. (collectively, “Hynix”) in the Superior Court of the State of California, for the County of Santa Clara, alleging violations of California antitrust law and California common law based on Hynix’s alleged anticompetitive actions in markets related to synchronous DRAM. Tessera Technologies, Inc. also seeks other relief, including enjoining Hynix from continuing their alleged anticompetitive actions. On June 1, 2007, the Superior Court overruled Hynix’s demurrer to Tessera Technologies, Inc.’s Cartwright Act claims against Hynix, thus allowing the claims to proceed. On September 14, 2007, the court overruled another Hynix demurrer to Tessera Technologies, Inc.’s claim for interference with contract and business relations, allowing those claims to proceed as well.

In December 2009, the case was formally coordinated with the Rambus v. Micron lawsuit pending in the San Francisco County Superior Court (Case No. 04-0431105).

On August 17, 2010,the court denied Hynix’s motion for summary adjudication for alleged lack of standing and Hynix’s motion for summary adjudication regarding Tessera Technologies, Inc.’s claims for damages. The court granted Hynix’s motion to dismiss Tessera Technologies, Inc.’s intentional interference claim. At present, no trial date has been set.

Tessera, Inc. v. Motorola, Inc., et. al, Civil Action No. 2-07-CV-143 (E.D. Tex.)

On April 17, 2007, Tessera, Inc. filed a complaint against Motorola, Inc., Qualcomm, Inc., Freescale Semiconductor, Inc., and ATI Technologies ULC in the United States District Court for the Eastern District of Texas, alleging infringement of Tessera, Inc.’s U.S. Patent Nos. 5,852,326 and 6,433,419, arising from, among other things, the defendants’ respective manufacture, use, sale, offer to sell and/or importation of certain packaged semiconductor components and assemblies thereof. Tessera, Inc. seeks to recover damages, up to treble the amount of actual damages, together with attorney’s fees, interest and costs. Tessera, Inc. filed an amended complaint on May 22, 2007. The parties agreed that the case would be temporarily stayed pending completion, including appeals, of ITC Investigation No. 337-TA-605 titled In re Certain Semiconductor Chips With Minimized Chip Package Size and Products Containing Same. On or about June 2, 2009, Motorola, Inc. and Tessera, Inc. entered into a settlement and license agreement regarding certain Tessera, Inc. technology, including the patents at issue in this action. Tessera, Inc.’s request to dismiss Motorola, Inc. from the action was granted by the Court on June 8, 2009.

On January 18, 2012, the stay was lifted and the case transferred to the United States District Court for the Northern District of California. On March 1, 2012, the Court ordered the parties to comply with the scheduling order in Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal).

 

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The defendants answered the amended complaint on March 12, 2012. ATI Technologies ULC and Qualcomm, Inc. also asserted counterclaims alleging that the Tessera, Inc. patents at issue are invalid and not infringed.

In the Matter of Certain Semiconductor Chips with Minimized Chip Package Size and Products Containing Same (III), ITC No. 337-TA-630 (the “‘630 ITC Action”)

On January 3, 2008, following a complaint by Tessera, the ITC commenced an investigation under Section 337 of the Tariff Act of 1930, as amended. The respondents named in the complaint were A-Data Technology Co., Ltd., A-Data Technology (U.S.A.) Co., Ltd., Acer, Inc., Acer America Corp., Centon Electronics, Inc., Elpida Memory, Inc., Elpida Memory (USA) Inc., International Products Sourcing Group, Inc. (“IPSG”), Kingston Technology Co., Inc., Nanya Technology Corporation, Nanya Technology Corp., U.S.A., Peripheral Devices & Products Systems, Inc. d/b/a Patriot Memory (“PDP”), Powerchip Semiconductor Corp., ProMOS Technologies Inc., Ramaxel Technology Ltd., Smart Modular Technologies, Inc., TwinMOS Technologies, Inc., and TwinMOS Technologies USA Inc. In the Notice of Institution, the ITC stated that it would, among other things, investigate infringement of U.S. Patent Nos. 5,679,977, 6,133,627, 5,663,106, and 6,458,681, and consider Tessera, Inc.’s request for issuance of an order excluding from entry into the United States infringing packaged semiconductor components, assemblies thereof, and products containing the same, as well as cease and desist orders directing parties with domestic inventories to desist from activities with respect to infringing products.

With the exception of the TwinMOS respondents, all of the respondents answered Tessera, Inc.’s complaint. On February 19, 2008, Tessera, Inc. filed a motion for an order to show cause why the TwinMOS respondents should not be found to be in default. Tessera, Inc.’s motion was granted. The TwinMOS respondents have not responded to the order to show cause.

On May 15, 2008, Tessera, Inc. filed a motion to withdraw U.S. Patent No. 6,458,681 from the ITC action. The respondents did not oppose the motion, and the motion was granted.

On May 21, 2008, Tessera, Inc. settled its dispute with one of the respondents, IPSG, and entered into a settlement and license agreement with IPSG and its parent, Micro Electronics, Inc. As part of the settlement, IPSG and Micro Electronics acknowledged the validity and enforceability of the asserted patents, and further acknowledged that their accused products infringe those patents. IPSG has been dismissed from the ITC action. On August 14, 2008, Tessera, Inc. settled its dispute with another respondent, PDP, and entered into a settlement and license agreement with PDP. As part of the settlement, PDP, on behalf of itself and its parents, affiliates and subsidiaries, acknowledged the validity and enforceability of the asserted patents, and further acknowledged that its accused products infringe those patents. On September 22, 2008, the Administrative Law Judge (“ALJ”) granted the motion of A-DATA Technology Co., Ltd. and A-DATA Technology (USA) Co., Ltd. to dismiss those respondents from the ITC action based on their stipulation to a consent order pursuant to which they agreed not to import or sell for importation into the United States any products infringing Tessera, Inc.’s asserted patents.

On August 28, 2009, the ALJ issued an Initial Determination on Violation of Section 337 and Recommended Determination on Remedy and Bond, in which he found that no violation of Section 337 of the Tariff Act of 1930 had occurred. The ALJ held, among other things, that the ITC had subject matter jurisdiction over the parties and products, that the importation or sale requirement of Section 337 was satisfied, that the accused products do not infringe the asserted claims, that the asserted claims are not invalid for anticipation, obviousness or indefiniteness, that a domestic industry exists, that the respondents failed to prove the affirmative defense of licensing, that respondents except for Elpida Memory, Inc. and Elpida Memory (USA) Inc. (collectively, “Elpida”) failed to prove the affirmative defense of patent exhaustion for certain accused products but had established it for others, and that Elpida proved that all of its accused products are subject to patent exhaustion. The section addressing the recommended remedy and bond provisionally recommended among other things that, if a violation of Section 337 had been found, Tessera, Inc. had not demonstrated entitlement to a general exclusion order or an order extending to downstream products, and that a bond could have been set at a reasonable royalty rate as determined by Tessera, Inc.’s license agreements.

On October 30, 2009, the ITC announced that it would review portions of the Initial Determination. The ITC stated that it would review, among other things, whether the respondents infringed the Tessera, Inc. patents asserted in the action.

On December 29, 2009, the ITC issued a Notice of Final Determination holding, among other things, that it would (1) modify the ALJ’s construction of the claim terms “top layer” and “thereon” recited in claim 1 of U.S. Patent No. 5,663,106 (the “106 patent”); (2) reverse the ALJ’s finding that the accused µBGA products do not meet all of the limitations of the asserted claims of the ‘106 patent but affirm his finding that there is no infringement due to patent exhaustion; (3) affirm the ALJ’s finding that the accused wBGA products do not infringe the asserted claims of the ‘106 patent; (4) affirm the ALJ’s validity and domestic industry analyses pertaining to the asserted claims of the ‘106 patent; (5) affirm the ALJ’s finding that the Direct Loading testing methodology employed by Tessera, Inc.’s expert fails to prove infringement; and (6) affirm the ALJ’s finding that the 1989 Motorola OMPAC 68-pin chip package fails to anticipate claims 17 and 18 of U.S. Patent No. 5,679,977 (the “977 patent”) under the on-sale bar provision of 35 U.S.C. § 102(b), but modify a portion of the Initial Determination. A public version of the ITC’s full opinion was issued on February 24, 2010. The ruling by the ITC is now being appealed, as discussed immediately below. In September 2010, the ‘977 and ‘627 patents expired.

Tessera, Inc. et al., v. International Trade Commission., U.S. Court of Appeals for the Federal Circuit Case No. 2010-1176

On January 28, 2010, Tessera, Inc. filed a Notice of Appeal of the ITC’s Final Determination in the ‘630 ITC Action with the United States Court of Appeals for the Federal Circuit. On May 23, 2011, the Court of Appeals released an opinion affirming the ITC’s Final Determination. On August 30, 2011 Tessera, Inc.’s petition seeking rehearing in this matter was denied.

 

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On December 28, 2011, Tessera, Inc. filed a petition for certiorari in the U.S. Supreme Court.

Tessera, Inc. v. A-DATA Technology Co., Ltd., et al., Civil Action No. 2-07-CV-534 (E.D. Tex.)

On December 7, 2007, Tessera, Inc. filed a complaint against A-Data Technology Co., Ltd., A-Data Technology (U.S.A.) Co., Ltd., Acer, Inc., Acer America Corp., Centon Electronics, Inc., Elpida Memory, Inc., Elpida Memory (USA) Inc., IPSG, Kingston Technology Co., Inc., Nanya Technology Corporation, Nanya Technology Corp., U.S.A., PDP, Powerchip Semiconductor Corp., ProMOS Technologies Inc., Ramaxel Technology Ltd., Smart Modular Technologies, Inc., TwinMOS Technologies, Inc., and TwinMOS Technologies USA Inc. in the United States District Court for the Eastern District of Texas, alleging infringement of U.S. Patent Nos. 5,679,977, 6,133,627, 5,663,106 and 6,458,681, arising from, among other things, the defendants’ respective manufacture, use, sale, offer to sell and/or importation of certain packaged semiconductor components and assemblies thereof. Tessera, Inc. seeks to recover damages, up to treble the amount of actual damages, together with attorney’s fees, interest and costs.

The defendants have not yet answered Tessera, Inc.’s complaint, but, with the exception of the TwinMOS defendants and Ramaxel, filed motions to stay the case pursuant to 28 U.S.C. § 1659 pending final resolution of the ‘630 ITC Action. Tessera, Inc. filed a motion seeking to find TwinMOS Technologies U.S.A. Inc. in default, and the clerk entered the default judgment. On February 25, 2008, the district court granted the defendants’ motion to stay the action.

As noted above, on May 21, 2008, Tessera, Inc. settled its dispute with IPSG, and entered into a settlement and license agreement with IPSG and its parent, Micro Electronics, Inc. IPSG was dismissed from the Texas district court action on June 30, 2008. On August 14, 2008, Tessera, Inc. settled its dispute with PDP, and entered into a settlement and license agreement with PDP. On September 9, 2008, PDP was dismissed from the Texas district court action.

Siliconware Precision Industries Co., and Siliconware U.S.A., Inc. v. Tessera, Inc., Civil Action No. 08-03667 (N.D. Cal.)

On July 31, 2008, SPIL filed a complaint against Tessera, Inc. in the United States District Court for the Northern District of California seeking a declaratory judgment of noninfringement, invalidity, and unenforceability of Tessera, Inc.’s U.S. Patent No. 5,663,106. Tessera, Inc. filed its Answer and Counterclaims on September 5, 2008, asserting infringement of the patent at issue by SPIL. On September 11, 2008, the case was related to Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal) and assigned to the same judge. On December 19, 2008, the court ordered this action be stayed pending completion of Investigation No. 337-TA-649 before the ITC, which investigation was terminated in July 2009.

The Court held a case management conference on January 4, 2012 and lifted the stay on that date. The Court’s January 4, 2012 Minute Order and Case Management Order, described above in connection with Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal.), applies to this lawsuit as well.

Advanced Semiconductor Engineering Inc., ASE Test Limited, and ASE (U.S.) Inc. v. Tessera, Inc., Civil Action No. 08-03726 (N.D. Cal.)

On August 4, 2008, Advanced Semiconductor Engineering Inc., ASE Test Limited, and ASE (U.S.) Inc. (collectively, “ASE”) filed a complaint against Tessera, Inc. in the United States District Court for the Northern District of California seeking a declaratory judgment of noninfringement and invalidity of Tessera, Inc.’s U.S. Patent No. 5,663,106. On September 11, 2008, the case was related to Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal) and assigned to the same judge. Tessera, Inc. filed its Answer and Counterclaims on December 1, 2008, asserting infringement of the patent at issue by ASE. On December 19, 2008, the court ordered this action be stayed pending completion of Investigation No. 337-TA-649 before the ITC, which investigation was terminated in July 2009.

The Court held a case management conference on January 4, 2012 and lifted the stay on that date. The Court’s January 4, 2012 Minute Order and Case Management Order, described above in connection with Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal.), applies to this lawsuit as well.

On April 2, 2012, Tessera, Inc. dismissed its counterclaim without prejudice.

ChipMOS Technologies Inc., ChipMOS U.S.A. Inc. and ChipMOS Technologies (Bermuda) Ltd. v. Tessera, Inc., Civil Action No. 08-03827 (N.D. Cal.)

On August 11, 2008, ChipMOS Technologies Inc., ChipMOS U.S.A. Inc. and ChipMOS Technologies (Bermuda) Ltd. (collectively, “ChipMOS”) filed a complaint against Tessera, Inc. in the United States District Court for the Northern District of California seeking a declaratory judgment of noninfringement and invalidity of Tessera, Inc.’s U.S. Patent No. 5,663,106. On September 11, 2008, the case was related to Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal) and assigned to the same judge. Tessera, Inc. filed its Answer and Counterclaims on September 12, 2008, asserting infringement of the patent at issue by ChipMOS. On December 19, 2008, the court ordered this action be stayed pending completion of Investigation No. 337-TA-649 before the ITC, which investigation was terminated in July 2009.

The Court held a case management conference on January 4, 2012 and lifted the stay on that date. The Court’s January 4, 2012 Minute Order and Case Management Order, described above in connection with Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal.), applies to this lawsuit as well.

 

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Powertech Technology Inc. v. Tessera, Inc., Civil Action No. 10-00945 (N.D. Cal.) and U.S. Court of Appeals for the Federal Circuit Case No. 2010-1489

On March 5, 2010, Powertech Technology Inc. (“PTI”) filed a complaint against Tessera, Inc. in the United States District Court for the Northern District of California seeking a declaratory judgment of noninfringement and invalidity of Tessera, Inc.’s U.S. Patent No. 5,663,106. On March 22, 2010, the case was related to Siliconware Precision Industries, Co., Ltd v. Tessera, Inc., Civil Action No. 08-03667 (N.D. Cal.), and assigned to the judge presiding over that action.

On April 1, 2010, Tessera, Inc. filed a motion to dismiss the complaint for lack of subject matter jurisdiction. On June 1, 2010, the judge granted Tessera, Inc.’s motion, and dismissed the action.

On June 29, 2010, PTI filed a motion seeking reconsideration of the June 1, 2010 order dismissing the action. On August 3, 2010, PTI’s motion was denied.

On August 6, 2010, PTI filed a notice of appeal with the U.S. Court of Appeals for the Federal Circuit. On September 30, 2011, the Federal Circuit issued an opinion reversing and remanding the case to the district court, determining that there was declaratory judgment jurisdiction. Tessera, Inc. filed a petition for rehearing on November 14, 2011. The Federal Circuit denied Tessera, Inc.’s petition for rehearing on January 5, 2012. On January 19, 2012, the Federal Circuit issued a judgment reversing and remanding the case to the district court. On December 15, 2011, the district court case was related to Powertech Technology Inc. v. Tessera, Inc., Civil Action No. 11-06121 (N.D. Cal.), discussed below.

The district court held a Case Management Conference on January 4, 2012. The court issued a Minute Order and Case Management Order dated January 4, 2012, setting, among other things, a fact discovery cut-off date of January 18, 2013 and a trial date of April 7, 2014.

Powertech Technology Inc. v. Tessera, Inc., Civil Action No. 11-06121 (N.D. Cal.)

On December 6, 2011, PTI filed a complaint against Tessera, Inc. in the U.S. District Court for the Northern District of California. PTI’s complaint seeks a declaratory judgment that PTI has the right to terminate its license with Tessera, Inc. as of December 6, 2011. The complaint also seeks damages for breach of contract in the amount of all royalties paid to Tessera, Inc. since December 7, 2007, purportedly totaling at least $200 million, in addition to an accounting of PTI’s damages, an accounting of Tessera, Inc.’s revenue from PTI, prejudgment interest, costs and fees, and other relief deemed proper. Tessera, Inc. disagrees with the assertions made by PTI in the complaint regarding breach of contract, and believes the likelihood that Tessera, Inc. will be required to return already-paid royalties is remote.

On December 15, 2011, the case was related to Powertech Technology Inc. v. Tessera, Inc., Civil Action No. 10-00945 (N.D. Cal.), discussed above.

On December 30, 2011, Tessera, Inc. filed a motion to dismiss and motion to strike PTI’s complaint.

The district court held a Case Management Conference on January 4, 2012. The court issued a Minute Order and Case Management Order dated January 4, 2012, setting, among other things, a fact discovery cut-off date of January 18, 2013 and a trial date of April 7, 2014.

Tessera, Inc. v. UTAC (Taiwan) Corporation, Civil Action No. 10-04435 (N.D. Cal.)

On September 30, 2010, Tessera, Inc. filed a complaint against UTAC (Taiwan) Corporation (“UTAC Taiwan”) in the United States District Court for the Northern District of California. Tessera, Inc.’s complaint names as defendant UTAC Taiwan and alleges causes of action for breach of contract, declaratory relief, and breach of the implied covenant of good faith and fair dealing. The complaint requests of the Court, among other things, a judicial determination and declaration that UTAC Taiwan remains contractually obligated to pay royalties to Tessera, Inc., an accounting and restitution in an amount to be determined at trial, and an award of damages in an amount to be determined at trial, plus interest on damages, costs, disbursements, attorneys’ fees, and such other and further relief as the Court may deem just and proper.

On March 16, 2011, UTAC Taiwan filed a motion to dismiss the complaint. On March 28, 2012, the Court granted UTAC Taiwan’s motion with leave to amend. On April 19, 2012, Tessera, Inc. filed an amended complaint against UTAC Taiwan alleging in further detail causes of action for breach of contract, declaratory relief and breach of the implied covenant of good faith and fair dealing. The amended complaint seeks the same relief as the original complaint.

Tessera, Inc. v. Sony Electronics, Inc. et al., Civil Action No. 10-CV-838(D. Del.)

On October 1, 2010, Tessera, Inc. filed a complaint against Sony Electronics, Inc., Sony Corporation, and Renesas Electronics Corporation (“Renesas”) in the United States District Court for the District of Delaware. On May 23, 2011, Tessera, Inc. filed an Amended Complaint. On October 28, 2011, Tessera, Inc. filed a Second Amended Complaint. On March 6, 2012, Tessera, Inc. filed a Third Amended Complaint, adding allegations against Sony Ericsson Mobile Communications AB and Sony Ericcson Mobile Communications (USA) Inc.

Tessera, Inc’s Third Amended Complaint alleges that Sony Electronics, Inc., Sony Corporation, Sony Ericsson Mobile Communications AB and Sony Ericcson Mobile Communications (USA) Inc. (collectively, “Sony”) and Renesas infringed and are currently infringing, including by directly infringing, contributorily infringing and/or inducing infringement, U.S. Patent Nos. 6,885,106 and 6,054,337. The complaint requests of the Court, among other things, a judgment that the defendants willfully infringed, induced others to infringe, and/or committed acts of

 

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contributory infringement of one or more claims of U.S. Patent Nos. 6,885,106 and 6,054,337; an order that defendants, their affiliates, subsidiaries, directors, officers, employees, attorneys, agents, and all persons in active concert or participation with any of them be preliminarily and permanently enjoined from further acts of infringement, inducing infringement, and contributory infringement of U.S. Patent Nos. 6,885,106 and 6,054,337; an order for an accounting; and an award of damages that result from the defendants’ infringing acts, interest on damages, costs, expenses, attorneys’ fees and such other and further relief as the Court deems just and proper.

On June 17, 2011, Renesas filed an Answer and Counterclaims to Tessera, Inc.’s Amended Complaint; in its filing, Renesas, among other things, denies infringement of U.S. Patent Nos. 6,885,106 and 6,054,337, alleges invalidity of U.S. Patent Nos. 6,885,106 and 6,054,337 and unenforceability of U.S. Patent No. 6,885,106, and alleges that Tessera, Inc. is not entitled to any injunctive relief.

On July 11, 2011, Tessera, Inc. filed a motion to dismiss Renesas’s counterclaim of inequitable conduct and to strike Renesas’s affirmative defense of inequitable conduct. On March 30, 2012 the Court denied the motion because it was based on an answer to a now-moot prior complaint. On July 12, 2011, Renesas filed a motion to transfer the case to the Northern District of California. On March 30, 2012 the Court denied the motion.

On March 19, 2012, Sony filed an Answer and Counterclaims to Tessera, Inc.’s Third Amended Complaint; in its filing, Sony, among other things, denies infringement of U.S. Patent Nos. 6,885,106 and 6,054,337 and alleges invalidity of U.S. Patent Nos. 6,885,106 and 6,054,337. Sony also alleges that Tessera, Inc.’s claims are precluded to the extent any allegedly infringing products are supplied directly or indirectly to Sony by an entity or entities having an express or implied license to the patents-in-suit, to the extent any allegedly infringing products are supplied, directly or indirectly, by Sony to an entity or entities having an express or implied license to the patents-in-suit, and/or to the extent Tessera, Inc.’s claims are otherwise precluded by the doctrine of patent exhaustion.

Tessera, Inc. v. Sony Corporation, Civil Action No. 11-04399 (N.D. Cal.)

On May 26, 2011, Tessera, Inc. filed a complaint against Sony Corporation (“Sony”) in the California Superior Court for Santa Clara County. Tessera, Inc.’s complaint alleges breach of contract and breach of the covenant of good faith and fair dealing claims against Sony. Tessera, Inc. contends that Sony failed to abide by the terms of a royalty-bearing technology license agreement between the parties. Tessera, Inc. contends that it commissioned an audit of payments due by Sony under the agreement, delivered an audit report to Sony on February 14, 2011, and that Sony has failed to pay the amounts the auditors found due. Tessera, Inc. requests its damages, plus interest, costs and attorney’s fees. Sony removed the case to federal district court (Northern District of California) on September 2, 2011. On September 8, 2011, Sony filed an answer and defenses to Tessera, Inc.’s complaint, and a counterclaim alleging breach of the implied covenant of good faith and fair dealing. On January 31, 2012, the Court issued a Case Management Order, setting various case deadlines, including scheduling a Preliminary Pretrial Conference for February 22, 2013.

Invensas Corporation v. Renesas Electronics Corporation, Civil Action No. 11-CV-448 (D. Del.)

On May 23, 2011, Invensas filed a complaint against Renesas in the United States District Court for the District of Delaware. Invensas’s complaint alleges that Renesas has infringed and is currently infringing, including by directly infringing, contributorily infringing and/or inducing infringement, U.S. Patent Nos. 6,777,802, 6,825,554, 6,566,167, and 6,396,140. The complaint requests of the Court, among other things, a judgment that Renesas has willfully infringed, induced others to infringe, and/or committed acts of contributory infringement of one or more claims of U.S. Patent Nos. 6,777,802, 6,825,554, 6,566,167, and 6,396,140; an order that Renesas, its affiliates, subsidiaries, directors, officers, employees, attorneys, agents, and all persons in active concert or participation with any of them be preliminarily and permanently enjoined from further acts of infringement, inducing infringement, or contributory infringement of U.S. Patent Nos. 6,777,802, 6,825,554, 6,566,167, and 6,396,140; an order for an accounting; and an award of damages that result from Renesas’s infringing acts, interest on damages, costs, expenses, attorneys’ fees and such other and further relief as the Court deems just and proper.

On October 28, 2011, Renesas filed an Answer and Counterclaims to Invensas’s Complaint. In its filing, Renesas, among other things, denies infringement of U.S. Patent Nos. 6,777,802, 6,825,554, 6,566,167, and 6,396,140, alleges invalidity of these same patents, alleges that Invensas is not entitled to any injunctive relief, alleges that Invensas’s claims for damages are limited or barred, and alleges that the court lacks personal jurisdiction over Renesas.

Reexamination Proceedings

On February 9, 2007 and February 15, 2007, SPIL filed with the PTO requests for inter partes reexamination relating to U.S. Patent Nos. 6,433,419 and 6,465,893, and ex parte reexamination relating to U.S. Patent Nos. 5,679,977, 6,133,627 and 5,852,326. On April 19, 2007, the PTO granted the requests for ex parte reexamination. On May 4, 2007, the PTO granted the requests for inter partes reexamination.

The PTO issued a non-final Official Action in connection with the inter partes reexamination of U.S. Patent No. 6,465,893 initially rejecting a number of patent claims on May 4, 2007. The PTO issued a non-final Official Action in connection with the inter partes reexamination of U.S. Patent No. 6,433,419 initially rejecting a number of the patent claims on June 5, 2007, to which a response was filed by Tessera, Inc. on August 6, 2007. On March 14, 2007, SPIL filed a second request for ex parte reexamination of U.S. Patent No. 5,679,977. The PTO granted this request on June 12, 2007.

On May 21, 2007, Amkor filed a request for ex parte reexamination of U.S. Patent No. 5,861,666. On July 26, 2007, the PTO granted this request. On June 11, 2007, Amkor filed additional requests for reexamination regarding U.S. Patent Nos. 5,679,977 and 6,133,627. The PTO granted the request for reexamination as to the 5,679,977 patent on August 15, 2007, and the PTO granted the requests for reexamination as to the 6,133,627 patent on August 13, 2007.

 

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A first official action rejecting some claims and confirming other claims as patentable was mailed February 21, 2008 in the reexamination of U.S. Patent No. 5,852,326. A second office action rejecting some claims and confirming other claims as patentable was mailed on August 1, 2008. A third, final official action rejecting all claims under reexamination was mailed on March 6, 2009. An advisory action was mailed by the PTO on June 22, 2009, maintaining all of the rejections presented in the Action of March 6, 2009. On July 1, 2009, Tessera, Inc. filed a petition to withdraw the finality of the official action mailed on March 6, 2009. The PTO issued a decision on July 10, 2009 dismissing Tessera, Inc.’s petition of July 1, 2009. Tessera, Inc. filed a Notice of Appeal on August 6, 2009, and timely filed an appeal brief on October 13, 2009. The PTO’s Answer to Tessera, Inc.’s appeal brief was mailed on May 28, 2010. On November 16, 2010, the PTO issued a Notice of Intent to Issue Ex Parte Reexamination Certificate, finding the original claims subject to reexamination to be patentable. The Reexamination Certificate issued on March 1, 2011, confirming that all of the original claims subject to reexamination are patentable and terminating the reexamination proceeding.

A first official action was mailed February 22, 2008 in the reexamination of U.S. Patent No. 5,861,666 rejecting those claims which were subject to reexamination. Such official action was superseded by a substantively identical action mailed March 11, 2008 restarting the period for response. A second official action was mailed on September 30, 2008. On March 13, 2009, the PTO issued a Notice of Intent to Issue Ex Parte Reexamination Certificate, after which a Supplemental Notice of Intent to Issue Ex Parte Reexamination Certificate (Corrected Status) was issued on April 2, 2009, finding certain amended and newly presented claims to be patentable. The Reexamination Certificate issued on June 30, 2009.

On February 12, 2008, the PTO issued decisions merging the three reexaminations of U.S. Patent No. 5,679,977 with one another and also merging the two reexaminations of U.S. Patent No. 6,133,627 with one another.

A first official action was issued on February 29, 2008 in the merged reexaminations of U.S. Patent No. 6,133,627, rejecting those claims subject to reexamination. On August 10, 2008, the PTO issued a second official action, to which Tessera, Inc. filed a Request to Vacate the Second Official Action on August 26, 2008 on procedural grounds. As a result, on September 11, 2008, the PTO issued a third non-final official action. A first official action was issued on March 28, 2008 in the merged reexaminations of U.S. Patent No. 5,679,977, rejecting those claims subject to reexamination. On October 10, 2008, the PTO issued a second non-final official action. On October 1, 2009, the PTO issued a final official action. On January 14, 2010, the PTO issued an Advisory Action indicating that Tessera, Inc.’s response of December 1, 2009 failed to overcome all of the rejections set forth in the final official action mailed October 1, 2009. Tessera, Inc. filed a Notice of Appeal on February 1, 2010, and timely filed an appeal brief on April 5, 2010. The PTO’s Answer to Tessera, Inc.’s appeal brief withdrew certain rejections previously applied to the claims, but continued to apply other rejections as to all claims under reexamination. On December 14, 2010, the PTO issued a Notice of Intent to Issue Ex Parte Reexamination Certificate, finding the original claims subject to reexamination to be patentable and canceling the newly presented claims. The Reexamination Certificate issued on March 15, 2011, confirming that all of the original claims subject to reexamination are patentable and terminating the reexamination proceeding.

On February 19, 2008, the PTO issued a second official action maintaining the rejections in U.S. Patent No. 6,433,419. On March 10, 2008, Tessera, Inc. filed a petition to vacate the second official action in the reexamination of U.S. Patent No. 6,433,419 on the ground that the second official action did not properly take account of an amendment to the specification of U.S. Patent No. 6,433,419. On June 3, 2008, Tessera, Inc. filed a renewed petition to vacate the inter partes reexamination on the ground that the request for such reexamination did not name the real party in interest. The petition was denied on September 10, 2008. On June 13, 2008, the PTO issued a third official action in the inter partes reexamination of U.S. Patent No. 6,433,419 which was denominated as an action closing prosecution. A Right of Appeal Notice was issued on September 17, 2008, and Tessera, Inc. filed a Notice of Appeal on October 17, 2008. On November 3, 2008, the PTO issued a decision withdrawing the Right of Appeal Notice and returning the case to the examiner for issuance of a further action. On December 23, 2008, the PTO issued a non-final official action, also denominated as an action closing prosecution. A Right of Appeal Notice was issued on June 19, 2009. On July 1, 2009, Tessera, Inc. filed a petition to withdraw the Right of Appeal Notice. Having not yet received a decision on the petition of July 1, 2009, Tessera, Inc. filed a Notice of Appeal on July 20, 2009. On July 30, 2009, the PTO issued a decision dismissing Tessera, Inc.’s petition of July 1, 2009. Tessera, Inc. timely filed an appeal brief on October 5, 2009. The PTO’s Answer to Tessera, Inc.’s appeal brief was mailed on July 13, 2010. On January 17, 2011, Tessera, Inc. filed a petition to reopen prosecution due to new developments after the close of briefing in the appeal which include actions by the PTO in other reexaminations and a new holding by the Court of Appeals for the Federal Circuit in an appeal from a decision of the International Trade Commission concerning U.S. Patent No. 6,433,419. On February 25, 2011, the PTO issued a decision granting in part Tessera, Inc.’s petition to the extent that prosecution of the reexamination proceedings in connection with U.S. Patent No. 6,433,419 was reopened. On March 11, 2011, the PTO issued a fourth official action in the inter partes reexamination of U.S. Patent No. 6,433,419 which was denominated an action closing prosecution. The official action of March 11, 2011 confirmed that all of the claims subject to reexamination are patentable. A Right of Appeal Notice was issued on May 3, 2011, and SPIL filed a Notice of Appeal on June 2, 2011. On November 15, 2011, the Examiner mailed an Examiner’s Answer maintaining all positions set forth in the Right of Appeal Notice issued on May 3, 2011. On February 15, 2008, the PTO issued a second official action, also denominated as an action closing prosecution, maintaining the rejections of U.S. Patent No. 6,465,893. On March 28, 2008, Tessera, Inc. filed a petition to vacate the second official action in the reexamination of U.S. Patent No. 6,465,893 on the ground that the second official action did not properly take account of an amendment to the specification of U.S. Patent No. 6,465,893. On June 9, 2008, Tessera, Inc. filed a renewed petition to vacate the inter partes reexamination on the ground that the request for such reexamination did not name the real party in interest, which petition was denied on September 10, 2008. On August 21, 2008, a non-final office action was issued. On February 5, 2009, the PTO issued a non-final official action, also denominated as the second action closing prosecution. A Right of Appeal Notice was issued on June 22, 2009. Tessera, Inc. filed a Notice of Appeal on July 22, 2009. On November 10, 2010, the PTO issued an action closing prosecution confirming certain of the original claims subject to reexamination as patentable and rejecting other claims subject to reexamination. A second Right of Appeal Notice was issued on February 18, 2011. Tessera, Inc. filed a Notice of Appeal on March 3, 2011, and SPIL filed a Notice of Cross Appeal on March 7, 2011. On August 22, 2011, the examiner mailed an examiner’s answer

 

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maintaining all positions set forth in the Right of Appeal Notice issued on February 18, 2011. On March 26, 2008, a request for a third ex parte reexamination of U.S. Patent No. 6,133,627 patent was filed, ostensibly by PowerChip Semiconductor Corporation (“Powerchip”). On May 2, 2008, the PTO granted this request. On November 18, 2008, the PTO issued a first non-final official action. On February 13, 2009, the PTO issued an order merging all of the reexaminations of U.S. Patent No. 6,133,627. On March 17, 2009, the PTO issued a non-final official action rejecting all claims under reexamination. On July 14, 2009, the PTO issued a final official action which held certain claims patentable but rejected other claims. On December 1, 2009, the PTO issued an Advisory Action indicating that Tessera, Inc.’s response of August 14, 2009 failed to overcome all of the rejections set forth in the final official action mailed July 14, 2009. Tessera, Inc. filed a Notice of Appeal on December 14, 2009. The PTO’s Answer to Tessera, Inc.’s appeal brief was mailed on May 28, 2010. On November 16, 2010, the PTO issued a Notice of Intent to Issue Ex Parte Reexamination Certificate, finding the original claims subject to reexamination to be patentable and canceling the newly presented claims. The Reexamination Certificate issued on March 1, 2011, confirming that all of the original claims subject to reexamination are patentable and terminating the reexamination proceeding.

On April 2, 2008, a request for inter partes reexamination of Tessera, Inc.’s U.S. Patent No. 6,458,681 was filed, ostensibly by Powerchip. On June 6, 2008, the PTO granted this request and issued an official action rejecting certain claims of the ‘681 patent. On September 21, 2009, the PTO issued an Action Closing Prosecution rejecting certain claims and holding one claim patentable. A Right of Appeal Notice was issued on February 22, 2010. On July 20, 2010, the PTO issued a Notice of Intent to Issue Inter Partes Reexamination Certificate, canceling the claims subject to reexamination. The reexamination certificate issued on October 26, 2010. On March 22, 2010, Tessera, Inc. filed an application for reissue of the ‘681 patent to further address the matters raised during the reexamination proceedings and to pursue additional claims.

On July 18, 2008, a request for ex parte reexamination of Tessera, Inc.’s U.S. Patent No. 5,663,106 was filed, ostensibly by Powerchip. On September 4, 2008, the PTO granted the request for reexamination. On April 10, 2009, the PTO issued a non-final official action rejecting all claims under reexamination. On November 19, 2009, the PTO issued a final official action finding certain claims patentable and rejecting other claims. On April 7, 2010, the PTO issued a non-final official action withdrawing the rejections previously made but rejecting all claims under reexamination on new grounds. On October 18, 2010, the PTO issued a new final official action. An advisory action was mailed by the PTO on March 17, 2011, finding certain claims patentable and maintaining the remainder of the rejections presented in the October 18, 2010 action. Tessera, Inc. filed a Notice of Appeal on April 18, 2011. On July 6, 2011, Tessera, Inc. filed a petition with the PTO to allow a first reissue application filed with the claims held to be patentable in the present reexamination proceeding, and to merge a second reissue application filed with the claims involved the present reexamination proceeding with the present proceeding. On January 18, 2012, the PTO issued a decision dismissing Tessera, Inc.’s July 6, 2011 petition and suspending the first and second reissue applications pending conclusion of the ex parte reexamination proceeding of U.S. Patent No. 5,663,106. The PTO’s Answer to Tessera, Inc.’s appeal brief was mailed on February 17, 2012.

On June 17, 2011, a request for inter partes reexamination of U.S. Patent No. 6,885,106 was filed by Sony Corporation and Sony Electronics, Inc. On September 8, 2011, the PTO granted the request for reexamination. On September 20, 2011, the PTO issued a non-final official action rejecting certain claims and confirming certain claims. Tessera, Inc. filed a Petition under 37 C.F.R. § 1.181 to Withdraw the Pending Office Action and Ultra Vires Requirement for Information (Rule 105 Requirement) on November 11, 2011. Tessera, Inc. then filed a response to the September 20, 2011, non-final official action on December 20, 2011. Sony filed responsive comments on January 19, 2012 with a Petition to waive page limits. The PTO dismissed Tessera, Inc.’s Rule 181 Petition as moot because the PTO accepted Tessera, Inc.’s arguments in the Response regarding the Rule 105 requirement. The PTO found Tessera, Inc.’s response non-compliant for exceeding the page limits in a Notice mailed February 22, 2012. Tessera Inc. filed a Response to the Notice and a Petition to waive page limits March 7, 2012. The PTO granted Tessera Inc.’s and Sony’s separate petitions to waive page limits on April 10, 2012. The PTO issued an Action Closing Prosecution (non-final) on April 17, 2012, which rejected certain claims and confirmed certain claims.

On or about January 3, 2006, Koninklijke Phillips Electronics N.V. and Philips Semiconductors B.V. (“Philips”), MICRON Semiconductor Deutschland GmbH (“Micron GmbH”), Infineon and STMicroelectronics, Inc. (“STM”) filed oppositions to Tessera, Inc.’s European Patent No. EP1111672 (the “EP672 Patent”) before the European Patent Office (the “EPO”). Micron GmbH and Infineon withdrew their oppositions on July 24, 2006 and November 4, 2006, respectively. On December 4, 2006, Phillips withdrew its opposition. On September 16, 2008, the EPO Opposition Division issued a “Summons to attend oral proceedings” which states “preliminary” opinions unfavorable to the claims of the EP672 Patent. An oral hearing before the EPO Opposition Division, was held on June 4, 2009, resulting in a decision to revoke the EP672 Patent. Tessera, Inc. filed a Notice of Appeal on August 24, 2009.

The following Tessera, Inc. patents expired on September 24, 2010: U.S. Patent Nos. 6,433,419, 6,465,893, 5,679,977, 6,133,627 and 5,852,326. In addition, on September 24, 2011, the EP672 Patent expired. The reexamination proceedings concerning U.S. Patents 6,433,419 and 6,465,893 will continue after expiration. As set forth above, the reexamination proceedings concerning U.S. Patents 5,679,977, 6,133,627 and 5,852,326 have terminated with issuance of reexamination certificates confirming patentability of the original claims subject to reexamination.

The patents that are subject to the above-described reexamination proceedings include some of the key patents in Tessera, Inc.’s portfolio, and claims that are treated in the current official actions are being asserted in certain of Tessera, Inc.’s various litigations. The Company cannot predict the outcome of these proceedings. An adverse decision could also significantly affect Tessera, Inc.’s ongoing litigations, as described herein, in which patents are being asserted, which in turn could significantly harm the Company’s business and consolidated financial position, results of operations or cash flows.

Insolvency Proceedings over the Estate of Qimonda AG, Local Court of Munich, Insolvency Court, File No. 1542 IN 209/09

On January 23, 2009, Qimonda AG filed a bankruptcy petition with the Local Court of Munich, Insolvency Court. On April 1, 2009, the Court opened insolvency proceedings over the estate of Qimonda AG and appointed Rechtsanwalt Dr. Michael Jaffé as the insolvency administrator.

 

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On or about May 27, 2009, Dr. Jaffé chose non-performance of Tessera, Inc.’s license agreement with Qimonda AG under Section 103 of the German Insolvency Code and purported to terminate the license agreement. On June 12, 2009, Tessera, Inc. filed a Proof of Claim in the Qimonda AG bankruptcy alleging amounts due of approximately 15.7 million Euros. On December 2, 2009, Dr. Jaffé preliminarily contested Tessera, Inc.’s claim in full. On November 15, 2010, Dr. Jaffé acknowledged approximately 7.8 million Euros of Tessera, Inc.’s claim. The amount has been registered with the list of creditors’ claims at the Local Court of Munich, Insolvency Court. However, both the date and the final amount of recovery for unsecured debtors remain uncertain.

In re Spansion, LLC, U.S. Bankruptcy Court (Del.), Case No. 09-1069; In re Spansion, Inc., U.S. Bankruptcy Court (Del.), Case No. 09-10690; In re Spansion Technology LLC, U.S. Bankruptcy Court (Del.), Case No. 09-10691

On or about March 1, 2009, Spansion LLC, Spansion, Inc. and Spansion Technology LLC (collectively, “Spansion”) initiated bankruptcy proceedings in the United States Bankruptcy Court for the District of Delaware. On or about July 17, 2009, Tessera, Inc. filed a Proof of Claim in each of the above Spansion bankruptcy proceedings alleging amounts due of not less than $25 million.

On January 12, 2010, Spansion filed a motion to determine and estimate the amount of Tessera, Inc.’s administrative expense claim, for the purpose of demonstrating the feasibility of Spansion’s Second Amended Joint Plan of Reorganization. Tessera, Inc.’s administrative expense claim relates to the damages that Spansion would owe for the post-petition (post-March 1, 2009) infringement of certain Tessera, Inc. patents. On January 26, 2010, Tessera, Inc. filed its objection to Spansion’s Second Amended Joint Plan of Reorganization, asserting that the plan was not feasible and that it failed to provide for the payout of administrative expense claims on the plan effective date.

On January 29, 2010, the court held a hearing on Spansion’s motion. On February 9, 2010, the Court announced its ruling that a reasonable royalty rate for Spansion products sold in the United States during the administrative period was 56.7 cents per unit. As later memorialized in its April 6, 2010 Order, the Court also estimated, for purposes of plan confirmation, Tessera, Inc.’s administrative expense claim at $4,232,986.13 for the period from March 1, 2009 to July 20, 2009.

On February 5, 2010, Spansion filed a motion for an order estimating the amount of “certain contingent, unliquidated, duplicative and/or overstated claims,” including Tessera, Inc.’s pre-petition claims, for purposes of establishing class 5 plan distribution reserves. Tessera, Inc. filed its objection to the estimation motion on February 17, 2010 and on that same date submitted three Amended Proofs of Claim, each for not less than $219 million, based in part on the Court’s 56.7 cents per unit royalty rate.

On February 23, 2010, Tessera, Inc. filed a motion for allowance and payment of its administrative expense claim. The motion requested that the claim be allowed at $96,765,070, for the period from March 1, 2009 to January 29, 2010, plus all after-arising damages, with interest. Spansion and the Official Committee of Unsecured Creditors filed an objection to this motion on March 16, 2010.

On March 23, 2010, the Court entered an order allowing Tessera, Inc. to file its three Amended Proofs of Claim. On March 25, 2010, the parties reached a stipulation that the Court would estimate Tessera, Inc.’s pre-petition claim in the amount of $130 million for purposes of establishing class 5 plan distribution reserves.

On April 1, 2010, the Court issued an Order and Opinion on Confirmation. The Order denied Spansion’s request for plan confirmation due in part to Spansion’s failure to set aside a reserve for Tessera, Inc.’s administrative expense claim. On April 7, 2010, Spansion filed an amended plan that included a reserve for Tessera, Inc.’s administrative expense claim in the amount of $4,232,986.13. On April 16, 2010, the Court issued its finding of facts, conclusions of law, and Order confirming the plan as amended. Spansion’s bankruptcy plan became effective on May 10, 2010.

In accordance with the parties’ prior stipulation, on May 26, 2010, the Court issued an Order estimating Tessera, Inc.’s pre-petition claims in the amount of $130 million. In a June 15, 2010 Order, the Court disallowed two of Tessera, Inc.’s Amended Proofs of Claim, leaving one proof of claim of not less than $219 million. On July 6, 2010, Spansion filed an objection to the remaining proof of claim.

On November 2, 2010, the remaining issues regarding Tessera, Inc.’s claims were transferred to the Northern District of California as Case No. 4:10-cv-04954-CW, which was then related to the previously pending case, Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Case No. 4:05-cv-04063-CW. Thus, the proceedings in the Northern District of California will address the objections to Tessera, Inc.’s pre-petition claim, which had been estimated for purposes of class 5 plan distribution reserves at $130 million. These proceedings will also address Tessera, Inc.’s administrative expense claim, which had been estimated for purposes of claim confirmation at $4,232,986.13 for the period from March 1, 2009 to July 20, 2009.

The Court in the Northern District of California held a case management conference on January 4, 2012 and lifted its stay on that date. The Court’s January 4, 2012 Minute Order and Case Management Order, described above in connection with Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal.), applies to this lawsuit as well.

Amkor Technology, Inc. v. Tessera, Inc. (ICC Case No. 16531/VRO)

On or about August 7, 2009, Amkor filed a request for arbitration against Tessera, Inc. before the International Chamber of Commerce (“ICC”). The request, among other things, accused Tessera, Inc. of interference with Amkor’s existing and prospective business relationships, of improperly claiming that Amkor had breached the parties’ license agreement, and of improperly threatening to terminate that agreement. Amkor seeks relief including judgment that it is in compliance with the license agreement and is a licensee in good standing under the license agreement;

 

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judgment that the license agreement remains in effect and no breach alleged by Tessera, Inc. against Amkor has terminated the license agreement; judgment that Amkor’s method of calculating royalties on a going-forward basis complies with Amkor’s obligations under the license agreement; an injunction against Tessera, Inc. forbidding it from making statements to Amkor’s customers and potential customers inconsistent with the above; an injunction against Tessera, Inc. forbidding it from attempting to terminate the license agreement or threatening to terminate the license agreement during the arbitration or based on events occurring prior to the conclusion of the arbitration; a damage award against Tessera, Inc. for attorneys’ fees and costs to Amkor associated with this arbitration, together with all other damages resulting from Tessera, Inc.’s alleged acts of tortious interference and punitive damages; all other relief recoverable under the Rules of Arbitration of the ICC; such other and further relief as the arbitrators deem just and proper.

On November 2, 2009, Tessera, Inc. filed its answer to the request, including counterclaims. The answer, among other things, denies Amkor’s accusations and accuses Amkor of failing to pay Tessera, Inc. full royalties on products Amkor sold to Qualcomm and potentially others that are subject to ITC injunctions, of refusing to allow Tessera, Inc. to audit in accordance with the parties’ license agreement, of interference with Tessera, Inc.’s prospective economic relationships, of failing to pay royalties or full royalties on products that infringe various U.S. and foreign patents owned by Tessera, Inc., and of violating the implied covenant of good faith and fair dealing. Tessera, Inc. seeks relief including judgment that the license agreement has been breached and that Tessera, Inc. is entitled to terminate the license agreement; judgment that products on which Amkor has not paid the full contractual royalties to Tessera, Inc. are not licensed under Tessera, Inc.’s patents; damages for Amkor’s breaches of the license agreement; damages, including punitive damages, for Amkor’s interference with Tessera, Inc.’s prospective business relationships; interest on any damages; attorneys’ fees and costs incurred by Tessera, Inc.; denial of Amkor’s claims against Tessera, Inc.; an order that awards Tessera, Inc. all other relief recoverable under the rules of Arbitration of the ICC; and an order for such other and further relief as the arbitrators deem just and proper.

On January 15, 2010, Amkor filed its response to Tessera, Inc.’s counterclaims, along with new counterclaims by Amkor and a motion for priority consideration of certain issues. In its responsive pleading, Amkor denied Tessera, Inc.’s counterclaims, arguing in part that Tessera, Inc.’s counterclaims for royalties are barred by the doctrines of collateral estoppel and res judicata, and sought a declaratory judgment that it has not infringed and that its packages are not made under any of the patents asserted in Tessera, Inc.’s answer and that the patents are invalid and unenforceable. Amkor also claimed a credit for royalties it alleges it overpaid Tessera, Inc.

On May 14, 2010, Amkor filed a motion to bar Tessera, Inc.’s counterclaims for royalties before December 1, 2008, as res judicata. The Tribunal ruled on Amkor’s motion on November 15, 2010, granting Amkor’s motion as to Tessera, Inc.’s counterclaims for royalties on some products and timeframes at issue, and denying the motion as to other products and timeframes.

On October 20, 2010, Amkor paid Tessera, Inc. approximately $2.3 million to address a portion of the past royalties claimed by Tessera, Inc.

On December 9 and December 10, 2010, the Tribunal held a two-day trial on certain issues in the arbitration, including (1) royalties payable on a going-forward basis for the patents addressed in the previous arbitration, including but not limited to royalties applicable to packages assembled for Qualcomm, Inc.; (2) Tessera, Inc.’s counterclaim for breach of the audit provision of the license agreement; (3) Tessera, Inc.’s claim for breach of the covenant of good faith and fair dealing, to the extent that it is based on issues (1) and (2) above; and (4) the status of Tessera, Inc.’s latest request to terminate the license agreement, to the extent that it is based on issues (1), (2), and (3) above.

On February 17, 2011, Tessera, Inc. sent Amkor an official notice of termination of Amkor’s license agreement with Tessera, Inc. Amkor has disputed Tessera, Inc.’s right to terminate the license agreement.

On March 11, 2011, Tessera, Inc. filed a motion seeking, among other things, to strike Amkor’s defense of invalidity for the time period before Amkor challenged the validity of the asserted patents. The Tribunal granted Tessera, Inc.’s motion on July 1, 2011, striking (1) Amkor’s invalidity and unenforceability defenses to the payment of royalties that accrued under the asserted U.S. patents before those defenses were raised, and (2) Amkor’s invalidity defenses to the payment of royalties due under the asserted foreign patents regardless of when the royalties accrued.

On June 1, 2011, the Tribunal issued an order construing certain claims of the patents-in-suit.

On July 11, 2011, the Tribunal issued a Partial Award on certain issues tried to the Tribunal on December 9-10, 2010. The Tribunal (1) granted Tessera, Inc.’s request for additional royalties due for the patents addressed in the previous arbitration, in an amount to be determined later, but denied Tessera, Inc.’s claim for additional royalties owing from certain packages assembled for customers including Qualcomm, Inc., (2) found that Amkor was in breach of the License Agreement as to its royalty obligations and the audit provision of the license agreement, and (3) deferred a final decision on certain grounds for termination of the license agreement until the second phase of this arbitration has concluded.

On August 15, 2011, pursuant to the parties’ stipulation, the Tribunal entered an Order dismissing with prejudice the parties’ respective tortious interference claims.

A seven-day hearing on the remaining issues was held from August 15, 2011 to August 21, 2011.

On October 17, 2011, the Tribunal issued a Partial Award on certain issues tried to the Tribunal on December 9-10, 2010. The Tribunal awarded Tessera, Inc. approximately $0.5 million associated with additional royalties due for the patents addressed in the previous arbitration.

 

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Tessera, Inc. v. Amkor Technology, Inc. (ICC Case No. 17976/VRO)

On May 26, 2011, Tessera, Inc. filed an additional request for arbitration against Amkor before the ICC. The request, among other things, alleges that Amkor failed to make a required election under the License Agreement, and that Amkor failed to comply with obligations regarding “Licensee Improvements” under the License Agreement. Tessera, Inc. seeks relief including a declaration that Amkor breached the License Agreement; that the License Agreement was properly terminated on this basis; a declaration that Amkor’s rights to Tessera, Inc.’s patents expired on May 9, 2011 or earlier; the identification and transfer of all Licensee Improvements to Tessera, Inc.; an injunction preventing Amkor from using Licensee Improvements, to the extent it has not complied with the License Agreement; damages and/or disgorgement of profits for Amkor’s failure to comply with the License Agreement; attorneys’ fees, costs and exemplary damages; and an order for such other and further relief as the Tribunal deems just and proper. In its request, Tessera, Inc. estimated the amount in dispute to be in excess of $1 million.

On July 26, 2011, Amkor filed its response to the request, which, among other things, denies Tessera, Inc.’s allegations, raises various purported defenses, asserts that Tessera, Inc.’s requests for relief should be denied, contends that Tessera, Inc. has breached the License Agreement, argues that Amkor is entitled to attorneys’ fees, costs and exemplary damages relating to the allegations set forth in Tessera, Inc.’s request, and asks that the Tribunal order Tessera, Inc. to pay such further relief to Amkor as the Tribunal deems appropriate. Tessera, Inc. filed an answer denying the allegations in Amkor’s response on September 1, 2011.

Item 1A. Risk Factors

Our operations and financial results are subject to various risks and uncertainties, including those described below, that could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock.

Some of our license agreements have fixed expiration dates and will need to be renewed or replaced. If we are unable to renew or relicense these license agreements on terms favorable to us, our results of operations could be harmed.

Some of our license agreements have fixed expiration dates. We need to renew or replace these agreements prior to their expiration in order to maintain our current revenue base. For example, our license agreement with Micron Technology, Inc. will expire in May 2012. We may not be able to continue licensing customers on terms favorable to us, under the existing terms or at all, which would harm our results of operations. We have expanded our licensable technology portfolio through internal development and patents purchased from third parties, but there is no guarantee that these measures will lead to continued royalties. If we fail to continue to do business with our current licensees, our business would be materially adversely affected.

We are currently involved in litigation and administrative proceedings involving some of our key patents; any invalidation or limitation of the scope of our key patents could significantly harm our business.

As more fully described in Part II, Item 1 — Legal Proceedings, we are currently involved in litigation involving some of our patents. The parties in these legal actions have challenged the validity, scope, enforceability and ownership of our patents. In addition, reexamination requests have been filed in the U.S. Patent and Trademark Office (“PTO”) with respect to patent claims at issue in one or more of our litigation proceedings, and oppositions have been filed against us with respect to our patents in the European Patent Office. Under a reexamination proceeding and upon completion of the proceeding, the PTO may leave a patent in its present form, narrow the scope of the patent or cancel some or all of the claims of the patent. The PTO issued several Official Actions rejecting or maintaining earlier rejections of many of the claims in some of our patents. We are currently asserting these patents and patent claims in litigation and administrative proceedings. If the PTO’s adverse rulings are upheld on appeal and some or all of the claims of the patents that are subject to reexamination are canceled, our business may be significantly harmed. In addition, counterparties to our litigation and administrative proceedings may seek and obtain orders to stay these proceedings based on rejections of claims in the PTO reexaminations, and other courts or tribunals reviewing our legal actions could make findings adverse to our interests, even if the PTO actions are not final.

We cannot predict the outcome of any of these proceedings or the myriad procedural and substantive motions in these proceedings. If there is an adverse ruling in any legal or administrative proceeding relating to the infringement, validity, enforceability or ownership of any of our patents, or if a court or an administrative body such as the PTO limits the scope of the claims of any of our patents, we could be prevented from enforcing or earning future revenues from those patents, and the likelihood that customers will take new licenses and that current licensees will continue to agree to pay under their existing licenses could be significantly reduced. The resulting reduction in license fees and royalties could significantly harm our business, consolidated financial position, results of operations or cash flows, or the trading price of our common stock.

Furthermore, regardless of the merits of any claim, the continued maintenance of these legal and administrative proceedings may result in substantial legal expenses and diverts our management’s time and attention away from our other business operations, which could significantly harm our business. Our enforcement proceedings historically have been protracted and complex. The time to resolution and complexity of our litigations, their disproportionate importance to our business compared to other companies, the propensity for delay in patent litigations, and the potential that we may lose particular motions as well as the overall litigations all could cause significant volatility in our stock price and materially adversely affect our business and consolidated financial position, results of operations and cash flows.

We expect to continue to be involved in material legal proceedings in the future to enforce or protect our intellectual property rights, including material litigation with existing licensees or strategic partners, which could harm either of our business segments, or both.

In the past, we have litigated to enforce our patents and other intellectual property rights, to enforce the terms of our license agreements, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others and to defend against claims of infringement or invalidity. Our current legal actions, as described in Part II, Item 1 – Legal Proceedings, are examples of disputes and litigation that impact our business. We expect to be involved in similar legal proceedings in the future, including proceedings to ensure proper and full payment of royalties by licensees under the terms of their license agreements.

 

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These existing and any future legal actions may harm either or both of our business segments, and may hinder our ability to independently optimize each of them. For example, they could cause an existing licensee or strategic partner to cease making royalty or other payments to us, or to challenge the validity and enforceability of our patents or the scope of our license agreements, and could significantly damage our relationship with such licensee or strategic partner and, as a result, prevent the adoption of our other Intellectual Property or DigitalOptics technologies by such licensee or strategic partner. Litigation could also severely disrupt or shut down the business operations of our licensees or strategic partners, which in turn would significantly harm our ongoing relations with them and cause us to lose royalty revenues.

From time to time we identify products that we believe to infringe our patents. We seek to license the manufacturer of those products but often the manufacturer is unwilling to enter into a license agreement and then we may elect to enforce our patent rights against those products. Litigation stemming from these or other disputes could also harm our relationships with other licensees or our ability to gain new customers, who may postpone licensing decisions pending the outcome of the litigation or dispute, or who may, as a result of such litigation, choose not to adopt our technologies. In addition, these legal proceedings could be very expensive and may reduce or eliminate our profits.

The costs associated with legal proceedings are typically high, relatively unpredictable and not completely within our control. These costs may be materially higher than expected, which could adversely affect our operating results and lead to volatility in the price of our common stock. Whether or not determined in our favor or ultimately settled, litigation diverts our managerial, technical, legal and financial resources from our business operations. Furthermore, an adverse decision in any of these legal actions could result in a loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses from others, limit the value of our licensed technology or otherwise negatively impact our stock price or our business and consolidated financial position, results of operations or cash flows.

Even if we prevail in our legal actions, significant contingencies will exist to their settlement and final resolution, including the scope of the liability of each party, our ability to enforce judgments against the parties, the ability and willingness of the parties to make any payments owed or agreed upon and the dismissal of the legal action by the relevant court, none of which are completely within our control. Parties that may be obligated to pay us royalties could also decide to alter their business activities or corporate structure, which could affect our ability to collect royalties from such parties.

Volume pricing incentives in our licenses with two DRAM manufacturers may slow our DRAM royalty growth.

In 2005, Tessera, Inc. provided two major dynamic random access memory (“DRAM”) manufacturers with pricing advantages with respect to royalties due to Tessera, Inc. under their respective licenses based on several factors, including volumes. The effect of the volume pricing adjustments may cause Tessera, Inc.’s aggregate annual DRAM royalty revenues to grow less rapidly than annual growth in overall unit shipments in the DRAM end market. An additional effect may include some quarter-to-quarter fluctuations in growth in Tessera, Inc.’s revenues from the DRAM end market, depending on the relative DRAM market share enjoyed by these two DRAM manufacturers as well as the timing of when they reach the volume pricing incentive in a given calendar quarter and their royalty payments within a calendar year.

If we fail to protect and enforce our intellectual property rights and our confidential information, our business will suffer.

We rely primarily on a combination of license, development and nondisclosure agreements and other contractual provisions and patent, trademark, trade secret and copyright laws to protect our technology and intellectual property. If we fail to protect our technology and intellectual property, our licensees and others may seek to use our technology and intellectual property without the payment of license fees and royalties, which could weaken our competitive position, reduce our operating results and increase the likelihood of costly litigation. The growth of our business depends in large part on our ability to obtain intellectual property rights in a timely manner, our ability to convince third parties of the applicability of our intellectual property rights to their products, and our ability to enforce our intellectual property rights against them.

In certain instances, we attempt to obtain patent protection for portions of our technology, and our license agreements typically include both issued patents and pending patent applications. If we fail to obtain patents in a timely manner or if the patents issued to us do not cover all of the inventions disclosed in our patent applications, others could use portions of our technology and intellectual property without the payment of license fees and royalties. For example, our business may suffer if we are unable to obtain patent protection in a timely manner from the PTO due to processing delays resulting from examiner turnover and a continuing backlog of patent applications.

We also rely on trade secret laws rather than patent laws to protect other portions of our proprietary technology. However, trade secrets can be difficult to protect. The misappropriation of our trade secrets or other proprietary information could seriously harm our business. We protect our proprietary technology and processes, in part, through confidentiality agreements with our employees, consultants, suppliers and customers. We cannot be certain that these contracts have not been and will not be breached, that we will be able to timely detect unauthorized use or transfer of our technology and intellectual property, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by competitors. If we fail to use these mechanisms to protect our technology and intellectual property, or if a court fails to enforce our intellectual property rights, our business will suffer. We cannot be certain that these protection mechanisms can be successfully asserted in the future or will not be invalidated or challenged.

Further, the laws and enforcement regimes of certain countries do not protect our technology and intellectual property to the same extent as do the laws and enforcement regimes of the U.S. Therefore, in certain jurisdictions we may be unable to protect our technology and intellectual property adequately against unauthorized use, which could adversely affect our business.

Our business may suffer if third parties assert that we violate their intellectual property rights.

Third parties may claim that we or our customers are infringing upon their intellectual property rights. Even if we believe that such claims are without merit, they can be time-consuming and costly to defend against and will divert management’s attention and resources away from our business. Furthermore, third parties making such claims may be able to obtain injunctive or other equitable relief that could block our ability to

 

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further develop or commercialize some or all of our products or services in the U.S. and abroad. Claims of intellectual property infringement also might require us to enter into costly settlement or license agreements or pay costly damage awards. Even if we have an agreement that provides for a third party to indemnify us against such costs, the indemnifying party may be unable to perform its contractual obligations under the agreement. If we cannot or do not license the infringed intellectual property at all or on reasonable terms, or substitute similar technology from another source, our business, financial position, results of operations or cash flows could suffer.

Recent changes to U.S. patent laws and proposed changes to the rules of the U.S. Patent and Trademark Office may adversely impact our business.

Our business relies in part on the uniform and historically consistent application of U.S. patent laws and regulations. There are numerous recent changes to the patent laws and proposed changes to the rules of the PTO, which may have a significant impact on our ability to protect our technology and enforce our intellectual property rights. For example, on September 16, 2011, President Obama signed the Leahy-Smith America Invents Act which codifies significant changes to the U.S. patent laws, including, among other things, changing from a “first to invent” to a “first inventor to file” system, limiting where a patentee may file a patent suit, requiring the apportionment of patent damages, replacing interference proceedings with derivation actions and creating a post-grant opposition process to challenge patents after they have been issued. The effects of these changes on our patent portfolio and business have yet to be determined, as the PTO must still implement regulations relating to these changes and the courts have yet to address the new provisions. In addition, in recent years, the courts have interpreted U.S. patent laws and regulations differently, and in particular the U.S. Supreme Court has decided a number of patent cases and continues to actively review more patent cases than it has in the past. Some of these changes or potential changes may not be advantageous for us, and may make it more difficult to obtain adequate patent protection or to enforce our patents against parties using them without a license or payment of royalties. These changes or potential changes could increase the costs and uncertainties surrounding the prosecution of our patent applications and the enforcement or defense of our patent rights, and could have a deleterious effect on our licensing program and, therefore, the royalties we can collect.

Some of our license agreements may convert to fully paid-up licenses at the expiration of their terms, and we may not receive royalties after that time.

Tessera, Inc.’s license agreement with Texas Instruments, Inc. automatically converts to a fully paid-up license on December 31, 2013, assuming that Texas Instruments complies with all terms and conditions of the license agreement up through its expiration. Tessera, Inc’s license agreements with Samsung Electronics Co, Ltd. and Hynix Semiconductor Inc. each convert to a fully paid-up license after the expiration of its extended term in 2017. We may not receive further royalties from licensees for any licensed technology under those agreements if they convert to fully paid-up licenses because such licensees will be entitled to continue using some, if not all, of Tessera, Inc.’s relevant intellectual property under the terms of the license agreements without further payment, even if relevant patents are still in effect. If we cannot find another source of revenue to replace the revenues from these license agreements converting to fully paid-up licenses, our results of operations following such conversion would be materially adversely affected.

A significant amount of our royalty revenues comes from a few end markets and products, and our business could be harmed if demand for these market segments or products declines.

A significant portion of our royalty revenues comes from the manufacture and sale of packaged semiconductor chips for digital signal processors, application-specific standard product semiconductors, application-specific integrated circuits and memory. In addition, we derive substantial revenues from the incorporation of our technology into mobile devices. If demand for semiconductors in any one or a combination of these market segments or products declines, our royalty revenues will be reduced significantly and our business would be harmed.

Our revenues are concentrated in a few customers and if we lose any of these customers our revenues may decrease substantially.

We earn a significant amount of our revenues from a limited number of customers. For the three months ended March 31, 2012, there were three customers that each accounted for 10% or more of total revenues. We expect that a significant portion of our revenues will continue to come from a limited number of customers for the foreseeable future. If we lose any of these customers, our revenues may decrease substantially. PTI, one of our customers that accounted for 10% or more of revenue for the year ended December 31, 2011, has initiated litigation to terminate its license with Tessera, Inc. See Part II, Item 1 — Legal Proceedings for additional detail. If PTI stops making payments, reduces payments, or if we receive an adverse determination in that case, it may have a substantial adverse impact on our royalty revenue in the near term. In addition, our license agreement with Micron Technology, Inc., our other customer that accounted for 10% or more of revenue for the year ended December 31, 2011, will expire in May 2012.

We have a royalty-based business model, which is inherently risky.

Our long-term success depends on future royalties paid to us by licensees. Royalty payments under our licenses are primarily based upon the number of electrical connections to the semiconductor chip in a package covered by our licensed technology. We also have royalty arrangements in which royalties are paid based on a percent of net sales, a per package, or a per unit sold basis. We are dependent upon our ability to structure, negotiate and enforce agreements for the determination and payment of royalties, as well as upon our licensees’ compliance with their agreements. We face risks inherent in a royalty-based business model, many of which are outside of our control, such as the following:

 

   

the rate of adoption and incorporation of our technology by semiconductor manufacturers and assemblers;

 

   

the demand for products incorporating semiconductors that use our licensed technology;

 

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the cyclicality of supply and demand for products using our licensed technology;

 

   

the impact of economic downturns; and

 

   

the timing of receipt of royalty reports may not meet our revenue recognition criteria resulting in fluctuation in our results of operations.

It is difficult for us to verify royalty amounts owed to us under our licensing agreements, and this may cause us to lose revenues.

The terms of our license agreements generally require our licensees to document their use of our technology and report related data to us on a quarterly basis. Although our license terms generally give us the right to audit books and records of our licensees to verify this information, audits can be expensive, time consuming, and may not be cost justified based on our understanding of our licensees’ businesses. Our license compliance program audits certain licensees to review the accuracy of the information contained in their royalty reports in an effort to decrease the likelihood that we will not receive the royalty revenues to which we are entitled under the terms of our license agreements, but we cannot give assurances that such audits will be effective to that end.

The markets for semiconductors and related products and camera modules are highly concentrated, and we may have limited opportunities to license our technologies or sell our products.

The semiconductor industry is highly concentrated in that a small number of semiconductor designers and manufacturers account for a substantial portion of the purchases of semiconductor products generally, including our products and products incorporating our technologies. Consolidation in the semiconductor industry may increase this concentration. Accordingly, we expect that licenses of our technologies and sales of our products will be concentrated with a limited number of customers for the foreseeable future. As we acquire new technologies and integrate them into our product line, we will need to establish new relationships to sell these products. Our financial results depend in significant part on our success in establishing and maintaining relationships with, and effecting substantial sales to, these customers. Even if we are successful in establishing and maintaining such relationships, our financial results will be dependent in large part on these customers’ sales and business results. This is also true for the camera module market which is the target market for our DigitalOptics business. In this market, a small number of original equipment manufacturers (“OEMs”) account for a substantial portion of purchases of camera-enabled cell phones and other mobile devices. We have been promoting the adoption of our technologies in this market through the supply chain infrastructure by signing licenses with the sensor, lens and camera manufacturers and assemblers. Consolidation of the OEMs may affect our licensees’ ability to maintain or establish relationships with these OEMs through which they sell products incorporating our DigitalOptics technologies. As a result, our financial results could be materially adversely affected.

The current DRAM market conditions are challenging, and if such conditions do not improve, it may have a material adverse effect on our business.

Current conditions in the DRAM market are challenging. Prices for many DRAM chips are less than our licensees’ or potential licensees’ variable costs of making that chip. The DRAM market has gone through many cycles of unprofitability, resulting in the bankruptcy, consolidation or discontinuation of DRAM production by many semiconductor companies. For example, Elpida Memory Inc. filed for bankruptcy protection in 2012. We are unable to predict the effect of the current market conditions on our licensees or potential licensees. The poor profitability, bankruptcy, consolidation or discontinuation of DRAM production by any of these companies could have a material adverse effect on our business.

We make significant investments in new products and services that may not achieve technological feasibility or profitability or that may limit our revenue growth.

We have made and will continue to make significant investments in research, development, and marketing of new technologies, products and services, including MEMS-based auto-focus technologies, EDoF, OptiML Zoom and other image quality enhancement technologies, and thermal management technology (also referred to as silent air cooling). Investments in new technologies are speculative and technological feasibility may not be achieved. Commercial success depends on many factors including innovativeness and demand for the technology, availability of materials and equipment, selling price the market is willing to bear, competition and effective licensing or product sales. We may not achieve significant revenues from new product and service investments for a number of years, if at all. Moreover, new technologies, products and services may not be profitable, and even if they are profitable, operating margins for new products and businesses may not be as high as the margins we have experienced historically or originally anticipated.

Competing technologies may harm our business.

We expect that our technologies will continue to compete with technologies of internal design groups at semiconductor manufacturers, assemblers, electronic component and system manufacturers, image sensor and lens manufacturers and camera module companies such as Omnivision Technologies, Inc., Aptina Imaging Corporation, STMicroelectronics, Inc., Samsung Electronics Co, Ltd., and Toshiba Corporation. The internal design groups of these companies create their own packaging, imaging and optics solutions. If these internal design groups design around our patents or introduce unique solutions superior to our technology, they may not need to license our technology. These groups may design technology that is less expensive to implement or that enables products with higher performance or additional features. Many of these groups have substantially greater resources, greater financial strength and lower cost structures which may allow them to undercut our price. They also have the inherent advantage of access to internal corporate strategies, technology roadmaps and technical information. As a result, they may be able to bring alternative solutions to market more easily and quickly.

 

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For our DigitalOptics technologies, our OptiML Focus technology enables camera modules to automatically focus without any moving parts by employing extended depth of field technology. Our MEMS-based auto-focus technology enables high-precision control of a moving lens for auto-focus functionality with a small form factor. These technologies compete with auto-focus technologies including traditional lens-motion-type auto-focus, emerging lens-modification-type auto-focus, solutions using voice coil motor technology, and also other computational-type auto-focus solutions and other solutions and technologies provided by companies such as DxO Labs. Our Micro-optics products such as the diffractive optical elements used in off-axis illumination for lithography, face competition from products offered by other Micro-optics manufacturers such as JenOptik A.G. as well as emerging technologies such as ASML’s FlexRay technology. Our wafer-level camera solution competes with both the traditional lens vendors who enjoy an established supply chain, as well as other wafer-level optics technologies offered by companies such as Heptagon Oy and Anteryon B.V. For the embedded image enhancement technologies such as Face Detection and our other Face Tools products, our offerings compete with other image processing software vendors such as ArcSoft, Inc. as well as internal design groups of our customers providing similar technologies by employing different approaches. We also expect to see other competing technologies emerge.

In the future, our licensed technologies may also compete with other technologies that emerge. These technologies may be less expensive and provide higher or additional performance. Companies with these competing technologies may also have greater resources. Technological change could render our technologies obsolete, and new, competitive technologies could emerge that achieve broad adoption and adversely affect the use of our technologies and intellectual property.

If we do not create and implement new technologies or expand our licensable technology portfolio, our competitive position could be harmed and our operating results adversely affected.

We derive a significant portion of our revenues from licenses and royalties from a relatively small number of key technologies. We devote significant engineering resources to develop new technologies to address the evolving needs of the semiconductor and the consumer and communication electronics industries. To remain competitive, we must introduce new technologies in a timely manner and the market must adopt them. Developments in our technologies are inherently complex, and require long development cycles and a substantial investment before we can determine their commercial viability. We may not be able to develop and market new technologies in a timely or commercially acceptable fashion. Moreover, our patents will expire in the future. Our current U.S. issued patents expire at various times from 2012 through 2030. We need to develop or acquire successful innovations and obtain patents on those innovations before our current patents expire, and our failure to do so could significantly harm our business, financial position, results of operations or cash flows.

If we do not successfully further develop and commercialize the technologies we acquire, or cultivate strategic relationships that expand our licensable technology portfolio, our competitive position could be harmed and our operating results adversely affected.

We also attempt to expand our licensable technology portfolio and technical expertise by acquiring and further developing new technologies or developing strategic relationships with others. These strategic relationships may include the right for us to sublicense technology and intellectual property to others. However, we may not be able to acquire or obtain rights to licensable technology and intellectual property in a timely manner or upon commercially reasonable terms. Even if we do acquire such rights, some of the technologies we invest in may be commercially unproven and may not be adopted or accepted by the industry. Moreover, our research and development efforts, and acquisitions and strategic relationships, may be futile if we do not accurately predict the future needs of the semiconductor, consumer and communication electronics, and consumer imaging industries. Our failure to acquire new technologies that are commercially viable in the semiconductor, consumer and communication electronics, and consumer imaging industries could significantly harm our business, financial position, results of operations or cash flows.

The way we integrate internally developed and acquired technologies into our products and licensing programs may not be accepted by customers.

We have devoted, and expect to continue to devote, considerable time and resources to developing, acquiring and integrating new and existing technologies into our products and licensing programs. However, if customers do not accept the way we have integrated our technologies, they may adopt competing solutions. In addition, as we introduce new products or licensing programs, we cannot predict with certainty if and when our customers will transition to those new products or licensing programs. If customers fail to accept new or upgraded products or licensing programs incorporating our technologies, our financial position, results of operations or cash flows could be adversely impacted.

Failure by our licensees to sell products using our technology could limit our royalty revenue growth.

Because we expect a portion of our future revenues to be derived from licenses and royalties from semiconductors that use our licensed technology, our future success depends upon our licensees developing and selling commercially successful products. Any of the following factors could limit our licensees’ ability to sell products that incorporate our technology:

 

   

the willingness and ability of materials and equipment suppliers to produce materials and equipment that support our licensed technology, in a quantity sufficient to enable volume manufacturing;

 

   

the ability of our licensees to purchase such materials and equipment on a cost-effective and timely basis;

 

   

the willingness of our licensees and others to make investments in the manufacturing process that supports our licensed technology, and the amount and timing of those investments; and

 

   

our licensees’ ability to design and assemble packages incorporating our technology that are acceptable to their customers.

As part of our DigitalOptics business, we currently derive revenues from licenses to and royalties from our DigitalOptics technologies in consumer electronics, such as mobile phones, digital still cameras, wireless devices, personal computers and other consumer electronics. Our

 

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future success depends upon transitioning our image enhancement solutions into the mobile imaging market through delivering revolutionary MEMS actuators and becoming a vertically integrated camera module supplier. Any of the following factors could limit the growth of our DigitalOptics technology:

 

   

our ability to innovate and provide solutions at lower costs, with improved performance, or with more enhanced features than our competitors;

 

   

the relevant markets’ rate of adoption of our DigitalOptics technologies;

 

   

our ability to build a robust supply chain to support product ramp plans; and

 

   

our competitors who may have superior products or solutions which take away market shares or design wins from us.

Failure by the semiconductor industry to adopt our packaging technology for the next generation high performance DRAM chips would significantly harm our business.

To date, our packaging technology has been used by several companies for high performance DRAM chips. For example, packaging using our technology is used for DDR2 and DDR3 DRAM and we currently have licensees, including Hynix Semiconductor Inc., Micron Technology, Inc., and Samsung Electronics, Co., Ltd., who are paying royalties for DRAM chips in advanced packages.

DRAM manufacturers are also currently developing next generation high performance DRAM chips, including next generation of DDR referred to as DDR4, to meet increasing speed and performance requirements of electronic products. We believe that these next-generation, high performance DRAM chips will require advanced packaging technologies such as CSP.

We anticipate that royalties from shipments of these next-generation, high performance DRAM chips packaged using our technology may account for a significant percentage of our future revenues. If semiconductor manufacturers do not continue to use packages employing our technology for the next generation of high performance DRAM and find a viable alternative packaging technology for use with next generation high performance DRAM chips, or if we do not receive royalties from next generation, high performance DRAM chips that use our technology, our future revenues could be adversely affected.

Our technology may be too expensive for certain next generation high performance DRAM manufacturers, which could significantly reduce the adoption rate of our packaging technology in next generation high performance DRAM chips. Even if our package technology is selected for at least some of these next generation high performance DRAM chips, there could be delays in the introduction of products utilizing these chips that could materially affect the amount and timing of any royalty payments that we receive. Other factors that could affect adoption of our technology for next generation high performance DRAM products include delays or shortages of materials and equipment and the availability of testing services.

If our licensees delay or are unable to make payments to us due to financial difficulties, or shift their licensed products to other companies to lower their royalties to us, our operating results and cash flows could be adversely affected.

A number of companies in the semiconductor and consumer electronics industries are facing severe financial difficulties. As a result, there have been recent bankruptcies and restructuring of companies in these industries. Our licensees may face similar financial difficulties which may result in their inability to make payments to us in a timely manner or if at all. In addition, our licensees may merge with or may shift the manufacture of licensed products to companies that are not currently licensees to us. This could make the collection process complex and difficult which could adversely impact our business, financial condition, results of operations and cash flows.

As a larger portion of our revenues is generated from product sales, we may rely on outsourced high volume manufacturing, which is inherently risky.

As we integrate internally developed technologies into products, we may rely on outsourced high volume manufacturing by utilizing third party foundry, packaging, assembly and test capabilities. Doing so could present risks to our operations, including:

 

   

reduced control over delivery schedules, yields, capacity and quality assurance;

 

   

limited number of vendors capable of manufacturing our high technology products;

 

   

limited availability of vendor capacity for our products which may delay time to market;

 

   

failure of vendors to meet our technical requirements;

 

   

difficulty in determining target inventory levels based on forecasted demand, which may not be reliable;

 

   

infringement or misappropriation of other third parties’ or our intellectual property;

 

   

limited warranties on products and services supplied to us; and

 

   

overhead costs of developing and maintaining a global supply chain.

If any vendor in the supply chain materially fails to perform, or if we are required to find an alternate vendor and are not able to do so on a timely basis, or if these vendors materially increase their prices, our business strategy could be harmed and our results of operations could be adversely affected.

 

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We may not be able to consummate our transaction with Flextronics, or the consummation of such transaction may be delayed, which may delay our ability to execute our business plans for our DigitalOptics business.

On March 1, 2012, we entered into a Stock and Asset Purchase Agreement, pursuant to which our wholly owned subsidiary DigitalOptics Corporation (“DOC”) will acquire from Flextronics International Ltd. (“Flextronics”) all the outstanding equity interests in Vista Point Electronic Technologies (Zhuhai) Co. Ltd. (the “Zhuhai Entity”) and acquire certain other assets from Flextronics related to its camera module business (collectively, the “Zhuhai Transaction”). The consummation of the Zhuhai Transaction is subject to the satisfaction of a number of conditions, including approval by the applicable governmental authorities in the People’s Republic of China. We may not be able to obtain such approvals or satisfy such other conditions, in which case the consummation of the Zhuhai Transaction may be delayed or terminated. If the Zhuhai Transaction is not consummated or is materially delayed for this or any other reason, the execution of our business plans for our DigitalOptics business, including the goal to become a significant supplier of next-generation camera modules, may be delayed. In the event of such delay, our business and operations would be adversely affected.

The success of the Zhuhai Transaction will depend on our ability to realize the anticipated benefits from integrating the acquired business and assets into our operations.

We may fail to realize the anticipated benefits from our integration of the Zhuhai Entity and other assets we are acquiring in the Zhuhai Transaction on a timely basis, or at all, for a variety of reasons, including the following:

 

   

difficulties operating in the People’s Republic of China, where the Company has limited direct prior experience;

 

   

difficulties integrating the relatively large number of personnel from the acquired business into our human resource processes and programs;

 

   

failure to maintain relationships with existing suppliers of the acquired business or to obtain alternate sources of supply for such business;

 

   

failure of existing customers of the acquired business to continue or renew their commercial relationship with us as a result of or following the acquisition; and

 

   

failure to integrate our existing DigitalOptics technologies, such as DOC’s MEMs solutions, with the manufacturing capabilities of the acquired business.

Our failure to successfully integrate the acquired business and assets may delay or undermine our ability to execute on our business plan for the DigitalOptics business, which would adversely affect our business and operations.

We do not have extensive experience in manufacturing and marketing products, and as a result, may be unable to successfully execute on our business plan for the DigitalOptics segment.

We will acquire our first large-scale manufacturing operation in the Zhuhai Transaction with Flextronics. While we have hired personnel with manufacturing and product marketing experience, we do not, as a company, have extensive experience in these areas. Even if the Zhuhai Transaction is consummated on a timely basis, our relative lack of experience may make it difficult for us to manufacture DigitalOptics products in commercial quantities while meeting the quality, price, engineering, design, and production standards required to profitably market those products. Even if we are successful in integrating and developing our manufacturing capabilities and processes, we do not know whether we will do so in time to satisfy the requirements of customers. Failure to meet the manufacturing requirements of customers, including Tier One OEMs, and the failure to successfully market our products to such customers, would adversely affect our business and results of operations.

Our manufacturing operations could expose us to liabilities and claims that we have not previously experienced, and such operations, as well as our entire DigitalOptics business, could be subject to litigation risks arising from our Intellectual Property business.

Our commencement of large-scale manufacturing operations following the completion of the Zhuhai Transaction could significantly increase the risk that our DigitalOptics business becomes subject to claims of infringement of third-party intellectual property rights. We do not have prior experience in such manufacturing for markets in which third parties may hold a substantial body of patents and other intellectual property rights. Moreover, the risks of third-party infringement claims could be heightened by our need to engage in enforcement activities in our Intellectual Property business, as existing or potential customers of our Intellectual Property business may seek to assert infringement claims against our DigitalOptics business in response to our enforcement activities in our Intellectual Property business. Competitors of our DigitalOptics business would not be subject to such heightened risk of third-party claims, and such claims could adversely affect our DigitalOptics business as well as impair our enforcement ability and results in our Intellectual Property business. Although a separation of our DigitalOptics business might partially abate our heightened vulnerability in this regard, such a separation remains speculative, and there can be no assurance that we ultimately will determine to separate or to be successful in separating such business.

We could experience losses due to product liability claims which could result in substantial costs to us.

We sell products and provide services that may subject us to product liability claims in the future. Although we carry liability insurance in amounts that we believe are appropriate, product liability claims can be costly and any future product liability claim made against us may exceed the coverage limits of our insurance policies, be excluded from coverage under the terms of our policies or cause us to record a self-insured loss. A product liability claim in excess of our insurance policies could have a material adverse effect on our business, financial condition and results of operations. Even if a product liability loss is covered by our insurance policies, such policies contain substantial retentions and deductibles that we would be required to pay. Our existing insurance may not be renewed at a cost and level of coverage comparable to that presently in effect, or at all. The payment of retentions or deductibles for a significant amount of claims could have a material adverse effect on our business, financial position, results of operations or cash flow.

 

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Our services business, including customization services, may subject us to specific costs and risks that we may fail to manage adequately and could harm our business.

We derive a portion of our revenues from engineering and design services. Among the engineering services that we offer are customized package design and prototyping, modeling, simulation, failure analysis and reliability testing and related training services. We also offer our customers design services to customize our technologies to incorporate into their products and production processes, enabling our customers to shorten the development effort and time to market. A number of factors, including, among others, the perceived value of our intellectual property portfolio, our ability to convince customers of the value of our engineering services and our reputation for performance under our service contracts, could cause our revenues from engineering services to decline, damage our reputation, and harm our ability to attract future customers, which would in turn harm our operating results.

Under certain contracts, we are required to perform certain services, in some cases including design services for lens, register transfer level, high performance optical and optical components and tooling services. If we fail to deliver as required under these contracts, we could lose revenues and become subject to liability for breach of contract. We also provide certain services at or below cost in an effort to increase the speed and breadth with which our customers adopt our technologies. For example, we provide modeling, manufacturing process training, equipment and materials characterization and other services to assist customers in designing, implementing, upgrading and maintaining their assembly lines. We frequently provide these services as a form of training to introduce new customers to our technology and existing customers to new technologies, with the aim that these services will generate revenues in the future. Our failure to manage these services adequately may harm our business, financial position, results of operations or cash flows.

Our DigitalOptics solutions currently rely on the use of certain materials from a single supplier or a limited number of suppliers. The lack of availability of these materials could delay the execution of our business strategy and adversely affect our revenues.

We currently rely on the use of certain materials available from a single supplier or a limited number of suppliers for the manufacturing of our small form factor micro-optics. If any or some of these materials become unavailable, or, if any of these suppliers cease operations and we cannot find an alternative source, our development efforts could be delayed and our revenues from our DigitalOptics business could be adversely affected.

Our licensing cycle is lengthy and costly, and our marketing, legal and sales efforts may be unsuccessful.

We generally incur significant marketing, legal and sales expenses prior to entering into our license agreements, generating a license fee and establishing a royalty stream from each licensee. The length of time it takes to establish a new licensing relationship can take 18 months or longer for an Intellectual Property license and 24 months or longer for a DigitalOptics license. As such, we may incur significant losses in any particular period before any associated revenue stream begins.

Tessera Intellectual Property Corp. incurs significant reverse engineering expenditures on products of potential licensee in order to prepare sales and marketing collateral. We employ intensive marketing and sales efforts to educate licensees, potential licensees and original equipment manufacturers about the benefits of our technologies. In addition, even if these companies adopt our technologies, they must devote significant resources to integrate fully our technologies into their operations. If our marketing and sales efforts are unsuccessful, then we will not be able to achieve widespread acceptance of our technology. In addition, ongoing litigation could impact our ability to gain new licensees which could have an adverse effect on our financial condition, results of operations or cash flows.

Our financial and operating results may vary, which may cause the price of our common stock to decline.

We currently provide guidance on revenues and expenses on a quarterly basis. Our quarterly operating results have fluctuated in the past and are likely to do so in the future. Because our operating results are difficult to predict, you should not rely on quarterly or annual comparisons of our results of operations as an indication of our future performance. Factors that could cause our operating results to fluctuate during any period or that could adversely affect our ability to achieve our strategic objectives include those listed in this “Risk Factors “ section of this report and the following:

 

   

the timing of and compliance with license or service agreements and the terms and conditions for payment to us of license or service fees under these agreements;

 

   

fluctuations in our royalties caused by pricing advantages provided to two DRAM manufacturers;

 

   

changes in our royalties caused by changes in demand for products incorporating semiconductors that use our licensed technology;

 

   

decrease in our revenues caused by price erosion on high performance camera modules incorporating our DigitalOptics technologies;

 

   

the amount of our product and service revenues;

 

   

the timing of obtaining design wins and manufacturing plan for our MEMS solutions;

 

   

changes in the level of our operating expenses;

 

   

delays in our introduction of new technologies or market acceptance of these new technologies through new license agreements;

 

   

our ability to protect or enforce our intellectual property rights or the terms of our agreements;

 

   

legal proceedings affecting our patents, patent applications or license agreements;

 

   

the timing of the introduction by others of competing technologies;

 

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changes in demand for semiconductor chips in the specific end markets in which we concentrate;

 

   

changes in demand for semiconductor capital equipment, digital still cameras and other camera-enabled devices including cell phones, security systems and personal computers;

 

   

the timing of the conclusion of license agreements;

 

   

the time it takes to establish new licensing arrangements could be lengthy;

 

   

the timing of meeting the requirements for revenue recognition under accounting principles;

 

   

changes in accounting principles; and

 

   

cyclical fluctuations in semiconductor markets generally.

Due to fluctuations in our operating results, reports from market and security analysts, litigation-related developments, and other factors, the price at which our common stock will trade is likely to continue to be highly volatile. In future periods, if our revenues or operating results are below our estimates or the estimates or expectations of public market analysts and investors, our stock price could decline. In the past, securities class action litigation has often been brought against companies following a decline in the market price of their securities. If our stock price is volatile, we may become involved in this type of litigation in the future. Any litigation could result in substantial costs and a diversion of management’s attention and resources that are needed to successfully run our business.

Our stockholders may not receive the level of dividends provided for in our dividend policy or any dividend at all, and any decrease in or suspension of the dividend could cause our stock price to decline.

Our initial dividend policy, adopted and announced in March 2012, contemplates the payment of a regular quarterly cash dividend of $0.10 per share on our outstanding common stock. We expect to continue to pay quarterly cash dividends on our common stock at the rate set forth in our current dividend policy. However, the dividend policy and the payment of future cash dividends under the policy are subject to the final determination each quarter by our Board of Directors that the policy remains in our best interests, which determination will be based on a number of factors, including our earnings, financial condition, capital resources and capital requirements, alternative uses of capital, economic condition and other factors considered relevant by the Board of Directors. Given these considerations, our Board of Directors may increase or decrease the amount of the dividend at any time and may also decide to suspend or discontinue the payment of cash dividends in the future. Any decrease in the amount of the dividend, or suspension or discontinuance of payment of a dividend, could cause our stock price to decline.

The investment of our cash, cash equivalents and investments in marketable debt securities are subject to risks which may cause losses and affect the liquidity of these investments.

At March 31, 2012, we held approximately $78.9 million in cash and cash equivalents and $411.5 million in short-term investments. These investments include various financial securities such as municipal bonds and notes, corporate bonds and notes, commercial paper, treasury and agency notes and bills, and money market funds. The weakened financial markets, originally caused by the sub-prime mortgage crisis in the U.S., has at times adversely impacted the general credit, liquidity, market and interest rates for these and other types of debt securities. Additionally, changes in monetary policy by the Federal Open Market Committee and recent concerns about the rising U.S. government debt level may cause a decrease in the purchasing power of the U.S. dollar and adversely affect our investment portfolio. The financial market and monetary risks associated with our investment portfolio may have a material adverse effect on our financial condition, results of operations or cash flows.

The economic downturn and weakened financial markets could negatively affect our businesses, results of operations and financial condition.

Slow economic activity, high unemployment, concerns about inflation and energy costs, decreased business and consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns have contributed to and continue to contribute to a challenging economic environment. This environment makes it difficult for our customers, our vendors and us to accurately forecast and plan future business activities and has caused businesses to slow spending on our products and services. Our major licensees have experienced reductions in semiconductor sales which could materially and adversely affect our revenues, results of operations and financial condition. Furthermore, the constraints in the capital and credit markets may limit the ability of our customers to timely borrow and access the capital and credit markets to meet their liquidity needs, which could result in an impairment of their ability to make timely payments to us and reduce their demand for our products and services, which could materially and adversely impact our results of operations or cash flows.

We operate in a highly cyclical semiconductor industry, which is subject to significant downturns.

The semiconductor industry has historically been cyclical and is characterized by wide fluctuations in product supply and demand. From time to time, this industry has experienced significant downturns, often in connection with, or in anticipation of, declining economic conditions, maturing product and technology cycles, and excess inventories. This cyclicality could cause our operating results to decline dramatically from one period to the next. Our business depends heavily upon the volume of production by our licensees, which, in turn, depends upon the current and anticipated market demand for semiconductors and products that use semiconductors. Similarly, our product revenues rely at least in part upon the demand of the semiconductor equipment market. Semiconductor manufacturers and package assembly companies generally sharply curtail their spending during industry downturns, such as in the current global economic downturn, and historically have lowered their spending more than the decline in their revenues. As a result, the impact of the current global economic downturn on our businesses is exacerbated by the cyclicality of the semiconductor industry. If we are unable to control our expenses adequately in response to lower revenues from our licensees and service customers in the current or any future economic downturn, our operating results may suffer and we may experience operating losses.

 

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Changes in financial accounting or existing taxation standards, rules, practices or interpretation may cause adverse unexpected revenue and expense fluctuations which may impact our reported results of operations.

We prepare our consolidated financial statements in accordance with U.S. GAAP. These principles are subject to interpretations by the SEC and various accounting bodies. In addition, we are subject to various taxation rules in many jurisdictions. The existing taxation rules are generally complex, frequently changing and often ambiguous. Changes to existing taxation rules, changes to the financial accounting standards such as the proposed convergence to international financial reporting standards, or any changes to the interpretations of these standards or rules may adversely affect our reported financial results or the way we conduct our business. Recent accounting pronouncements and their estimated potential impact on our business are addressed in Note 3— “Recent Accounting Pronouncements” in the Notes to the Condensed Consolidated Financial Statements.

The international nature of our business exposes us to financial and regulatory risks that may have a negative impact on our consolidated financial position, results of operations or cash flow, and we may have difficulty protecting our intellectual property in some foreign countries.

We derive a significant portion of our revenues from licensees headquartered outside of the U.S. We have also expanded our operations outside of the U.S. such as research and development facilities in Israel, Ireland and Romania to design, develop, test or market certain technologies. International operations are subject to a number of risks, including but not limited to the following:

 

   

fluctuations in exchange rates between the U.S. dollar and foreign currencies as our revenues are denominated principally in U.S. dollars and a portion of our costs are based in non U.S. dollars;

 

   

security concerns, including crime, political instability, terrorist activity, armed conflict and civil or military unrest;

 

   

changes in trade protection laws, policies and measures, and other regulatory requirements affecting trade and investment;

 

   

regulatory requirements and prohibitions that differ between jurisdictions;

 

   

laws and business practices favoring local companies;

 

   

withholding tax obligations on license revenues that we may not be able to offset fully against our U.S. tax obligations, including the further risk that foreign tax authorities may re-characterize license fees or increase tax rates, which could result in increased tax withholdings and penalties;

 

   

differing employment practices, labor issues and business and cultural factors;

 

   

less effective protection of intellectual property than is afforded to us in the U.S. or other developed countries; and

 

   

limited infrastructure and disruptions, such as large-scale outages or interruptions of service from utilities or telecommunications providers.

Our intellectual property is also used in a large number of foreign countries. There are many countries in which we currently have no issued patents. In addition, effective intellectual property enforcement may be unavailable or limited in some foreign countries. It may be difficult for us to protect our intellectual property from misuse or infringement by other companies in these countries. We expect this to become a greater problem for us as our licensees increase their manufacturing and sales in countries which provide less protection for intellectual property. Our inability to enforce our intellectual property rights in some countries may harm our business, financial position, results of operations or cash flows.

Our business and operating results may be harmed if we are unable to manage growth in our business or if we undertake any restructuring activities or if we dispose of a business division or dispose of or discontinue any product lines.

We plan to continue the expansion of our operations, domestically and internationally, and may continue to do so through both internal growth and acquisitions. For example, in March 2012, we entered into a definitive agreement to acquire the Zhuhai Entity and certain other assets from Flextronics related to its camera module business. This expansion may strain our systems and management, operational and financial controls and resources. In addition, we are likely to incur higher operating costs. To manage our growth effectively, we must continue to improve and expand our management, systems and financial controls. We also need to continue to expand, train and manage our employee base. We cannot ensure that we will be able to timely and effectively meet demand and maintain the quality standards required by our existing and potential customers and licensees. Furthermore, production orders from customers and licensees of the acquired businesses may decline from historical levels. If we are unable to effectively manage our growth or we are unsuccessful in recruiting and retaining personnel, our business and operating results will be harmed.

From time to time, we may undertake to restructure our business, including the disposition of a business division, or the disposition or discontinuance of a product line. For example, in April 2011, we announced that we are exploring a possible separation of our DigitalOptics business and, in August 2011, we announced closure of our development facility located in Yokohama, Japan. There are several factors that could cause a restructuring, a disposition or a discontinuance to have an adverse effect on our business, financial position, results of operations or cash flows. These include potential disruption of our operations and our information technology systems, the timing of development of our technology, the deliveries of products or services to our customers and other aspects of our business. In addition, such actions may increase the risk of claims or threats of lawsuits by our customers. In the case of a disposition of a product line, there may be a risk of not identifying a purchaser, or, if

 

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identified, the purchase price may be less than the net asset book value for the product line. Employee morale and productivity could also suffer and we may lose employees whom we want to keep. Any restructuring, disposition or discontinuance would require substantial management time and attention and may divert management from other important work. There are no assurances that the restructuring, disposal or discontinuance will reduce our operating expenses. We may also incur other significant liabilities and costs including employee severance costs, relocation expenses, and impairment of lease obligations and long-lived assets. Moreover, we could encounter delays in executing any restructuring plans, which could cause further disruption and additional unanticipated expense.

We may be unable to identify or complete a favorable transaction to separate our DigitalOptics business.

Although as previously announced we are exploring a possible separation of our DigitalOptics business, we have not set a definitive timetable for completing our exploration of strategic alternatives for that business, and there can be no assurance that the process will result in the identification or selection of a transaction, that any transaction that is identified or selected will be completed, or that a completed transaction will be favorable to us and our stockholders. There are numerous hurdles to such a transaction, including the ongoing operating losses of the DigtialOptics business, which make it uncertain whether such business could be operated as a stand-alone company or would attract interest from any potential buyer.

In order to realize our business plan for the DigitalOptics business, we will need to invest a significant amount of capital into our DigitalOptics business and make additional acquisitions.

Even if the Zhuhai Transaction is consummated on a timely basis and the acquired business and assets are successfully integrated into our operations, the success of our business plan for the DigitalOptics business, including the goal to become a significant supplier of next-generation camera modules, will require substantial additional capital expenditures, increased working capital, and additional acquisitions. There can be no assurance that our existing capital resources and cash from operations will be sufficient to fund such capital expenditures and make additional acquisitions, and such uncertainty could be compounded if we pursue a separation of our DigitalOptics business, a possibility we announced in April 2011. We may need to raise capital or fund acquisitions through the issuance of debt or equity securities or the sale of assets; however, we may not be able to secure debt financing or equity financing on reasonable terms, if at all. Even if we have or obtain all necessary funding, we may nevertheless be unable to identify and execute suitable acquisitions to grow the DigitalOptics business. If our existing capital resources or cash from operations are not sufficient and we are unable to obtain necessary capital to execute on our DigitalOptics business plan, or to make additional acquisitions, it would adversely affect our business, financial condition and results of operations

Disputes regarding our intellectual property may require us to indemnify certain licensees, the cost of which could adversely affect our business operations and financial condition.

While we generally do not indemnify our licensees, some of our license agreements in our DigitalOptics business provide limited indemnities for certain actions brought by third parties against our licensees, and some require us to provide technical support and information to a licensee that is involved in litigation for using our technology. We expect to agree to provide similar indemnity or support obligations to future licensees. Our indemnity and support obligations could result in substantial expenses. In addition to the time and expense required for us to indemnify or supply such support to our licensees, a licensee’s development, marketing and sales of licensed DigitalOptics products could be severely disrupted or shut down as a result of litigation, which in turn could have a material adverse effect on our business operations, consolidated financial position, results of operations or cash flows.

If we lose any of our key personnel or are unable to attract, train and retain qualified personnel, we may not be able to execute our business strategy effectively.

Our success depends, in large part, on the continued contributions of our key management, engineering, sales and marketing, legal and finance personnel, many of whom are highly skilled and would be difficult to replace. None of our senior management, key technical personnel or key sales personnel are bound by written employment contracts to remain with us for a specified period. In addition, we do not currently maintain key person life insurance covering our key personnel. The loss of any of our senior management or other key personnel could harm our ability to implement our business strategy and respond to the rapidly changing market conditions in which we operate. Moreover, some of the individuals on our management team have been in their current positions for a relatively short period of time. Our future success will depend to a significant extent on the ability of our management team to work together effectively.

Our success also depends on our ability to attract, train and retain highly skilled managerial, engineering, sales, marketing, legal and finance personnel and on the abilities of new personnel to function effectively, both individually and as a group. Competition for qualified senior employees can be intense. For example, we have experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled engineers with appropriate qualifications to support our growth and expansion. Further, we must train our new personnel, especially our technical support personnel, to respond to and support our licensees and customers. If we fail to do this, it could lead to dissatisfaction among our licensees or customers, which could slow our growth or result in a loss of business.

Changes to our enterprise resource planning and other key software applications could cause unexpected problems to occur and disrupt the management of our business.

As our business grows and becomes more complex, it may become necessary to expand and upgrade our enterprise resource planning system (“ERP”), and other management information systems which are critical to the operational, accounting and financial functions of our company. Significant management attention and resources would be used and extensive planning would be required to support effective implementation of a new ERP and other such systems. In addition, such implementation may carry certain risks, including the risk of significant design errors, and unexpected difficulties may arise that could materially and adversely affect the accuracy and timely reporting of our operating results and impact our ability to manage our business.

 

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Our business operations could suffer in the event of information technology systems’ failures or security breaches.

Despite system redundancy and the implementation of security measures within our internal and external information technology and networking systems, our information technology systems may be subject to security breaches, damages from computer viruses, natural disasters, terrorism, and telecommunication failures. Any system failure or security breach could cause interruptions in our operations in addition to the possibility of losing proprietary information and trade secrets. To the extent that any disruption or security breach results in inappropriate disclosure of our confidential information, we may incur liability or additional costs to remedy the damages caused by these disruptions or security breaches.

Decreased effectiveness of share-based compensation could adversely affect our ability to attract and retain employees.

We have historically used stock options and other forms of stock-based compensation as key components of our employee compensation program in order to align employees’ interests with the interests of our stockholders, encourage employee retention and provide competitive compensation and benefit packages. Since the adoption of the authoritative guidance on share-based payment, we have recorded significant compensation costs associated with our stock-based compensation programs. Difficulties relating to obtaining stockholder approval of equity compensation plans or changes to the plans could make it harder or more expensive for us to grant stock-based compensation to employees in the future. As a result, we may find it difficult to attract, retain and motivate employees, and any such difficulty could materially adversely affect our business.

Failure to comply with environmental regulations could harm our business.

We use hazardous substances in the manufacturing and testing of prototype products and in the development of our technologies in our research and development laboratories. We are subject to a variety of local, state, federal and foreign governmental regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances. Our past, present or future failure to comply with environmental regulations could result in the imposition of substantial fines on us, suspension of production, and alteration of our manufacturing processes or cessation of operations. Compliance with such regulations could require us to acquire expensive remediation equipment or to incur other substantial expenses. Any failure by us to control the use, disposal, removal or storage of, or to adequately restrict the discharge of, or assist in the cleanup of, hazardous or toxic substances, could subject us to significant liabilities, including joint and several liabilities under certain statutes. The imposition of such liabilities could significantly harm our business, financial position, results of operations or cash flows.

We have business operations located globally in places that are subject to natural disasters.

Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel. Our locations may be subject to earthquakes, hurricanes and other natural disasters. Should a hurricane, earthquake or other catastrophe, such a fire, flood, tsunami, power loss, communication failure or similar event disable our facilities, we do not have readily available alternative facilities from which we could conduct our business.

Some of our offices are located in states or countries where the local governments may be in financial crisis which may interrupt our business operations and adversely impact our results of operations.

We operate our business in many jurisdictions worldwide. Our corporate headquarters are located in the state of California which is facing significant budgetary challenges and large operating deficits. As a result, the state has stopped certain improvement projects and disrupted certain services to its residents, and the Governor has proposed significant spending cuts and revenue increases to cover the funding shortfall. Our results of operations could be adversely impacted if the state proposes additional taxation or other measures to increase its revenue through tax levies on corporations like us or on its residents, including some of our employees. In addition, we have operations in various countries, including Ireland and Romania, which may be facing financial distress. If the governments of the states or countries where we have business operations cannot provide public services, impose additional tax regulations or levies, or increase their tax examination activities, our business operations may be interrupted and our results of operations may be adversely impacted.

We have made and may continue to make or to pursue acquisitions which could divert management’s attention, cause ownership dilution to our stockholders, or be difficult to integrate, which may adversely affect our financial results.

We have made several acquisitions, and it is our current plan to continue to acquire companies, assets, patent portfolios and technologies that we believe are strategic to our future business, such as the Zhuhai Transaction. Investigating businesses, assets, patent portfolios or technologies and integrating newly acquired businesses, assets, patent portfolios or technologies could put a strain on our resources, could be costly and time consuming, and might not be successful. Such activities divert our management’s attention from other business concerns. In addition, we might lose key employees while integrating new organizations or operations. Acquisitions could also result in customer dissatisfaction, performance problems with an acquired company or technology, potentially dilutive issuances of equity securities or the incurrence of debt, the assumption or incurrence of contingent liabilities, impairment charges related to goodwill and possible impairment charges related to other intangible assets or other unanticipated events or circumstances, any of which could harm our business.

Our plans to integrate and expand upon research and development programs and technologies obtained through acquisitions may result in products or technologies that are not adopted by the market. Similarly, our plans to establish and to expand manufacturing operations for new products in China and potentially other countries may result in products that do not achieve anticipated customer acceptance or sales. The market may adopt competitive solutions to our products or technologies. Consequently, we might not be successful in integrating any acquired businesses, assets, products or technologies, and might not achieve anticipated revenues and cost benefits.

 

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There are numerous risks associated with our acquisitions of businesses, technologies and patents.

We have made a number of acquisitions of businesses, technologies and patents in the recent years. These acquisitions are subject to a number of risks, including but not limited to the following:

 

   

These acquisitions could fail to produce anticipated benefits, or could have other adverse effects that we currently do not foresee. As a result, these acquisitions could result in a reduction of net income per share as compared to the net income per share we would have achieved if these acquisitions had not occurred.

 

   

The purchase price for each acquisition is determined based on significant judgment on factors such as projected value, quality and availability of the business, technology or patent. In addition, if other companies have similar interests in the same business, technology or patent, our ability to negotiate these acquisitions at favorable terms may be limited and the purchase price may be artificially inflated.

 

   

Following completion of these acquisitions, we may uncover additional liabilities, patent validity, infringement or enforcement issues or unforeseen expenses not discovered during our diligence process. Any such additional liabilities, patent validity, infringement or enforcement issues or expenses could result in significant unanticipated costs not originally estimated, such as impairment charges of acquired assets and goodwill, and may harm our financial results. For example, during 2011 we recorded an impairment of goodwill of $49.7 million, mainly due to a significant decline in our market capitalization for an extended period of time.

 

   

The integration of technologies, patent portfolios and personnel, if any, will be a time consuming and expensive process that may disrupt our operations if it is not completed in a timely and efficient manner. If our integration efforts are not successful, our results of operations could be harmed, employee morale could decline, key employees could leave, and customer relations could be damaged. In addition, we may not achieve anticipated synergies or other benefits from any of these acquisitions.

 

   

We have incurred substantial direct transaction costs as a result of these acquisitions and anticipate incurring substantial additional costs to support the integration of these businesses and technologies. The total cost of the integration may exceed our expectations.

 

   

Sales by the acquired businesses may be subject to different accounting treatment than our existing businesses, especially related to the recognition of revenues. This may lead to potential deferral of revenues due to new multiple-element revenue arrangements.

 

   

There is a significant time lag between acquiring a patent portfolio and recognizing revenue from those patent assets. During that time lag, material costs are likely to be incurred in preparing licensing and/or litigation campaigns that would have a negative effect on our results of operations, cash flows and financial position.

 

   

We may require external financing that is dilutive, presents risks of debt or shares a corporate opportunity with a third party.

 

   

We are required to estimate and record fair values of contingent assets, liabilities, deferred tax assets and liabilities at the time of an acquisition. Even though these estimates are based on management’s best effort, the actual results may differ. Under the current accounting guidance, differences between actual results and management’s estimate could cause our operating results to fluctuate or could adversely affect our results of operations.

If our amortizable intangible assets (such as acquired patents) or equity investments become impaired, we may be required to record a significant charge to earnings.

In addition to internal development, we intend to broaden our intellectual property portfolio through strategic relationships and acquisitions. We believe this will enhance the competitiveness and size of our current businesses and diversify into markets and technologies that complement our current businesses. These acquisitions could be in the form of asset purchases, equity investments, or business combinations. As a result, we may have intangible assets which are amortized over their estimated useful lives, equity investments, in-process research and development, and goodwill. Under U.S. GAAP, we are required to periodically review our goodwill, amortizable intangible assets, such as patent portfolio, and equity investments for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill, amortizable intangible assets or equity investments may not be recoverable include a decline in future cash flows, fluctuations in market capitalization, slower growth rates in our industry or slower than anticipated adoption of our products by our customers. In 2011, we recorded an impairment of goodwill of $49.7 million due to a significant decline in our market capitalization for an extended period of time. As we continue to review for factors that may affect our business which may not be in our control, we may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our amortizable intangible assets or equity investments is determined, resulting in an adverse impact on our business, financial position or results of operations.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, new SEC regulations and the NASDAQ Stock Market rules, have created uncertainty for companies. These laws, regulations and standards are often subject to varying interpretations. As a result, their application in practice may evolve as new guidance is provided by regulatory and governing bodies, which could result in higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result of our efforts to comply with evolving laws, regulations and standards, we have increased and may continue to increase general and administrative expenses and diversion of management time and attention from revenue-generating activities to compliance activities.

 

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Provisions of our certificate of incorporation and bylaws or Delaware law might delay or prevent a change of control transaction and depress the market price of our stock.

Various provisions of our certificate of incorporation and bylaws might have the effect of making it more difficult for a third party to acquire, or discouraging a third party from attempting to acquire, control of our company. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock. Certain of these provisions eliminate cumulative voting in the election of directors, authorize the board to issue “blank check” preferred stock, prohibit stockholder action by written consent, eliminate the right of stockholders to call special meetings, limit the ability of stockholders to remove directors, and establish advance notice procedures for director nominations by stockholders and the submission of other proposals for consideration at stockholder meetings. We are also subject to provisions of Delaware law which could delay or make more difficult a merger, tender offer or proxy contest involving our company. In particular, Section 203 of the Delaware General Corporation Law prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years unless specific conditions are met. Any of these provisions could have the effect of delaying, deferring or preventing a change in control, including without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

 

Exhibit

Number

 

Exhibit Title

2.1   Stock and Asset Purchase Agreement, dated March 1, 2012, by and among, Tessera Technologies, Inc., DigitalOptics Corporation and Flextronics International Ltd. (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, filed March 2, 2012, and incorporated herein by reference).*
3.1   Restated Certificate of Incorporation (filed as Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1 (SEC File No. 333-108518), effective November 12, 2003, and incorporated herein by reference)
3.2   Amended and Restated Bylaws, dated September 14, 2011 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed September 16, 2011, and incorporated herein by reference)
31.1   Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
31.2   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
32.1   Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**   XBRL Instance Document
101.SCH**   XBRL Taxonomy Extension Schema Document
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**   XBRL Taxomony Extension Definition Linkbase Document
101.LAB**   XBRL Taxonomy Extension Label Linkbase Document
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document

 

* The exhibits and schedules to this agreement have been omitted in reliance on Item 601(b)(2) of Regulation S-K promulgated by the SEC, and a copy thereof will be furnished supplementally to the SEC upon its request. You are cautioned that the representations and warranties set forth in this agreement are qualified by those schedules, and should not be relied upon as accurate or complete without reference to those schedules.
** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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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.

Dated: May 3, 2012

 

Tessera Technologies, Inc.
By:  

/s/    Michael Anthofer

  Michael Anthofer
  Executive Vice President and Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit

Number

 

Exhibit Title

2.1   Stock and Asset Purchase Agreement, dated March 1, 2012, by and among, Tessera Technologies, Inc., DigitalOptics Corporation and Flextronics International Ltd. (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, filed March 2, 2012, and incorporated herein by reference).*
3.1   Restated Certificate of Incorporation (filed as Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1 (SEC File No. 333-108518), effective November 12, 2003, and incorporated herein by reference)
3.2   Amended and Restated Bylaws, dated September 14, 2011 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed September 16, 2011, and incorporated herein by reference)
31.1   Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
31.2   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
32.1   Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**   XBRL Instance Document
101.SCH**   XBRL Taxonomy Extension Schema Document
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**   XBRL Taxomony Extension Definition Linkbase Document
101.LAB**   XBRL Taxonomy Extension Label Linkbase Document
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document

 

* The exhibits and schedules to this agreement have been omitted in reliance on Item 601(b)(2) of Regulation S-K promulgated by the SEC, and a copy thereof will be furnished supplementally to the SEC upon its request. You are cautioned that the representations and warranties set forth in this agreement are qualified by those schedules, and should not be relied upon as accurate or complete without reference to those schedules.
** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

55

XNAS:TSRA Tessera Technologies Inc Quarterly Report 10-Q Filling

Tessera Technologies Inc XNAS:TSRA Stock - Get Quarterly Report SEC Filing of Tessera Technologies Inc XNAS:TSRA stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

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XNAS:TSRA Tessera Technologies Inc Quarterly Report 10-Q Filing - 3/31/2012
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