20-F 1 dp44413_20f.htm FORM 20-F
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended:  December 31, 2013
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________________ to ________________
 
OR
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Date of event requiring this shell company report ________________
Commission file number:  0-29644
ARM Holdings plc
(Exact name of Registrant as specified in its charter)
 
England
(Jurisdiction of incorporation or organization)
 
 
110 Fulbourn Road
Cambridge CB1 9NJ, England
(Address of principal executive offices)
 
 
Tim Score, phone:  +44 1223 400 400, fax:  +44 1223 400 700, tim.score@arm.com, 110 Fulbourn Road, Cambridge CB1 9NJ, England
(Name, Telephone, E-mail and/or Facsimile number and Address of Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class
Name of each exchange on which registered
American Depositary Shares, each representing 3 Ordinary Shares of 0.05p each
The Nasdaq Stock Market LLC
Ordinary Shares of 0.05p each
The Nasdaq Stock Market LLC*
*
Not for trading, but only in connection with the registration of American Depositary Shares representing such Ordinary Shares pursuant to the requirements of the Securities and Exchange Commission.
 
Securities registered or to be registered pursuant to Section 12(g) of the Act:
 
None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
 

The number of outstanding shares in the capital of ARM Holdings plc as of December 31, 2013:
Ordinary Shares of 0.05p each                                                 1,400,263,804
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
x Yes    o No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
o Yes    x No
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
 
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.
x Yes    o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
oYes    o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer    x
Accelerated filer    o
Non-accelerated filer    o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
o U.S. GAAP
x International Financial Reporting Standards as issued by the International Accounting Standards Board
o Other
If “Other” has been checked to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
o Item 17    o Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes    x No
 
 
 
 
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Presentation of Financial Information
 
In this report, the term “US GAAP” refers to generally accepted accounting principles (“GAAP”) in the US and “IFRS” refers to International Financial Reporting Standards as issued by the International Accounting Standards Board (“IASB”).
 
We prepare our consolidated financial statements in accordance with IFRS.
 
Forward-looking Statements
 
This annual report contains forward-looking statements. These forward-looking statements are not historical facts, but rather are based on our current expectations, estimates and projections about our industry, our beliefs and assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties are described in “Item 3. Key Information—Risk Factors” and elsewhere in this annual report. We caution you not to place undue reliance on these forward-looking statements, which reflect our management’s view only as of the date of this annual report.
 
Certain Information
 
As used in this annual report, “we,” “us,” “our,” the “Company,” the “Group” and “ARM” refer to ARM Holdings plc and its subsidiaries, except where it is clear that such terms mean only ARM Holdings plc.
 
We publish our consolidated financial statements in pounds sterling. In this annual report, references to “pounds sterling,” “pounds,” “sterling,” “£,” “pence” and “p” are to the currency of the United Kingdom (“UK”) and references to “US dollars,” “dollars,” “$” or “c” are to the currency of the United States of America (“US”). See “Item 3. Key Information—Selected Financial Data—Exchange Rate Information” for historical information regarding the period end exchange rates between pounds sterling and US dollars. You should not construe these translations as representations that the pound amounts actually represent such US dollar amounts or could have been or could be converted into US dollars at the rates indicated or at any other rates.
 
This annual report includes product names and other trade names, logos and trademarks, either registered or with respect to which applications are pending, of ARM and of other companies. ARM, ARM Powered, AMBA, ARM7TDMI, ARM9TDMI, Artisan, Artisan Components, Cortex, Embedded-ICE, Integrator, Jazelle, Mali, Move, Multi-ICE, Multi-TRACE, OptimoDE, PrimeCell, PrimeXsys, Process-Perfect, SecurCore, StrongARM, The Architecture for the Digital World, Thumb, and TrustZone are registered trademarks of ARM Limited or its subsidiaries. Advantage, ARM Developer Suite, ARM7, ARM7EJ, ARM7EJ-S, ARM7TDMI-S, ARM720T, ARM9, ARM9TDMI-S, ARM9E, ARM9E-S, ARM9EJ-S, ARM920T, ARM922T, ARM926EJ-S, ARM940T, ARM946E-S, ARM966E-S, ARM10, ARM10E, ARM1020E, ARM1022E, ARM1026EJ-S, ARM11, ARM1136J-S, ARM1136JF-S, ARM1156T2F-S, ARM1156T2-S, ARM1176JZ-S, ARM1176JZF-S, Cortex-M0, Cortex-M1, Cortex-M3, Cortex-M4, Cortex-A8, Cortex-A9, Cortex-R4, Cortex-A5, Cortex-A9 MPCore, Cortex-A15, Cortex-A15 MPCore, CoreSight, ETM, Embedded Trace Macrocell, ETM10, ETM10RV, EmbeddedICE-RT, Keil, Microvision, Mali-55, Mali-200, Mali-JSR184, Mali-JSR226, Mali-JSR239, Mali-JSR287, Mali-JSR297, Mali-SVG-t, Metro, MPCore, Neon, SAGE-X, SAGE-HS, SAGE-HD, SC100, SC110, SC200, SC210, SC300 and Velocity are trademarks of ARM Limited. All other brands or product names are the property of their respective holders. “ARM” is used to represent ARM Holdings plc; its operating company ARM Limited; and the regional subsidiaries ARM Inc.; ARM KK; ARM Korea Limited; ARM Taiwan Limited; ARM France SAS; ARM Consulting (Shanghai) Co. Ltd.; ARM Belgium Services BVBA; ARM Germany GmbH; ARM Finland Oy; ARM Physical IP Asia Pacific Pte. Limited; ARM Embedded Technologies Pvt. Ltd.; ARM Norway AS; ARM Sweden AB and Geomerics Limited.
 
Various amounts and percentages set out in this annual report have been rounded and accordingly may not total.
 
 
 
 
Not applicable.
 
 
Not applicable.
 
 
Selected Financial Data
 
Our selected financial data at December 31, 2012 and 2013 and for the years ended December 31, 2011, 2012 and 2013 has been derived from our consolidated financial statements prepared in accordance with IFRS. Our consolidated financial statements have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Our summary financial data at December 31, 2009, 2010 and 2011 and for the years ended December 31, 2009 and 2010 are also presented in accordance with IFRS and have been derived from our consolidated financial statements that are not included in this annual report. The following selected financial data should be read in conjunction with, and are qualified in their entirety by reference to, our consolidated financial statements and the notes thereto.
 
   
Year ended December 31,
  
   
2009
    
2010
    
2011
    
2012
    
2013
  
   
(£ million, except per share data, percentages, number of shares and employees)
  
Revenues
   £ 305.0     £ 406.6     £ 491.8     £ 576.9       714.6  
Cost of revenues
     (25.5 )     (26.1 )     (27.7 )     (31.9 )     (39.3 )
Operating expenses
     (233.9 )     (273.5 )     (315.2 )     (336.9 )     (420.5 )
Exceptional items (1)
     -       -       -       -       (101.3 )
Profit from operations
     45.6       107.0       148.9       208.1       153.5  
Investment income, net
     1.6       3.1       8.0       13.6       13.1  
Share of results in joint venture
     -       -       -       (0.7 )     (4.0 )
Profit before tax
     47.2       110.1       156.9       221.0       162.6  
Tax
     (6.8 )     (24.1 )     (44.3 )     (60.3 )     (57.8 )
Profit for the year
     40.4       86.0       112.6       160.7       104.8  
Basic earnings per share (pence)
     3.2 p     6.5 p     8.4 p     11.7 p     7.5 p
Diluted earnings per share (pence)
     3.1 p     6.4 p     8.2 p     11.5 p     7.4 p
Dividends declared per share (pence)
     2.42 p     2.90 p     3.48 p     4.50 p     5.70 p
Diluted weighted average number of shares (m)
     1,300.7       1,352.2       1,376.0       1,395.8       1,411.8  
Research and development as a percentage of revenues
     36.8 %     34.4 %     32.2 %     28.8 %     28.4 %
Balance Sheet Data:
                                        
Capital expenditure
     6.9       7.4       13.0       33.2       17.0  
Cash and cash equivalents, short- and long-term deposits and marketable securities
     141.8       291.8       429.0       527.6       713.5  
Share capital
     0.7       0.7       0.7       0.7       0.7  
Shareholders’ equity
     738.7       894.9       1,061.2       1,206.1       1,311.4  
Total assets
     844.5       1,084.7       1,299.8       1,466.8       1,638.4  
Employees at year end (number)
     1,710       1,889       2,116       2,392       2,833  

(1) The exceptional items in 2013 relate to a contribution to a full and final settlement of certain patent-related litigation and the impairment of an available-for-sale financial asset acquired as part of a transaction to acquire rights to a patent portfolio.

Exchange Rate Information
 
The following table sets forth, for the periods indicated, certain information concerning the exchange rate between pounds sterling and US dollars. Period average rates are based on the average daily buying rate (expressed as US dollars per pound sterling). Period end rates are based on the closing midpoint at the end of the period. Such rates are provided solely for the convenience of the reader and are not necessarily the exchange rates (if any) we used in the preparation of our consolidated financial statements included elsewhere in this annual report on Form 20-F. No representation is made that pounds sterling could have been, or could be, converted into US dollars at these rates or at any other rates.
 
 
USD/£1.00
Year Ended December 31,
  
Period Average
    
Period End
  
2009
     1.5659       1.6140  
2010
     1.5455       1.5657  
2011
     1.6039       1.5541  
2012
     1.5849       1.6255  
2013
     1.5646       1.6563  
2014 (through March 3, 2014) 
  
1.6516
    
1.6735
  
 
USD/£1.00
Month
  
High
    
Low
  
September 2013
     1.6140       1.5504  
October 2013
     1.6215       1.5949  
November 2013
     1.6349       1.5925  
December 2013
     1.6563       1.6292  
January 2014
     1.6589       1.6354  
February 2014
 
1.6748
    
1.6306
  
March 2014 (through March 3, 2014)  
1.6735
    
1.6735
  

On March 3, 2014 the closing rate was $1.6735/£1.00.
 
RISK FACTORS
 
You should carefully consider the risks described below as well as the other information contained in this annual report in evaluating us and our business. If any of the following risks actually occurs, our business, financial condition or results of future operations could be significantly harmed. In that case, the trading price of our shares and ADSs could decline and you may lose all or part of your investment. This annual report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including the risks faced by us described below and elsewhere in this annual report. You should also refer to the other information in this annual report, including our consolidated financial statements and the related notes.
 
Our Quarterly Results May Fluctuate Significantly and Be Unpredictable – This Could Adversely Affect the Market Price of Our Shares
 
We have experienced, and may in the future experience, significant quarterly fluctuations in our results of operations. Our quarterly results may fluctuate because of a variety of factors. Such factors include:
 
 
·
the timing of entering into agreements with licensees;
 
 
·
the financial terms and delivery schedules of our agreements with licensees;
 
 
·
the demand for products that incorporate our technology;
 
 
·
the mixture of license fees, royalties, revenues from the sale of development systems and fees from services;
 
 
·
the introduction of new technology by us, our licensees or our competition;
 
 
·
the timing of orders from and shipments to systems companies of ARM-based microprocessors from our semiconductor partners;
 
 
·
sudden technological or other changes in the microprocessor industry; and
 
 
·
new litigation or developments in current litigation.
 
In future periods, our operating results may not meet the expectations of public market analysts or investors. In such an event the market price of our shares could be materially adversely affected. A more detailed description of how we earn revenues from license fees and royalties is set forth in the sections entitled “Item 18. Financial Statements—Notes to the Consolidated Financial Statements—Note 1b. Summary of significant accounting policies—Revenue recognition” and “Item 5. Operating and Financial Review and Prospects—Operating Results—Critical Accounting Policies and Estimates.”
 
We Are Dependent on Both Our Semiconductor Partners and Major Physical Intellectual Property (“IP”) Licensees
 
We rely on our semiconductor partners to manufacture and market microprocessors based on our architecture in order to receive royalties in the future. We also depend on them to add value to our licensed architecture by providing complete ARM-based microprocessor solutions to meet the specific application needs of systems companies. However, the semiconductor partners are not contractually obliged to manufacture, distribute or sell microprocessors based on our technology or to market our microprocessor architecture on an exclusive basis. Some of our existing semiconductor partners design, develop and/or manufacture and market microprocessors based on competing architectures, including their own, and others may do so in the future.
 
We also rely on our major physical IP licensees to manufacture and market physical IP based on our libraries. We anticipate that our revenue will continue to depend on these major customers for the foreseeable future, although the companies considered to be major customers and the percentage of revenue represented by each major customer may vary from period to period depending on the addition of new contracts, the timing of work performed by us and the number of designs utilizing our products. None of our major physical IP licensees are contractually obliged to license future generations of physical IP components or additional physical IP components from us, and we cannot
 
 
be certain that any customer will license physical IP components from us in the future. Our revenue from these customers may be comprised of license fees and royalties. In addition, we cannot be certain that any of the integrated circuit manufacturers will produce products incorporating our physical IP components or that, if production occurs, they will generate significant royalty revenue for us.
 
If one or more of our semiconductor partners or major physical IP licensees stops licensing our microprocessors or physical IP components, reduces its orders, fails to pay license or royalty fees due or does not produce products containing our microprocessors or physical IP components, our operating results could be materially and negatively affected.
 
We cannot assure you that our semiconductor partners or our major physical IP licensees will dedicate the resources necessary to promote and further develop products based on our architecture and physical IP libraries respectively, that they will manufacture products based on our microprocessors or physical IP libraries in quantities sufficient to meet demand, that we will be successful in maintaining our relationships with our semiconductor partners and major physical IP licensees or that we will be able to develop relationships with new semiconductor partners or major physical IP licensees. Although we believe that our strategy of selecting multiple semiconductor partners and major physical IP licensees will expand the market for our architecture and physical IP libraries respectively and lead to more rapid acceptance of our architecture and physical IP libraries by assuring multiple reliable sources of microprocessors and physical IP libraries at competitive prices, such a strategy may also result in distribution channel conflicts. This could create disincentives to market our architecture aggressively and make it more difficult to retain our existing semiconductor partners and major physical IP licensees and to attract new partners and licensees.
 
Accurate prediction of the timing of inception of new licenses is difficult because the development of a business relationship with a potential licensee may frequently span a year or more. The fiscal period in which a new license agreement will be entered into, if at all, is difficult to predict, as are the financial terms of any such agreement. Engineering services are dependent upon the varying level of assistance desired by licensees and, therefore, the timing of revenue from these services is also difficult to predict.
 
With increasing complexity in each successive generation of integrated circuit products, we face the risk that the rate of adoption of smaller process geometries for integrated circuit manufacturing may slow or cease. We also face the risk that licensing revenue may suffer if current or former customers collaborate with each other regarding design standards for particular generations of integrated circuit products.
 
The royalties we receive on ARM-based microprocessors are based on the volumes and prices of microprocessors manufactured and sold by our semiconductor partners and the royalties we receive on physical IP libraries are based on volumes and prices of wafers, manufactured and sold by our physical IP licensees. Our royalties are therefore influenced by many of the risks faced by the semiconductor market in general. These risks include reductions in demand for systems-on-chip (“SoC”) based on our microprocessors and physical IP libraries and reduced average selling prices. The semiconductor market is intensely competitive. It is also generally characterized by declining average selling prices over the life of a generation of microprocessors and physical IP libraries. The effect of these price decreases is compounded by the fact that royalty rates decrease as a function of volume. We cannot assure you that delays in licensing, poor demand for services, decreases in prices or in our royalty rates will not materially adversely affect our business, results of operations and financial condition.
 
 
We Depend Largely on a Small Number of Customers and Products – This May Adversely Affect Our Revenues
 
Our revenues depend largely on a small number of licensees and products. As regards revenues from licensees, our revenues in a particular period are generally concentrated in a small number of licensees. If we fail to achieve the performance required under a single license contract or if a single customer fails to make its milestone payments, our business, financial condition and results of operations could be materially adversely affected. In addition, any failure to develop successor products which offer significant competitive advantages to these customers in a timely manner or any decrease in demand for ARM technology could materially adversely affect us.
 
Changes in technology trends and/or economic conditions may cause companies within the semiconductor industry to consolidate further or for industry concentration to intensify, thereby reducing the number of customers that ARM may sell its technology to and potentially making ARM even more dependent on those customers that remain.
 
Our Success Depends Substantially on Systems Companies
 
Our success depends substantially on the acceptance of our technology by systems companies, particularly those which develop and market high-volume electronic products in the wireless, consumer electronics and networking markets where demand may be highly cyclical. The reason for this dependence is that sales of ARM-based microprocessors by our semiconductor partners to systems companies directly affect the amount of royalties we receive. We are subject to many risks beyond our control that may influence the success or failure of a particular systems company. These risks include:
 
 
·
competition faced by the systems company in its particular industry;
 
 
·
the engineering and marketing capabilities of the systems company;
 
 
·
market acceptance of the systems company’s products;
 
 
·
technical challenges unrelated to our technology faced by the systems company in developing its products; and
 
 
·
the financial and other resources of the systems company.
 
It can take a long time to persuade systems companies to accept our technology and, even if accepted, we cannot assure you that our technology will be used in a product that is ultimately brought to market. Furthermore, even if our technology is used in a product brought to market, we cannot assure you that such product will be commercially accepted or result in significant royalties to us. Demand for our intellectual property may also be affected by consolidation in the integrated circuit and related industries, which may reduce the aggregate level of purchases of our intellectual property components and services by the combined companies.
 
The revenue we generate from licensing activities depends in large part on the rate at which systems companies adopt new product generations, which, in turn, is affected by the level of demand for their integrated circuits and other products.
 
Rapid Technological Changes in Our Industry Are Difficult to Predict – Our Business May Be Adversely Affected if We Cannot Develop New Products on a Timely Basis
 
The market for our architecture is characterized by rapidly changing technology and end user needs. Our business, reputation and relationships with our partners could be adversely affected if we cannot develop technological improvements or adapt our products to technological changes on a timely basis. Whether we will be able to compete in the future will substantially depend on our ability to advance our technology to meet these changing market and user needs and to anticipate successfully or respond to technological changes in hardware, software and architecture standards on a cost-effective and timely basis.
 
We will have to make significant expenditures to develop our products. The long lead time from the initial design of our technology until it is incorporated into new end user applications can place significant strain on our research and development resources. Certain of our products have suffered delays in the past. We cannot assure you
 
 
that the design of future products will be completed as scheduled, that we will be successful in developing and licensing new products, that we will not experience difficulties that delay or prevent the successful development, introduction and marketing of new products or that any new products that we may introduce will achieve market acceptance.
 
Our Microprocessor Architecture, Physical IP Libraries and Development Systems Tools May Not Continue to Be Accepted by the Market
 
There are competing microprocessor architectures in the market. We cannot assure you that the market will continue to accept our architecture. Market acceptance of our architecture by semiconductor and systems companies for use in a variety of embedded applications is critical for our success. While our microprocessor architecture has already been licensed by many semiconductor and systems companies for use in a variety of high-volume applications in the wireless, consumer electronics and networking markets, other microprocessor architectures have a large installed base of embedded applications and are supported by a broad base of related software and development tools. A more detailed description of these competing architectures is set forth in the section entitled “Item 4. Information on the Company—Business Overview—Competition”. It may be difficult for our architecture to succeed against incumbent architectures as systems companies that have used other microprocessor architectures would need to invest in additional training and development tools and convert software for existing embedded applications in order to change to a new architecture. Moreover, some competing microprocessor architectures have been developed by firms, including some of our semiconductor partners, that have substantially greater financial, technical and marketing resources than we do.
 
Our physical IP library products also face significant competition from the internal design groups of integrated circuit manufacturers that have expanded their manufacturing capabilities and portfolio of intellectual property components to participate in the SoC market. Our physical IP library products also face competition from integrated circuit designers that have expanded their internal design capabilities and portfolio of intellectual property components to meet their internal design needs. Integrated circuit manufacturers and designers that license our physical IP components have historically had their own internal physical IP component design groups. These design groups continue to compete with ARM for access to the integrated circuit manufacturers’ or designers’ physical IP component requisitions and, in some cases, compete with ARM to supply physical IP components to third parties. Physical IP components developed by internal design groups of integrated circuit manufacturers are designed to utilize the qualities of their own manufacturing process, and may therefore benefit from capacity, informational, cost and technical advantages.
 
Foundry partners may be reluctant to rely on a single vendor for a broad array of IP components, including microprocessors and Physical IP, and could select another vendor to provide them with products formerly supplied by us.
 
Our development systems tools business faces significant competition from both the open source community and third-party tools and software suppliers. In the event that market share is lost to such competitors, there could be a material adverse effect on our revenues.
 
The High Cost of Building Advanced Semiconductor Manufacturing Facilities May Limit the Number of Foundries as Potential Customers for our Physical IP Libraries
 
The cost of developing leading-edge manufacturing facilities and processes needed for building advanced chips is rising. Some of ARM’s current foundry customers may delay or cancel plans for developing new manufacturing processes. Without a new process, ARM will not have an opportunity to develop and sell physical IP libraries for that process. This would reduce the licensing opportunity for ARM. In addition, the bargaining power of the remaining foundries with advanced manufacturing facilities would be increased. This could make it harder for ARM to win profitable licensing deals with these foundries, further reducing both licensing and royalty revenue.
 
Competition – We May Not Be Able to Compete Successfully in the Future
 
The markets for our products are intensely competitive and characterized by rapid technological change. We cannot assure you that we will have the financial resources, technical expertise or marketing or support capabilities to compete successfully in the future. Competition is based on a variety of factors including price, performance, features, product quality, software availability, marketing and distribution capability, customer support, name
 
 
recognition and financial strength. Further, given our reliance on our semiconductor partners, our competitive position is dependent on their competitive position. In addition, our semiconductor partners do not license our architecture exclusively, and several of them also design, develop, manufacture and market microprocessors based on their own architectures or on other non-ARM architectures. A more detailed description of the competition we face from new technologies or products is set forth in the section entitled “Item 4. Information on the Company—Business Overview—Competition.”
 
Our Architecture and Physical IP Libraries May Face Strong Competition from Well Resourced Competitors
 
Some semiconductor companies have developed their own proprietary architecture for specific markets or applications. These companies may reuse their proprietary architecture to penetrate markets where ARM is currently the architecture of choice, or where ARM may be used in the future, making it harder for ARM to penetrate in the future. For example, Intel Corporation has developed the X86 architecture for use in PCs and laptops. With mobile phones becoming smarter, Intel is trying to capture the high-end smartphone market with a family of chips based on the X86 architecture. This could limit ARM’s market share in mobile phones and could prevent any further growth into mobile computing devices. Other semiconductor companies have proprietary architectures in other applications including, but not limited to, automotive, networking, digital television, electronic storage, microcontrollers, smart sensors and mobile communications. These companies may have much larger engineering, marketing and sales resources than ARM, and if successful in displacing or impeding ARM, could reduce licensing opportunities and royalties, negatively affecting operating results.
 
Some companies develop their own intellectual property components or distribute components developed by foundries.  For example, Synopsys, Inc. (“Synopsys”) develops intellectual property components that are designed to serve the same purpose as components produced by ARM. Synopsys is combining these components with its other products and services to create a product portfolio that may be difficult for ARM to compete with.  If Synopsys is successful in its strategy, then we would lose both license revenue and royalties, negatively affecting operating results.
 
The Availability of Development Tools, Systems Software, EDA Tools and Operating Systems is Crucial to the Market Acceptance of Our Products
 
We believe that it is crucial for the market acceptance of our products that development tools, systems software, EDA software and operating systems compatible with our architecture be available. We currently work with systems software, EDA software and tools and development partners to offer development tools, systems software, EDA software and operating systems for our architecture. However, we cannot assure you that:
 
 
·
we will be able to attract additional tools and development, systems software and EDA tool partners;
 
 
·
our existing partners will continue to offer development tools, systems software, EDA tools and operating systems compatible with our architecture; or
 
 
·
the available development tools, systems software, EDA tools and operating systems will be sufficient to support customers’ needs.
 
We May Incur Unanticipated Costs Because of Products That Could Have Technical Difficulties or Undetected Design Errors
 
Our products or technology could have a substantial technical difficulty or an undetected design error. This could result in unanticipated costs, including product liability litigation. The discovery of any design defect or any ensuing litigation could damage our results and reputation and our relationships with partners could be adversely affected.
 
There May Be Risks Associated with any Strategic Investments or Acquisitions We May Make
 
We envisage making strategic investments or acquisitions where there is an opportunity to further the establishment of our technology. Exploring and implementing any investments or acquisitions may place strain upon our ability to manage our future growth and may divert management attention from our core design and licensing business. There are also other risks associated with this strategy. We cannot assure you that we will be able to make
 
investments or acquire businesses on satisfactory terms or that any business acquired by us or in which we invest will be integrated successfully into our operations or be able to operate profitably.
 
Our International Operations Expose Us to Risks
 
We currently have operations in various jurisdictions around the world and may in the future expand our operations either within these jurisdictions or to new jurisdictions. Some risks associated with these international operations are exposure to exchange rate fluctuations, political, economic and financial conditions and unexpected changes in regulatory environments. Another risk we face is that, particularly with respect to intellectual property, we are exposed to different legal jurisdictions, which may impact our ability to exercise our contractual rights in those countries. In addition, we could face potentially adverse tax consequences and difficulties in staffing and managing operations. With respect to foreign exchange, a large proportion of our revenues are in US dollars, while our costs reflect the geographic spread of our operations with approximately 50% of our costs being in pounds sterling. This mismatch will result in gains or losses with respect to movements in foreign exchange rates and may be material. To mitigate this effect, we engage in currency hedging transactions. A more detailed description of these hedging transactions is set forth in the section entitled “Item 5. Operating and Financial Review and Prospects— Operating Results—Foreign Currency Fluctuations.” Although we have not to date experienced any material adverse effects with respect to our foreign operations arising from such factors, we cannot assure you that such problems will not arise in the future. Finally, managing operations in multiple jurisdictions will place further strain on our ability to manage overall growth.
 
Our Business Will Be Adversely Affected if We Cannot Manage the Significant Changes in the Number of Our Employees and the Size of Our Operations
 
Either through acquisition or organic growth, from time to time we may significantly increase the number of our employees and the size of our operations. These changes in head count may place a significant strain on our management and other resources. We will face challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs in different jurisdictions.
 
If we are unable to manage growth in our head count, expenses, technological integration and the scope of operations effectively, the cost and quality of our products may suffer and we may be unable to attract and retain key personnel and develop and market new products. Further, the inability to successfully manage the substantially larger and geographically more diverse organization could have a material adverse effect on the Company and, as a result, on the market prices of our ADSs and our ordinary shares.
 
We May Not Operate Disaster Recovery Plans Which Adequately Mitigate the Effects of an Event Over Which We Do Not Have Direct Control
 
Our business depends on the efficient and uninterrupted operation of our computer and communications software and hardware systems and other information technology. If such systems were to fail for any reason or if we were to experience any unscheduled downtimes, even for only a short period, our operations and financial results could be adversely affected. Our systems could be damaged or interrupted by earthquake, fire, flood, hurricanes, power loss, telecommunications failure, break-ins or similar events. We have formal disaster recovery plans in place. However, these plans may not be entirely successful in preventing delays or other complications that could arise from information systems failure, and, if they are not successful, our business interruption insurance may not adequately compensate us for losses that may occur, negatively affecting operating results.
 
We Are Dependent on Our Senior Management Personnel and on Hiring and Retaining Both Qualified Engineers and Experienced Sales and Marketing Personnel
 
If we lose the services of any of our senior management personnel or a significant number of our engineers or sales and marketing personnel, it could be disruptive to our development efforts or business relationships and could have a material adverse effect on our business, financial condition and results of operations. As our future success depends on whether we can continue to enhance and introduce new generations of our technology, we are particularly dependent upon our ability to identify, attract, motivate and retain qualified engineers with the requisite educational background and industry experience. Competition for qualified engineers, particularly those with significant industry experience, is intense. We are also dependent upon our senior management personnel. In
 
 
addition, whether we can successfully expand geographically will depend on our ability to attract and retain sales and marketing personnel. In certain geographic regions, there is fierce competition for such personnel.
 
Our Business and Future Operating Results May Be Adversely Affected by General Economic Conditions and Other Events Outside of Our Control
 
We are subject to risks arising from adverse changes in global economic conditions. Due to economic uncertainties in many of our key markets, many companies may delay or reduce technology purchases and investments. The impact of this on us is difficult to predict, but if businesses defer licensing our technology, require fewer services or development tools, or if consumers defer purchases of new products which incorporate our technology, our revenue could decline. A decline in revenue would have an adverse effect on our results of operations and could have an adverse effect on our financial condition.
 
Our business and operating results will also be vulnerable to interruption by other events outside of our control, such as earthquakes, fire, power loss, telecommunications failures, political instability, pandemics, military conflict and uncertainties arising out of terrorist attacks, including a global economic slowdown, the economic consequences of additional military action or additional terrorist activities and associated political instability, and the effect of heightened security concerns on domestic and international travel and commerce.
 
Claims May Be Made for Which We Do Not Have Adequate Insurance
 
Since 2001, the insurance industry has faced unprecedented and escalating global events compounded by international economic uncertainty. As a result of these and other pressures, many insurers have withdrawn from certain market sectors. We have continued with our philosophy of only placing coverage with secure underwriters with programs arranged individually to suit our needs. We currently have global insurance policies including coverage for the following significant risks: business interruption, public and products liability and directors’ and officers’ liability. We do not insure against claims concerning patent litigation or other intellectual property infringement claims and potential related indemnification obligations, because we are of the view that any limited coverage that could be obtained is prohibitively expensive. Our results of operations could be materially adversely affected by the occurrence of a catastrophic event, to the extent that any resulting loss or claim is not covered under the terms of our then existing insurance policies.
 
We May Be Unable to Protect and Enforce Our Proprietary Rights
 
Our ability to compete may be affected by whether we can protect our technology and enforce our proprietary rights. We take great care to protect our technology and innovations with patents, agreements with licensees, employees and consultants and other security measures. We also rely on copyright, trademarks and trade secret laws to protect our technology and innovations.
 
However, despite our efforts, we cannot assure you that others will not gain access to our trade secrets, or that we can meaningfully protect our technology and innovations. In addition, effective trade secret protection may be unavailable or limited in certain countries. Although we intend to protect our technology and innovations vigorously, there can be no assurance that such measures will be successful.
 
A more detailed description of how we protect our intellectual property is set forth in the section entitled “Item 4. Information on the Company—Business Overview—Patent and Intellectual Property Protection.”
 
We May Have to Defend Ourselves Against Third Parties Who Claim That We Have Infringed Their Proprietary Rights
 
We take great care to establish and maintain the integrity of our products. We focus on designing and implementing our products without the use of intellectual property belonging to third parties, except under strictly maintained procedures and with the benefit of appropriate license rights. In the event that a third-party successfully proves that it has intellectual property rights covering a product that we have licensed to customers, we will take steps to either purchase a license to use the relevant technology or work around the technology by developing our own solution so as to avoid infringement of that third-party’s intellectual property rights.
 
An Infringement Claim or a Significant Damage Award Would Adversely Impact Our Operating Results
 
The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. From time to time, third parties, including our competitors, may assert patent, copyright and other intellectual property rights to technologies that are important to our business. We cannot be certain that we would ultimately prevail in any dispute or be able to license any valid and infringed patents from third parties on commercially reasonable terms. Any infringement claim brought against us or our partners, regardless of the duration, outcome or size of the damage award, could:
 
 
·
result in substantial cost to us;
 
 
·
divert management’s attention and resources;
 
 
·
be time-consuming to defend;
 
 
·
result in substantial damage awards;
 
 
·
damage the company’s reputation;
 
 
·
cause product shipment delays; or
 
 
·
require us to seek to enter into royalty or other licensing agreements.
 
Any infringement claim or other litigation against or by us could have a material negative affect on our business.
 
Any assertion of intellectual property rights by a third-party against our technology could result in our licensees becoming the target of litigation and we may be bound to indemnify such licensees under the terms of our license agreements. Although our indemnification obligations are generally subject to a maximum amount, such obligations could nevertheless result in substantial expenses to us, which could have a material adverse effect on our business, financial condition and results of operations. In addition to the time and expense required for us to indemnify our licensees, a licensee’s development, marketing and sales of ARM architecture-based products could be severely disrupted or discontinued as a result of litigation, which in turn could also have a material adverse effect on our business, financial condition and results of operations.
 
In addition to the time and expense required for us to satisfy our support and indemnification obligations to our customers and strategic partners, any litigation could severely disrupt or shut down the business of our customers and strategic partners, which in turn could damage our relations with them and have a material adverse effect on our business, financial condition and results of operations.
 
Our Future Capital Needs May Require Us to Seek Debt Financing or Additional Equity Funding Which, if Not Available, Could Cause Our Business to Suffer
 
From time to time, we may be required to raise additional funds for our future capital needs through public or private financing, strategic relationships or other arrangements. There can be no assurance that the funding, if needed, will be available on attractive terms, or at all. Furthermore, any additional financing arrangements may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. Strategic arrangements, if necessary to raise additional funds, may require us to relinquish our rights to certain of our technologies or products. Our failure to raise capital when needed could have a material adverse effect on our business.
 
We Could Suffer Significant Damage to Our Brand and Reputation.
 
ARM’s technology is used in billions of consumer and enterprise products, many of which are depended on by individuals and business, and are used to store, manage or transmit huge amounts of personal, confidential or proprietary information.  A fault or bug associated with one of ARM’s products could lead to damage to ARM’s corporate reputation and loss of brand value.
 
We May Fail to Have Appropriate Measures and Arrangements to Protect and Use Commercially Sensitive Information, Including Intellectual Property.
 
The information shared between us and third parties, (which includes the intellectual property owned by us, our suppliers and our customers), for the development of products and technologies is commercially sensitive and highly confidential. We enter into agreements with our employees, consultants, commercial partners and others to control access to, and distribution of, our technologies, documentation and other proprietary information and that of third parties.
 
Despite these efforts, persons may attempt to obtain, use, copy, disclose, distribute, offer for sale or make our products, services or technology without authorization, including but not limited to combining with or releasing our code as open source. Monitoring the use and disclosure of our commercially sensitive information is difficult, and our security measures and contractual provisions may not prevent the unauthorised use or disclosure of our commercially sensitive information.
 
Controls or restrictions put in place to protect data or ideas may not be sufficient and legal remedies are limited in different geographies. We cannot assure you that our efforts to prevent the misappropriation or infringement of our intellectual property or the intellectual property of our customers will succeed. To enforce a breached contract requires the initiation of litigation. The initiation of litigation may adversely affect our relationships and agreements with certain customers that have a stake in the outcome of the litigation proceedings. Litigation is very expensive, time consuming and may divert the attention of management and other key employees from the operation of the business, which could negatively impact our business and results of operations.
 
Additionally, despite our security measures, persons could attempt to penetrate our computer systems and networks to misappropriate our proprietary information and technology or interrupt our business. Because the techniques used by computer hackers and others to access or sabotage networks change frequently and generally are not recognized until launched against a target, we may be unable to anticipate, counter or ameliorate these techniques. In addition, our information technology and infrastructure may be breached due to employee error, malfeasance or other disruptions. Failure of such controls may result in the Company breaching the intellectual rights of third parties or undertakings we have given to safeguard third party information.
 
In the event of an inappropriate exposure or misappropriation of our IP, the Company’s business reputation and its operating performance and results would be adversely affected and if such information were to be released to unauthorized parties, including competitors, litigation could be increased, and our business would suffer.
 
 
 
HISTORY AND DEVELOPMENT OF ARM HOLDINGS PLC
 
History
 
ARM Holdings plc is a public limited company incorporated under the laws of England and Wales. The Company was formed on October 16, 1990 as a joint venture between Apple Computer (UK) Limited and Acorn Computers Limited and operated under the name Advanced RISC Machines Holdings Limited.
 
In 1998, the Company re-registered as a public company under the name ARM Holdings plc when it completed its initial public offering of shares and listed its shares for trading on the London Stock Exchange and for quotation on the NASDAQ National Market. In 2004, ARM Holdings plc acquired Artisan Components, Inc., a publicly held physical IP company based in Sunnyvale, California.
 
Our principal executive offices are at 110 Fulbourn Road, Cambridge, CB1 9NJ, England, and our telephone number is +44 1223 400 400. ARM, Inc., our US subsidiary, is located at 150 Rose Orchard Way, San Jose, CA 95134-1358, USA and its telephone number is +1 408 576 1500.
 
Capital Expenditures
 
For a discussion of the Company’s capital expenditures see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
 
 
BUSINESS OVERVIEW
 
ARM designs microprocessors, physical IP and related technology and software, and sells development tools to enhance the performance, cost-effectiveness and energy efficiency of high-volume embedded applications. ARM licenses and sells its technology and products to leading international electronics companies, which in turn manufacture, market and sell microprocessors, application-specific integrated circuits (“ASICs”), application-specific standard processors (“ASSPs”) and microcontrollers (“MCUs”) based on ARM’s technology to systems companies for incorporation into a wide variety of end products. By creating a network of Partners, and working with them to best utilize ARM’s technology, ARM is establishing its processor architecture and physical IP for use in many high-volume embedded microprocessor applications, including cellular phones, digital televisions, mobile computers and PC peripherals and for potential use in many growing markets, including smart cards and microcontrollers. ARM also licenses and sells development tools directly to systems companies and provides support services to its licensees, systems companies and other systems designers. ARM’s principal geographic markets are Europe, the US and Asia Pacific.
 
Industry Background
 
The semiconductor industry has been in place for many decades and provides the world’s digital electronics market with a growing variety of products. Over the life of the semiconductor industry, continuous technology developments have enabled miniaturization and given rise to an increasing level of design complexity. This increased complexity has had the effect of increasing structural costs; thus, the semiconductor industry has had to find ways to mitigate this. To this end, the industry has transitioned from being highly vertically integrated to being an industry that looks for horizontal specialization to alleviate structural cost. This in turn has given way to the creation of a sub-sector, semiconductor IP, which serves the needs of semiconductor companies by enabling them to outsource the cost of technology development where there is an inequality between the economic benefit of the development versus the differentiation that the company can achieve for the development. Specific areas where this outsourcing has occurred in a significant manner are in embedded microprocessors and physical IP.
 
Microprocessors are embedded in a wide variety of high-volume electronic products, ranging from video games to automotive control systems to digital cellular phones. While most of these microprocessors are invisible and inaccessible to the end user, product designers use the computational capabilities of these embedded microprocessors to implement the operating features of electronic products and control systems. “Embedded microprocessor” is a general term that refers to microprocessors other than the central processing unit (“CPU”) in traditional desktop personal computers (“PCs”).
 
The embedded microprocessor market has grown to support new electronic products as well as new capabilities and features in existing products. New products with easier user interfaces, such as mobile phones and audio players, all depend on embedded microprocessors. At the same time, new capabilities and features also drive the need for new and more powerful embedded microprocessors in products such as smartphones and digital televisions. As consumers demand electronic products and control systems with more features, capabilities and portability, systems companies which manufacture these products and control systems are demanding embedded microprocessors that support increasingly complex functions at low cost, that use energy efficiently, that can be rapidly implemented to shorten time to market and that are available in volume from multiple sources.
 
To shorten time to market and lower development costs, system designers need technology solutions that can be rapidly implemented, both from a hardware and software standpoint, to meet varying design needs for performance, power consumption and cost. Typically, a system designer will create a SoC integrating one or more microprocessor cores with other processing engines and peripherals. Product designers need an open microprocessor architecture that can be rapidly implemented, used in a variety of hardware formats and easily combined with differentiating technology suited to different applications.
 
These designs are highly complex, containing, in some cases, hundreds of millions of transistors. SoC designers incorporate functional blocks in the form of standard physical IP libraries that translate the circuit design of the SoC into the physical layout of transistors on a silicon wafer. The SoC will typically be fabricated either at the in-house facility of the designer’s semiconductor company or at one of the industry’s foundry manufacturing companies. As process node geometries continue to shrink, the increasing complexity of developing physical IP libraries is rendering the in-house development of such technology increasingly expensive and economically unattractive, as compared to the product differentiation derived from the optimization to the designer’s semiconductor
 
 
manufacturing process. The Company believes that, over the long term, there will be an ever-increasing need for companies to outsource this activity in order to meet the demand of increased functionality within digital devices while remaining at a reasonable price.
 
As electronic products and control systems have grown more complex, the software used to implement these products and systems has also grown in complexity, forming an increasingly important component of the overall embedded microprocessor solution and contributing a significant portion of the overall development time and cost. In addition, to implement embedded microprocessor solutions efficiently, effective hardware and software development tools must be available to product designers. Using the industry-leading embedded microprocessor architecture permits a common set of software development tools to be used for application development and preserves software investments by permitting developers to reuse software across a variety of hardware implementations of the same architecture, saving considerable development resources for each new product.
 
ARM Solution
 
ARM addresses the needs of the semiconductor industry by designing and licensing microprocessors, physical IP, system components and software and development tools which enable the rapid design of embedded microprocessor solutions for use across a wide variety of applications. ARM offers systems designers a family of powerful, low-cost, energy-efficient microprocessor “cores” based on a common architecture and spanning a wide performance range. The design of these microprocessor cores (the “IP”) is then incorporated by ARM partners with other functional and computational blocks to develop semiconductor chips which are then incorporated into digital electronics products.
 
ARM also offers high-performance and low-power physical library solutions (“physical IP”) on a variety of processes that can be used independently for designs that may or may not contain ARM microprocessor cores. By using physical library components from ARM, users are able to design their systems around standard libraries and then have those designs fabricated at both internal and independent semiconductor manufacturing facilities.
 
In addition, the Company provides the necessary development boards, software development toolkits and software debug tools, which facilitate system design and rapid development of system solutions. Finally, to further support the Company’s architecture, the Company continues to grow its on-chip fabric IP, graphics IP, video IP and embedded software business and also provides training and support services.
 
ARM believes that worldwide support from its semiconductor, software, design and tools partners provides systems companies with a microprocessor architecture and physical library components which are available from multiple sources and which, due to the flexibility offered by a common architecture, enables semiconductor partners and systems designers to design chips rapidly based on the ARM architecture and facilitates ongoing design and maintenance efforts at cost-competitive prices.
 
The Company Believes That Key Benefits of the ARM Solution are:
 
Maximum flexibility of performance, cost and power. The Company offers a wide range of high-performance, low-cost solutions which enable systems designers to make the appropriate performance/price trade-offs for use in a particular application. The ARM architecture offers designers the flexibility to select an ARM processor with performance, die area (chip size) and power consumption characteristics appropriate for a specific application. ARM believes that its microprocessor architecture offers designers the opportunity to design embedded microprocessors at leading price/performance ratios. ARM believes that incorporating the ARM physical IP libraries for high performance or low power gives the designer a further advantage in using the ARM solution. By minimizing the die size of ARM cores and microprocessors, maximizing the energy efficiency, and maximizing the performance through the combination of the microprocessor core and physical IP system, designers receive an unparalleled advantage by usage of the ARM portfolio of products.
 
Standards, re-use, and broad support enable rapid system design. As systems become more complex, use and re-use of proven hardware and software intellectual property are essential to achieve time to market and cost goals. ARM provides a set of IP that enables system designers to standardize portions of their semiconductor chip design and development which enables significant reductions in development time and costs. In addition, ARM offers a means of creating flexible system designs through its range of fabric IP based on the Advanced Microcontroller Bus Architecture (“AMBA”) standard. This allows the designer to concentrate on application-specific portions of the
 
system design, where they add real value. By deploying standard solutions across its range of cores and platforms, and making them widely available via its partnership business model, ARM attracts strong third-party support in the form of EDA modeling tools, software development tools, debug tools, operating system and real time operating system ports, software intellectual property and peripherals.
 
Global partner network. ARM’s global network of partners assures systems companies of sufficient availability for high-volume products and, together with ARM’s international presence, gives systems designers global support for their design development. At December 31, 2013, ARM’s technology has been licensed to about 350 semiconductor companies, including the majority of leading semiconductor companies worldwide. ARM’s broad semiconductor partner base provides systems companies with a wide range of suppliers, thus reducing the dependence of systems companies on any one supplier and producing price competition helping to contain costs of ARM-based chips. ARM’s various partners build their own solutions using ARM technology; there are a growing number of ARM-based ASICs, ASSPs and MCUs available for use by systems companies, thus facilitating their use of the ARM architecture. The Company works with numerous industry leading software systems and tools and development partners, including Adobe, Microsoft Corporation, Google, Mozilla, Oracle Corporation, Red Hat Incorporated, and many others who provide the third-party support needed to facilitate the use of ARM technology in a wide variety of applications.
 
Development of software tools and platforms. ARM designs and manufactures its own family of tools that span the complete development process from concept to final product deployment. Each product within this portfolio has been developed closely alongside ARM cores ensuring it maximizes the cores’ performance. These embedded software tools, simulation models and hardware platforms enable validated support for device development. Support for ARM cores is provided in the ARM Development Studio at an early stage when lead partners are just starting to develop designs incorporating new ARM cores. For ARM partners producing microcontrollers, ARM has a single solution for their end users with the ARM Microcontroller Development Kit, based on the industry leading Keil microcontroller tools, that facilitates end users’ migration from 8- to 32-bit MCUs.
 
ARM Strategy and Business Model
 
ARM’s strategy is to create technology that resides at the heart of advanced digital products. It is ARM’s strategy for its IP to be used by the world’s leading semiconductor providers to create these digital products. Therefore, ARM has taken the approach of designing and licensing its IP, for which it receives an initial license fee and an ongoing royalty each time ARM’s IP is incorporated into a semiconductor chip. This type of arrangement represents the manner in which the majority of ARM revenue is generated. There is typically a delay of two to four years between the licensing of ARM technology and the time at which royalties are received. ARM’s royalties are generally based on a percentage of the revenues received by licensees on their sales of chips based on ARM technology, or less frequently as a fixed amount per chip, and are normally payable by a licensee on sales occurring during the life of the ARM technology being licensed. Accordingly, ARM could continue to receive royalties in relation to specific technology even if such technology is no longer licensed to new customers. The Company believes that as ARM technology becomes more widely accepted, the revenues from royalties, as a percentage of total revenues, will increase.
 
The Company also intends to generate a diversified revenue base beyond license fees and royalties through support, maintenance and training, and from sales and licensing of toolkits, development boards and systems software. In addition, the Company believes that revenues from support and maintenance, the sale and licensing of development tools and system and physical IP will increase as the ARM architecture continues to become more established across a broader range of markets.
 
To help designers to design systems based on ARM technology and develop software for ARM-based microprocessors, ARM also provides compilers, debuggers and development boards. These tools enable optimal software to be created and improve productivity for system and software developers. These products are sold as a one-time cost to the customer and do not typically include a royalty.
 
Leverage partner alliances. ARM’s semiconductor partners help grow the total ARM market by integrating their own intellectual property in conjunction with ARM technology, thus combining their own particular strengths with those of ARM to provide an extensive array of ARM-based solutions. ARM’s business model also enables the Company to benefit from the extensive manufacturing, marketing and distribution networks of its semiconductor partners. The marketing and direct selling of semiconductors to systems companies is undertaken by ARM’s
 
 
partners. ARM’s ability to manage its partnerships effectively has been and will continue to be a major challenge and a key factor in its success. See “Item 3. Key Information—Risk Factors—We Are Dependent on Both Our Semiconductor Partners and Major Physical Intellectual Property (“IP”) Licensees.”
 
Increased availability of third-party support of ARM technology. ARM has established partnerships to develop software, tools, operating systems and designs to maximize the level of support for ARM’s technology and provide an efficient environment for system designers. Increasing acceptance and implementation of ARM technology has led to various third parties adapting software programs and development tools to ARM’s architecture. To the extent that such acceptance continues, it should drive even broader acceptance of the ARM technology by systems companies and end users. See “Item 3. Key Information—Risk Factors—The Availability of Development Tools, Systems Software, EDA Tools and Operating Systems is Crucial to the Market Acceptance of Our Products” for a discussion of the Company’s reliance on the availability of systems software and development tools compatible with the ARM architecture.
 
Focus on needs of systems companies. ARM is committed to providing technology solutions responsive to the requirements of end users in a variety of markets. The Company works with systems companies either directly or in tandem with its semiconductor partners to aid the systems companies’ customization of the ARM architecture to perceived market needs. ARM also aims to simplify and shorten the design process for systems companies. See “Item 3. Key Information—Risk Factors—Our Success Depends Substantially on Systems Companies.”
 
Strategic involvement in related products and services. ARM will continue to analyze its market and communicate with its partner network to identify opportunities for product innovation and new product creation, including with respect to features such as low power, high performance media and graphics, security, the creation of efficient code and platform execution environments. ARM will also continue to develop products and encourage and support industry standardization efforts to address the challenges that result from shrinking semiconductor process geometries and the increasing cost and complexity of semiconductor chip design. ARM maintains an ongoing five-year strategy plan for the development and growth of the business and constantly monitors its marketplace and evaluates new business, investment and acquisition opportunities.
 
Target Markets
 
ARM is continuing to see the convergence of the consumer electronics and telecommunications IT markets. This is being driven by a need for low-power, high-performance, secure components which need to be easy to both design and use. The Company’s four target markets (Home Solutions, Mobile Solutions, Enterprise Solutions, and Embedded Solutions) each demonstrate some or all of these requirements but differ in their applications. The Company continues to evolve from focusing on digital products to focusing on the way people use digital products and also on the solutions the Company provides to meet this demand worldwide.
 
Home Solutions. In the home solutions market, the management and display of audio-visual content are the foremost concerns of consumers. Within this market, applications like digital TVs, set-top boxes, digital still cameras and gaming devices deliver visual content to the home. ARM is well placed in this market with its scalable architecture performance, support for security applications (TrustZone), graphics (Mali) and physical IP libraries.
 
Mobile Solutions. The mobile market comprises a wide variety of mobile communication and portable computing devices, each with their own characteristics and needs. The applications include wireless handsets, mobile computers, portable media players and bluetooth devices. For each of these products, mobility (being able to use them while on the go) is the key concern to consumers. With ARM’s high performance/low power architecture, ARM’s customers can balance performance and power with cost, so that ARM ultimately provides the best solution to end users. With the acceleration of applications becoming critical, energy-efficient ARM technology is well placed to meet the demands of this market. Security is becoming increasingly important as mobile devices are used to carry out financial transactions, generating industry interest in products such as TrustZone.  As low power is critical in mobile devices in order to extend battery life, products such as video and graphics processors, and physical IP libraries are well positioned.
 
Enterprise Solutions. In today’s world, having the data you need at your fingertips is key. In the Enterprise Solutions market, ARM focuses on the way data is handled through devices such as storage devices, printers, wireless and wired networking, servers and enterprise networking. ARM’s range of microprocessor performance, development systems and data efficient architecture give ARM a competitive advantage in this market space.
 
Embedded Solutions. The world of embedded processors is growing in multiple areas, including anti-lock braking systems, smartcards and industrial control applications. This market has the potential to grow substantially, especially as existing 8- and 16-bit applications need to migrate to 32-bit processors. The reliability and software reusability of the ARM architecture positions ARM to penetrate this market. In addition, the introduction of products such as the Cortex-M class of processors, with their low gate count, small size and capabilities for high code density, together with Keil’s complementary MCU tools, positions ARM for taking designs once owned by 8- and 16-bit processors.
 
For a breakdown of total revenues by geographic market, see Note 2 to the Consolidated Financial Statements.
 
ARM’s Products and Services
 
ARM’s comprehensive product offering includes the following:
 
 
·
microprocessor Cores:  microprocessor cores, including specific functions such as video and graphics IP and on-chip fabric IP;
 
 
·
embedded software;
 
 
·
physical IP;
 
 
·
development tools; and
 
 
·
support and maintenance services.
 
Processor Cores
 
Historically, microprocessor designers concentrated on maximizing performance, with cost and size as secondary concerns. Anticipating the growth in portable and embedded markets, ARM has always focused on producing low-cost microprocessor cores that offer the higher performance that increasingly complex applications demand, yet operate within the power constraints of portable devices. This emphasis on low power consumption and low chip and system cost has made ARM’s products suitable for a broad range of applications.
 
Low power consumption has wider benefits in a broad range of markets. In addition to its clear advantage for battery operated devices, it enables the use of lower cost packaging, lower cost power supply components, and it allows more electronics to be packed into a small space without requiring the expense of cooling by fan or air conditioning.
 
ARM microprocessors are designed to allow high performance at a low total system cost. Two key features that help achieve this are small die area (chip size), and high code density. Code density is a measure of the amount of memory required to hold program code. High code density reduces the system cost by reducing the size of the main memory and bandwidth it must deliver.
 
ARM Architecture
 
The foundation of the ARM family of processors is its efficient Reduced Instruction Set Computing (“RISC”) instruction set. The design of the instruction set has two aims: high code density and easy instruction decoding. Older Complex Instruction Set Computing (“CISC”) processors use complex instructions to reduce the number of instructions necessary to code a program, resulting in high code density, but also in complex, power-hungry processor designs. RISC processors, on the other hand, use simple instruction sets but usually code less densely than CISC processors. Code compiled for ARM RISC processors, however, is generally more dense than code for competing CISC processors, delivering the memory cost advantages of high code density, with the performance, power, and die size advantages of RISC processors.
 
Architectural Extensions
 
ARM’s strategy is to develop products incorporating additional features and instruction set enhancements appropriate to application needs, while maintaining a common, general purpose instruction set which provides code
 
 
compatibility. Architectural extensions are introduced in subsequent versions of the ARM architecture, building on the previous architectures, thus adding backwards code compatibility of new processor cores with older generations.
 
The ARM Microprocessor Families
 
ARM architecture processors offer a wide range of performance options in the ARM7 family, ARM9 family, ARM11 family, ARM Cortex family and ARM SecurCore family. Scalability, the ability to match processing power to the application, is an important consideration when designers select a microprocessor family. The ARM architecture gives systems designers a wide choice of processor cores at different performance/price points, yet all ARM microprocessors use substantially the same instruction set and are capable of running the same software. This protects the investments ARM’s customers make in software development, software tools and staff training. The ARM product roadmap offers customers a proven architecture and intends to deliver innovative, powerful and cost-effective solutions to industry needs in future generations, while maintaining a high degree of compatibility.
 
ARM7 family. The ARM7 family comprises low power, general purpose 32-bit microprocessor cores particularly suitable where strict die area and power constraints must be satisfied while maintaining reasonably high performance, as in portable telecommunications. It is used in cost-sensitive embedded control applications and has been highly successful in the digital cellular telephone market.
 
ARM9 family. The ARM9 family comprises a range of microprocessors in the 150-250MHz range. Each processor has been designed for a specific application or function, such as an application processor for a feature phone or running a WiFi protocol stack. Therefore each has differentiating features appropriate for that application.
 
ARM11 family. The ARM11 family comprises a range of microprocessors in the 300-600MHz range. Each processor has been designed for a specific application or function such as an application processor for a smartphone or controlling the engine management system in a car.
 
ARM Cortex family. This is ARM’s newest family of processor cores. The family is split into three series:
 
 
·
A Series targeting applications processors running complex operating systems;
 
 
·
R Series targeting real time deeply embedded markets and running Real Time Operating Systems (“RTOSs”); and
 
 
·
M Series addressing the needs of the low cost microcontroller markets.
 
By ensuring software compatibility across the three series, ARM has enabled the re-use of software, tools and engineering knowledge.
 
Graphics and Video IP
 
ARM develops graphics accelerator IP and software for semiconductor SoC vendors that deliver high-quality multimedia images without compromising performance, power consumption or system cost. ARM’s IP provides industry-leading 3D graphics solutions suitable for mobile phones, portable media players, set-top boxes, handheld gaming devices and infotainment systems (including automotive).
 
ARM also develops video processor and imaging technology IP, which combined with our graphics IP provides customers with an integrated multimedia platform, which is becoming increasingly important in devices such as mobile computers, portable media players and digital TVs.
 
Physical IP
 
ARM is a leading provider of physical IP components for the design and manufacture of integrated circuits, including SoCs. ARM Artisan physical IP products comprise embedded memory, standard cell and input/output components which are designed to provide the customers’ desired combination of performance, density, power and yield for a given manufacturing process. Artisan physical IP also includes a limited portfolio of analog and mixed-signal products. ARM’s physical IP components are developed for a variety of process geometries ranging from 14nm – 250nm design and are validated by producing them in silicon to ensure that they perform to specification, reducing the risk of design failure and gaining valuable time to market. ARM licenses its products to customers for
 
 
the design and manufacture of integrated circuits used in complex, high-volume applications, such as portable computing devices, communication systems, cellular phones, microcontrollers, consumer multimedia products, automotive electronics, personal computers and workstations and many others.
 
ARM’s physical IP components are developed and delivered using a proprietary methodology that includes both commercial and proprietary electronic design automation tools and techniques. This methodology ensures that ARM’s intellectual property components provide optimized power, performance, and area while reducing customer risk and time-to-market. ARM physical IP is easily integrated into a variety of customer design methodologies and support industry standard Integrated Circuit (“IC”) design tools, including those from EDA tool vendors such as Cadence,  Mentor Graphics and Synopsys, as well as many other specialty IC design and modeling tools. To support these various IC design tool environments, each of ARM’s products includes an extremely broad set of verified tool models.
 
Physical IP Products
 
Logic and Memory products. ARM’s embedded memory components include random access memories, read only memories and register files.
 
These memories are provided in the form of a configurable “memory compiler” which allows the customer to generate the appropriate configuration for the given application.
 
All of ARM’s memory components include many configurable features such as power-down modes, low-voltage data retention and fully static operation as well as different transistor options to trade off performance and power. In addition, ARM’s memory components include built-in test interfaces that support the leading industry test methodologies and tools. ARM memory components also offer redundant storage elements which may help increase the manufacturing yield of integrated circuit designs containing large memories.
 
ARM logic products deliver optimal performance, power and area when building ARM Processors, Graphics, Video and Fabric IP along with general SoC subsystem implementation, designed to deliver highest yield through extensive manufacturing optimization.
 
Processor Optimization Packs (“POPs”).  ARM has created optimized logic and memory physical IP for a specific process technology, supported by implementation knowledge and ARM benchmarking.  Combined together, POP IP allows chip designers to optimize ARM microprocessors for maximum performance, lowest power or to develop customized solutions balancing power and performance for their specific application.
 
High-speed interface products. ARM delivers physical interface for a range of DDR SDRAM (double-data rate synchronous dynamic random-access memory) applications ranging from high-speed mission critical applications to low-power memory sub-systems. At advanced process geometries 40nm and newer these interfaces are delivered as fully-hardened PHY blocks to reduce customer risk of high speed timing closure of these interfaces. These interface products have been optimized for high data bandwidth, low power and enhanced signaling integrity features to enable support for a wide range of applications completing ARM’s  “Processor to Pads” implementation support philosophy.
 
Silicon on Insulator (“SOI”) products. SOI is an alternative methodology to traditional semiconductor fabrication techniques that enables higher performance and lower power designs than today’s more common bulk silicon process. It is ARM’s belief that SOI will continue to be used in some market segments and applications..
 
System Design
 
ARM’s software development tools help a software design engineer deliver proven products right the first time. Engineers use these tools in the design and deployment of code, from applications running on open operating systems right through to low-level firmware.
 
The ARM Development Studio is complemented by hardware components that allow the software designer to connect to a real target system and control the system for the purposes of finding errors in the software. The ARM DSTREAM unit allows the software developer to control the software running on the prototype product and examine the internal state of the prototype product, which is an essential part of debugging software. It also allows
 
 
the software developer to capture the way that the software executes on the product in real time and provides feedback on the prototype product performance.
 
ARM Development Boards are ideal systems for prototyping ARM-based products. This enables the function of the product to be confirmed in advance of building a silicon chip with a foundry or with a silicon partner. Building a silicon chip is an expensive process which requires a high degree of certainty in the prototype product function.
 
ARM Fast Models provide a methodology for engineers to build a virtual prototype of their system and run software on it.  This allows software development to proceed in parallel with hardware development, which reduces overall time to market.
 
The ARM Microcontroller Development Kit supports ARM-based microcontrollers and also 8051-based microcontrollers. The ARM Microcontroller Development Kit is used by developers who are building products and writing software using standard off-the-shelf microcontrollers.
 
Support and Maintenance Services
 
Support, maintenance and training. ARM provides support and maintenance services under its license agreements to its semiconductor partners as well as ARM product-related training. See “—License Agreements” and “Item 5. Operating and Financial Review and Prospects—Operating Results—Overview— Service Revenues— Support and maintenance.” In order to serve its partners better, ARM has expanded the range of support, maintenance and training services, and now provides such services from its overseas offices, local to our customers’ engineering teams. To this end ARM has Technical Support staff in its Bangalore, India and P.R. China offices. See “Item 3. Key Information—Risk Factors—Our International Operations Expose Us to Risks” for a discussion of certain risks inherent in our international operations.
 
ARM Partner Network
 
Semiconductor partners. ARM licenses its technology on a worldwide and non-exclusive basis to semiconductor partners that manufacture and sell ARM-based chip solutions to systems companies. At December 31, 2013, ARM’s technology has been licensed to about 350 semiconductor companies, including many of the leading semiconductor companies worldwide. ARM serves this geographically diverse base from offices in the UK, P.R. China, France, Germany, Norway, Sweden, Finland, Belgium, Israel, Japan, South Korea, Taiwan, India and the United States.
 
Tools and development partners. ARM enables its tools and development partners to design tools that help ARM’s semiconductor partners and customers design ARM-based systems. ARM provides IP and support to these tools and development partners to give end customers of the ARM architecture the widest possible range of tools support.
 
Design partners. There are many design companies who develop ARM-based solutions for specific customer needs. Tasks for the system designers range from developing World Wide Web browser software for ARM-based platforms to offering turnkey product design services. The Company has also introduced the ARM Approved Design Center Program whereby design houses, which pass our strict qualification process, are able to access ARM technologies to enable them to undertake ARM-based designs for third parties.
 
License Agreements
 
ARM is the owner of IP in the field of microprocessor architecture and implementation for embedded signal processing, graphics IP, video IP, system platforms, peripherals, system software and software development and debug tools and physical IP components. ARM creates innovative technology which incorporates such IP. ARM grants licenses to such technology to semiconductor manufacturers, Integrated Device Manufacturers (“IDMs”) and fabless companies, original equipment manufacturers and chip design houses to enable such licensees to design, manufacture and distribute silicon chips which combine such technology with licensees’ own differentiating proprietary technology. The licenses are granted under written agreements which contain contractual terms and conditions to protect the technology and the intellectual property embodied therein and to limit ARM’s liability in respect of licensees’ use of the technology. There are a number of different forms of license offered by ARM which are structured to address different licensee requirements and different intellectual property protection issues. In all forms of license, ARM strictly controls the modification rights which it grants to its technology and mandates, in
 
 
order to protect the integrity of the ARM architecture, that the technology is verified by reference to ARM-specified tests prior to distribution in licensee products.
 
Fees and royalties. With regard to microprocessors, ARM typically charges a license fee for access to its technology and a royalty for each unit of silicon which incorporates ARM’s technology and is distributed by the licensee. ARM licenses its physical IP components on a non-exclusive, worldwide basis to major IC manufacturers and IC design teams that are customers of such manufacturers.
 
License fees are invoiced in accordance with an agreed set of milestones. Revenue generated in the form of license fees is recognized in accordance with IFRS. Royalties are invoiced and recognized quarterly in arrears.
 
License Programs in respect of the Processor Division
 
The Processor Division’s licenses generally fall under two broad programs: Architecture and Implementation. The Architecture License Program is associated with Architecture Licenses. The Implementation License Program encompasses the Implementation License, the Term License, the Per-Use License and the Subscription License. Each of these licenses is described below.
 
The Architecture License provides the licensee with the flexibility to differentiate its ARM-based products by creating alternative implementations of the licensed architecture, while retaining instruction set compatibility.
 
The Implementation License is a license with the objective of producing a specific ARM-based end product. The licensee has perpetual design and manufacturing rights for the licensed product.
 
The Term License has the same objectives as the Implementation License. The difference is in the design right license grant, as the design rights are only granted for a limited period of generally three years for the licensed product.
 
The Per-Use License has the same objectives as the Implementation License. The difference is in the design rights, as these are granted for design of one ARM-based end product.
 
The Subscription License allows a partner access to a selected set of ARM products, including unspecified future products, over a defined time period for a set annual fee. Design rights are granted for the subscription period, and manufacturing rights are perpetual for ARM-based products designed during that period.
 
License Programs in respect of Physical IP
 
ARM charges manufacturers a license fee that gives them the right to manufacture ICs containing physical IP components ARM has developed for its manufacturing process. Manufacturers also agree to pay ARM royalties based on the selling prices of ICs or wafers that contain ARM’s physical IP components. Generally, ARM credits a small portion of the royalty payments to the manufacturer’s account to be applied against license fees for any future orders placed with ARM within a certain time period, if any, payable by the manufacturer. The portion of the royalty payment that is credited to a manufacturer’s account to be applied against future license fees, if any, is based on negotiations at the time the license arrangement is signed.
 
ARM provides the design rights to use ARM’s physical IP from the majority of libraries developed for the manufacturing facilities free of charge. This enables small fabless design companies to easily gain access to the ARM physical IP technology and have their design manufactured at a variety of foundry companies. In some cases, ARM will charge a license fee to the design company for optimized libraries for specific process technologies and process variants. The royalties for these designs are then subsequently collected from the facility where they were manufactured.
 
Competition
 
The markets for the Company’s products are intensely competitive and are characterized by rapid technological change. These changes result in frequent product introductions, short product life cycles and increased product capabilities typically representing significant price/performance improvements. Competition is based on a variety of
 
 
factors including price, performance, product quality, software availability, marketing and distribution capability, customer support, name recognition and financial strength. Further, given the Company’s reliance on its semiconductor partners, the Company’s competitive position is dependent on its partners’ competitive positions. In addition, ARM’s semiconductor partners do not license ARM technology exclusively, and several of them also design, develop, manufacture and market microprocessors based on their own architectures or on other non-ARM architectures and develop their own physical IP in-house. They often compete with each other and with ARM in various applications.
 
Many of the Company’s direct and indirect competitors, including some of ARM’s semiconductor partners, are major corporations with substantially greater technical, financial and marketing resources and name recognition than ARM. Many of these competitors have a much larger base of application software and have a much larger installed customer base than ARM. There can be no assurance that ARM will have the financial resources, technical expertise, marketing or support capabilities to compete successfully in the future.
 
The Company believes that the ARM architecture is the leading independent microprocessor technology openly licensed to other companies and that the broad presence afforded to the Company through its established worldwide network of partners gives it an advantage over other companies which license microprocessor-related technology. The Company believes that its products offer high performance at competitive prices, and compete favorably in the embedded market by providing an open compatible architecture that is scalable from high-performance multimedia applications to small battery operated devices. However, there can be no assurance that the Company will be successful in the face of increasing competition from new technologies or products introduced by existing competitors and by new companies entering the market. See “Item 3. Key Information—Risk Factors— Competition—We May Not Be Able to Compete Successfully in the Future” and “—Our Architecture and Physical IP Libraries May Face Strong Competition from Well Resourced Competitors.”
 
Patent and Intellectual Property Protection
 
The Company has an active program of protecting its proprietary technology through the filing of patents. As at December 31, 2013 the Company held 908 US patents in various aspects of its technology, and 984 non-US patents with expiration dates ranging from 2014 to 2033. In addition, as of the same date, the Company had 1,319 patent applications pending worldwide. The Company’s US patents do not prevent the manufacture or sale of ARM-based products outside of the United States. There can be no assurance that the Company’s pending patent applications or any future patent applications will be approved or will not be challenged successfully by third parties, that any issued patents will protect the Company’s technology or will not be challenged by third parties, or that the patents of others will not have an adverse effect on the Company’s ability to do business. Furthermore, there can be no assurance that others will not independently develop similar or competing technology or design around any patents that have been or may be issued to the Company.
 
In February 2013, the Company participated in a consortium of major technology companies which completed an agreement with MIPS Technologies, Inc. (“MIPS”) to obtain rights to its patent portfolio. The MIPS patent portfolio includes 580 patents and patent applications covering microprocessor design, SoC design and other related technology fields.
 
The Company attempts to protect its trade secrets and other proprietary information through agreements with licensees and systems companies, proprietary information agreements with employees and consultants and other security measures. The Company also relies on trademarks, copyright and trade secret laws to protect its technology. Despite these efforts, there can be no assurance that others will not gain access to the Company’s trade secrets, or that the Company can meaningfully protect its technology. In addition, effective trademark, copyright and trade secret protection may be unavailable or limited in certain foreign countries. Although the Company intends to protect its rights vigorously, there can be no assurance that such measures will be successful.
 
Certain of the Company’s license agreements require licensees to grant back to ARM a royalty-free non-exclusive license to patented licensee modifications to the ARM technology. Such licenses permit ARM to sublicense to other licensees.
 
The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. See “Item 8. Financial Information—Legal Proceedings” for details of current litigation. Further litigation may be necessary in the future to enforce the Company’s patents and other intellectual property rights, to protect the Company’s trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity, and there can be no assurance that other parties in any such litigation would not be able to devote substantially greater financial resources to such litigation proceedings or that the Company would prevail in any future litigation. Any such litigation, whether or not determined in the Company’s favor or settled by the Company, would be costly and would divert the efforts and attention of the Company’s management and technical personnel from normal business operations, which could have a material adverse effect on the Company’s business, financial condition and results of operations.
 
Any adverse determinations in litigation could result in the loss of the Company’s proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from third parties or prevent the Company from licensing its technology, any of which could have a material adverse effect on the Company’s business, financial condition and results of operations. Moreover, the laws of certain countries in which the Company’s technology is or may in the future be licensed may not protect the Company’s intellectual property rights to the same extent as laws in the United Kingdom or the United States, thus reducing the enforceability of the Company’s intellectual property in those countries.
 
In any potential dispute involving the Company’s patents or other intellectual property, the Company’s licensees could also become the target of litigation and the Company may be bound to indemnify such licensees under the terms of its license agreements. Although ARM’s indemnification obligations are generally subject to a maximum amount, such obligations could nevertheless result in substantial expenses to the Company. In addition to the time and expense required for the Company to indemnify its licensees, a licensee’s development, marketing and sales of ARM architecture-based products could be severely disrupted or discontinued as a result of litigation, which in turn could have a material adverse effect on the Company’s business, financial condition and results of operations.  See “Item 3. Key Information—Risk Factors—We May Be Unable to Protect and Enforce Our
 
 
Proprietary Rights” and “—We May Have to Defend Ourselves Against Third Parties Who Claim That We Have Infringed Their Proprietary Rights.”
 
Marketing and Distribution
 
In order to speed global acceptance of ARM technology, ARM seeks partners with diverse geographic locations and a broad base of systems company relationships. The Company markets its architecture and technology directly to its semiconductor partners and other customers from its offices in Cambridge, Maidenhead, Sheffield and Blackburn in the United Kingdom and also from offices in Japan, South Korea, France, Germany, Norway, Sweden, Finland, Taiwan, P.R. China, Israel, Slovenia, India, and in California, Texas, Massachusetts and Washington in the United States. The Company’s architecture and technology are marketed on the basis of a number of factors including high performance/low power and price/performance, rapid time-to-market and the availability of third-party support. ARM also capitalizes on the extensive marketing and distribution networks of its semiconductor partners who market and distribute ARM core-based products directly to systems companies. As part of the Company’s strategy to increase ARM’s visibility, the Company’s license agreements generally require its partners to display an ARM logo on the ARM core-based products that they distribute. The Company believes that to the extent ARM technology becomes more widely accepted, the ARM “brand” will become increasingly important to potential partners and will drive the Company’s expansion into related software, development tools and system design. ARM believes that the availability of its marketing, sales and support services to all of its partners worldwide is critical to the success of the ARM architecture.
 
Research and Development
 
The ability of the Company to compete in the future will be substantially dependent on its ability to advance its technology in order to meet changing market needs. To this end, Company engineers are involved in researching and developing new versions of ARM microprocessor cores and physical IP technology as well as related software and tools applications. The Company is also involved in collaborative research with selected universities to leverage the technological expertise available at those universities. The Company has acquired certain patents from these collaborations.
 
As of December 31, 2013, ARM had 1,996 full-time research and development staff located at offices in Cambridge, Maidenhead, Sheffield and Blackburn in the United Kingdom; Sophia Antipolis and Grenoble, France; Grasbrunn, Germany; Trondheim, Norway; Lund, Sweden; Oulu, Finland; Sentjernej, Slovenia; Austin, Texas, US; San Jose, Irvine and San Diego, California, US; Olympia, Washington, US; Bangalore and Noida, India; Shanghai, P.R. China and Hsinchu, Taiwan.
 
In 2011, 2012 and 2013, research and development costs were approximately £158.6 million, £166.3 million and £202.9 million, respectively. Research and development costs were 32%, 29% and 28% of total revenues in 2011, 2012 and 2013, respectively.
 
Acquisitions
 
On July 19, 2013, the Company purchased the entire share capital of Sensinode OY. (“Sensinode”) for $11.7 million in cash.  This purchase has been accounted for as an acquisition.
 
On December 12, 2013, the Company purchased the entire share capital of Geomerics Limited (“Geomerics”) for £13.4 million in cash.  This purchase has been accounted for as an acquisition.
 
There were no acquisitions in 2012.
 
On June 15, 2011, the Company purchased the entire share capital of Obsidian Software Inc. (“Obsidian”) for $5.6 million in cash, plus a further $9.5 million payable as earn-out to the shareholders subject to them remaining in employment with ARM for up to 3 years and meeting certain performance criteria.  This purchase has been accounted for as an acquisition.
 
On October 31, 2011, the Company purchased the entire share capital of Prolific Inc. (“Prolific”) for $7.7 million in cash, plus a further $8.5 million payable as an earn-out to the shareholders subject to them remaining in employment with ARM for up to five years and meeting certain performance criteria. This purchase has been accounted for as an acquisition.
 
 
Joint Venture
 
In April 2012, the Company announced the creation of a joint venture with two partners dedicated to delivering a secure, accessible environment for advanced services running on the growing range of connected devices. All three joint venture partners will contribute assets to the new venture, including patents, software, people, cash and capital equipment. The joint venture received regulatory approval at the end of November 2012 and commenced trading as Trustonic Limited on December 4, 2012. The Company owns 40% of the joint venture.
 
 
ORGANIZATIONAL STRUCTURE
 
ARM Holdings plc is the holding company for a number of subsidiaries. The following is a list of our significant subsidiaries at December 31, 2013. Not all of our subsidiaries are included, as the list would be excessive in length. Unless stated otherwise, each subsidiary is wholly owned.
 
Company
  
Jurisdiction of Incorporation
ARM, Inc.
  
United States
ARM Limited
  
England and Wales
ARM France SAS
  
France
ARM Consulting (Shanghai) Co. Ltd
  
China
ARM Norway AS
  
Norway
ARM Embedded Technologies Pvt. Ltd.
  
India
 
PROPERTIES
 
The Company leases land and buildings for its executive offices, engineering, marketing, administrative and support operations and design centers. The following table summarizes certain information with respect to the principal facilities leased by the Company:
 
Location
  
Freehold/Leasehold
  
Lease Term and Commencement Date
  
Approximate Area
(square feet)
  
Principal Use
Cambridge, UK (110 Fulbourn Road)
  
Leasehold
  
20 years
September 29, 1999
  
45,000
  
Executive offices and engineering, marketing and administrative operations
Cambridge, UK (130 Fulbourn Road)
  
Leasehold
  
20 years
March 25, 2002
  
35,000
  
Executive offices and engineering, marketing and administrative operations
Cambridge, UK (100 Fulbourn Road)
  
Leasehold
  
13 years
 October 4,
 2010
  
30,000
  
Executive offices and engineering, marketing and administrative operations
Maidenhead, UK
  
Leasehold
  
25 years
July 7, 1998
  
20,000
  
Executive offices and design center
San Jose, California, US
  
Leasehold
  
7 years
August 1, 2008
  
92,000
  
Executive offices and engineering, marketing and administrative operations
Austin, Texas, US
  
Leasehold
  
7.5 years
August 1, 2009
  
57,400
  
Design center, marketing and support operations
Bangalore, India
  
Leasehold
  
10 years
March 1, 2007
  
113,800
  
Executive offices and engineering, marketing and administrative operations
Shanghai, China
  
Leasehold
  
3 years
May 1, 2012
  
37,000
  
Executive offices and engineering, marketing and administrative operations

In addition, the Company leases offices in Sheffield, England; Blackburn, England; Cambridge, England; Grasbrunn, Germany; Trondheim, Norway; Lund, Sweden; Oulu, Finland; Sophia Antipolis and Grenoble, France; Sentjernej, Slovenia; Hsinchu, Taiwan; Noida, India; Irvine, California, USA; Plano, Texas, USA; Olympia, Washington, USA and Shanghai, China that are used for engineering and administrative purposes as well as in Shin-Yokohama, Japan; Shenzhen and Beijing, China; Taipei City, Taiwan; and Seoul, South Korea which are used for marketing and support operations. Company personnel based in Boston, Massachusetts, US; Seattle, Washington, US; San Diego, California, US; Paris, France; Vilvoorde, Belgium and Kfar Saba, Israel have office space available to them.
 
 
None.
 
 
OPERATING RESULTS
 
The following discussion should be read in conjunction with the consolidated financial statements of ARM Holdings plc and notes thereto included elsewhere in this document which have been prepared in accordance with IFRS, which differ in certain respects from U.S. GAAP, and with the discussion of certain risk factors set forth under “Item 3. Key Information—Risk Factors” that might materially affect the Company’s operating results and financial condition.
 
Within the review of the Operating Results we have included certain non-IFRS measures; specifically, we present (i) research and development costs, (ii) sales and marketing expenditure, (iii) general and administrative costs, (iv) operating costs for each of the segments and (v) profit/loss before tax for each of the segments, adjusted in each case to exclude exceptional items, share-based compensation charges including payroll taxes, amortization of intangibles acquired with business combinations, other acquisition-related charges, charges relating to the disposal and impairment of investments, share of results of joint venture and costs relating to the Company’s associate company Linaro.  Where such non-IFRS measures are presented, we also present the reconciling items detailed above and amount thereof, to the most directly comparable IFRS measures of research and development costs, sales and marketing expenditure, general and administrative and operating costs and profit/loss before tax for each of the segments, respectively. 
 
We believe that disclosing such non-IFRS measures enables analysts and investors to isolate and evaluate clearly the impact of the items detailed above separately from the underlying financial performance of the Company.  We believe this also allows for a clearer comparison of performance from year to year (including of our research and development costs, sales and marketing expenditure, general and administrative costs, and operating costs and profit/loss before tax for each of the segments). Management believes that this provides analysts and investors with valuable additional information which gives them an improved insight into the business.
 
It should be noted that the non-IFRS measures presented are adjusted items and that all items for which the non-IFRS measures are adjusted are included in our reported financial information because they represent real costs of our business in the periods presented. As a result, non-IFRS measures merely allow investors to differentiate among different kinds of costs and they should not be used in isolation. Our determination of non-IFRS measures, together with our presentation of them within this financial information, may differ from similarly titled non-IFRS measures of other companies.
 
In 2011, the Linaro costs were previously classified as Research and Development costs since the principal activities of Linaro are predominantly engineering in nature.  Since the Company receives no direct engineering benefit from this expenditure, it is now considered that these charges would be more appropriately recorded as General and Administrative costs.  As a result the amount of £6.8 million has been reclassified as General and Administrative Costs in the 2011 comparatives.
 
Overview
 
ARM designs the technology that lies at the heart of advanced digital products, from wireless networking and consumer entertainment solutions to imaging, automotive, security and storage devices. ARM’s comprehensive product offering includes 16/32/64-bit RISC microprocessors, data engines, graphics processors, digital libraries, embedded memories, peripherals, software and development tools, as well as analog functions and high-speed connectivity products. The Company licenses this technology to semiconductor companies which, in turn, manufacture, market and sell microprocessors and related products. ARM has developed an innovative, intellectual property-centered and market-driven business model in which it neither manufactures nor sells the products incorporating ARM technology, but concentrates on the research and development, design and support of the ARM architecture and supporting development tools and software. ARM provides a total system solution that offers a fast, reliable path to market for leading electronics companies.
 
The Company’s revenues in 2013 increased in US dollars, being the primary currency of revenues generated, by approximately 22% whilst the semiconductor industry (excluding memory and analog) US dollar revenues as a whole increased by about 1% during the period October 1, 2012 to September 30, 2013 (source: Semiconductor Industry Association). This period is, in the Company’s opinion, relevant for comparison purposes because the
 
 
Company’s royalty revenues are recognized when the Company receives notification from the customer of product sales, and such notification is typically received in the quarter following shipment of the product by the customer. Looking ahead to 2014, semiconductor industry revenues are generally anticipated to grow modestly compared to 2013 (source: Gartner) and the Company is well positioned to continue to outperform the industry.
 
In 2013, the Company has remained both profitable and cash generative. On operating profits of £153.5 million, cash inflows from operating activities were £315.3 million, resulting in cash being returned to shareholders through dividends of £68.9 million. At the end of the year, the Company reported cash, cash equivalents and short- and long-term deposits, net of accrued interest of £706.3 million.
 
Revenues
 
The Company’s revenues are classified as either “Product Revenues,” consisting of license fees, sales of development systems and royalties, or “Service Revenues,” consisting of revenues from support, maintenance and training. The most significant component of ARM’s total revenues are license fees and royalty income which accounted for approximately, 88%, 89% and 90% of total revenues in 2011, 2012 and 2013, respectively.
 
Revenues from license fees accounted for approximately, 37%, 37% and 40% of total revenues in 2011, 2012, and 2013 respectively. License fees as a percentage of total revenues will be affected by fluctuations in royalties and in demand for ARM’s development systems and support and maintenance services. These products and services complement ARM’s licenses by supporting ARM’s semiconductor partners in their efforts to reduce time to market. In addition, they provide ARM with a way to support systems companies who purchase finished ARM technology-based products from semiconductor companies as well as certain software vendors whose software runs on ARM microprocessors. Growth in these complementary products and services will depend on continued success in demonstrating to semiconductor companies, systems companies and software vendors the enhanced implementation possibilities which such products and services provide for ARM technology-based products and, more generally, on continued market acceptance of the ARM architecture. Growth in these complementary products and services will also depend on whether the Company can devote sufficient engineering staff to support growth in services. Revenues from development systems and support and maintenance services represented approximately 12%, 11% and 10% of total revenues in 2011, 2012 and 2013, respectively.
 
Revenues from royalties accounted for approximately, 51%, 52% and 50% of total revenues in 2011, 2012, and 2013 respectively. The Company believes royalty revenue will continue to contribute a significant portion of total revenue going forward as the total number of partners and licenses increases.
 
As of December 31, 2013, the Company had about 350 partners who, in turn, provide access to many other customers worldwide.
 
Product Revenues
 
License fees. Most licenses are designed to meet the specific requirements of the particular customer and can vary from rights to embed ARM technology into a customer’s own application specific product to the complete design of a SoC. See “Item 4. Information on the Company—Business Overview—License Agreements.” Over the term of a license, contractual payments can range from hundreds of thousands of dollars to several millions of dollars. The intellectual property licensed by the Company consists of software and related documentation which enable a customer to design and manufacture microprocessors and related technology and software. A license may be perpetual or time-limited in its application. In general, the time between the signing of a license and final customer validation of the ARM technology is between 6 and 15 months with most time allocated to the period between delivery and validation of the technology. Delivery generally occurs within a short time period after the signing of a license. The licensee obtains license rights to the intellectual property at the time of signing. In addition, the licensee obtains ownership of the licensed rights to the in-process customization as well as the completed customization. License fees are invoiced according to an agreed schedule. Typically, the first invoice is generated on signing of the contract, the second is generated on delivery of the customized intellectual property (being the intellectual property and other technical information relating to the product licensed) and the third and subsequent invoices are date-based milestones. No upgrades or modifications to the licensed intellectual property are provided, except those updates and upgrades provided on a when-and-if-available basis under post-delivery service support. Following licensee validation of the ARM technology, the Company has no further obligations under the license agreement, except those under a valid post-delivery service support arrangement as mentioned above.
 
In addition to the license fees, contracts generally contain an agreement to provide post-delivery service support (support, maintenance and training) which consists of an identified customer contact at the Company and telephonic or e-mail support. Fees for post-delivery service support, which is provided after customer acceptance, are specified in the contract. Revenues from post-delivery service support are shown within Service Revenues and are discussed further below under “—Service Revenues—Support and maintenance.”
 
Development systems. Dollar revenues from sales of development boards and tool kits fluctuate with demand from licensees, systems companies and certain software vendors whose software runs on ARM microprocessors.
 
Royalties. Royalties are either set as a percentage of the licensee’s net sale price per chip or, less frequently, as a fixed amount per chip. In both cases, the royalty percentage typically declines as the total volume of ARM-compliant products shipped increases before typically flattening out at an agreed volume level. Royalty payment schedules in individual contracts vary depending on the nature of the license and the degree of market acceptance of the ARM architecture prevailing at the contract date. The average royalty rate reported in any period will also depend on the mix of end products into which ARM-based chips have been designed in the period. ARM technology is designed into a wide range of end products which incorporate chips with a broad spectrum of selling prices. Royalties are payable by licensees when they have manufactured and sold the resulting ARM-compliant microprocessors and peripherals to systems companies. The license contracts provide for reports to be issued to ARM with details of such sales and, in certain cases, with forecasts of sales for periods in the near future.
 
Systems software. The Company earns additional product revenues with the sale of systems software. Revenue is recognized on customer acceptance.
 
Service Revenues
 
Support and maintenance. ARM generally requires its licensees to pay an annual fee for support and maintenance for a minimum of one year. The fair value of this post-delivery service support is determined by reference to the consideration the customer is required to pay when it is sold separately, and the service portion is recognized ratably over the term of the support arrangement. Revenue related to post-delivery service support is recognized based on fair value, which is determined with reference to contractual renewal rates.
 
Costs of Revenues
 
Product costs. Product costs are limited to variable costs of production, such as the costs of manufacture of development systems, amortization of the Company’s third-party technology licenses, cross-license payments to collaborative parties and the time spent by engineers on developing physical IP products.
 
Service costs. Service costs include the costs of support and maintenance services to licensees of ARM technology.
 
Critical Accounting Policies and Estimates
 
The preparation of financial statements in accordance with IFRS requires the directors to make critical accounting estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates and judgments are continually evaluated and are based on historical experiences and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
 
The impact and any associated risks related to these policies on our business operations are discussed throughout this section where such policies affect our reported and expected financial results. Note that the preparation of the financial statements included in this annual report on Form 20-F requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.
 
Revenue Recognition
 
The Company follows the principles of IAS 18, “Revenue recognition”, in determining appropriate revenue recognition policies. In principle, therefore, revenue associated with the sale of goods is recognised when all of the following conditions have been satisfied:
 
 
·
the Company has transferred to the buyer the significant risks and rewards of ownership of the goods;
 
 
·
the Company does not retain either continuing managerial involvement to the degree usually associated with ownership or effective control over the goods sold;
 
 
·
the amount of revenue can be measured reliably;
 
 
·
it is probable that the economic benefits associated with the transaction will flow to the Company; and
 
 
·
the costs incurred or to be incurred in respect of the sale can be measured reliably.
 
Revenue associated with the rendering of services is recognised when all of the following conditions have been satisfied:
 
 
·
the amount of revenue can be measured reliably;
 
 
·
it is probable that the economic benefits associated with the transaction will flow to the Company;
 
 
·
the stage of completion of the transaction at the end of the reporting period can be measured reliably; and
 
 
·
the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.
 
Revenue is shown net of value added tax, returns, rebates and discounts, and after eliminating sales within the Company.
 
Revenue comprises the value of sales of licenses to ARM technology, royalties arising from the resulting sale of licensees’ ARM technology-based products, revenues from support, maintenance and training and the sale of development boards and software toolkits.
 
License revenue. Revenue from standard license products which are not modified to meet the specific requirements of each customer is recognised when all of the conditions relevant to revenue associated with the sale of goods have been satisfied:

 
·
the significant risks and rewards of ownership are transferred when a license arrangement has been agreed and the intellectual property (IP) has been delivered to the customer;
 
 
·
continuing managerial involvement and effective control over IP licensed is relinquished at the point at which the IP is delivered to the customer;
 
 
·
the amount of revenue can be measured reliably; any consideration due under the licensing arrangement that is not deemed to be reliably measurable is deferred until it can be measured reliably; and
 
 
·
it is probable that the economic benefits associated with the transaction will flow to the Company; any economic benefits of the transaction that are deemed unlikely to flow to the Company are deferred until it becomes probable that they will flow to the Company.
 
The majority of the Company’s revenues come from the licensing of IP and subsequent receipt of royalty revenues and there are therefore very few direct costs associated with the sale of goods; where there are direct costs of revenues, these are measured with reference to the purchasing agreements in place with the Company’s suppliers.
 
Many license agreements are for products which are designed to meet the specific requirements of each customer. Revenue from the sale of such licenses is recognised on a percentage-of-completion basis over the period from signing of the license to customer acceptance. Under the percentage-of-completion method, provisions for
 
 
estimated losses on uncompleted contracts are recognised in the period in which the likelihood of such losses is determined. The percentage-of-completion is measured by monitoring progress using records of actual time incurred to date in the project compared with the total estimated project requirement, which approximates to the extent of performance.
 
Where invoicing milestones in license arrangements are such that the receipts fall due significantly outside the period over which the customisation is expected to be performed or significantly outside its normal payment terms for standard license arrangements, the Company evaluates whether it is probable that economic benefits associated with these milestones will flow to the Company and therefore whether these receipts should initially be included in the arrangement consideration.
 
In particular, it considers:
 
 
·
whether there is sufficient certainty that the invoice will be raised in the expected timeframe, particularly where the invoicing milestone is in some way dependent on customer activity;
 
 
·
whether it has sufficient evidence that the customer considers that the Company’s contractual obligations have been, or will be, fulfilled;
 
 
·
whether there is sufficient certainty that only those costs expected to be incurred will indeed be incurred before the customer will accept that a future invoice may be raised; and
 
 
·
the extent to which previous experience with similar product groups and similar customers supports the conclusions reached.
 
Where the Company considers that there is insufficient evidence that it is probable that the economic benefits associated with such future milestones will flow to the Company, taking into account these criteria, such milestones are excluded from the arrangement consideration until there is sufficient evidence that it is probable that the economic benefits associated with the transaction will flow to the Company. The Company does not discount future invoicing milestones, as the effect of so doing would be immaterial.
 
Where agreements involve several components, the entire fee from such arrangements is allocated to each of the individual components based on each component’s fair value, where fair value is the price that is regularly charged for an item when sold separately. Where a component in a multiple-component agreement has not previously been sold separately, the assessment of fair value for that component is based on other factors including, but not limited to, the price charged when it was sold alongside other items and the book price of the component relative to the book prices of the other components in the agreement. If fair value of one or more components in a multiple-component agreement is not determinable (where such component is not considered incidental to the overall arrangement), the entire arrangement fee is deferred until such fair value is determinable, or the component has been delivered to the licensee. Where, in substance, two or more elements of a contract are linked and fair values cannot be allocated to the individual components, the revenue recognition criteria are applied to the elements as if they were a single element.
 
Agreements including rights to unspecified future products (as opposed to unspecified upgrades and enhancements) are accounted for using subscription accounting, with revenue from the arrangement being recognised on a straight-line basis over the term of the arrangement, or an estimate of the economic life of the products offered if no term is specified, beginning with the delivery of the first product.
 
Royalty revenues. Royalty revenues are earned on sales by the Company’s customers of products containing ARM technology. Royalty revenues are recognised when it is probable that the economic benefits associated with the transaction will flow to the Company and the amount of revenue can be reliably measured. Revenues are recognised when the Company receives notification from the customer of product sales. Notification is typically received in the quarter following shipment of the products by the customer.
 
Other revenues. In addition to license fees, contracts generally contain an agreement to provide post-delivery service support, in the form of support, maintenance and training which consists of the right to receive services and/or unspecified product upgrades or enhancements that are offered on a when-and-if-available basis. Fees for post-delivery service support are generally specified in the contract. Revenue related to post-delivery service support
 
 
is recognised based on fair value, which is determined with reference to contractual renewal rates. Where renewal rates are specified, revenue for post-delivery service support is recognised on a straight-line basis over the period for which support and maintenance is contractually agreed by the Company with the licensee.
 
Sales of software, including development systems, which are not specifically designed for a given license (such as off-the-shelf software) are recognised upon delivery, when the significant risks and rewards of ownership have been transferred to the customer. At that time, the Company has no further obligations except that, where necessary, the costs associated with providing post-delivery service support have been accrued. Services (such as training) that the Company provides which are not essential to the functionality of the IP are separately stated and priced in the contract and, therefore, accounted for separately. Revenue is recognised as services are performed and it is probable that the economic benefits associated with the transaction will flow to the Company.
 
For all types of revenue, if the amount of revenue recognised exceeds the amounts invoiced to customers, the excess amount is recorded as amounts recoverable on contracts within accounts receivable. The excess of license fees and post-delivery service support invoiced over revenue recognised is recorded as deferred revenue.
 
The Company makes significant estimates in applying its revenue recognition policies. In particular, as discussed in detail above, estimates are made in relation to the use of the percentage-of-completion accounting method, which requires that the extent of progress toward completion of contracts may be anticipated with reasonable certainty. The use of the percentage-of-completion method is itself based on the assumption that, at the outset of license agreements, there is an insignificant risk that customer acceptance may not be obtained. The Company also makes assessments, based on prior experience, of the extent to which future milestone receipts represent a probable future economic benefit to the Company. In addition, when allocating revenue to various components of arrangements involving several components, it is assumed that the fair value of each element is reflected by its price when sold separately. The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent with the application of the revenue recognition policies affect the amounts reported in the financial statements. If different assumptions were used, it is possible that different amounts would be reported in the financial statements.
 
Intangible Assets
 
Goodwill. Goodwill represents the excess of the fair value of the consideration paid on acquisition of a business over the fair value of the assets, including any intangible assets identified, and liabilities acquired. Goodwill is not amortised but is measured at cost less impairment losses. In determining the fair value of consideration, the fair value of equity issued is the market value of equity at the date of completion, the fair value of share options is calculated using the Black-Scholes valuation model, and the fair value of contingent consideration is based upon whether the directors believe any performance conditions will be met and thus whether any further consideration will be payable.
 
Other intangible assets. Computer software, purchased patents and licenses to use technology are capitalised at cost and amortised on a straight-line basis over an estimate of the time that the Company is expected to benefit from them. Costs that are directly attributable to the development of new business application software and which are incurred during the period prior to the date that the software is placed into operational use, are capitalised. External costs and internal costs are capitalised to the extent they enhance the future economic benefit of the asset.
 
Although an independent valuation is made of any intangible assets purchased as part of a business combination, the directors are primarily responsible for determining the fair value of intangible assets.
 
In-process research and development projects purchased as part of a business combination may meet the criteria set out in IFRS 3 (revised), “Business combinations”, for recognition as intangible assets other than goodwill. Management tracks the status of in-process research and development intangible assets such that their amortisation commences when the assets are brought into use.
 
Amortisation is calculated so as to write off the cost of intangible assets, less their estimated residual values, which are adjusted, if appropriate, at each balance sheet date, on a straight-line basis over the expected useful economic lives of the assets concerned. The principal economic lives used for this purpose are:
 
Computer software
Three to five years
Patents and licenses
Three to eleven years
 
In-process research and development
One to five years
Developed technology
One to seven years
Existing agreements and customer relationships
One to six years
Core technology
Five years
Trademarks and tradenames
One to five years
Order backlog
One year

Impairment of assets
 
Non-financial assets that have an indefinite useful life, for example goodwill, are not subject to amortisation but are tested annually for impairment.
 
Non-financial assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
 
An impairment loss is recognised for the amount by which the non-financial asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value-in-use. For purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (each a cash generating unit, “CGU”). Where the recoverable amount of a CGU is measured based on a value-in-use calculation, all cash inflows and outflows associated with the CGU are taken into account whether these are explicitly charged or not. Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.
 
The annual impairment tests in 2013 and 2012 showed there was no impairment with respect to goodwill. Furthermore, no trigger events have been identified that would suggest the impairment of any of the Company’s other intangible assets.
 
The Company considers at each reporting date whether there is any indication that financial assets are impaired. If there is such an indication, the Company carries out an impairment test by measuring the assets’ recoverable amounts, which are the higher of the assets’ fair values less costs to sell and their values in use. If the recoverable amounts are less than the carrying amounts an impairment loss is recognised, and the assets are written down to their recoverable amounts.
 
In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are permanently impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any permanent impairment loss on that financial asset previously recognised in the income statement – is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement.
 
When securities classified as available-for-sale are sold or permanently impaired, the accumulated fair value adjustments recognised through other comprehensive income are recycled through the income statement.
 
Income taxes
 
The current income tax charge is calculated on the basis of tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company’s subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
 
During the period, legislation was enacted to allow UK companies to elect for the Research and Development Expenditure Credit (RDEC) on qualifying expenditure incurred since April 1, 2013, instead of the existing super-deduction rules. At the balance sheet date, management has concluded that the election will be made and therefore the RDEC is recorded as income in profit before tax, netted against research and development expenses as the RDEC is of the nature of a government grant.  In previous periods there was a reduction in the income tax expense.
 
Deferred income taxes are computed using the liability method. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and
 
 
liabilities and are measured using enacted rates and laws that will be in effect when the differences are expected to reverse. The deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will arise against which the temporary differences will be utilised.
 
Deferred tax is provided on temporary differences arising on investments in subsidiaries except where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets and liabilities arising in the same tax jurisdiction are offset, where the taxation authority permits a single net payment.
 
In the period a decision to elect into the UK patent box regime was made. The UK patent box regime seeks to tax all profits attributable to patented technology at a reduced rate of 10%.  The rules are to be phased in over 5 years from April 1, 2013 – a company will be entitled to only 60% of the deduction in financial year 2013/14, rising to 100% by 2017/18. As ‘relevant’ patent box profits are taxed at 10% and other profits are taxed at UK statutory rates, deferred tax assets and liabilities are measured using the average rates expected to apply on realization or settlement.
 
In the UK and the US, the Company is entitled to a tax deduction for amounts treated as compensation on exercise of certain employee share options or vest of share awards under each jurisdiction’s tax rules. A compensation expense is recorded in the Company’s income statement over the period from the grant date to the vesting date of the relevant options and awards. As there is a temporary difference between the accounting and tax bases, a deferred tax asset is recorded. The deferred tax asset arising is calculated by comparing the estimated amount of tax deduction to be obtained in the future (based on the Company’s share price at the balance sheet date) with the cumulative amount of the compensation expense recorded in the income statement. If the amount of estimated future tax deduction exceeds the cumulative amount of the compensation expense at the statutory rate, the excess is recorded directly in equity, against retained earnings.
 
Provisions
 
Provisions for legal claims are recognised when: the Company has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount of the outflow can be reliably estimated.
 
Application of these accounting principles to potential losses that could arise from intellectual property disputes is inherently difficult given the complex nature of the facts and law involved. Deciding whether or not to provide for loss in connection with such disputes requires management to make determinations about various factual and legal matters beyond the Company’s control. To the extent management’s determinations at any time do not reflect subsequent developments or the eventual outcome of any dispute, future income statements and balance sheets may be materially affected with an adverse impact upon our results of operation and financial position. Among the factors that the Company considers in making decisions on provisions are the nature of the litigation, claim, or assessment, the progress of the case (including progress after the date of the financial statements but before those statements are issued), the opinions or views of legal counsel and other advisers, the experience of the Company in similar cases, and any decision of the Company’s management as to how the Company intends to respond to the litigation, claim, or assessment. The fact that legal counsel is unable to express an opinion that the outcome will be favorable to the Company does not necessarily mean that the above conditions for accrual of a loss are met.
 
Results of Operations
 
The following table sets forth, for the periods indicated, the percentage of total revenues represented by certain items reflected in the Company’s consolidated statements of operations.
 
   
Year ended December 31,
  
   
2011
    
2012
    
2013
  
   
%
    
%
    
%
  
Revenues
                  
Product revenues
     94.7       95.1       95.2  
Service revenues
     5.3       4.9       4.8  
 
 
   
Year ended December 31,
  
   
2011
    
2012
    
2013
  
   
%
    
%
    
%
  
Total revenues
     100.0       100.0       100.0  
Cost of revenues
                        
Product costs
     3.2       3.4       3.5  
Service costs
     2.4       2.1       2.0  
Total cost of revenues
     5.6       5.5       5.5  
Gross profit
     94.4       94.5       94.5  
Operating expenses
                        
Research and development
     32.2       28.8       28.4  
Sales and marketing
     14.8       12.6       12.5  
General and administrative
     17.1       16.9       17.9  
Total operating expenses before exceptional items
     64.1       58.3       58.8  
Exceptional items (1)
     -       -       14.2  
Total operating expenses after exceptional items
     64.1       58.3       73.0  
Profit from operations
     30.3       36.2       21.5  
Investment income
     1.6       2.4       1.9  
Interest payable
     0.0       0.0       0.0  
Share of results of joint venture
     -       (0.1 )     (0.6 )
Profit before tax
     31.9       38.5       22.8  
Tax
     9.0       10.5       8.1  
Profit for the year
     22.9       28.0       14.7  

(1) The exceptional items in 2013 relate to a contribution to a full and final settlement of certain patent related litigation and the impairment of an available-for-sale financial asset acquired as part of a transaction to acquire rights to a patent portfolio.

 
The following table sets forth, for the periods indicated, our total revenues in U.S. dollars and sterling:
 
   
Year ended December 31,
  
   
2011
    
2012
    
2013
  
      £ million       £ million       £ million       £ million       £ million       £ million  
Total Revenues
     491.8       785.0       576.9       913.1       714.6       1,117.7  
Percentage Increase (vs previous year)
                     17%       16%       24%       22%  
Actual Dollar/Sterling Exchange Rate
      $1.60        $1.58        $1.56  
 
Management analyzes product revenues in the categories of royalties, licenses and development systems. Service revenues consist of support, maintenance and training income. The following table sets forth, for the periods indicated, the amount of total revenues represented by each component of revenue:
 
   
Year ended December 31,
  
   
2011
    
2012
    
2013
  
   
£ million
  
Product Revenues
                  
Royalties
     252.4       299.8       358.3  
Licenses
     180.5       214.0       285.6  
Software and tools
     32.9       34.7       36.4  
      465.8       548.5       680.3  
Service Revenues
                        
Support, Maintenance and Training
     26.0       28.4       34.3  
Total Revenues
     491.8       576.9       714.6  

Product revenues. Product revenues consist of license fees, sales of development systems and royalties. Product revenues for 2011, 2012 and 2013 were £465.8 million, £548.5 million and £680.3 million, respectively, representing approximately 95% of total revenues in each of 2011, 2012 and 2013, respectively. Product revenues in US dollars, being the primary currency of revenues generated, increased from $743.7 million in 2011 to $868.1 million in 2012 and increased further to $1,063.9 million in 2013.
 
License revenues increased from £180.5 million in 2011 to £214.0 million in 2012 and further increased to £285.6 million representing approximately 37%, 37% and 40% of total revenues in 2011, 2012 and 2013, respectively. License revenues in US dollars increased from $285.7 million in 2011 to $339.3 million in 2012 and further increased to $447.9 million in 2013.
 
Processor Division (PD) dollar license revenues increased by 21% in 2012 and increased by 33% in 2013.
 
The portfolio of licensable products comprises a rich mix of proven ARM technology, such as the ARM7, ARM9 and ARM11 families of products and newer technology such as the Cortex family of products and the Mali 3D graphics processors.
 
   
Year ended December 31,
  
   
2011
    
2012
    
2013
  
   
(number or % of PD license revenue)
  
Licenses
                  
New licenses signed
     121       110       121  
PD License Revenues
                        
Cortex Family
     52 %     53 %     53 %
Long term licenses with certain strategic customers
     23 %     25 %     27 %
Graphics Processor
     8 %     9 %     8 %
Other Core license revenue
     6 %     2 %     1 %
Non-Core
     11 %     11 %     11 %
Total
     100 %     100 %     100 %

33 companies became new ARM Partners in 2013 (2012: 28 new ARM Partners), bringing the total number of semiconductor partners to about 350 at the end of the year. This total number of semiconductor partners was net of those companies that have signed licenses with ARM in the past but have since been acquired by other companies or who no longer have access to ARM technology for other reasons.
 
During 2013, 91 Cortex family licenses were signed, bringing the accumulated total of Cortex family licenses to 415 (excluding licenses that are no longer expected to generate royalties). 19 licenses to ARM’s Mali 3D graphics processors were signed in 2013, bringing the accumulated total of Mali licenses to 86 (excluding licenses that are no longer expected to generate royalties).
 
License revenues from non-core products, covering items such as platforms, peripherals, embedded trace modules, embedded software, data engines, models and sub-systems were £26.0 million in 2013 compared to £20.5 million in 2012 and £16.2 million in 2011.
 
By the end of 2013, ARM had signed a total of 101 physical IP platform licenses. ARM’s Physical IP Division (“PIPD”) reported license revenues of £41.2 million in 2013 compared to £32.9 million in 2012 and £31.2 million in 2011, representing approximately 14% of total license revenues in 2013, 15% in 2012 and 17% in 2011.
 
In 2013, ARM continued to develop leading-edge physical IP which enables the optimized implementation of SoC designs and to sign synergistic licenses that have been enabled by the combination of ARM and Artisan. Cortex-A class processors benefit from physical IP optimized for high performance and low power on advance process nodes; and Cortex-M class processors benefit from physical IP optimized for low performance and low power on mature process nodes. 16 licenses were signed for processor optimization packages in 2013, bringing the total number of licenses for this technology to 57.
 
Revenues from the sale of development systems increased from £32.9 million in 2011 to £34.7 million in 2012 and further increased to £36.4 million in 2013, representing approximately 7% in 2011, 6% in 2012 and 5% in 2013. Development systems revenues in US dollars increased from $52.5 million in 2011 to $54.9 million in 2012 and
 
 
further increased to $57.1 million in 2013. The increase in 2012 and 2013 was due to the greater demand for the Company’s products required to support processor products.
 
Royalties are either set as a percentage of the licensee’s average selling price (“ASP”) per chip or, less frequently, as a fixed amount and are recognized when the Company receives notification from the customer of product sales. In effect, this means that it is normally in the quarter following the shipments that data is received and so royalty data for a year reflects actual shipments made from the beginning of October of the previous year to the end of September of the current year. As the penetration of ARM technology-based chips grows across a wide range of end-market applications, the range of ASPs gets wider.
 
Royalties increased from £252.4 million in 2011 to £299.8 million in 2012 and further increased to £358.3 million in 2013, representing, 51%, 52% and 50% of total revenues in 2011, 2012 and 2013, respectively. US dollar royalty revenues increased from $405.6 million in 2011 to $473.9 million in 2012 and further increased to $558.9 million in 2013. Royalty revenues in 2013 comprised £317.5 million from PD and £40.8 million from PIPD. PD volume shipments increased from 7.9 billion units in 2011 to 8.7 billion units in 2012 and further increased to 10.4 billion units in 2013, representing an increase of 19% compared to 2012. Worldwide unit shipments of mobile handsets grew around 5% in 2013. As more ARM technology is typically incorporated into feature-rich handsets, the Company benefited from the higher proportion of smartphones being shipped in the year. Beyond mobile, the Company also continued to gain share in all target end-markets including mobile computing, digital televisions and microcontrollers.
 
The Company expects royalty revenues to grow over the medium-term although they may be subject to significant fluctuations from quarter to quarter. The total number of partners shipping ARM technology-based products at the end of 2013 was 142 after taking into account corporate activity within the ARM partnership. 29 companies were paying royalties for physical IP products at the end of the year.
 
Service revenues. Service revenues consist of support, maintenance and training. Service revenues increased from £26.0 million in 2011 to £28.4 million in 2012 and further increased to £34.3 million in 2013, representing 5% of total revenues in 2013 (2012: 5%, 2011: 5%). Service revenues in US dollars, increased from $41.3 million in 2011 to $45.0 million in 2012 and further increased to $53.8 million in 2013.
 
Geographic analysis. The Company earns revenues from customers who are based in many different geographies. The following table sets forth, for the periods indicated, revenue by geographic destination as a percentage of total revenue per the Company’s consolidated financial statements. The proportion of revenues from the Asia Pacific region (excluding Japan) is increasing as the level of licensing and royalty shipments from customers based in China, South Korea and Taiwan increases.
 
   
Year ended December 31,
  
   
2011
    
2012
    
2013
  
   
%
    
%
    
%
  
Revenue by destination:
                  
North America
     39       38       39  
Japan
     10       8       7  
Asia Pacific, excluding Japan
     39       43       45  
Europe
     12       11       9  
Total
     100       100       100  

Product costs. Product costs are limited to variable costs of production such as the costs of manufacture of development systems, amortization of third-party technology licenses, cross-license payments to collaborative partners and time of engineers on PIPD projects.
 
   
Year ended December 31,
  
   
2011
    
2012
    
2013
  
Product costs
   £ 15.8m     £ 19.8m     £ 24.7m  
As a percentage of total revenue
     3 %     3 %     3 %
Product Gross Margin
     97 %     96 %     96 %

 
Product costs increased in 2013 and in 2012 due primarily to the continued increase in PIPD direct costs. In 2013, development systems costs made up 11% (2012: 16%, 2011: 18%) of total product costs, PIPD direct costs accounted for 87% (2012: 73%, 2011: 74%) and the balance related to third-party licenses and cross-license payments.
 
Service costs. Service costs include the costs of support and maintenance services provided to licensees of ARM technology. Cost of services was £11.9 million in 2011, £12.1 million in 2012 and £14.6 million in 2013. The gross margins earned on service revenues were approximately 54% in 2011, 58% in 2012 and 57% in 2013. In 2012 and 2013, the increase in service costs was largely due to increasing staff costs as the Company grows, offset by a lower stock-based compensation charge compared to 2011.
 
Performance indicators. The Company’s management uses several performance indicators in assessing the Company’s performance, of which revenues and earnings per share are the most important. Revenues are discussed in further detail in “—Results of Operations” above. Earnings per share are disclosed in our financial statements filed herewith. Another performance indicator for the business is backlog, defined as the aggregate value of contracted business not yet recognized as revenue in the profit and loss account. Period-end backlog excludes royalty revenue, which is recognized upon receipt of the royalty reports from our partners and consequently passes into backlog and is immediately released when invoiced.
 
The Company discloses the quarterly trend in backlog along with the maturity profile (how much is expected to be recognized as revenue in the next two quarters, in the subsequent two quarters, and over more than one year), and its composition is split between the main component parts.
 
   
At December 31,
  
Maturity profile of backlog
  
2012
    
2013
  
Next two quarters (Q1 and Q2)
     24 %     25 %
Subsequent two quarters (Q3 and Q4)
     22 %     19 %
Greater than twelve months
     54 %     56 %
Total
     100 %     100 %

   
At December 31,
  
Backlog composition
  
2012
    
2013
  
Processors
     73 %     76 %
Physical IP
     14 %     12 %
Support & Maintenance and Others
     13 %     12 %
Total
     100 %     100 %

At the end of 2013, backlog was 17% higher than at the beginning of the year due to the licensing of new technologies to lead partners along with the signing of further large long-term licensing deals where revenue is expected to be recognized over a number of accounting periods.
 
Another performance indicator is the number of patent applications submitted by ARM employees. ARM incentivizes its employees to submit patent applications by awarding patent bonuses. The number of proposed patent applications submitted by ARM employees was 210 in 2013, 214 in 2012 and 196 in 2011.
 
Research and Development Costs
 
   
Year ended December 31,
  
   
2011
    
2012
    
2013
  
   
(in millions of pounds or %)
  
Total
     158.6       166.3       202.9  
Percentage of total revenue
     32 %     29 %     28 %
Share based compensation charges (including payroll taxes)
     34.8       25.9       45.1  

 
38
 
   
Year ended December 31,
  
   
2011
    
2012
    
2013
  
Amortization of intangible assets acquired with business combinations
     2.4       2.2       6.9  
Acquisition-related charges
     2.5       4.3       2.6  
Normalized research and development costs
     118.9       133.9       148.3  
Excluding these charges the Percentage of total revenue
     24 %     23 %     21 %
 
Continued investment in research and development remains an essential part of the Company’s strategy as the development of new products for licensing is key to its future growth.
 
Average engineering headcount increased from 1,366 in 2011 to 1,581 in 2012 and further increased to 1,803 in 2013. Staff costs increased in both 2012 and 2013 as a result of the growth in headcount as well as employee cost inflation.
 
Typically, when a new product is in development, the Company seeks to work with a small number of potential customers interested in licensing the product prior to the completion of its development. Once the customers are identified, further work is undertaken to complete the product’s fundamental design, after which it is transferred to the customers’ semiconductor process so that a series of test chips may be manufactured and validated. The Company cannot determine whether the product can be manufactured in accordance with its design specifications, including functions, features, and technical performance requirements, until the end of this process. Since all design, coding, and testing activities must be completed before technological feasibility is established, the Company does not capitalize any product development costs.
 
Sales and Marketing Expenditure
 
   
Year ended December 31,
  
   
2011
    
2012
    
2013
  
   
(in millions of pounds or %)
  
Total
     72.6       72.9       89.4  
Percentage of total revenue
     15 %     13 %     13 %
Share based compensation charges (including payroll taxes)
     11.3       7.7       12.1  
Amortization of intangible assets acquired with business combinations and other acquisition related costs
     0.8       0.8       0.6  
Normalized sales and marketing expenditure
     60.5       64.4       76.7  
Excluding these charges the Percentage of total revenue
     12 %     11 %     11 %
 
Average headcount in this area increased from 349 in 2011 to 367 in 2012 and 425 in 2013.
 
Overall sales and marketing costs increased in 2011 due primarily to increased staff bonuses and sales commissions. Sales and marketing costs increased largely due to increased corporate marketing in 2012 and 2013.
 
General and Administrative Costs
 
   
Year ended December 31,
  
   
2011
    
2012
    
2013
  
   
(in millions of pounds or %)
  
Total
     84.0       97.7       128.2  
Percentage of total revenue
     17 %     17 %     18 %
Share based compensation charges (including payroll taxes)
     8.1       9.8       14.7  
Investment-related charges
     1.8       0.6       3.5  
Linaro-related charges
     6.8       -       7.0  

 
   
Year ended December 31,
  
   
2011
    
2012
    
2013
  
Acquisition-related charges
     0.7       1.4       1.5  
Normalized general and administrative costs
     66.6       85.9       101.5  
Excluding these charges the Percentage of total revenue
     14 %     15 %     14 %
 
In 2012 the Company built a data center in Cambridge, UK to provide further engineering clusters which increased information technology costs significantly. In 2013, general and administrative costs were higher due to further costs relating to engineering clusters as well as higher legal costs relating to patent acquisitions and legal claims. Costs were also higher due to an increase in bad debt provisions.

General and administrative average headcount was 370, up from 313 in 2012 and 281 in 2011.
 
Unrealized future foreign exchange losses on certain committed but not yet invoiced future revenue streams of £4.5 million (2012: £3.7 million; 2011: £1.2 million) were recorded in 2013. There were other foreign exchange gains of £4.2 million in 2011, £1.9 million in 2012 and £3.3 million in 2013. The foreign exchange rate between the US dollar and sterling has been relatively stable during 2012 and 2013. The overall net charge or gain depends upon the mix and quantum of non-sterling denominated monetary assets (including cash, accounts receivable and accounts payable), embedded derivatives and currency exchange contracts.
 
Restructuring costs. In 2011, 2012 and 2013, there were no restructuring charges.
 
Amortization of intangible assets. Licenses to use third-party technology and acquired patents are capitalized and amortized over the useful economic period that the Company is expected to gain benefit from them (generally between three and ten years). Licenses and patents totaling £23.6 million were purchased during 2001 to 2008. No licenses were purchased in 2009, 2010 and 2011. In 2012 and 2013 licenses were purchased for £1.4 million and £74.1 million, respectively. Amortization of these licenses amounted to £8.3 million in 2013 (2012: £1.8 million; 2011: £1.6 million). At December 31, 2013, the net book value of these assets was £69.5 million; which will be amortized over the next eleven years.
 
During 2006, the Company purchased Falanx Microsystems AS, a graphics IP company in Norway. Intangibles acquired and capitalized consisted of developed technology and customer relationships and totaled £5.3 million. These were amortized over three to five years and the charge in 2011 was £0.3 million. The Company also purchased Soisic SA, an IP company based in France and the US. Intangibles acquired and capitalized were all developed technology and totaled £4.3 million. These assets were amortized over five years with a charge of £0.9 million in 2011. The assets were fully amortized by the end of 2011.
 
During 2008, the Company purchased Logipard AB, a video IP company in Sweden. Intangibles acquired and capitalized consisted of developed technology, customer relationships and in-process research and development and totaled £5.0 million. These assets are being amortized over three to five years and the charge in 2011 was £0.9 million, in 2012 was £0.9 million and in 2013 was £0.9 million. These assets were fully amortized by the end of 2013. As part of the acquisition, the Company also acquired some contracts from the parent company of Logipard. The value of these contracts is £1.8 million was capitalized and amortized over their useful economic lives. The charge in both 2011 and 2012 was £0.5 million. These assets were fully amortized by the end of 2012.
 
During 2011, the Company purchased Obsidian Software Inc., a developer of verification and validation products and services, based in Texas.  Intangibles acquired and capitalized consisted of patents and customer relationships and totaled £2.7 million.  These assets are being amortized over 3 years and the charge in 2011 was £0.4 million, in 2012 was £0.9 million and in 2013 was £0.9 million. At December 31, 2013, the net book value of these assets was £0.4 million. The Company also acquired Prolific, Inc., a California-based company that develops leading-edge IC design optimisation software tools. Intangibles acquired and capitalized consisted of developed technology, customer relationships and trademarks and totaled £2.4 million.  These assets are being amortized over 6 months to 3 years and the charge in 2011 was £0.1 million, in 2012 was £0.9 million and in 2013 was £0.8 million. At December 31, 2013, the net book value of these assets was £0.6 million.
 
There were no acquisitions in 2012.
 
During 2013, the Company purchased Sensinode OY, a provider of software technology for the Internet of Things (“IoT”).  Intangibles acquired and capitalized consisted of developed technology and customer relationships and totaled £2.8 million.  These assets are being amortized over five years and the charge in 2013 was £0.4 million.  The Company also purchased Geomerics Limited, a leader in lighting technology for the gaming and entertainment industries. Intangibles acquired and capitalized consisted of patents and customer relationships and totaled £5.0 million.These assets are being amortized over seven years and the charge in 2013 was £nil.
 
Exceptional item - IP indemnity and similar charges. As noted in prior financial statements, the Company had been in discussions with a licensee to re-negotiate the terms upon which the Company would indemnify that licensee. During 2013, terms were executed and the Company incurred indemnification costs amounting to $18.0 million. Further in relation to legal proceedings regarding the same patent portfolio, for consideration of $45.4 million, ARM entered into a license agreement with a third party covering patents being asserted against ARM technology in litigation between the patentee and a number of licensees of ARM technology. The license was entered into in full and final settlement of any indemnity claims with respect to the asserted patents and will prevent any future assertion of the patents against ARM technology.  Total indemnification, settlement and license costs of $63.4 million (£41.8 million) were expensed, as an exceptional item, in 2013, with a tax impact of £9.7 million.
 
Exceptional item - Impairment of available for sale financial assets (current). During the year, the Company has participated in a consortium, via a trust, to acquire certain patent rights. These rights were not subject to actual or threatened legal proceedings. Of the Company’s total contribution to the consortium, $100.5 million was classified within current available-for-sale financial assets (£60.7 million after translation at 31 December 2013 exchange rates) and $67 million, the residual, was classified within other intangible assets (£37.4 million after amortization to 31 December 2013). The available-for-sale financial asset represented ARM’s right to receive cash from the Company's financial interest in the consortium as it was anticipated that a program of licensing the patents to third parties would be undertaken by the trust. The other intangible asset consists of intellectual property rights that are being amortized over a period of eight and a half years, being the average remaining life of the underlying patent portfolio.
 
In Q4 2013, the trust made a strategic decision not to pursue a licensing program and the portfolio was put up for sale by auction. The Company acquired the Patents in January 2014 for $4.0 million (£2.4 million) which will be accounted for as an additional intangible asset.  As there is no longer an expectation of any future cash flows with respect to licensing of the Patents by the Trust, the available-for-sale financial asset has been impaired down to the value of the Company’s share of the auction proceeds, giving rise to an exceptional charge of $98.5 million (£59.5 million), with a tax impact of £18.3 million.
 
Interest. Net investment income increased from £8.0 million in 2011 to £13.6 million in 2012 and decreased to £13.1 in 2013. The decrease in 2013 was mainly due to lower interest rates. The increase in 2012 was mainly due to significantly higher cash balances, although the interest rates available were lower towards the end of the year. Cash was invested for periods of up to two years although more typically for periods of less than one year. Interest received in 2011, 2012 and 2013 included £0.1 million relating to a charitable interest free loan made by the Company in 2010.
 
Profit before tax. Profit before tax £156.9 million in 2011, £221.0 million in 2012 and £162.6 million in 2013, representing 32%, 38% and 23% of total revenues, respectively. In 2012, revenues grew strongly as a result of increased licensing activity as well as higher royalty revenues, with the result that profit increased by 38%. In 2013, higher revenues have been offset by the cost of exceptional items.
 
Share of results of joint venture. On December 4, 2012 the joint venture, Trustonic Limited, of which the Company holds a 40% share, commenced trading. The initial investment value amounted to £7.5 million. The Company’s share of the results of Trustonic in 2013 was a loss of £4.0 million (2012: loss of £0.7 million).
 
Tax charge. The Company’s effective tax rates were  28% in 2011, 27% in 2012 and 36% in 2013. The tax rate in 2012 was impacted by the partial de-recognition of an existing deferred tax asset considered non-recoverable following a change in California state tax law. The provisions extending the US federal R&D tax credits into 2012 were signed on January 2, 2013. However, since the provisions were not enacted until after the year end, the benefit of the 2012 R&D tax credits will be accounted for in 2013. In 2013, the tax rate has increased primarily due to the exceptional cost relating to the impairment of the available-for-sale financial asset which has given rise to an unrecognized deferred tax asset.
 
Segment Information

At December 31, 2013, the Company was organized on a worldwide basis into three business segments, namely the Processor Division (“PD”), the Physical IP Division (“PIPD”) and the System Design Division (“SDD”). This was based upon the Company’s internal organization and management structure and was the primary way in which the Chief Operating Decision Maker (“CODM”) and the rest of the board were provided with financial information. Whilst revenues were reported into four main revenue streams (namely licensing, royalties, development systems and services), the costs, operating results and balance sheets were only analyzed by the three segments.
 
PD primarily comprises the ARM processor and services businesses. Recent acquisitions have been allocated to the various divisions as follows: Falanx in 2006, Logipard in 2008, Obsidian in 2011 and Sensinode and Geomerics in 2013 to PD, and Soisic in 2006 and Prolific in 2011 to PIPD. Goodwill on each acquisition has also been allocated to these divisions, except for Artisan where the goodwill arising was allocated between PD and PIPD. See Note 13 to the Consolidated Financial Statements for the allocation of goodwill by segment.
 
Processor Division (PD)
 
The Processor Division encompasses those resources that are centered around microprocessor cores, including specific functions such as graphics IP, fabric IP, embedded software IP and configurable digital signal processing (“DSP”) IP.
 
Revenues. Total PD revenues for 2011, 2012 and 2013 were £397.6 million, £473.9 million and £596.2 million respectively.
 
License revenues increased from £149.3 million in 2011 to £181.1 million in 2012 and further increased to £244.4 million in 2013, representing approximately 38%, 38% and 41% of total PD revenues in 2011, 2012 and 2013, respectively. License revenues in US dollars increased from $236.5 million in 2011 to $287.1 million in 2012 and further increased to $382.6 million in 2013. Licensing revenues are driven by customers’ ongoing R&D programs. In 2012 and 2013, customers continued to invest further and also licensed higher value products resulting in the higher licensing revenues. The portfolio of licensable products comprises a rich mix of ARM technology, with the main revenue growth coming from the Cortex family of products and the Mali 3D graphics processors. See “—Results of Operations—Product revenues” above for further details. Optimized versions of certain processor cores were able to command higher prices which contributed to revenue growth in each of the years from 2011 to 2013. This optimization has been achieved by the combination of the Company’s physical IP with Cortex processor cores.
 
Royalties are either set as a percentage of the licensee’s ASP or, less frequently, as a fixed amount and are recognized when the Company receives notification from the customer of product sales. In effect, this means that it is normally in the quarter following the shipments that data is received and so royalty data for a year reflects actual shipments made from the beginning of October of the previous year to the end of September of the current year.
 
PD royalties increased from £222.2 million in 2011 to £264.4 million in 2012 and further increased to £317.5 million in 2013, representing 56%, 56% and 53% of total PD revenues in 2011, 2012 and 2013, respectively. Royalty revenues in US dollars were $356.9 million, $417.7 million and $495.1 million in 2011, 2012 and 2013, respectively. PD volume shipments increased from 7.9 billion units in 2011 to 8.7 billion units in 2012 and further increased to 10.4 billion units in 2013, representing an increase of 29% , an increase of 11% and an increase of 20% in 2011, 2012 and 2013, respectively. Average royalty revenue per chip remained constant at 4.8 cents in 2013 and 2012, up from 4.5 cents in 2011. In 2012, the increase was driven primarily by strong growth in Cortex-A class processor shipments and in the number of chips containing Mali graphics. We typically receive a higher royalty percentage for chips incorporating Cortex-A class processors and an additional royalty if these chips also contain a Mali graphics processor.
 
The following table presents a breakdown of processor unit shipments by type:
 
Processor Series
  
2011 Unit Shipments
    
2012 Unit Shipments
    
2013 Unit
Shipments
  
ARM7
     43%       36%       27%  
ARM9
     27%       21%       17%  
ARM11
       9%         9%         5%  
Cortex-A
       5%         9%       17%  

 
Processor Series
  
2011 Unit Shipments
    
2012 Unit Shipments
    
2013 Unit
Shipments
  
Cortex-R
       2%         3%         4%  
Cortex-M
     14%       22%       30%  
 
The following table presents a breakdown of processor unit shipments by target market:

Target Market
  
2011 Unit
Shipments
    
2012 Unit Shipments
    
2013 Unit
Shipments
  
Mobile
     57%       53%       49%  
Enterprise
     16%       16%       18%  
Home
       4%         5%         5%  
Embedded
     23%       26%       28%  
 
Service revenues consist of design consulting services and revenues from support, maintenance and training. Service revenues increased from £26.0 million in 2011 to £28.4 million in 2012 and further increased to £34.3 million in 2013, representing 7%, 6% and 6% of total PD revenues in 2011, 2012 and 2013, respectively. Service revenues in US dollars were $41.3 million in 2011, $45.0 million in 2012 and $53.8 million in 2013.
 
Operating Costs
 
   
Year ended December 31,
  
   
2011
    
2012
    
2013
  
   
(in millions of pounds)
  
Total
     223.8       243.3       426.6  
Share based compensation charges (including payroll taxes)
     36.9       30.0       54.5  
Amortization of intangibles and other charges relating to business combinations
     4.6       5.5       9.6  
Share of results of joint venture and Linaro related costs
     6.9    
nil
       7.0  
Exceptional items
  
nil
    
nil
       101.3  
Net losses on investments
  
nil
       0.6       3.5  
Normalised Operating Costs
     175.4       207.2     £ 250.7  

Operating costs include cost of sales (comprising products costs and service costs), research and development costs, sales and marketing costs and general and administrative costs.
 
The increase in costs in 2012 and 2013 was due primarily to an increase in the research and development capability of the division and to increased expenditure on IT engineering cluster capacity to support the higher level of research and development activity. In 2013, there were exceptional costs of £41.8 million incurred relating to IP indemnification costs and £59.5 million relating to the impairment of an available-for-sale financial current asset.
 
Profit before tax. Profit before tax was £173.8 million in 2011, £230.6 million in 2012 and £169.6 million in 2013, representing 44%, 49% and 28% of total PD revenues, respectively. Excluding the charges noted above, operating margins in 2011, 2012 and 2013 were 56%, 56% and 58%, respectively.
 
Capital expenditure. Capital expenditure represents additions of property, plant and equipment. In 2011, 2012 and 2013 such expenditure was £7.7 million, £22.5 million and £10.4 million, respectively. The increase in 2012 was due to the investment to provide additional engineering cluster capacity to support the development of increasingly advanced processors. In 2013 there was no significant expenditure on engineering cluster capacity and as a result capital expenditure was lower than in 2012.
 
Total assets, total liabilities and net assets. Total assets in 2011, 2012 and 2013 were £274.6 million, £284.6 million and £389.4 million, respectively. In 2012, the investment in engineering cluster capacity gave rise to a higher level of property, plant and equipment. In 2013, total assets increased due to the acquisition of licenses and patents as well as an increase in goodwill due to the acquisitions of Sensinode and Geomerics. Total liabilities in 2011, 2012 and 2013 were £155.3 million, £182.6 million and £243.2 million, respectively. Liabilities increased in
 
 
each year as a result of the increase in deferred revenue due to amounts invoiced on a number of high-value deals for products, the revenue for which will be recognized over a number of accounting periods. PD had net assets of £119.3 million, £102.0 million and £146.2 million in 2011, 2012 and 2013, respectively.
 
Goodwill. A portion of the goodwill arising on the acquisition of Artisan Components, Inc. in December 2004 was allocated to PD. The directors believe that incremental revenue will accrue to PD as a result of the ownership of PIPD for the following reasons:
 
 
·
the development of faster and more power-efficient microprocessors as a result of collaboration between PD and PIPD engineering teams. This is expected to generate more PD licensing deals at higher prices; and
 
 
·
the potential for PD to win more microprocessor licensing business as a result of ARM being able to offer both processor and physical IP in-house.
 
Goodwill decreased from £143.7 million in 2011 to £138.0 million in 2012 and increased to £151.5 million in 2013. The movement in 2013 was mostly due to the acquisitions of Sensinode and Geomerics, which resulted in £16.4 million of additional goodwill. The other movements in each year are as a result of fluctuations in the year end currency exchange rates.
 
Physical IP Division (PIPD)
 
The Physical IP Division is concerned with the building blocks necessary for translation of a circuit design into actual silicon.
 
Revenues. Total PIPD revenues in 2011, 2012 and 2013 were £61.3 million, £68.3 million and £82.0 million, respectively. In 2011, 2012 and 2013, PIPD’s license revenues were £31.2 million, £32.9 million and £41.2 million, respectively; and its royalty revenues were £30.1 million, £35.4 million and £40.8 million, respectively. In US dollar terms, licensing revenue increased from $49.2 million in 2011 to $52.2 million in 2012 and further increased to $65.3 million in 2013, and royalty revenue increased from $48.7 million in 2011 to $56.2 million in 2012 and further increased to $63.8 million in 2013. In 2012, the increase in license and royalty revenues was due to continued higher licensing activity and further utilization of ARM physical IP by foundries. These trends continued into 2013 with the resulting increase in revenues.
 
Operating Costs
 
   
Year ended December 31,
  
   
2011
    
2012
    
2013
  
   
(in millions of pounds)
  
Total
     81.1       82.8       90.7  
Share based compensation charges (including payroll taxes)
     12.1       8.6       12.1  
Amortization of intangibles and other charges relating to business combinations
     1.6       2.5       2.0  
Write down of an investment
     1.7    
nil
    
nil
  
Normalised operating costs
     65.7       71.7       76.6  

Operating costs include product cost of sales, service cost of sales, research and development costs, sales and marketing costs and general and administrative costs.
 
Total average PIPD headcount was 488, 557 and 615 in 2011, 2012 and 2013, respectively. The headcount grew, in 2012 and 2013, in line with the growth in the business. Costs in 2012 and 2013 grew in line with the growth in headcount.
 
Profit/Loss before tax. PIPD recorded a loss before tax of £19.8 million, £14.5 million and £8.7 million in 2011, 2012 and 2013, respectively. Excluding the share-based compensation, and amortization and other charges relating to business combinations, PIPD recorded a loss before income tax of £4.4 million, £3.4 million and a profit of £5.4 million in 2011, 2012 and 2013, respectively. In 2012, the reduction of the loss was due to the increased licensing
 
 
and royalty revenues. This trend continued in 2013 resulting in a profit for the year (excluding certain charges noted above).
 
Capital expenditure. Capital expenditure represents additions of property, plant and equipment. In 2011, 2012 and 2013, such expenditure was £4.1 million, £6.3 million and £3.4 million, respectively.
 
Total assets, total liabilities and net assets. Total assets in 2011, 2012 and 2013 were £419.9 million, £409.2 million and £400.1 million, respectively, with the movements in all three years being largely attributable to foreign exchange differences on goodwill and amortization of the intangibles. Total liabilities in 2011, 2012 and 2013 were £40.1 million, £43.9 million and £46.0 million, respectively. In 2012, liabilities were higher mostly due to the growth in deferred revenue. In 2013, liabilities grew slightly in line with the growth of the business. PIPD had net assets of £379.8 million, £365.3 million and £354.1 million in 2011, 2012 and 2013, respectively.
 
Goodwill. Goodwill in 2011, 2012 and 2013 was £383.9 million, £367.0 million and £360.2 million, respectively. The movement in 2012 and 2013 was due to foreign exchange rate movements. Part of the goodwill in respect of the Artisan acquisition has been allocated to PD (see above).
 
System Design Division (SDD)
 
The System Design Division develops and sells the tools and models used to create and debug software and SoC designs.
 
Revenues. SDD revenues increased from £32.9 million in 2011 to £34.7 million in 2012 and further increased to £36.4 million in 2013. US dollar revenues for the division were $52.4 million in 2011, $54.9 million in 2012 and $57.1 million in 2013.  The increase in 2012 and 2013 was due to the greater demand for the Company’s products required to support processor products.
 
Operating Costs
 
   
Year ended December 31,
  
   
2011
    
2012
    
2013
  
   
(in millions of pounds)
  
Total
     41.2       40.1       42.6  
Share based compensation charges (including payroll taxes)
     8.7       6.8       7.4  
Amortization of intangibles purchased business combinations and other acquisition costs
     0.2    
nil
    
nil
  
Investment related charges
     0.1    
nil
    
nil
  
Normalised operating costs
     32.2       33.3       35.2  
 
Operating costs include cost of sales, research and development costs, sales and marketing costs and general and administrative costs.
 
In 2012 and 2013, headcount and other business costs remained at similar levels.
 
Loss before tax. SDD recorded a loss before income tax of £8.3 million, £5.4 million and £6.2 million in 2011, 2012 and 2013, respectively. Excluding the charges for share-based compensation, amortization and restructuring noted above, SDD made a profit of £0.7 million, £1.4 million and £1.2 million in 2011, 2012 and 2013, respectively.
 
Capital expenditure. Capital expenditure represents additions of property, plant and equipment. In 2011, 2012 and 2013, such expenditure was £1.2 million, £4.5 million and £1.2 million, respectively.
 
Total assets, total liabilities and net assets. Total assets in 2011, 2012 and 2013 were £30.9 million, £32.5 million and £31.6 million, respectively. The movements between years are due to fluctuations in working capital. Total liabilities in 2011, 2012 and 2013 were £15.0 million, £15.1 million and £12.0 million, respectively. SDD had net assets of £15.9 million, £17.4 million and £19.6 million in 2011, 2012 and 2013, respectively.
 
Goodwill. Goodwill in 2011, 2012 and 2013 was £14.9 million, £14.4 million and £14.2 million, respectively. The fluctuations are due to the impact of foreign exchange difference on the Axys and KSI goodwill which is denominated in dollars and KEG goodwill which is denominated in Euros.
 
Foreign Currency Fluctuations
 
Foreign currency fluctuations. The Company’s earnings and liquidity are affected by fluctuations in foreign currency exchange rates, principally the US dollar rate, as most of the Company’s revenues and cash receipts are denominated in US dollars while a high proportion of its costs are in sterling.
 
The Company hedges its currency exposure using forward contracts for the sale of US dollars, which are entered into with major banks. The Company also uses currency options for a limited proportion of its dollar exposure. The fair values of the currency exchange contracts outstanding at December 31, 2011, 2012 and 2013 are disclosed in Note 17 to the Consolidated Financial Statements. The settlement period of the forward contracts outstanding at December 31, 2013 was between January 8, 2014 and July 15, 2015. The settlement period of the forward contracts outstanding at December 31, 2012 was between January 4, 2013 and December 23, 2013. The settlement period of the option contracts outstanding at December 31, 2013 was between January 21, 2014 and December 31, 2014. The settlement period of the option contracts outstanding at December 31, 2012 was between January 17, 2013 and December 17, 2013.
 
Contingencies and Loss Provisions
 
The accounting policy with respect to loss provisions is described in “—Operating Results—Critical Accounting Policies and Estimates—Provisions” above. Intellectual property disputes to which we are party are described in “Item 8. Financial Information—Legal Proceedings.” There was no provision for such disputes as of December 31, 2013 (2012: £1.2 million; 2011: £0.6 million) as, based on the facts and circumstances surrounding any disputes, the Company does not expect any such dispute to result in a material cash outflow.
 
Risk Factors
 
For a discussion of the risks faced by the Company, see “Item 3. Key Information—Risk Factors.”
 
Recently Issued Accounting Announcements
 
IFRS Accounting Standards and Pronouncements
 
For a description of newly published IFRS accounting standards see Note 1 to the Consolidated Financial Statements. There are no significant amendments to accounting policies during the year as a result of new accounting standards.
 
LIQUIDITY AND CAPITAL RESOURCES
 
We have financed our operations primarily through cash generated from operations. Over the previous three years we have received £20.0 million in cash from the issuance of shares and transfers of treasury shares to employees who have exercised options in the Company.
 
The Company’s operating activities provided net cash of £193.8 million, £156.9 million and £315.3 million in 2011, 2012 and 2013, respectively.
 
Accounts receivable increased by £13.4 million in 2011, increased by £5.7 million in 2012 and further increased by £19.8 million in 2013. Days’ sales outstanding were 46 at December 31, 2011, 48 at December 31, 2012 and 47 at December 31, 2013. In 2012 and 2013, increased licensing activity resulted in an increase in both accounts receivable and deferred revenue. Included within accounts receivable are amounts recoverable on contracts. Prepaid expenses and other assets increased by £12.3 million in 2011, increased by £1.1 million in 2012, and increased by £8.8 million in 2013. Inventories in 2013 remained at similar levels to 2012. There have been no other significant movements in other current assets.
 
The cash flow statement for 2012 includes a revision in respect of the advance payment to acquire rights to MIPS Technologies, Inc.’s portfolio of patents.  £103.7 million has been moved from ‘prepayments and other
 
 
assets’ within working capital movements to ‘advance payment to acquire intangible asset and available-for-sale financial asset’ within investing activities.  The revision has been made to reflect the nature of the payment following the completion of the transaction in 2013.
 
Accounts payable increased by £4.4 million in 2011, decreased by £2.8 million in 2012 and increased by £1.1 million in 2013. Movements in the accounts payable balance reflect the timing of receipt of invoices from suppliers. Accrued and other liabilities increased by £10.2 million in 2011, decreased by £4.8 million in 2012 and increased by £8.3 million in 2013. The decrease in 2012 was primarily due to a lower accrual for share-based payment taxes. The increase in 2013 was in line with the growth of the business.
 
At December 31, 2013, the Company recorded £199.2 million of deferred revenues (2012: £150.6 million; 2011: £116.8 million). Deferred revenues are an element of customer backlog, and represent amounts invoiced to customers not yet recognized as revenues in the income statement. Similarly, the Company recorded £5.6 million of amounts recoverable on contracts (“AROC”) at December 31, 2013, compared to £4.9 million and £7.8 million at December 31, 2011 and 2012, respectively. AROC represents amounts that have been recognized as revenue in the income statement but are yet to be invoiced to customers. Both deferred revenue and AROC fluctuate due to the maturity profile of ARM’s products, and invoicing milestones within contracts. Deferred revenues have increased due to the higher number of long-term license deals with certain strategic partners where the revenue will be recognized over a number of accounting periods as well as license deals for newer technologies where a greater proportion of the revenue is deferred until later periods. At December 31, 2013, £42.5 million of deferred revenue is expected to be recognized after more than one year.
 
The Company believes that, given its current level of business, it has sufficient working capital for the foreseeable future.
 
Cash flow from operations has been used to fund the working capital requirements of the Company as well as capital expenditure. Cash outflow from capital expenditure in 2013 was £13.5 million for property, plant and equipment and £31.8 million for other intangible assets, compared with £20.2 million and £5.4 million in 2012 and £12.1 million and £0.8 million in 2011, respectively. Capital expenditure on property, plant and equipment was higher in 2012 primarily due to greater investment in engineering cluster servers, larger quantities of which are required to enable research and development work at the lower geometries. This included the construction of a data center at the Cambridge, UK site. In 2013, capital expenditure on property, plant and equipment was lower since there has not been the same activity relating to engineering cluster services in 2013.  The cash flow in respect of intangible assets has been higher due to the expenditure on licenses to intellectual property.
 
In 2011, the Company made two acquisitions: Prolific, Inc. and Obsidian Software, Inc. and made an additional payment in respect of the acquisition of Keil Elektronik GmbH of £0.5 million.
 
In 2012, the Company made no acquisitions, but made additional payments of £2.2 million and £0.8 million in respect of the acquisitions of Obsidian and Prolific, respectively, for time-based and performance bonuses due under the acquisition agreement.
 
In 2013, the Company made two acquisitions: Sensinode Oy and Geomerics Limited. The total expenditure, net of cash acquired, on these acquisitions was £21.1 million. The Company also made additional payments of £2.0 million and £0.6 million in respect of the acquisitions of Obsidian and Prolific, respectively, for time-based and performance bonuses due under the acquisition agreement.
 
The Company envisages making further strategic investments in the future in situations where the Company can broaden its product portfolio, where it can obtain skilled engineering resources and where the potential for furthering ARM core-based design wins is improved significantly.
 
In 2011, the Company made further investments in Cognovo Limited of £2.3 million, in Ideaworks 3D Limited of £0.5 million, and in Ambiq Micro Inc. of £0.2 million. In addition, the Company invested £5.4 million in various companies and investment funds, including companies focusing on energy efficiency.
 
In 2012, the Company made further investments in Ideaworks 3D Limited (now called Marmalade Technologies Limited) and Ambiq Micro, Inc, of £1.3 million and £0.4 million, respectively. The Company also disposed of various investments including Cognovo Limited and Nethra Imaging, Inc.
 
During the year, the Company has participated in a consortium, via a trust, to acquire certain patent rights. These rights were not subject to actual or threatened legal proceedings. Of the Company’s total contribution to the consortium, $100.5 million was classified within current available-for-sale financial assets (£60.7 million after translation at 31 December 2013 exchange rates) and $67 million, the residual, was classified within other intangible assets (£37.4 million after amortization to 31 December 2013). The available-for-sale financial asset represented ARM’s right to receive cash from the Company's financial interest in the consortium as it was anticipated that a program of licensing the patents to third parties would be undertaken by the trust. The other intangible asset consists of IP rights that are being amortized over a period of eight and a half years, being the average remaining life of the underlying patent portfolio.
 
In Q4 2013, the trust made a strategic decision not to pursue a licensing program and the portfolio was put up for sale by auction. The Company acquired the Patents in January 2014 for $4.0 million (£2.4 million) which will be accounted for as an additional intangible asset.  As there is no longer an expectation of any future cash flows with respect to licensing of the patents by the trust, the AFS financial asset has been impaired down to the value of the Company’s share of the auction proceeds, giving rise to a non-cash exceptional charge of $98.5 million (£59.5 million).  A deferred tax asset has not been recognized in relation to this exceptional item, increasing the current tax charge by £18.3 million.
 
 During 2012, the Company entered into a number of lease agreements for IT equipment which have been classified as finance leases. The outstanding liability at December 31, 2012 was £5.8 million.
 
In 2013, the Company invested £5.0 million in Cambridge Innovation Capital plc and made further investments of £3.1 million.
 
From time to time the Company has bought back shares in order to supplement dividends in returning surplus funds to shareholders. The Company did not buy back any shares during 2011, 2012 or 2013. Dividends totaling £68.9 million were paid to shareholders in 2013 (2012: £51.8 million; 2011: £42.2 million). In aggregate, the Company has returned £565 million to shareholders since 2005 through buy-backs and dividends. Share option exercises in 2013 gave rise to a £5.9 million cash inflow to the Company compared to £5.6 million in 2012 and £8.5 million in 2011.
 
Cash, cash equivalents and short- and long-term deposits, net of accrued interest at December 31, 2013 were £706.3 million compared to £520.2 million at December 31, 2012 and £424.0 million at December 31, 2011.
 
Our cash requirements depend on numerous factors, including: our ability to generate revenues from new and existing licensing and other agreements; expenditures in connection with ongoing research and development and acquisitions and disposals of and investments in complementary technologies and businesses; competing technological and market developments; the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; the purchase of additional capital equipment; fluctuations in foreign exchange rates; and capital expenditures required to expand our facilities. Changes in our research and development plans or other changes affecting our operating expenses may result in changes in the timing and amount of expenditures of our capital resources.
 
RESEARCH AND DEVELOPMENT
 
Research and development is of major importance and, as part of its research activities, the Company collaborates closely with universities worldwide, and plans to continue its successful engagement with the University of Michigan. Key areas of product development for 2014 include the development of further energy-efficient, high-performance engines for both data and control applications such as ARM cores based on the next generation of the ARM architecture that includes support for 64-bit processing. The Company is investing in future physical IP development, including lower-power, low-leakage technologies for both bulk Complementary Metal-Oxide Semiconductor (“CMOS”) and SOI processes to ensure leadership in this market. In addition, the Company will deliver development tools, graphics processors and fabric IP to enable its customers to design and program SoC products. The Company incurred research and development costs of £202.9 million in 2013, £166.3 million in 2012 and £158.6 million in 2011. See “Item 4. Information on the Company—Business Overview—Research and Development” and “Item 5. Operating and Financial Review and Prospects—Operating Results—Results of Operations—Research and development costs” above.
 
 
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
 
Our major outstanding contractual commitments relate to rental of office facilities and certain equipment under non-cancelable operating lease agreements which expire at various dates through 2023. Our contractual commitments as of December 31, 2013 were as follows:
 
   
Payments due by period (£ million)
  
   
Total
    
Less than 1 year
    
2-3 years
    
4-5 years
    
Thereafter
  
Operating leases
     64.2       26.8       18.8       9.6       9.0  
Finance leases
     4.2       2.7       1.5       -       -  
Capital purchase commitments (expenditure on investments)
     9.8       9.8       -       -       -  
Total
     78.2       39.3       20.3       9.6       9.0  

The Company does not have any off-balance sheet arrangements with unconsolidated entities or other persons.
 
 
DIRECTORS AND SENIOR MANAGEMENT
 
Directors
 
The directors of the Company (each, a “director,” and together, the “directors”) at March 3, 2014 were as follows:
 
Name(1)
  
Age
  
Term Expires
  
Position
Sir John Buchanan
  
70
  
2014 (2)
  
Chairman (until March 1, 2014)
Stuart Chambers
  
57
  
2014 (2)
  
Chairman (from March 1, 2014)
Simon Segars
  
46
  
2014
  
Chief Executive Officer; Director
Tim Score
  
53
  
2014
  
Chief Financial Officer; Director
Mike Muller
  
55
  
2014
  
Chief Technology Officer; Director
Kathleen O’Donovan
  
56
  
2014 (2)
  
Senior Independent Director (Non-Executive)
Philip Rowley
  
61
  
2014 (2)
  
Independent Non-Executive Director
Janice Roberts
  
58
  
2014 (2)
  
Independent Non-Executive Director
Larry Hirst
  
62
  
2014 (2)
  
Independent Non-Executive Director
Andy Green
  
58
  
2014 (2)
  
Independent Non-Executive Director
Eric Meurice
  
57
  
2014 (2)
  
Independent Non-Executive Director
 
(1)
The address for each listed director is c/o ARM Holdings plc, 110 Fulbourn Road, Cambridge CB1 9NJ, England.
 
 
(2)
Non-Executive Directors are normally appointed for three-year terms subject to election or re-election each year at the AGM.
 
Sir John Buchanan, age 70, Chairman. John Buchanan joined the Board as Chairman on May 3, 2012. His intention to retire from the Board, due to a medical condition, was announced on January 27, 2014.  He handed over the role of Chairman on 1 March 2014 and will retire from the Board at the AGM on 1 May 2014. He has broad international experience gained in large and complex businesses. He has experience and knowledge of the international investor community and has held various leadership roles in strategic, financial, operational and marketing positions, including executive experience in different countries. He is a former Chief Financial Officer of BP plc and a former Deputy Chairman and senior independent director of Vodafone Group plc. He is currently Chairman of Smith & Nephew plc, Senior Independent Director of BHP Billiton plc, Chairman of International Chamber of Commerce (UK) and Chairman of the UK Trustees for the Christchurch Earthquake appeal.

Stuart Chambers, age 57, Stuart Chambers joined the Board as Chairman designate on January 27, 2014 and became Chairman on March 1, 2014.   He has brings a strong track record and a wealth of board and executive experience both in the UK and globally. Up to 2009 he was the Group Chief Executive of Nippon Sheet Glass Group, which acquired Pilkington plc in 2006, where he was Chief Executive. Prior to the glass industry, Stuart held
 
 
a number of senior positions at Mars, Inc., having previously spent 10 years in several European roles at Royal Dutch Shell plc. He is Chairman of Rexam plc and an Independent non-executive director of Tesco plc.

Simon Segars, age 46, Chief Executive Officer. Simon Segars joined the Board in January 2005 and was appointed Chief Executive Officer on July 1, 2013. His previous roles include President, leading the IP divisions and representing them on the Board. EVP and General Manager of the Processor and Physical IP Divisions and prior to that, EVP, Engineering, EVP, Worldwide Sales and EVP, Business Development. He joined ARM in early 1991 and worked on many of the early ARM CPU products. He led the development of the ARM7TM and ARM9TM Thumb® families. He holds a number of patents in the field of embedded CPU architectures. He is a director of the SOI Industry Consortium and the EDA Consortium.
 
Tim Score, age 53, Chief Financial Officer. Tim Score joined ARM as Chief Financial Officer and director in March 2002. Before joining ARM, he was Finance Director of Rebus Group Limited. He was previously Group Finance Director of William Baird plc, Group Controller at LucasVarity plc and Group Financial Controller at BTR plc. He was Senior Independent Director and Chairman of the Audit Committee of National Express Group plc until February 25, 2014.
 
Mike Muller, age 55, Chief Technology Officer. Mike Muller was one of the founders of ARM. Before joining the Company, he was responsible for hardware strategy and the development of portable products at Acorn Computers. He was previously at Orbis Computers. At ARM he was VP, Marketing from 1992 to 1996 and EVP, Business Development until October 2000 when he was appointed Chief Technology Officer. He was appointed to the Board in October 2001. He is a director of Intelligent Energy Limited and Trustonic Limited.
 
Kathleen O’Donovan, age 56, Senior Independent Non-Executive Director. Kathleen O’Donovan joined the Board in December 2006. She is a non-executive director and Chairman of the Audit Committee of Trinity Mirror plc, Chairman of Invensys Pension Trustee Ltd and a non-executive director of D S Smith plc. Previously she was a non-executive director and Chairman of the Audit Committees of the Court of the Bank of England, Great Portland Estates plc, EMI Group plc and Prudential plc and a non-executive director of O2 plc. Prior to that, she was Chief Financial Officer of BTR plc and Invensys plc, and before that she was a Partner at Ernst & Young.
 
Philip Rowley, age 61, Independent Non-Executive Director. Philip Rowley joined the Board in January 2005 and will be retiring at the 2014 AGM. He was Chairman and CEO of AOL Europe, the internet services and web brands provider until February 2007 and Chairman of HMV Group plc until early 2013.  He is a qualified chartered accountant and was Group Finance Director of Kingfisher plc from 1998 to 2000 and Deputy CEO and CFO of the General Merchandise Division until 2001. Prior to that, his roles included EVP, Chief Financial Officer of EMI Music Worldwide. He is a non-executive director and Chairman of the Audit Committee of Promethean World plc and Chairman of Livestation Limited and Pouncer Media Limited.
 
Janice Roberts, age 58, Independent Non-Executive Director. Janice Roberts joined the Board in January 2011. She is a Venture Adviser at Mayfield Fund having been a Managing Director from 2000-2013.  Mayfield is a Silicon Valley-based venture capital firm with approximately $3 billion under management, where her focus is on the mobile, wireless, communications and consumer technology industries. Prior to that, she held various executive positions at 3Com Corporation, including President Palm Computing, President 3Com Ventures and Senior Vice President, Business Development and Global Marketing.   She is a non-executive director of RealNetworks, Inc., Zebra Technologies Corporation and a director of several private technology companies in the US.
 
Larry Hirst, age 62, Independent Non-Executive Director. Larry Hirst joined the Board in January 2011. He is a non-executive director of MITIE Group plc. He is the former Chairman of IBM Europe, Middle East and Africa. He retired from IBM in 2010, having previously held a wide range of senior positions since joining the company in 1977. He currently chairs the Imperial College Digital Cities Exchange.  He is also an Ambassador to Monitise plc and on the International Advisory Board for British Airways. Former roles include being a UK Business Ambassador, a Commissioner for the Commission for Employment and Skills, and Chair of e-skills UK (the UK Sector Skills Council for Business and Information Technology).  He was awarded a CBE in 2006.
 
Andy Green, age 58, Independent Non-Executive Director. Andy Green joined the Board in February 2011.  He was CEO of Logica plc from 2008 to 2012.  He is a former CEO of BT Global Services and a former CEO of Group Strategy and Operations at BT plc and was CEO of BT Openworld.  He is Chair of e-Skills UK (the UK Sector Skills Council for Business and Information Technology), is on the board and the President’s Committee of the CBI and is a Companion of the Chartered Management Institute. He is the Chairman of Dock On AG, Networking
 
 
People (UK) Limited and  the UK  Government Connected Digital Economy Catapult (CDEC) and a trustee and director of ABESU.
 
Eric Meurice, age 57, Independent Non-Executive Director. Eric Meurice joined the Board in July 2013. He was President and Chief Executive Officer of ASML Holding NV from October 2004 until 30 June 2013 and will continue as their Chairman until 31 March 2014.  Former roles include Executive Vice President of Thomson Television Worldwide and head of Dell Computers’ Western, Eastern Europe and EMEA emerging market businesses. He also gained extensive technology experience in the semiconductor industry between 1984 and 1994 at Intel and then at ITT Semiconductors Group.
 
Election and re-election of Directors
 
In line with the provisions of the UK Corporate Governance Code 2012, all directors will present themselves for re-election (if eligible) unless the directors have agreed otherwise.
 
Executive Officers
 
Name(1)
  
Age
  
Position
Simon Segars
  
46
  
Chief Executive Officer; Director
Tim Score
  
53
  
Chief Financial Officer; Director
Mike Muller
  
55
  
Chief Technology Officer; Director
(1)
The address for each listed executive officer is c/o ARM Holdings plc, 110 Fulbourn Road, Cambridge CB1 9NJ, England.
 
BOARD PRACTICES
 
Corporate Governance
 
Compliance with the UK Corporate Governance Code (September 2012) and the Sarbanes-Oxley Act 2002 (US)
 
The Company has complied with the provisions of the UK Corporate Governance Code throughout 2013 and to the date of this document. The Company also achieved full compliance with the requirements of section 404 of the Sarbanes-Oxley Act 2002 for the eighth successive year. The Company’s American Depositary Shares are listed on NASDAQ and we are therefore subject to and comply fully with NASDAQ rules, US Securities laws and Securities and Exchange Commission rules to the extent that they apply to foreign private issuers. We explain in the reports below how we applied the provisions and principles of the FCA Listing Rules, the Disclosure and Transparency Rules, and the UK Corporate Governance Code throughout the year.
 
Board
 
The Board is collectively responsible for the overall conduct of the Company’s business. The Board’s core activities include:
 
 
• 
providing leadership for the Company;
 
 
• 
active engagement in developing the Company’s long-term strategy;
 
 
•
monitoring executive actions, standards of conduct, performance against business plans and budgets and ensuring that the necessary financial resources and people are in place for the Company to meet its objectives;
 
 
•
obtaining assurance that material risks to the Company are identified and appropriate systems of risk management and control exist to mitigate such risks and defining the Company’s appetite for risk;
 
 
• 
Board and executive management succession;
 
 
•
responsibility for the long-term success of the Company having regard to the interests of all stakeholders; and
 
 
•
responsibility for ensuring the effectiveness of and reporting on our system of corporate governance.
 
The Board has a formal schedule of matters specifically reserved for its decision, which include:
 
 
• 
Company strategy and major business decisions;
 
 
• 
annual budgets and long-term plans;
 
 
• 
major capital expenditure, acquisitions, disposals and investments;
 
 
• 
financial reporting, controls and financial structure;
 
 
• 
shareholder communications;
 
 
• 
key policies; and
 
 
• 
key advisers.
 
The schedule was reviewed in January 2014.
 
Composition and operation of the Board
 
At the end of 2013, the Board comprised three executive directors (the Chief Executive Officer, the Chief Financial Officer and the Chief Technology Officer), the Chairman, and six independent non-executive directors.  John Buchanan and Philip Rowley will be retiring from the Board at the 2014 AGM.
 
Conflicts
 
The Board is fully aware of the other commitments of the former and current Chairman, and the executive and non-executive directors.  All directors have completed conflicts of interest questionnaires and any planned changes in their directorships outside the Company are subject to prior approval by the Board.  No conflicts of interest arose in 2013 or to date in 2014, and no other situations have been identified that might lead to a conflict of interest.  In circumstances where a potential conflict arises, the Board (excluding the director concerned) would consider the situation and either authorise the arrangement in accordance with the Companies Act 2006 and the Articles of Association or take other appropriate action.
 
Independence
 
The Board reviewed the independence of the non-executive directors on appointment and continues to do so on an ongoing basis.  The independence of the longer serving non-executive directors, Kathleen O’Donovan and Philip Rowley has been considered.  Kathleen O’Donovan, who has now served for 7 years, remains highly committed and continues to be regarded as independent.  In her capacity as Senior Independent Director and Chairman of the Audit Committee her independence is demonstrated on many occasions each year through her robust approach to questioning management.  Philip Rowley, who will be retiring from the Board in May 2014, has demonstrated his independence on many occasions during his tenure in both his interactions with management and shareholders on remuneration matters.
 
The other non-executive directors have shorter service and are regarded as independent in character, judgment and behaviour, based on both participation and performance at Board and committee meetings. There are no relationships or circumstances that are likely to affect the judgment of any of them. It is the policy of the Board to review the continued appointment of non-executive directors after six years’ service.  Both Sir John Buchanan and Stuart Chambers were regarded as independent at the time of their respective appointments as Chairman and Chairman designate.
 
Non-executive directors’ expertise
 
Kathleen O’Donovan has been the Senior Independent Director since January 2011. In this capacity she acts as a sounding board for the Chairman and provides a communication channel between the Chairman and the non-executive directors.  She is also available to discuss matters with shareholders, if required.  During 2013 and early 2014, she led the Nomination Committee through the process to identify and recommend the recruitment of the new Chairman.
 
Janice Roberts (who is based in Silicon Valley), Larry Hirst, Andy Green and Eric Meurice all have a broad understanding of the Company’s technology and the practices of major US-based technology companies. Philip Rowley and Kathleen O’Donovan are both financial experts with strong financial backgrounds. The beneficial interests of the directors in the share capital of the Company are set out in “―Share Ownership”.
 
Board meetings
 
Board and committee papers are circulated electronically before each meeting.  The business considered at each Board meeting includes the Chief Executive Officer’s report on the status of the business (incorporating industry and strategic developments) and the Chief Financial Officer’s report (incorporating financial, market and investor-related information).  On a cyclical basis, Board agendas also include detailed assessments of risk, governance, corporate responsibility, public affairs, performance by division and geographical area, competitive landscape, R&D and organisation/succession planning.
 
In the event that a director is unable to attend a meeting or participate by conference call they receive and read the documents for consideration at that meeting and have the opportunity to relay their comments and, if necessary, to follow up with the Chairman or the Chief Executive Officer after the meeting.
 
The non-executive directors are encouraged to suggest matters for Board discussions, and in 2013 they were active in contributing to the agenda for the strategy review and ensuring the amount of time spent on strategic and operational issues was appropriately balanced. The independently conducted Board evaluation in 2013 confirmed that the September 2013 strategy meeting was considered to be thorough and informative. An additional strategy meeting has again been scheduled during 2014 and strategy will continue to be covered regularly at Board meetings during the year.  During 2013, the non-executive directors encouraged the executive team to allocate resources to accelerate the development of technology in the Internet of Things arena. A new group was set up in 2013 to focus on the Internet of Things and has been enhanced by the acquisition in July 2013 of Sensinode, which has developed software for connecting wireless low power, low cost devices to the Internet.
 
Key senior executives attend Board meetings throughout the year, which gives the non-executive directors visibility of executive talent below executive director level, direct information about business developments, and informs them on potential management succession. In particular, each year the General Managers of the Divisions present a review of past performance against key objectives and KPIs, and their proposals for the coming year.
 
During 2013, the Chairman held at least two meetings with the non-executive directors without the executives present, and the non-executive directors met on at least one occasion without the Chairman being present.
 
The table below shows directors’ attendance at scheduled Board meetings, conference calls and ad hoc meetings which they were eligible to attend during the 2013 financial year:
 
   
Scheduled Board meetings
    
Board conference calls/ad hoc meetings
  
Total number of meetings
     6       6  
Sir John Buchanan
     6/6       5/6  
Simon Segars
     6/6       6/6  
Andy Green
     6/6       6/6  
Larry Hirst
     5/6       6/6  
Eric Meurice
     2/3       3/3  
Mike Muller
     6/6       5/6  
Kathleen O’Donovan
     6/6       5/6  
Janice Roberts
     6/6       5/6  

 
53
 
   
 
Scheduled Board meetings
    
 
Board conference calls/ad hoc meetings
  
Philip Rowley
     6/6       6/6  
Tim Score
     6/6       5/6  
Warren East
     3/3       3/3  
Mike Inglis
     2/2       1/1  
 
The directors have the benefit of directors’ and officers’ liability insurance.
 
Chairman
 
As previously announced, Sir John Buchanan retired as Chairman on March 1, 2014 and will leave the Board at the close of the AGM on May 1, 2014. He is also chairman of Smith & Nephew plc and the International Chamber of Commerce (UK), and is Senior Independent Director of BHP Billiton plc. He has attended all meetings and conference calls since the date of his appointment and also several induction sessions, meeting members of the executive team and a range of senior managers to increase his knowledge and understanding of the various parts of the business and its operations.
 
Stuart Chambers joined the Board on January 27, 2014 and took over from Sir John Buchanan as Chairman on March 1, 2014.  He is Chairman of Rexam plc and an independent non-executive director of Tesco plc.
 
The Chairman has primary responsibility for running the Board and the Chief Executive Officer has executive responsibility for the operations and results of the Company, and also for making proposals to the Board in relation to the strategic development of the Group. The Board recognises that the roles of the Chairman and Chief Executive Officer are distinct (as described below) and also the importance of establishing an excellent working relationship between them.
 
During 2013, there were regular meetings and calls between the Chairman and the Chief Executive Officer outside Board meetings.  These discussions provided and continue to provide opportunities for the exchange of information, mentoring and regular updates on the list of priorities that the Board set for the Chief Executive Officer on his appointment.  These priorities include: development of the organisation and the next generation of executives, working effectively with the Board, ensuring appropriate strategic decisions are made on investments, employee motivation, and customer focus.
 
Main responsibilities of the Chairman include:
 
 
·
leadership of the Board and creating the conditions for overall Board and individual director effectiveness and a constructive relationship with good communications between the executive and non-executive directors;
 
 
·
ensuring that the Board as a whole plays a full and constructive part in the development of strategy and overall commercial objectives;
 
 
·
chairing the Nomination Committee which initiates succession planning to retain and build an effective and complementary Board;
 
 
·
ensuring that there is effective communication with shareholders and that members of the Board develop an understanding of the views of the major investors in the Company;
 
 
·
promoting the highest standards of integrity, probity and corporate governance throughout the Company, particularly at Board level; and
 
 
·
ensuring that the performance of the Board as a whole, its committees, and individual directors is formally and rigorously evaluated at least once a year.
 
Chief Executive Officer
 
Main responsibilities of the Chief Executive Officer include:
 
 
·
proposing and developing the Company’s strategy and overall commercial objectives in conjunction with the Executive Committee;
 
 
·
day-to-day management of the Company’s business;
 
 
·
chairing the Executive Committee;
 
 
·
maintaining a close working relationship with the Chairman;
 
 
·
meeting regularly with ARM’s leading customers for executive discussions on broad strategic and industry trends;
 
 
·
hosting discussions with influential media outlets;
 
 
·
fostering good relationships with ARM’s larger shareholders and major financial institutions; and
 
 
·
representing the organization in various industry organization and professional associations, and activities within the local community and at international level.
 
Company Secretary
 
Patricia Alsop acts as Secretary to the Board and Board committees, and all Board members have individual access to her advice. She ensures that the Board receives all relevant information in a timely manner, organizes induction and training programs, and facilitates the Board evaluation in years when this is conducted internally. She is also responsible for ensuring that the correct Board and Committee procedures are followed and advises the Board on corporate governance matters. The established procedure under which directors can, where appropriate, obtain independent legal or other professional advice at the Company’s expense is also administered through her.
 
Annual Report, information and communication with shareholders and other stakeholders
 
The ultimate responsibility for reviewing and approving the Annual Report and accounts and the quarterly earnings releases, and for ensuring that they present a balanced assessment of the Company’s position, lies with the Board.
 
The Board delegates day-to-day responsibility for managing the Company to the Executive Committee and has a number of other Committees, details of which are set out on the following pages.
 
Investor relations
 
The Board makes considerable efforts to establish and maintain good relationships with shareholders and the wider investment community. There is regular dialogue with institutional investors during the year, except during close periods. The main channel of communication continues to be through the Chief Executive Officer, the Chief Financial Officer and the VP of Investor Relations. The Chairman, the Senior Independent Director and the other directors are available to engage in dialogue with major shareholders as appropriate. Beginning in 2012, the Chairman of the Remuneration Committee and the Chairman consulted with shareholders on the terms of the new Long Term Incentive Plan, which was approved at the 2013 AGM.  Philip Rowley also consulted with major shareholders over incentive programs in 2013 and early in 2014.
 
The Board encourages communication with private investors and part of the Company’s website is dedicated to providing information for all investors, including responses to frequently asked questions, the investment case, product information, press releases, RNS and Securities and Exchange Commission (SEC) announcements, and an interactive online version of the Annual Report.
 
At present, over 30 sell-side analysts write research reports on the Company and their details appear on the Company’s website. Shareholders can also obtain telephone numbers from the website, enabling them to listen to earnings presentations and audio conference calls with analysts. In addition, webcasts or audiocasts of key presentations are made available through the website.
 
Members of the Board develop an understanding of the views of major shareholders through any direct contact that may be initiated by shareholders, or through analysts’ and brokers’ briefings. The Board also receives feedback from the Company’s brokers and financial PR advisers, who in turn obtain feedback from analysts and brokers following investor roadshows. All shareholders can register to receive the Company’s press releases via the internet.
 
AGM
 
The Board actively encourages participation at the AGM, scheduled for May 1, 2014, which is the principal forum for dialogue with private shareholders. A presentation is made outlining recent developments in the business and an open question and-answer session follows to enable shareholders to ask questions about the business in general. The Chairman, who chairs the Nomination Committee, will be present at the AGM. He will arrange for the respective chairs of the Audit and Remuneration Committees to be available to answer questions and for all directors to attend.
 
All resolutions proposed at the 2014 AGM will be decided on a poll and the voting results will be published via RNS and the SEC, and will be available on the Company’s website.
 
Board evaluation
 
The Board undertakes an annual review of its effectiveness. In order to provide the longest possible period in which to evaluate the performance of the Board following the change of Chief Executive Officer in July 2013 the Board evaluation was deferred until late 2013.  This exercise was conducted by an external provider, Independent Audit, who had detailed individual discussions with all members of the Board, four senior executives and the external audit partner. The findings were reported to the Board in January 2014 and were the subject of detailed discussion by the Board in February 2014.  Neither the Company nor any individual director has any connection with Independent Audit.
 
The 2013 evaluation covered:
 
 
·
Board Composition and Dynamics;
 
 
·
the Board’s role;
 
 
·
the operation of the Board, which was observed first hand; and
 
 
·
the operation of each of the Audit, Remuneration and Nomination Committees.
 
The overall conclusion was that individual Board members are satisfied that the Board works well and operates effectively in an environment where there is constructive challenge from the non-executive directors. They are also satisfied with the contribution made by their colleagues and that Board committees operate properly and efficiently. There are a number of areas for further consideration and action in 2014 including:
 
 
·
the size, composition and mix of the Board;
 
 
·
succession planning both within the executive team and the non-executive directors;
 
 
·
providing improved visibility of the strategic planning and review process to the non-executive directors;
 
 
·
the number and scheduling of Board meetings;
 
 
·
increased focus on strategy which has been addressed by the Chief Executive Officer including a strategy update within each of his reports and scheduling an additional full-day meeting in April 2014;
 
 
·
a continuing program of development sessions/teach-ins for the non-executive directors in order to provide them with a more detailed appreciation of possible strategic and technological development.  The first of these, on the Internet of Things technology, was held in February 2014 and further sessions are planned; and
 
 
·
continuing development and documentation of risk assessment and risk appetite.
 
The non-executive directors will also meet with the Chairman outside Board meetings on a more frequent basis to discuss any issues and concerns, which will provide opportunities for greater sharing of views and understanding without impacting on the business of Board meetings themselves. An internally facilitated Board evaluation will take place during 2014 and the Board intends to continue with a cycle of external evaluations every three years with internal evaluations in between.
 
Induction
 
A personalised induction programme is arranged for new directors, tailored to their specific requirements, the aim of which is to introduce them to key executives across the business and to enhance their knowledge and understanding of the Company and its activities. In 2013, this included continuation of the programme for Sir John Buchanan and a new program, which will continue during 2014, for Eric Meurice who joined the Board in July 2013.  A induction program is underway for Stuart Chambers, who was appointed to the Board on January 27, 2014 and took over the Chairman role on March 1, 2014.  During the first three months this will include several days with the Chief Executive Officer in Silicon Valley to see the Company’s operations and meet senior executives based there, in addition to a series of individual meetings with Board members, senior executives and external advisers based in the UK.
 
All members of the Board are encouraged to spend time outside Board meetings with members of the Executive Committee and senior management and a number of individual meetings took place during 2013, which will continue during 2014. All Board members are invited to attend the annual ARM Partner Meeting in the UK, which is the Company’s key customer event of the year and/or the ARM TechCon in the US. Board members are also invited to attend the annual Analyst and Investor Day. These events offer the opportunity to understand more about the business, products, technology development roadmap, customer base and investor perspective.
 
Training
 
Board members receive guidance on the regulatory regimes and corporate governance framework that the Company operates under. In particular, during 2013 the Board received an update from the Company Secretary on current governance topics including executive remuneration and Board diversity. The Company has a commitment to training and all directors, executive or non-executive, are encouraged to attend suitable training courses at the Company’s expense.
 
Terms of reference
 
The terms of reference of the Audit, Remuneration and Nomination Committees are published on the Company’s website at www.arm.com.
 
Executive Committee
 
The Executive Committee is responsible for developing and implementing the strategy approved by the Board. In particular, the Committee is responsible for ensuring that the Company’s budget and forecasts are properly prepared, that targets are met, and for generally managing and developing the business within the overall budget. In addition the Committee ensures that risks identified through the Operational Planning process, particularly corporate- level risks are managed and mitigated to the greatest extent possible.
 
Variations from the budget and changes in strategy require approval from the main Board of the Company. The Executive Committee, which meets monthly, now comprises the Chief Executive Officer, Chief Financial Officer, the Chief Technology Officer, the Chief Operating Officer, the Chief Information Officer, the EVP and President Product Groups, the EVP and President of Commercial and Global Development, the EVP Strategy, the EVP and General Manager Physical Design Group, the General Manager of the Internet of Things business unit, the Chief Marketing Officer, the EVP People, the General Counsel and the Company Secretary.  Executive
 
 
Committee meetings are attended by other senior operational personnel, as appropriate. In recognition of the increasing importance of Asia as both a market and an engineering base, the President of ARM Greater China, who is based in China, was appointed as an Executive Committee observer on January 1, 2014 and now attends all meetings.
 
Biographies of the members of the Executive Committee appear on the Company’s website at www.arm.com.
 
Management structure
 
The Company has a traditional UK board structure with a unitary Board comprising the Chairman, executive and non-executive directors. The Audit and Remuneration Committees are made up of independent non-executive directors and they, together with the Nomination Committee, report to the Board. The divisions and functions report to the Executive Committee. The Risk Review Committee reports periodically to the Executive Committee, Audit Committee and the Board.  The VP Business Assurance/Head of Internal Audit also has a separate reporting line to the Chairman of the Audit Committee.
 
Audit Committee
 
Audit Committee composition and meeting attendance during 2013:

Name of Director
  
Position
  
Meetings Attended
Kathleen O’Donovan
  
Senior Independent Director, Committee Chairman
  
6/6
Larry Hirst
  
Independent non-executive director
  
5/6
Janice Roberts
  
Independent non-executive director
  
6/6
Philip Rowley
  
Independent non-executive director
  
6/6

Kathleen O’Donovan has chaired the Committee since January 2011. She is qualified as the Audit Committee financial expert as defined in the Sarbanes-Oxley Act 2002. Philip Rowley is also qualified to fulfil this role. Both have recent and relevant financial expertise in compliance with the Code provision C3.1. The external auditors, Chief Executive Officer, Chief Financial Officer, the VP Finance, ARM Group, the VP Business Assurance/Head of Internal Audit, the Head of Tax and the Company Secretary attend all meetings in order to ensure that all the information required by the Committee for it to operate effectively is available. The Company Chairman and other Board members also attend Committee meetings from time to time.
 
The Chairman of the Committee reports to the Board on how the Committee had discharged its responsibilities.
 
On 1 January 2014, Eric Meurice joined the Committee and Larry Hirst stepped down as a member, on his appointment as Chairman of the Remuneration Committee.
 
Representatives of the Company’s external auditors have a private session with the Committee at the start of each meeting, without other management being present. The Chairman of the Committee also has separate meetings with the VP Business Assurance/Head of Internal Audit, the Chairman of the Risk Review Committee, the external auditors, the Chief Financial Officer and the VP Finance, ARM Group during the year to discuss their ongoing work and any areas of concern, and also to invite certain members of management to report on key areas of risk and control.
 
During 2013, the Chairman of the Committee and the external audit partner again organized a meeting for the UK-based PricewaterhouseCoopers LLP (“PwC”) audit and tax teams and the ARM finance and tax teams discuss the audit approach, understand the planning for the year end, and to gain insights into the corporate governance environment and the Company’s expectations from the internal and external audit processes.
 
In line with the requirement in the UK Corporate Governance Code applicable to financial years commencing on or after October 1, 2012, based on both internal and external audit reviews and confirmations from management, the Committee and the Board believe that the Annual Report, taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy.
 
Principal activities of the Committee during 2013:
 
 
·
in conjunction with management and the Risk Review Committee, the Committee undertook an in depth review of the Company’s risk assessment and reporting framework, with assistance and guidance from external advisers.  The work has resulted in the development of a new format for the Corporate Risk Register, Risk Assurance Matrix and Risk Heatmap.  These documents are expected to continue to evolve during 2014, with feedback from the Board being provided through the ongoing risk appetite discussions.
 
 
·
reviewing a detailed response from management to the questions raised by the Conduct Committee of the Financial Reporting Council on the Annual Report for the year ended December 31, 2012.  The Company’s response was accepted with no further questions being raised.  We have included certain additional disclosures relating to goodwill impairment testing in this Annual Report.
 
 
·
reviewing the work and results of Business Assurance and Internal Audit in relation to the 2013 Audit Plan and approving the Audit Plan for the 2014 year;
 
 
·
reviewing the 2013 external audit plans and reports, including those of overseas subsidiaries;
 
 
·
considering and approving the assumptions in the annual goodwill impairment review, prior to approval by the full Board;
 
 
·
reviewing the status of Sarbanes-Oxley compliance and testing;
 
 
·
considering any whistleblowing reports (of which there were none in 2013);
 
 
·
implementing our policy on the engagement of the external auditors to supply non-audit services and assessing their nature, extent and cost effectiveness;
 
 
·
assessing the external auditors’ independence and objectivity, the effectiveness of the audit process and fees;
 
 
·
undertaking an assessment of the effectiveness of the Audit Committee (which took place early in 2014 and concluded that its performance was effective);
 
 
·
monitoring the integrity of the financial statements of the Company and any formal announcements relating to the Company’s financial performance and reviewing any significant financial reporting judgments and the clarity of disclosures;
 
 
·
reviewing the effectiveness of the Company’s internal control over financial reporting;
 
 
·
providing oversight of the Company’s risk management framework and process;
 
 
·
making recommendations to the Board in relation to the appointment, remuneration and resignation or dismissal of the Company’s external auditors;
 
 
·
considering compliance with legal requirements, accounting standards, the Listing Rules of the Financial Conduct Authority and the requirements of the SEC; and
 
 
·
monitoring the assessment of going concern , in advance of its consideration by the Board.
 
Financial reporting judgements
 
Each quarter, the Audit Committee reviewed accounting papers prepared by management on areas of financial reporting judgment. These included:
 
 
·
consideration of the accounting treatment of substantial transactions, including any judgmental matters in relation to revenue recognition for major license contracts with customers;
 
 
·
consideration of the judgments surrounding the goodwill impairment review performed in the fourth quarter of 2013. In light of the strong performance of the Physical IP Division business in the year and a
 
 
robust order backlog, the Committee was comfortable with management’s assessment that no reasonable variation in key assumptions would affect the conclusion that no impairment in carrying value was required. In reaching this conclusion, the Committee considered the detailed work and sensitivity analyses presented by the external auditors;
 
 
·
in connection with the Company’s participation in a consortium of technology companies that acquired rights to MIPS Technologies Inc’s portfolio of patents in February 2013, consideration of the impairment of the value of $100.5 million, which was classified as an available-for-sale (AFS) financial asset. In Q4 2013, the trust made a strategic decision not to pursue a licensing program, which resulted in a decision that the asset had been impaired, giving rise to a non-cash exceptional charge of £59.5 million. The Committee reviewed the situation in detail and concurred with management’s view that this impairment was necessary.
 
 
·
consideration of management’s judgment of the level of provision required to be carried in relation to ongoing litigation involving either the Company or its licensees, and in particular where the Company may be required to indemnify its licensees, including receiving regular updates from the Company’s General Counsel;
 
 
·
consideration of the key judgments made in estimating the Company’s tax charge and review of any tax provisions in respect of open areas, together with assessment from independent experts; and
 
 
·
consideration of the Company’s tax strategy and key developments that may influence the Company’s global tax position.
 
Internal Audit
 
The Committee noted further improvements in the development and effectiveness of the Business Assurance/Internal Audit function in 2013. In particular The Audit Assurance System (AAS) deployed during 2012 to provide improved  document control, risk assessment and reporting, was reviewed in 2013. Further improvements to the AAS are underway and are expected to be completed in 2014. We reviewed the resources of the team and the plans for their deployment during the year. We also noted the key relationships between the Assurance team and the Compliance and Risk Review functions, as well as the working relationship with the external auditors, PricewaterhouseCoopers LLP (“PwC”) and Lloyd’s Register Quality Assurance.
 
As well as the Committee's formal meeting with the VP Business Assurance/Internal Audit, the Chair of the Committee meets informally throughout the year in order to provide the opportunity for open and timely dialogue. Typically discussed are the content and quality of papers intended for the Committee, emerging business risks, the quality of engagement with IA and any concerns therein.
 
Audit plan and Approach
 
During the year PwC's audit strategy is reviewed as well as the audit approach, key areas of focus and the audit plan produced as a result. PwC explained their risk-based approach, including the interaction with their work on internal control for the purposes of expressing an opinion under section 404 of the Sarbanes-Oxley Act. The results of those procedures were reported in January and February 2014. No material misstatements remained unadjusted in the financial statements.
 
In addition to the private meetings held with the external auditors and the Committee , the Chairman of the Committee meets with the PwC team on a regular basis to provide the opportunity for an open communication regarding any concerns, as well as to understand their assessment of key judgements as they arise.
 
Auditor effectiveness and partner rotation
 
PricewaterhouseCoopers LLP have been the Company’s auditors since it listed on the London Stock Exchange in April 1998. The external auditors are required to rotate the audit partner responsible for the Company and subsidiary audits every fifth year-end. The last audit partner rotation took place early in 2012. The Committee considers that the relationship with the auditors is working well and remains satisfied with their objectivity and effectiveness.
 
This view is supported by a review of the effectiveness of the external audit process which was undertaken early in 2014 with Board members and senior managers who interact with the auditors. It looked at the robustness of the audit and the quality of delivery, people and service and concluded that the auditors are effective. Accordingly, the Committee has not considered it necessary to date to require the firm to tender for the audit work. This situation will be kept under regular review. The Committee is actively monitoring the developments and ongoing discussions in this area at the Financial Reporting Council, the EU and the Competition Commission.
 
Auditor independence
 
The auditors are required to and do communicate with the Committee at least annually as to whether there are any threats to their independence and objectivity and, if there are, what safeguards have been applied.   The Committee has also reviewed the auditors’ Transparency Report, paying particular attention to the sections covering internal controls, independence policies and the results of external regulator reviews.  Having reviewed the safeguards in place, and the contents of the Transparency Report, as well as noting the regular and recent rotation of the audit partner, the Committee is satisfied that the auditors’ procedures are sufficient to maintain their independence and objectivity.  The Committee has also considered the level of non-audit fees and believes that these are at a level which does not compromise their objectivity or independence in any way.
 
There are no contractual obligations restricting the Company’s choice of external auditor. The Committee also keeps under review the value for money of the audit.
 
Policy on auditors providing non-audit services
 
To avoid the possibility of the auditors’ objectivity and independence being compromised, there is an agreed policy in place on the provision of non-audit services by the auditors, which sets out arrangements for approving:
 
 
·
services that require general pre-approval by the Committee;
 
 
·
services that require specific pre-approval by the Committee before work commences; and
 
 
·
services that cannot be provided by the auditors.
 
The non-audit services policy is reviewed annually. The Company’s tax advisory work is carried out by the auditors only in cases where they are deemed to be best suited to perform the work in a cost-effective manner, given their familiarity with the Company’s business. In other cases, the Company has engaged another independent firm of accountants to perform tax advisory work. The Company does not normally award general consulting work to the auditors. From time to time, however, the Company will engage the auditors to perform work on matters relating to benchmarking of the internal audit function, human resources, and royalty audits. A breakdown of fees paid to the auditors can be found in note 5 to the financial statements.
 
Nomination Committee
 
Nomination Committee composition and meeting attendance during 2013:
 
Name of Director
  
Position
  
Meetings attended
Sir John Buchanan
  
Chairman
  
3/3
Kathleen O’Donovan
  
Senior Independent Director
  
4/4
Philip Rowley
  
Independent non-executive director
  
4/4
Andy Green
  
Independent non-executive director (appointed February 21, 2013)
  
3/3
 
During the year, the activities of the Committee included engaging external search firms to seek and introduce candidates and interviewing a number of candidates in each case for the following roles:
 
 
·
Chief Executive Officer (“CEO”), which resulted in the Committee recommending the appointment of Simon Segars.
 
 
·
Chairman, which resulted in the Committee recommending the appointment of Stuart Chambers.
 
 
·
Independent non-executive director, which resulted in the Committee recommending the appointment of Eric Meurice.
 
The Chairman led the process for the appointment of the new CEO and the new independent non-executive director.  Kathleen O’Donovan, in her capacity as the Senior Independent Director, led the process for the appointment of the new Chairman, chairing relevant meetings of the Nomination Committee and a number of conference calls between Committee members. The recruitment process involved a review by the Board of all aspects of the role of Chairman, its requirements, Board dynamics and how best the new Chairman should interact with the Board, the Executive Committee, shareholders and other stakeholders.
 
The external search firms were Zygos in the case of the Chairman recruitment and Egon Zehnder in relation to the CEO and non-executive director recruitments. There is no connection between the Company, any individual director nor either of the search firms.
 
Andy Green joined the Committee in February 2013. His business and skills background contributed valuable experience to our work.
 
In addition to leading the process for Board appointments and making recommendations to the Board in relation to new appointments, the Committee’s general responsibilities include:
 
 
·
reviewing succession planning, Board composition and balance; and
 
 
·
considering the roles and capabilities required for each new appointment, based on an evaluation of the skills, experience, independence and knowledge of the existing directors.
 
The Nomination Committee is seeking further candidates as independent non-executive directors with appropriate skills, experience and diversity to complement our existing Board members and maintain, collectively, an effective Board.  Over the medium term, we will also be looking for financial expertise with the forthcoming retirement of Philip Rowley in May 2014, following his nine years’ service on the Board.
 
Internal control/risk management
 
The Company fully complies with the UK Corporate Governance Code (September 2012)’s provisions on internal control, having established procedures to implement in full the Turnbull Guidance “Internal Control: Revised Guidance for Directors on the Combined Code”. The Company’s risks are managed within a systematic process of risk identification and assessment.
 
The Audit Committee is responsible for ensuring that the risk management framework and process is operating effectively. The Risk Review Committee reviews the Corporate Risk Register (“CRR”), Risk Assurance Matrix (“RAM”), and risk heatmap on a quarterly basis and minutes of its meetings are reviewed by the Audit Committee.  The Executive Committee and the Board also review these documents at least twice each year. The Board confirms that the necessary actions have been or are being taken to remedy any significant failings or weaknesses identified from this process in a timely manner.
 
The Board has overall responsibility for ensuring that the Company maintains an adequate system of internal control and risk management, and for reviewing its effectiveness, while implementation of internal control systems is the responsibility of management. The Company has implemented an internal control system designed to help ensure:
 
 
·
the effective and efficient operation of the Company and its divisions by enabling management to respond appropriately to significant risks to achieving the Company’s business objectives;
 
 
·
the safeguarding of assets from inappropriate use or from loss and fraud, and ensuring that liabilities are identified and managed;
 
 
·
the quality of internal and external reporting;
 
 
·
compliance with applicable laws and regulations and with internal policies on the conduct of the Company’s business; and
 
 
·
the ability to recover in a timely manner from the effects of disasters or major accidents that originate outside the Company’s direct control.
 
Compliance with section 404 of the Sarbanes-Oxley Act 2002 has been successfully achieved for each financial year since it became effective for foreign private issuers in 2006. The processes and procedures for identifying, evaluating and managing the significant business, operational, financial, compliance and other risks facing the Company have been successfully integrated into day-to-day business operations through our internal control system. This is known as the ARM Management System (AMS) and is proven to provide a sustainable solution for ongoing compliance
 
The AMS, which covers financial, compliance and operational controls, is fully documented and compliance is monitored through periodic controls testing during each year.  The effectiveness of individual controls is also reviewed with their owners within the divisions and functions to ensure efficacy and relevance.  The Business Assurance function reports on the status of the AMS to the Audit Committee at least twice each year.  The Compliance and Audit Committees also monitor the satisfactory remediation of any identified control issues with Company-level significance.
 
The Board has reviewed and approved the system of internal control, including internal controls over the consolidation process and financial reporting, which have been in place for the year under review and up to the date of approval of the Annual Report and financial statements. These controls consist of extensive reviews by qualified and experienced individuals underpinned by a system of checklists which ensures that all elements of the financial statements and appropriate disclosures are considered and accurately stated.
 
Control systems are designed to manage rather than eliminate the risks inherent in a fast-moving, high-technology business and can, therefore, provide only reasonable and not absolute assurance against material misstatement or loss.
 
The Company has a number of other committees and bodies that contribute to the overall control environment. These include:
 
Risk Review Committee
 
The Risk Review Committee comprises the Chief Technology Officer, the Chief Financial Officer, the Chief Operating Officer, the VP Finance, ARM Group, the VP Business Assurance/Head of Internal Audit and the Company Secretary. The Company’s process for the identification, ownership, mitigation and reporting of risk was enhanced further during 2013.  The Committee established a CRR some years ago, which summarises the key risks faced by the Company and sets out risk management activities, the sources of assurance and action plans to mitigate any significant residual risk.  Residual risks are assessed in terms of likelihood and impact and mapped onto the RAM.  Each risk on the CRR is owned by a member of the senior management team.  Risk management action plans are managed within the relevant operational plans of the divisions and corporate functions.
 
During 2013, the Committee, in conjunction with management undertook an in-depth review of our risk assessment and reporting framework, with assistance and guidance from external advisers.  The work has resulted in the development of a new format for the CRR, RAM and risk heatmap with a better focus on strategic risks.  These documents are expected to continue to evolve during 2014 with feedback from the Board being provided through our ongoing risk appetite discussions.
 
The CRR and risk heatmap are normally considered in detail by the Board in January each year and, at the January 2014 review, the Board confirmed that the level of residual risk is regarded as acceptable and within normal parameters for a company operating in ARM’s sphere of business.  Risk appetite and a draft set of guiding principles were also discussed by the Board in January 2014.   It was agreed that the draft guiding principles are a good starting point to inform and serve as a context for the development and implementation of the Company’s strategy.  The guiding principles will continue to be refined during 2014.
 
The Risk Review Committee reports to the Audit Committee throughout the year. The Board and the Audit Committee receive copies of the minutes of Risk Review Committee meetings, the CRR and the risk heatmap. These provide greater visibility of the range of risks, the ways in which such risks are mitigated, and an assessment of the level and acceptability of residual risk. It is intended that the Board will review changes to the CRR and risk heatmap quarterly during 2014.
 
The Risk Review Committee typically meets on a quarterly basis to review the CRR and identify other risks that need to be incorporated. Each risk owner is required to review and demonstrate that residual risks are being appropriately mitigated via the operational plans. The divisions’ and corporate functions’ operational plans are updated quarterly. Changes that could impact the CRR are reviewed by the Committee.
 
The Committee reports formally on the CRR to the Executive Committee twice a year where its findings are considered and challenged.
 
Compliance Committee
 
The Compliance Committee consists of the General Counsel, the Chief Operating Officer, the Chief Financial Officer, the EVP, People, the VP Business Assurance/Head of Internal Audit, the Chief Information Officer, the VP Operations and the Company Secretary. It oversees compliance throughout the business with all relevant international regulations, export controls, trading requirements and standards, including direct oversight of financial, employment, health and safety, environmental, business continuity and security processes and policies.
 
Disclosure Committee
 
The Disclosure Committee comprises the Chief Executive Officer, the Chief Financial Officer, the VP Finance, ARM Group, the General Counsel, the VP of Investor Relations and the Company Secretary. It is responsible for ensuring that disclosures made by the Company to its shareholders and the investment community are accurate, complete and fairly present the Company’s financial condition in all material respects.
 
Management Structure
 
In addition, there are various committees, Governance Review Teams and Operational Review Meetings that span the Company. These include the regular Executive Committee meetings chaired by the Chief Executive Officer and the weekly Business Review Meeting chaired by the Chief Operating Officer, the purpose of which is to monitor and control all main business activities, revenue forecasts and other matters requiring approval. Through this structure management reviews (with representatives from the divisions and functions) revenues, orders booked, costs, product and project delivery dates, and levels of defects found in products in development. Relevant issues are escalated to the Executive Committee which, in turn, raises relevant issues with the Board of the Company.
 
The seven Governance Review Teams and three Operational Review meetings all report to the Operations Committee which in turn reports to the Executive Committee.
 
Internal audit function
 
The Company has an internal audit function that meets the criteria set out in the key practice standards prescribed by the Institute of Internal Auditors. The internal audit function undertook a range of financial and operational audits in line with the plan agreed with the Audit Committee. Additional resource was provided by co-sourcing arrangements in 2013 and this will continue in 2014.
 
The Company successfully achieved certificate renewal for ISO 9001 in December 2013.  The Company also has certification for ISO 27001, the international standard for Information Security Management and for ISO 22301, the international standard for Business Continuity Management, both of which were maintained throughout the year.
 
The Company’s Management System documents processes and responsibilities across all business functions and operations. As an autonomous part of this system, the internal audit function carries out a program of audits to assess its effectiveness and efficiency, resulting in continuous maintenance and improvement of the system, adapting to changes in business operations as necessary.
 
 To demonstrate compliance with the requirements of the Sarbanes-Oxley Act, the internal audit function also maintains the documented controls over financial reporting and confirms the operation of them either by direct testing or through a monitored self-assessment program. The management system is audited externally by Lloyd’s Register Quality Assurance for compliance with the requirements of ISO9001:2008, ISO27001:2005, ISO22301:2012 and as part of its Business Assurance scheme supports the Sarbanes-Oxley compliance activity.
 
Any significant control failings identified through the internal audit function or the external auditors are brought to the attention of the Compliance Committee and undergo a detailed process of evaluation of both the failing and
 
 
the steps taken to remedy it. There is then a process for communication of any significant control failures to the Audit Committee. There were no significant control failures during 2013 or up to March 3, 2014, being the latest practicable date before the printing of this report.
 
Whistleblowing procedures
 
The Company operates a whistleblowing policy for employees to report concerns about any unethical business practices to senior management in strict confidence and without fear of recrimination. If they prefer, they can do so anonymously through an independent third-party telephone line. The third-party telephone line is tested regularly to ensure that employees can use it if they have occasion to. The Audit Committee receives details of any such confidential reports from the Compliance Committee. There were no whistleblowing reports in 2013. In 2014, there has been one whistleblowing report, which is currently under investigation.  
 
Anti-bribery and anti-corruption measures
 
The Company’s Code of Business Conduct and Ethics, which is available on the Company’s website, and the Company Rules incorporate appropriate provisions to meet our obligations under the UK Bribery Act 2010. A training and communication program is in place to ensure that employees understand the requirements of the Act and the reporting procedures. This is targeted at employees in roles or working in countries that are regarded as higher risk.
 
Arrangements with contractors and suppliers have been and will continue to be reviewed and updated to reflect the requirements of the Act. The Compliance Committee oversees the reporting procedures and monitors and escalates reports in appropriate circumstances. There were no reports of concern during 2013 or up to March 3, 2014, being the latest practicable date before the printing of this report.
 
Human rights and equal opportunities
 
The Company has signed the Universal Declaration of Human Rights and has integrated relevant human rights principles into its policies for employees and contractors. There is growing interest worldwide in the issue of the impact of business on human rights. Reflecting this, the Company has worked this year with Shift, a specialist non-profit organization, working on business and human rights, to understand more about this agenda and its key guidelines, the UN Guiding Principles on Business and Human Rights.
 
We are confident that our risk in this area is low, but no company can afford to be complacent.  We have therefore adopted a specific Human Rights Policy, in addition to our existing policies including those on conflict minerals, business ethics and discrimination. The new policy underlines our commitment to avoiding adverse impact on human rights in the way we conduct our operations.
 
The Company strives for equal opportunities for all its employees and does not tolerate any harassment of, or discrimination against, its staff. The Company endeavors to be honest and fair in its relationships with its customers and suppliers and to be a good corporate citizen, respecting the laws of the countries in which it operates.
 
University Programme
 
The ARM University Program (AUP) is an important initiative for the future of the Company and our relationships with business partners. The program engages with professors, researchers and students worldwide using various channels, including higher education institutions, government agencies and ARM’s business Partners.
 
The aim of the AUP is to develop the next generation of engineers for the ARM ecosystem, and 2013 saw the building of firm foundations to achieve this aim. A strategy and plan have been put in place to increase the reach of the Company and its Partners into academia worldwide and to scale up AUP operations using strategic partnerships, streamlined processes and procedures. These include the AUP flagship Lab-in-a-Box (LiB) product which is now shipping.  This allows educators to use state-of-the-art ARM and ARM Partners’ technologies in their courses and laboratories. LiB, which is free of charge, includes both hardware and software and comprehensive teaching materials.
 
2013 saw the AUP sign up seven Partners: Freescale, ST, NXP, Nuvoton, Cypress, EnergyMicro/SiLabs and Xilinx for joint university engagements and LiB hardware platforms. In this time the AUP, also doubled its reach to universities as a result of the above activities, with particularly high growth in AsiaPAC and India. Further partnerships in education and research are being explored in 2014 to enable the AUP to increase its reach and scalability.
 
 The Company and our Partners are seeing the benefits of AUP, as students graduate with experience in designing with ARM products and as university engineering departments base their own research around ARM technology.
 
Environmental, social, corporate governance and ethical policies
 
While the Company is accountable to its shareholders, it also endeavors to take into account the interests of all its stakeholders, including employees, customers and suppliers and the local communities and environments in which it operates. The Chief Executive Officer and the Chief Financial Officer take responsibility for these matters, which are considered at Board level. Full details of our CR strategy and achievements can be found in the main CR report on our website www.arm.com/reporting2013.
 
The Company regularly monitors employees’ awareness of Company policies and procedures, including its conduct and ethical policies. Employees and temporary contractors reconfirm their understanding of key policies each year to help reinforce awareness.
 
The Company operates from a global portfolio of offices located in 15 countries. The portfolio is made up entirely of offices since the Company has no manufacturing activities. As such there are no hazardous substances nor complex waste streams to be managed as part of our business operations. The Company’s principal activity involves the use of IT based engineering tools to create intellectual property. With the exception of development systems products, the majority of “products” sold by the Company comprise microprocessor core and physical IP designs that are delivered electronically to customers.
 
The Company’s ongoing environmental impact analysis informs management about key environmental factors and how it can reduce the impacts associated with them. In 2013 the Company’s advanced compute resource requirement continued to build upon the success of its CEEDA Gold (Certified Energy Efficient Data Centre Award) winning data centre in Cambridge by commissioning the design and build of a second major data centre hub in Austin, Texas. This installation has the potential to harness geothermal energy as part of its design and therefore could have a Power Usage Effectiveness (PUE) rating some 25% lower than typical data centres in this region. We have piloted new build techniques for this project as part of a program to ensure minimal environmental impact in our data centre strategy.
 
In 2013 ARM opened a new 120,000 sq ft office in Bangalore, which attained Leadership in Energy and Environmental Design (LEED) Gold Accreditation. This accreditation recognizes buildings for high environmental performance in their construction and operation. ARM aims to meet the same LEED accreditation or the equivalent Building Research Establishment Environmental Assessment Methodology (BREEAM) performance in all new office construction as demonstrated in the design briefs of other office expansions developed during 2013. These building standards ensure high environmental performance of the Company’s built environment throughout its entire lifecycle.
 
The Company has continued to partner with companies working in the low impact building technology field.  We have test installations in place with Intellisense, Enlight and Alert Me in our Cambridge offices to improve environmental performance using energy-efficient ARM technology. Areas such as lighting control and environmental monitoring of plant for improved building efficiency are being developed with these partners and will be extended to other key sites and new build projects. The Company continued to enhance its environmental data collection and reporting ability during 2013 to support the work of our Energy Use and Climate Change Committee (EUCCC). This is an Executive sponsored steering group that directs activity relating to environmental stewardship and the management of our environmental aspects.
 
The Company’s environmental policy is published on our website within the CR report. In line with the Companies Act 2006, the articles of association enable the Company to send information to shareholders electronically and make documents available through the website rather than in hard copy, which provides both
 
 
environmental and cost benefits. Shareholders can opt to continue receiving a printed copy of the Annual Report, subject to availability.
 
Health and safety
 
The Company operates in an industry and in environments which are considered low risk from a health and safety perspective. However the safety and welfare of employees, contractors and visitors is a priority in all Company workplaces worldwide. The Company continues to improve its management systems in this area with an audit program that includes external auditing of processes and offices. More detail about the Company’s approach to environmental matters and health and safety is included below.
 
Corporate responsibility summary
 
Our ambition is to address global needs, achieve lasting impact and connect our charitable partnerships to our long-term business goals. Our approach is to:
 
 
·
work on long-term, strategic partnerships with charities;
 
 
·
use external expertise to define the areas of greatest potential;
 
 
·
co-ordinate and drive collaboration between the projects we support.
 
Sustainability and Corporate Responsibility (“CR”) are an important part of ARM’s business. Our products are focused on energy-efficiency and our business model is founded on partnership. We are one of a handful of companies that reach everyone, from the billionaire to the subsistence farmer. Together, these factors add up to a great opportunity for ARM to achieve a positive global impact.
 
Our People
 
ARM’s success relies upon a motivated, innovative and highly skilled workforce working in an efficient, friendly working environment. Maintaining this is our aim. Treating everyone equally is an important part of our approach, so we provide the same benefits to everyone globally. We encourage a culture of open and honest communication at all levels of the organisation. There are regular opportunities for employees to provide feedback such as the Global Employee Opinion Survey and our open door policy for discussions with the executive team.
 
Emphasis is placed on continuous learning and development. We use a blend of education, reflection, feedback and direct experience as well as formal and on-the-job training. Our charity fundraising and volunteering programme, Team ARM, encourages teamwork and engagement with ARM’s CR areas of interest and strategic charity partners.
 
We are investing more in Team ARM in 2014 to deliver a wider range of opportunities for employee engagement in everything from charity hackathons to mentoring young engineers.
 
ARM finished 2013 with 2,833 employees, an increase of 18%, in 31 offices across 15 countries. Staff turnover dropped from 8.0% to 6.8%.
 
Our Responsible Behaviour
 
ARM’s business model means that the impact of our operations on the environment, human rights issues and local communities is low. The scale and potential of our business ecosystem and technology to make a productive contribution to sustainability is high. We are committed to reducing any environmental impacts we have whilst maximising the beneficial aspects of our business model and products.
 
To help us understand where our risks, responsibilities and opportunities lie, ARM is a member of United Nations Global Compact (UNGC) LEAD. LEAD is a group of 53 multinationals working with the UN towards a more sustainable world by implementing their Blueprint for Corporate Sustainability Leadership. LEAD companies were chosen out of the 7,000 UNGC members because of their history of engagement with the UN and commitment to CR. ARM is represented on both the global LEAD and UK network’s advisory boards, keeping us in touch with
 
 
our peers and informing how we can contribute to sustainability in our immediate operations, our ecosystem and more broadly.
 
In 2013 we sponsored the creation of a UN Climate and Energy Action Hub to enable new business partnerships on environmental projects. The hub now has 43 organisations involved, working together to scale up climate and energy efforts. As part of the project, ARM is supporting research into the potential for smarter appliances to consume less energy and reduce peaks in power consumption.
 
Carbon reduction is an issue that affects everyone. Despite independent assessment of ARM as an environmentally low-impact business, ARM has taken part in the Carbon Disclosure Project (CDP) for the past three years. We have been using the CDP framework to help us improve the reporting and management of our carbon impacts. We achieved a 42% improvement on our 2012 score this year, placing us in Grade C.
 
During 2013 we readjusted all our environmental data, starting from our baseline of 2009. This re-statement was made in order to account for material changes to the conversion factors provided by DEFRA for company reporting purposes.
 
We have made steady progress towards our corporate environmental goal for energy use and remain committed to our carbon emission reduction targets for a 30% reduction in intensity by headcount by 2020. At the end of 2013 we had achieved a reduction of 18%.
 
Our energy intensity based on kWh per employee has decreased by 19% globally based on our 2009 baseline. This has been achieved through our commitment to better energy performance from our buildings alongside improved utility of our estate.
 
Our Support For Innovation
 
ARM believes that business has an important role to play in charitable work and addressing global sustainability issues. It is expected that, following the 2015 Millennium Development Goals, the post 2015 United Nations “Sustainable Development Goals” will include the role of business as a key enabler. We believe that the technology sector has a great deal to offer.
 
When working with charities, companies are unencumbered by many of the constraints faced by charitable foundations and governments. We have an opportunity to bring charities and businesses together, looking at the bigger picture across multiple issue areas to develop new ideas that can deliver real benefits. Companies are able to take more risk and try out ideas that may not work, but this is a necessary part of research, development and entrepreneurship, subjects that are very close to ARM.
 
In the past year, ARM has helped launch some exciting new initiatives. In early 2013, ARM became the first major sponsor of Code Club, a non-profit organisation helping primary school children learn computer coding. ARM’s early support, taking a leap of faith in the founders’ vision, led to the expansion of the team from two part-time founders to four full-time and two part-time members of staff. We saw the potential for the idea to scale and supported the entrepreneurial spirit of the two cofounders.
 
ARM employees run 15 clubs and there are now a total of over 1500 clubs across the UK supporting 22,000 children. At the time of writing, 100 new clubs are started each month and next year ARM will be helping Code Club deliver more regional support with a goal of reaching 25% of all primary schools by the end of 2015. We will also be working with the founders to help take the Code Club model worldwide, using ARM locations around the world to help start new Code Clubs.
 
Literacy Bridge uses “Talking Book” technology designed to provide those living in extreme poverty with education on health and agriculture that can reduce maternal and child mortality, hunger and chronic malnutrition. ARM has been working with Literacy Bridge to develop a long-term strategy aiming to empower the world’s poorest families. In 2013, we partnered with UNICEF in Ghana on a major 18-month project that will allow Literacy Bridge to prove their model at a scale of 40,000+ people. This is a critical milestone as the majority of projects fail after the pilot stage.
 
UNICEF and ARM have delivered the funding for the maternal health component of the project. ARM suggested the inclusion of Literacy Bridge’s prior work on agriculture, which was outside the remit of the
 
 
UNICEF’s project, and provided the additional support needed. This is an example of a company’s freedom to look at the big picture, and across different issue areas, something that is challenging for sector-focused charities and donors.
 
Initial data suggests that educational information from Literacy Bridge can help people achieve a 48% increase in their crop yield. For a subsistence farmer this increase is life-changing. In a small health trial in the Jirapa District, people adopted 90% of applicable health messages from the Talking Book. “There were so many things we didn’t know about raising healthy children but due to the Talking Book, we listen and learn healthy ways to raise our children.” Nadowli Kuubataanono, traditional birth attendant in the Jirapa District, Ghana.
 
In 2014, ARM will continue its support for Literacy Bridge, focussing on its R&D efforts to use ARM’s Cortex M0 within a new chip that will deliver a significant reduction in manufacturing costs and power consumption of the technology.
 
Helping Our Local Communities
 
 ARM’s approach to local community support is two-fold; to support activities that impact on our employees directly, and to help in areas of need that are often neglected. We work closely with local charities to advise us on where our supported is most needed and can have the greatest impact.
 
ARM has been an active supporter of the community local to its Cambridge head office ever since its foundation. Now, as a global company, it is important that we are able to support our local communities in all of our locations.
 
We recognise that the needs of every community are different and so we build relationships at a local level and encourage each office to allocate support to local charities or community outreach projects. Our aim is to help strengthen the fabric of society in the communities around our offices.
 
ARM is now working with community leaders to understand the most pressing local needs, whether this is one-off emergency support or long-term help for the areas of greatest deprivation.
 
This is a programme that we will be focusing on in 2014. We are confident ARM can make as big a contribution to our local communities as we have in our strategic charitable partnerships.
 
There are more examples of our charitable partnerships, as well as data on all our material issues, in the full CR Report. We have self-assessed the CR report at GRI level B and it can be found at www.arm.com/reporting2013.
 
Going concern
 
After dividend payments of £68.9 million, the highly cash generative nature of the business enabled the Company to increase its cash, cash equivalents and deposits to £706.3 million (net of accrued interest of £7.2 million) at the end of 2013. This was an increase from £520.2 million (net of accrued interest of £7.4 million) at the start of the year. After reviewing the 2014 budget and longer-term plans and considering any reasonably likely scenarios that may occur, the directors are satisfied that, at the time of approving the financial statements, it is appropriate to adopt the going concern basis in preparing the financial statements of the Company. This view was supported by a sensitivity analysis and stress tests undertaken at the year end which showed that some extreme assumptions would have to be made before there is a negative impact.

Statement of directors’ responsibilities
 
The directors are responsible for preparing the Annual Report, the Remuneration Report, and the financial statements in accordance with applicable law and regulations.
 
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Company financial statements in accordance with International Financial Reporting Standards as issued by the IASB.  Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
 
In preparing these financial statements, the directors are required to:
 
 
·
select suitable accounting policies and then apply them consistently;
 
 
·
make judgements and accounting estimates that are reasonable and prudent;
 
 
·
state whether IFRSs as adopted by the IASB have been followed, subject to any material departures disclosed and explained in the Company financial statements; and
 
 
·
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
 
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Remuneration report comply with the Companies Act 2006 and, with regards to the Company financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
 
The directors are responsible for the maintenance and integrity of the Annual Report included on the Company’s website in accordance with the United Kingdom legislation governing the preparation and dissemination of financial statements. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
 
Remuneration Committee
 
Committee composition and meeting attendance during 2013:
 
Name of Director
  
Position
  
Meetings Attended
Philip Rowley
  
Independent non-executive director (Committee Chairman until December 31, 2013)
  
5/5
Andy Green
  
Independent non-executive director
  
5/5
Larry Hirst
  
Independent non-executive director (Committee Chairman from January 1, 2014)
  
5/5
Janice Roberts
  
(joined February 28, 2013)
  
5/5
 
Given their diverse business experience, the independent non-executive directors who made up the Committee in 2013 offer a balanced view and international expertise in relation to remuneration matters for the Company.
 
Janice Roberts joined the Committee on February 28, 2013 and has added valuable knowledge, particularly on US compensation matters.
 
Operation of the Committee
 
The Chief Executive Officer and the EVP, People attend each meeting for at least part of the time to ensure that the Committee is able to obtain their views on the level of compensation for executive directors and other senior executives, although they are not present when their own remuneration is discussed. The Company Secretary advises the Committee on corporate governance guidelines and acts as Secretary to the Committee.
 
Key decisions on remuneration and actions taken in relation to 2013 and 2014 include:
 
 
·
approval of a pay and benefits package (including an LTIP top up) for Simon Segars on his appointment as Chief Executive Officer.   Pay was increased to the same level as applied for the retiring Chief Executive Officer (see details in “Compensation” section);
 
 
·
approval of an average executive team base pay increase of 3.48% for 2013 and 3.00% for 2014 compared to the average increases for the workforce as a whole of 4.70% for 2013 and 4.35% for 2014;
 
 
·
setting of suitably stretching performance targets for the bonus plan and new LTIP;
 
 
·
approval of pro-rated vesting under the LTIP and DAB plans for former Chief Executive Officer, Warren East and former Chief Commercial Officer, Mike Inglis on their retirements from the Group;
 
 
·
clear documentation of our remuneration policies as set out in this report.
 
Remuneration policy
 
The Company operates a remuneration policy and framework for executive directors designed to ensure that it attracts, retains and motivates high calibre people with the skills necessary to achieve its goal of sustained growth in corporate performance. We believe that this sustained growth can be successfully achieved only with a high level of employee engagement and motivation. Our policy seeks to provide rewards and incentives for the remuneration of executive directors that reflect their performance and align with the objectives of the Company. These comprise a mix of performance-related and non-performance-related remuneration.
 
The Committee believes that a director’s total remuneration should be monitored against their worth in the external market, with total reward closely linked to corporate and individual performance.   To this end, the Committee obtains information from independently published remuneration surveys, benchmarks the total remuneration package, and applies the following principles:
 
 
·
base salaries are set at an appropriately competitive level;
 
 
·
a significant amount (i.e. more than 70%) of total potential remuneration is performance-related;
 
 
·
there should be reward for performance but not for failure with an opportunity for upside for exceptional performance;
 
 
·
benchmarking provides a useful reference point but not a target range for salaries or other benefits;
 
 
·
a significant element of performance-related remuneration is provided in the form of shares;
 
 
·
elements of performance-related variable remuneration are subject to deferral; and
 
 
·
consideration is given to pay and conditions elsewhere in the Company.
 
The Committee is able to consider corporate performance on environmental, social and corporate governance issues when setting the remuneration of executive directors, and also takes account of pay and conditions elsewhere in the Company. In particular, the Committee is mindful of the fact that all employees receive share awards (or cash equivalents) under the Company’s equity plans.
 
The Committee does not specifically consult with employees when setting and reviewing remuneration policy for the executive directors; however, it does review the salary increases for all Executive Committee members against the general employee pay award each year to ensure that there is fairness.  Employees have an opportunity to raise any concerns over pay and benefits through the annual employee engagement survey or direct with their line manager.
 
The Committee believes that the new LTIP and bonus arrangements provide a much simpler package (similar to the approach adopted in a largely US dominated sector) and one that rewards only sustained longer term performance. The new LTIP also rebalances the package towards long-term performance and materially reduces the total quantum released after three years. In addition, the introduction of the new holding periods and increased share ownership guidelines will result in longer term performance alignment. Therefore, if share price performance is sustained during the holding period, then participants are rewarded. If share price performance is not sustained during the holding period then participants are worse off than under the old arrangements.

The Directors’ Remuneration Policy below will be put to shareholders for approval at the next Annual General Meeting on May 1, 2014 and is intended to apply for three years from that date.

The Policy applies to the executive directors at the date of this report and is intended to apply to any new executive directors who may be appointed during this three-year period.


Component of remuneration package and how it supports business strategy
Operation and clawback
Maximum  potential value
Performance conditions, targets assessment and areas of discretion
Base salary
 
To provide an appropriately competitive level of base salary, to enable the Company to recruit, retain and motivate executive directors of the calibre required to achieve the Company’s business strategy and goal of sustained growth in corporate performance.
Base salaries are reviewed annually by  the Committee and are paid monthly in cash
 
Increases generally apply from January in each year.  In its annual review or on promotion, the Committee considers the following:
 
·      pay levels at companies of similar size  (by reference to market capitalisation and revenue) on a geographic and global basis.
 
·      external market conditions.
 
·      pay and benefits elsewhere in the Company.
 
·      individual performance, skills, experience and potential.
 
·      corporate performance on environmental, social and corporate governance issues.
 
Clawback does not apply to base salary (in accordance with contractual agreements).
Base salaries are set at an appropriate level for each role,  taking account of the factors described in this table.
 
Generally salaries are no higher than market median although higher salaries may be paid, if necessary, to recruit externally or to retain key executives.
 
In normal circumstances base salary increases will be determined by reference to average increases for employees across the Company.
 
Greater increases may be approved if there is a substantial change in a director’s role or responsibilities or if the salary is significantly below the current market rate.  In such circumstances, increases may be phased over a number of years and be conditional on performance.
None, although the overall performance of each executive director is considered by the Committee when reviewing base salaries.
 
Maximum notice period is 12 months and pay in lieu of notice may be made at the discretion of the Company.  This would include base salary and contractual benefits (pro-rated where applicable) and any untaken holiday.
 
Fees for outplacement and legal advice may be also be paid by the Company.
Performance-related bonus
 
(in respect of 2014
 
Bonus, if earned, is paid wholly in cash for  2014 onwards
 
Paid annually after the
Maximum bonus: 125% of base salary.
 
Amount is subject to achievement of  two performance targets and then
 
financial year onwards)
 
To incentivise executive directors to achieve performance objectives that are directly linked to the Company’s short- term financial and strategic goals.
Preliminary Announcement for the prior year end
 
Bonus payments are not pensionable
 
Individual performance measures are focused on objectives that are specific to each executive director.
 
Clawback:  provisions exist that require bonus to be forfeited (i.e. offset of bonus accruing in that year) or an equivalent value repaid in exceptional circumstances. These include material misstatement of published results and misconduct causing a material loss and would apply for two years from the payment of such bonus. The proportion of the bonus that would be repayable (and could be 100%) would depend on the extent to which the original bonus exceeds that which would have been paid if the results had been correctly stated, and also taking into account any negative impact of the re-statement.
Bonus payable at target: 85% of base salary .
 
Target means the achievement of appropriate maximum targets in respect of both Normalised Operating Profit (NOP) and total revenue and prior to any personal performance adjustment.
 
Bonus payable at threshold: 0% of base salary.
 
Threshold means the minimum level of performance before bonus starts to accrue.
adjusted for individual performance:
 
·      Normalized Operating Profit  (NOP)  (50% of target bonus).
 
·      total revenue (50% of target bonus.
 
·      Individual performance measures specific to each executive director which flex the  amount of bonus by a factor of 0.75 to 1.25.
 
Revenue and profit growth are regarded as the most appropriate short-term metrics for continuing the Company’s performance.
 
The Committee retains discretion to adjust bonus targets for any financial year to reflect intervening events including acquisitions or disposals.
 
The numerical values of targets for any particular financial year will not be disclosed in advance or during that year as the Committee considers this information to be commercially sensitive. The actual targets will be disclosed in the following financial year.
Performance -related bonus
 
(in respect of years up to and including 2013)
Bonus earned in respect of 2013 was subject to the provisions of the DAB Plan.  This was the final operation the DAB Plan.
 
Bonus was split 50% cash and 50% deferred shares based on
Maximum and target bonus opportunity of 150% and 100% of salary respectively.
The targets for 2013 bonus were:
 
50% of target bonus was dependent on achieving a NOP target of
 
To incentivise executive directors to achieve performance objectives that are directly linked to the Company’s short-term financial and strategic goals.
 
Revenue and profit growth are regarded as the best driversmost appropriate short-term metrics for continuing the Company’s performance.
NOP, total revenue and individual performance.
 
There is compulsory deferral into shares for three years.
 
Bonus matching applies to deferred shares in the range of 0.3 for 1 to 2 for 1 match subject to three year EPS growth of CPI + 4% to CPI +12% p.a., respectively.
 
Deferred and any matching shares in relation to 2013 performance will be received in February 2017
 
Dividend shares are added at vesting*.
 
Provisions exist that could result in immediate forfeiture of shares in the event of dismissal for gross misconduct, as determined by the Committee and at its discretion.
  
£313.5m** with 0% payout at £257.7m rising in a linear way to 25% at £294.6m.
 
The NOP portion of bonus can continue to accrue linearly above the target of £313.5m on a straight-line basis, subject to the overall maximum of 150% of base salary.
 
50% of bonus was dependent on achieving a US$ revenue target of US$1,096m with 0% payout at US$913.2m rising to 25%  at US$1,030.1m
 
The revenue portion of  bonus can continue to accrue above the target of US$1,096m so that for every 1% increase  in revenue, bonus is increased by 2.5% of the target, subject to the overall maximum of 150% of base salary
 
Bonus amount is then subject to an individual performance multiplier which flexes the payment by 0.75 to 1.25 again subject to the overall maximum of 150% of base salary
Long-Term Incentive Plan 2013
Annual conditional share awards are made at 187.5% of base salary with the ability for
Maximum limit of 600% in exceptional
Vesting is based on:
 
(first operation in 2014)
 
To incentivise executive directors to achieve performance objectives that are directly linked to the Company’s long- term financial and strategic goals.
 
To align executive directors’ interests with shareholders through the performance conditions and share retention obligations.
vesting of between 0% to 200% after three years dependant on achievement of the performance conditions, with a maximum of 375% of  base salary.
 
50% of the vested shares will be subject to additional holding periods with 25% released after four years and the remaining 25% released after five years. During these holding periods shares may not be sold even if the participant has left the Company.
 
Dividend shares are added at vesting.
 
Malus:  The Committee has discretion to reduce a share award (including to nil) prior to vesting where there are exceptional circumstances which include a material misstatement in the Company’s published results, misconduct by the executive director that is deemed to have caused or contributed to a material loss as a result of reckless, negligent or wilful actions, or inappropriate values or behavior.
 
Clawback:  the Committee has discretion to clawback shares and executive directors have an obligation under the Rules to transfer shares or pay over the proceeds of sale in exceptional circumstances (as described above).  If sold at less than market value, the obligation is to pay market value at the date of disposal.  Clawback would be less any tax and social security paid or due to be paid. The Committee has discretion to set the length of the clawback period which would normally be two years from acquisition of the shares.
circumstances as determined by the Committee.
 
By way of example, exceptional circumstances could include the hiring of an exceptional senior executive director in a highly competitive market where we need to make an exceptional offer in order to recruit.
three year growth relative to the FTSE All World Technology Index (25%).
 
three year TSR growth relative to the FTSE 350 (25%).
 
three year EPS growth (50%) with threshold at 15 % annual growth (including CPI) and the upper performance target at 22% annual growth (including CPI).
 
25% of the respective TSR elements vest for median performance with 100%  vesting for upper quintile performance.
 
Similarly 25% of the EPS element vests at threshold performance with 100% vesting at the upper performance target with straight line interpolation between these two points.
 
The Committee will review the performance conditions for new awards annually.
 
The Committee has discretion to waive or change a performance condition if anything happens that causes the Committee reasonably to consider it appropriate,
 
     
provided that any changed performance condition will be no more difficult to satisfy than the original condition was intended to be at the time the award was granted.
Shareholding requirement
 
To align executive directors’ interests with those of shareholders over a longer time period, they are required to build a shareholding of 200% of base salary.
 
Until 200% of salary is achieved, no more than 50% of shares received through the DAB Plan and LTIP (after the automatic sale of shares to satisfy tax liabilities) can be disposed of.
 
Unvested DAB Plan shares do not count towards the shareholding requirements.
    
Long-Term Incentive Plan
 
(in respect of years up to and including 2013)
 
To incentivise executive directors to achieve performance objectives that are directly linked to the Company’s long term financial and strategic goals.
 
To align executive directors’ interests with those of the shareholders through the performance conditions and share retention obligations.
Annual conditional awards normally at 100% of salary with the potential for the award to vest at between 0% and 200% of salary for upper decile performance at the end of the three-year performance period.
 
Dividend shares are added at vesting.
Maximum award limit of 400% in exceptional circumstances was never used.
Vesting is based on:
 
Three-year TSR growth relative to the FTSE All World Technology Index (50%).
 
Three-year TSR growth relative to the FTSE 350 (50%).
 
Threshold vesting commencing at median ranking of TSR group (25% of respective TSR elements rising to 100% vesting for an upper decile ranking on a straight-line basis).
 
The Committee has discretion to waive or change a performance condition which cause the
 
     
Committee to reasonably consider that:
 
(a)   The amended Performance Condition would be a fairer measure of performance and would be no easier to satisfy; or
 
(b)   The Performance Condition should be waived.
Pension
 
To provide pension contributions in line with market practice, which will enable directors to plan for retirement.
10% of base salary for executive directors and 11% for the CEO is paid either into the Group Personal Pension Plan or overseas equivalent, or  as a cash allowance (subject to payroll deductions) for those in excess of the lifetime allowance applicable in the UK.
11% of base salary.
Not applicable.
Other benefits
 
To provide competitive benefits in line with market practice to enable the Company to recruit and retain high calibre executive directors
 
To reward innovation and invention.
Other benefits are provided appropriate to the location of the executive director and include provision of a car or car and fuel allowance, long term sickness and disability insurance, death in service benefit, healthcare insurance and travel insurance for the executive director and family
 
Executive directors may also receive patent bonuses in line with the scheme operated by the Group from time to time for patent applications and on grants of patents.
Reasonable market cost of providing benefits.
 
The Committee reserves the discretion to provide such situation-specific benefits as may be required in the interests of the Company’s business, such as relocation. Full details of the exercise of any such discretion would be provided to shareholders in the next remuneration report.
Not applicable.
Overseas benefits/Relocation
Executives based in countries outside their home country
Reasonable market cost of
Not applicable.
 
allowances
 
To provide competitive benefits in line with market practice to enable the Company to recruit and retain high- calibre executive directors and move them to alternative locations when required by the needs of the business.
receive other benefits appropriate to the country in which they are working.
 
In the event that an executive director agrees to move from their home country temporarily the relocation arrangements may include:
 
Housing allowance or settlement of actual costs.
 
Disturbance allowance to enable essential household purchases to be made.
 
Cost of living and transportation allowance for the duration of the assignment.
 
Flights home for executive and family.
 
School fees for executive director’s children.
 
Cost of personal tax advice.
 
Cost of visas for executive and family.
 
Cost of transporting executive and family’s personal effects.
 
Legal and estate agents fees associated with properties in home and overseas locations.
providing benefits for the duration of the term abroad.
  
One-off recruitment cash/equity awards
 
To provide an appropriately attractive package to persuade an external hire to accept an offer of employment and/or to buy out equity that would be lost on leaving previous employment.
An award of restricted stock units (RSUs) or a grant of options may be made under the Employee Equity Plan to a new recruit to compensate for equity awards foregone with previous employer and/or provide equity that vests in the three years prior to potential vesting of the first  LTIP award.
 
Alternatively a cash payment or an additional LTIP award may be made to compensate.
 
Payment may be on taking up appointment or to coincide with vesting dates under the previous employer’s plan.
The maximum would be a sum equal to the value of equity foregone, taking account of performance conditions attached to the award,  likelihood of vesting and accelerated payment.
The Committee has discretion to determine performance conditions for any award of RSUs, any LTIP award, or any grant of options taking into account of the circumstances of each individual case. Performance conditions would  normally be applied on an equivalent basis to those applicable to awards made to other executive
 
 
Malus and clawback provisions would apply.
  
directors in the same calendar year. Performance conditions may, but would not necessarily be applied to any cash payment.
Other Contributory Equity Plans
 
Executive directors are eligible to participate in the share plan applicable to the country where they work.
 
These plans provide an opportunity for executive directors to voluntarily invest in the Company.
ARM currently operates a Save as You Earn Option Scheme in the UK (and some other countries) and an Employee Stock Purchase Plan in the US (and some other countries), which enables employees to buy shares at a discount of up to 20% of market value through regular monthly or fortnightly payroll deductions.
The maximum participation limits will not exceed those set by the relevant tax authorities from time to time.
Not applicable.
Fees for non-executive roles held outside the Company
 
To provide executive directors with opportunities to widen their knowledge and experience of the operation of other company boards and committees, they are permitted to hold non-executive positions at other companies.
Executive directors are permitted to retain any fees paid and/or shares offered in connection with external non-executive roles that they undertake.
The amounts received are disclosed annually.
Not applicable.
Non-Executive Directors’ (NED) and Chairman’s fees
 
To attract and retain an appropriately experienced Chairman and independent non-executive directors of suitable calibre to fulfil a range of different roles including, financial expert/Audit Committee Chairman, Senior Independent Director, and Committee Chairmen.
NED fees are proposed by the executive directors and approved by the Board as a whole. The Chairman’s fee is proposed by the Committee and approved by the Board as a whole with the Chairman taking no part in the decision.
 
NED appointments are terminable on three months’ notice.
 
Fees are reviewed on an annual basis and take account of fees paid for similar roles by peer companies.
Fees are set at an appropriate level taking into account the factors outlined in this table.
 
Additional fees are paid to the SID and Committee Chairmen.
 
An additional fee is paid to NEDs based outside the UK who undertake long
Not applicable.
 
To pay fees that reflect responsibilities and workload undertaken, and which are competitive with peer companies.
The NEDs and the Chairman are not eligible to receive bonuses, pension contributions and nor can they to participate in the LTIP or other equity plans.
 
The overall fees paid to non-executive directors will remain within the limit stated in our Articles of Association, currently £0.5m which we are seeking approval to increase to £1.0m at the 2014 AGM.
haul travel to attend Board meetings in the UK, to reflect the additional time commitment.
  
Legacy arrangements
 
(pre 27 June 2012)
None.
    

* Dividend shares are additional shares added at vesting equal to the amount of dividends that would have been paid during the deferral period for the DAB Plan and LTIP.
** Calculated at the Company budget exchange rate of £1:US$1.60

Selection of Performance Measures and how targets are set

Long Term Incentive Plan
 
Performance measures for the new LTIP were selected after careful consideration by the Committee and following consultation with larger shareholders.  The Committee believes that the use of both TSR and EPS performance measures provide the best alignment to Company strategy and encourages, reinforces and rewards the delivery of sustainable shareholder value.  The TSR element (which accounts for 50% of total LTIP vesting) was approved by shareholders as part of the approval of the new LTIP at the 2013 AGM.
 
The normalized EPS growth performance condition (which accounts for 50% of total LTIP vesting) has been set as follows:
 
12.5% vesting for annual growth of 15% (including CPI) rising on a straight-line basis to 50% vesting for annual growth of 22% (including CPI).
 
The Committee has set this range for the LTIP award made for 2014 and intends to review it annually. Changes will be made only if the targets become inappropriate in changing market conditions. Analysts’ targets are acknowledged as important reference points for the markets, but there are a number of factors beyond the control of the Company and the executive directors that may impact medium- to long-term EPS performance (such as macro or semiconductor industry cycles and currency fluctuations). These may have impacts that would not necessarily be seen as underperformance by the Company. The Committee is also keen not to encourage short-term views or behaviour where, in theory, investment in the long-term future (either organically or by acquisition) may be discouraged if the EPS range is set at too high a level.
 
Annual Bonus Plan
 
Performance measures for the Annual Bonus Plan are set annually.  Each year the Committee considers the most appropriate metrics to apply for the following financial year.  These metrics are currently NOP and Group Revenue.  A personal performance multiplier is then applied related to achievement of specific personal goals for each individual. The Committee is of the opinion that the numerical values of targets for the Annual Bonus Plan are commercially sensitive because they include budgeted numbers within the range of outcomes and it would be detrimental to the Company to disclose them in advance of or during the relevant performance period. The actual targets will be disclosed in the following financial year.
 
Changes to executive directors’ remuneration for 2014

The former LTIP approved in 2003 expired in 2013 and at that time the Committee took the opportunity to review its entire approach to executive pay.  The objective of the review was to ensure that the Group’s approach remains fit for purpose over the next stage of its development.  The replacement of the DAB Plan and former LTIP with the new Bonus Plan and LTIP will not result in any increases to the maximum quantum of reward delivered.  The Committee believes that the new structure provides a much simpler package (similar to the approach adopted in a largely US dominated sector) and one that rewards only sustained longer term performance.
 
Termination of employment

In the event of termination of an executive director’s contract of employment, compensation would be based on salary and contractual benefits during the notice period and whether the departing director is accepted to be a good leaver under the rules of the bonus plan, the 2013 LTIP, the former LTIP, and the former DAB Plan.
 

 
Contractual provisions/Plan Rules
Exit Payment Policy
Service Contracts
Payment of contractual entitlements, including payment in lieu of notice in appropriate circumstances, where certainty and protection of restrictive covenants are in the best interests of the Company.
 
Termination payments would take into account the particular circumstances relevant to each individual situation.
Maximum  notice period is 12 months and pay in lieu of notice may be made at the discretion of the Company.
 
This would include base salary and contractual benefits (pro-rated where applicable) and any untaken holiday.
 
Fees for outplacement and legal advice may also be paid by the Company.
 
LTIP
 
For good Leavers conditional awards under the LTIP would normally vest pro-rata to time served and the extent to which the performance conditions are satisfied at the date of termination of employment.
 
For bad leavers, unvested share awards would lapse on termination of employment.
 
In relation to both the LTIP and Bonus Plan:in assessing whether  an executive director is a good leaver in  retirement circumstances, the executive director is required to confirm future intentions to the Committee (including that he or she will not accept a full time executive role in a commercial organisation). If the Committee determines that the executive director is a good leaver and subject to satisfaction of performance targets, pro-rated vesting of entitlements under the old and new LTIPs and bonus plans would normally be approved.
 
The holding periods described in the Remuneration Policy table would apply to any shares that vest under the LTIP.
Bonus Plans
There is no automatic entitlement to annual bonus.  In the event of death or leaving as a result of disability or ill health, pro rata bonus may be paid for the year of cessation.
 
Bad leavers would not receive performance-related bonus awards in relation to the year of cessation.
 
Clawback provisions exist that require bonus to be forfeited (i.e. offset of bonus accruing in that year) or an equivalent value repaid should it be necessary for the Company to re-state to a material extent the financial results on which the bonus was awarded within two years of the payment of such bonus.  The proportion of the bonus that would be repayable (which could be 100%) would depend on the extent to which the original bonus exceeds that which would have been paid if the results had been correctly stated, also taking into account any negative impact of the re-statement.
  
Former DAB Plan
Deferred shares under the former
 
 
 
DAB Plan would vest on termination.  Deferred shares can be forfeited in certain circumstances.  Matching shares vest, to the extent the performance conditions are satisfied, for good leavers only.
  
 
Share dilution
 
It is proposed that the Company will continue to manage dilution within the context of maintaining award levels within a 10% limit over five years (excluding rolled over Artisan options), the limit that has applied since 2003. We are aware that this is higher than the limit of 5% over ten years in respect of discretionary awards and 10% over ten years in respect of all schemes adopted by many UK companies and preferred by many institutional investors. The reasons for this higher limit, which was approved by shareholders when the LTIP was introduced, are at least as strong today. These are the broad based nature of our equity plans which cover all employees and the need to be able to compete with US companies worldwide for the high calibre engineers and executives required to secure the Company’s future success. The Committee is keenly aware of this issue, and will continue to keep well below the 10% upper limit. Dilution over the past five years has been 6.85%.
 
Base salary increase for 2014 and 2013

For 2013, the average increase in base salaries for the executive directors was 3.48% and the average increase for the workforce as a whole was 4.70%. On his appointment as Chief Executive Officer on 1 July 2013, the Committee approved a salary increase for Simon Segars to £500,000, which was at the same level as the retiring Chief Executive Officer. For 2014 the average increases are 3.00% for the executive directors and 4.35% for the workforce as a whole. Within the overall increase for 2014, the range was 3.4% for the US rising to 8.0% in Asia, reflecting local market conditions and salary inflation.
 
Shareholding requirements
 
In order to align executives’ interests with those of shareholders over a longer time period, all Executive Committee members are now required to build a shareholding of 200% of base salary (an increase from the previous level of 100% of base salary). For other participants in the new LTIP, the shareholding requirement has increased from 50% to 100% of base salary. Unvested DAB Plan shares do not count towards the shareholding requirements. Until these levels are achieved, no more than 50% of shares received through the DAB Plan and LTIP (after the automatic sale of shares to satisfy tax liabilities) can be disposed of by participants. For 2014 a transitional arrangement is in place for participants below Executive Committee level under which 20% of net shares vesting must be retained.  This will increase to 50% for 2015 onwards. At the present share price, all of the executive directors meet the 200% of base salary shareholding requirement.

Collectively the Executive Committee, including the executive directors, held 3.7 million shares with a value of £36.8 million at March 3, 2014. This currently equates to a multiple of 10 times base salaries.
 
Current Incentive arrangements and their operation in respect of 2013 financial year
 
For 2013 there were four key incentive schemes in operation across the workforce as a whole. These are as follows:
 
For executive directors and senior managers:

 
·
the final annual bonus award under the DAB Plan.
 
 
·
an annual conditional award under the LTIP.
 
For all other employees:

 
·
awards under the Annual Bonus Plan.
 
 
·
Employee Equity Plan.
 
Option grants to executive directors ceased in 2006 (although the facility to grant options exists in exceptional circumstances).  The move away from options to restricted shares for all employees reduces potential dilution and has simplified remuneration arrangements.

We significantly out-performed our international peer group over the last three years, which resulted in 183.7% vesting of the LTIP awards made in 2011 when the share price was 611 pence per share and full vesting of the DAB Plan matching share awards made in respect of 2010.   To put the awards that are currently outstanding under the LTIP and DAB Plan into context, the share price was 568 pence per share for the February 2012 awards and 924.5 pence per share for the February 2013 awards.  The share price was 896 pence per share on 7 February 2014 being the day before the 2014 LTIP and final DAB Plan awards were made.

Shares earned are satisfied through the issue of new shares (any treasury shares available would be used first).

Deferred Annual Bonus Plan in respect of 2013 financial year
 
This was the final operation of the DAB Plan which will be replaced by the new Annual Bonus Plan and LTIP for 2014 onwards.  Details of these new plans are included in the Remuneration Policy summary earlier in this report. The deferred and matching share elements of the DAB Plan will continue to vest over the next three years and all new awards will be made under the new LTIP and Annual Bonus Plan.  As demonstrated in this summary, there is a highly variable element to executive directors’ remuneration. For 2013 target and maximum bonus of 100% and 150% of base salary respectively (after application of an individual performance multiplier which flexes the payment by 0.75 to 1.25) could be earned through the DAB Plan if all targets were met.
 
The strong performance of the Company in 2013 resulted in achievement of both of the equally weighted bonus targets, as set out below:
 
2013 Bonus targets
  
Target
  
Actual
  
Bonus % achieved of base salary
  
Revenue
  
US$1,096 million
  
US$1,117.9 million
     55.0 %
NOP
  
£313.5 million
  
£332.6 million
     62.9 %
Total
             117.9 %
(1)
NOP for bonus purposes is calculated using the Company budget exchange rate of £1: US$1.60 for 2013.
 
Each of the executive directors achieved a personal performance multiplier of at least 1.15 for 2013, which means bonus received was in the range 136% to 144% of salary, half of which was compulsorily deferred into shares for three years.
 
The revenue target is set in US dollars to reflect the main currency in which revenues are earned.
 
The normalized operating profit (NOP) target range was from zero payout at £257.7 million up to 25% at £294.6 million and 50% at £313.5 million, all at the Company budget exchange rate of £1:US$1.60.
 
Shares representing the deferred element of bonus earned in 2010 and awarded in 2011 vested in February 2014, with the maximum 2:1 ratio of matching shares being triggered. This ratio was achieved because EPS growth was 120.4%, which is was greater than CPI plus 12% per annum on average for the three years making up the performance period.
 
At normalized EPS growth equal to the increase in the Consumer Prices Index (CPI) plus 4% per annum, the deferred shares will be matched on a 0.3:1 basis, rising to 2:1 when EPS growth is in excess of CPI plus 12% per annum. These targets are directly related to the Company’s financial results and encourage achievement of the Company’s short-term financial goals, while the deferral and matching elements encourage a longer term view of
 
 
the success of the Company. The deferred shares can be forfeited in the event of gross misconduct and the matching shares are subject to forfeiture for “bad leavers”.
 
New Bonus Plan for 2014
 
As part of the new structure for executive remuneration and in particular the new LTIP (which was consulted on with shareholders in 2012/13 and approved by shareholders at the 2013 Annual General Meeting), bonuses, if earned, will paid wholly in cash for 2014 onwards.  The maximum bonus opportunity has reduced from 150% to 125% of base salary, bonus payable at target has reduced from 100% to 85% of base salary and no bonus is paid at threshold.
 
Target constitutes the achievement of appropriate maximum targets in respect of both NOP and total revenue and prior to any personal performance adjustment.
 
The amount is subject to achievement of two performance targets and then adjusted for individual performance:
 
 
·
NOP -  50% of target bonus.
 
 
·
Total revenue - 50% of target bonus.
 
 
·
Individual performance multiplier specific to each executive director, which flexes the bonus amount by a factor of 0.75 to 1.25.
 
Revenue and profit growth are regarded as the best drivers to increase market share and continue the Company’s outperformance of semiconductor market growth.  The Committee retains discretion to adjust bonus targets for any financial year to reflect intervening events including acquisitions or disposals.  It should be noted that the individual performance multiplier when applied to the executive directors normally falls within a relatively narrow range at the upper end.  This results from the fact that maintenance of a very high level of performance is a pre-requisite to continuation in the role of executive director.  Performance is reviewed on an in depth basis on at least an annual basis by the CEO (for the other executive directors) and by the Chairman for the CEO. The individual performance multipliers for the executive directors are then approved by the Committee.
 
The numerical values of targets for any particular financial year will not be disclosed in advance or during that year as the Committee considers this information to be commercially sensitive. The commercial sensitivity relates to the use of current year budget revenue within the range of outcomes. The actual targets will be disclosed in the following financial year.
 
The bonus targets set by the Committee for the each year are intended to be stretching but motivational and average bonus paid to the executive directors over the past five years was 125% of salary (with a range from 84% payout for 2009 to 150% for 2011).
 
Linkage of Bonus targets to business strategy
 
The personal performance multiplier depends on the achievement of pre-determined objectives, which are reviewed and approved by the Committee each year. These include key strategic objectives related to each director’s role and responsibilities (such as compliance with the Management Charter, which is designed to foster employee development), understanding of the overall vision and strategy of the Company, and good governance. The Committee is able to consider corporate performance on environmental, social and corporate governance issues when setting the remuneration of executive directors.

Long-Term Incentive Plan
 
Former LTIP
 
Under the former LTIP annual conditional awards to executive directors were normally made at a level equivalent to base salary. Conditional awards vest to the extent that the performance criteria are satisfied over a three-year performance period from January 1 of the year of award, with no subsequent retesting permitted. The performance conditions are based on the Company’s TSR when measured against that of two comparator groups (each testing half of the shares comprised in the award). The first index comprises UK companies across all sectors
 
 
(FTSE 350) and the second comprises predominantly US companies within the hi-tech sector (FTSE All World Technology Index).
 
For each comparator group, the number of shares that may vest may be up to a maximum of 200% of the relevant half of the shares comprised in the conditional award if the Company’s TSR ranks in the upper decile, 50% of the relevant half of the shares will vest in the event of median performance and between median and upper decile performance vesting will increase on a straight-line basis. Additional shares may vest to cover dividends paid by the Company during the performance period. No shares will be received for below-median performance. In addition, no shares will vest unless the Committee is satisfied that there has been a sustained improvement in the underlying financial performance of the Company.
 
The vesting of the 2011 LTIP awards in February 2014 was at 183.7% as a result of our significant out-performance compared to our international peer group over the past three years. Subject to achievement of the performance conditions, the final outstanding awards under the former LTIP will vest in 2016.
 
New LTIP
 
The new LTIP was approved by shareholders at the 2013 Annual General Meeting and is described in more detail in the Remuneration Policy summary.  Annual awards are made up to a normal maximum of 375% of base salary. Dividend shares are added at vesting. Vesting is based on:
 
 
·
Three-year relative TSR growth relative to the FTSE All World Technology Index (25%)
 
 
·
Three-year relative TSR growth relative to the FTSE 350 (25%)
 
 
·
Three-year EPS growth (50%)
 
25% of the respective TSR elements vest for median performance with 100% vesting for upper quintile performance
 
Similarly 25% of the EPS element vests at threshold performance (annual growth in EPS of 15% including CPI) and 100% vests at maximum performance (annual growth in EPS of 22% including CPI) and rising on a straight-line basis between these two points.
 
50% of the vested shares will be subject to additional holding periods with 25% released after four years and the remaining 25% released after five years. During these holding periods shares may not be sold even if the participant has left the Company.
 
The Committee gave particularly careful thought to this range, taking into account a number of factors including internal forecasts and updated market consensus, balanced with the need to create a real incentive over the long-term. Another key factor was the need for the Company to have the flexibility to make appropriate investments with a view to generating long-term shareholder value (recognising the typical timelines in which investments in technology give rise to license and royalty revenue). The range is considered to be challenging and exceeds the EPS growth range for awards granted under the former DAB Plan (being CPI + 4% to CPI + 12%).
 
Our intent is to review these targets on an annual basis, taking account of market conditions and any other relevant factors to ensure that they remain appropriate in the context of the factors set out above. The Committee will review their applicability on an annual basis, so that in the event that exceptional circumstances arise, such as material corporate activity or substantial changes in market conditions, their impact can be considered against subsequent annual awards.  If changes are to be proposed for any prospective LTIP award, it would be the Committee’s intention to confirm any such change to shareholders in advance.
 
Former share option schemes
 
The remaining shares of the final option grant to executive directors made in 2006 vested in accordance with the rules of the scheme in February 2013.
 
Pensions
 
The Company does not operate its own pension scheme but makes payments into a group personal pension plan, which is a money purchase scheme. For the Chief Executive Officer, the rate of Company contribution is 11% and
 
 
for executive directors, the normal rate of Company contribution is 10% of the executive director’s basic salary plus additional amounts in accordance with the Company’s salary sacrifice scheme. Full details of Company contributions are set out in the directors’ emoluments table. Since 2011, to the extent that contributions cannot be made in a tax efficient way at the 10/11% of basic salary level, the difference is paid as an additional cash allowance (and subject to appropriate tax and other deductions).
 
Compensation for Loss of Office
 
No payments were made during 2013 to former executive directors by way of compensation for loss of office, or pay in lieu of notice.
 
Executive Director Service Contracts
 
Executive directors have service contracts that may be terminated by either party on one year’s notice. These agreements provide for each of the directors to provide services to the Company on a full-time basis and contain restrictive covenants for periods of three to six months following termination of employment relating to non-competition, non-solicitation of the Company’s customers, non-dealing with customers and non-solicitation of the Company’s suppliers and employees. In addition, each service contract contains an express obligation of confidentiality in respect of the Company’s trade secrets and confidential information and provides for the Company to own any intellectual property rights created by the directors in the course of their employment.
 
The dates of the service contracts of each person who served as an executive director during the financial year are as follows:
 
Name of Director
  
Date
Simon Segars
  
January 4, 2005
Tim Score
  
March 1, 2002
Mile Muller
  
January 31, 1996
Warren East (retired June 30, 2013)
  
January 29, 2001
Mike Inglis (retired March 31, 2013)
  
July 17, 2002
 
Non-executive Directors
 
During 2013, the Chairmen of the Audit and Remuneration Committees each received a total fee of £70,000 per annum and the other non executive directors each received a total fee of £55,000 per annum. In line with fee arrangements in place in other companies of similar size and complexity the executive directors have implemented new arrangements from January 1, 2014 as follows:
 
 
·
standard fee of £60,000 per annum.
 
 
·
additional fee for Committee Chairmen and Senior Independent Director £16,000 per annum.
 
This is believed to more fairly reflect the workload undertaken by Committee Chairmen and the Senior Independent Director. The additional fee of $2,500 per meeting which is paid to non-executive directors who are based in the US and travel to the UK for Board meetings will continue at this level. This is to reflect their additional time commitment.
 
The Chairman’s fee for 2013 was at the rate of £390,000 per annum and increased by 2.6% for 2014 to the rate of £400,000 per annum.
 
Non-executive directors do not have service contracts and are not eligible to participate in bonus or share incentive arrangements. Their service does not qualify for pension purposes or other benefits, and no element of their fees is performance-related.
 
In addition to the interests disclosed above, the executive directors have interests in dividend shares that could be awarded under the former and current LTIP and the former DAB Plan, the amount of which will depend on the extent to which the performance criteria are satisfied and on the dividends declared during the performance period.
 
 
COMPENSATION
 
The aggregate compensation (including pension contributions) paid by the Company to all persons who served in the capacity of director or executive officer in 2013 (12 persons) was £6.8 million. This includes £2.8 million of share-based compensation. This does not include expenses reimbursed to officers (including business travel, professional and business association dues and expenses) but includes amounts expended by the Company for automobiles made available to its officers and other benefits commonly reimbursed or paid by companies in the UK. Each executive officer participates in the Company’s Deferred Annual Bonus Plan under which he may receive a bonus of up to 150% of base salary, 50% of which is compulsorily deferred into shares and an equity match of up to 2:1 if certain targets (determined by agreement between the executive and the Remuneration Committee) are exceeded. The aggregate amount accrued by the Company during 2013 to provide pension, retirement or similar benefits for directors and executive officers was £0.1 million.
 
Directors’ emoluments
 
The emoluments of the executive directors of the Company in respect of services to the Company were paid through its wholly-owned subsidiary, ARM Limited, as were non-executive directors, with the exception of Simon Segars, Janice Roberts and Young Sohn who were paid through ARM, Inc., and were as follows:
 
 
Director
  
Fees
    
Basic salary
    
Bonus payments (1)
    
Benefits (2)
    
Subtotal 2013
    
Pension contributions 2013
    
Share-based payments 2013 (3)
    
Total 2013
    
Subtotal 2012
    
Pension contributions 2012
    
Share-based payments 2012 (3)
    
Total 2012
  
    £     £     £     £     £     £     £     £     £     £     £     £  
Executive
                                                                                                
Simon Segars
     —       400,000       543,454       73,186       1,016,640       44,000       476,327       1,536,967       743,889       30,800       263,113       1,037,802  
Tim Score
     —       415,000       599,374       26,031       1,040,405       44,156       660,711       1,745,272       954,614       42,560       378,166       1,375,340  
Mike Muller
     —       285,000       403,718       14,940       703,658       32,148       446,211       1,182,017       639,515       31,020       259,530       930,065  
Warren East (retired June 30, 2013)
     —       250,000       —       42,041       292,041       —       833,019       1,125,060       1,176,704       —       456,471       1,633,175  
Mike Inglis (retired March 31, 2013)
     —       71,250       —       18,418       89,668       —       407,813       497,481       673,806       5,085       265,255       944,146  
Tudor Brown (retired May 3, 2012)
     —       —       —       —       —       —       —       —       91,077       6,417       193,522       291,016  
Total
             1,421,250       1,546,546       174,616       3,142,412       120,304       2,824,081       6,086,797       4,279,605       115,882       1,816,057       6,211,544  
Non-executive
                                                                                                
Sir John Buchanan (appointed May 3, 2012)
     390,000       —       —       —       390,000       —       —       390,000       258,879       —       —       258,879  
Andy Green
     55,000       —       —       —       55,000       —       —       55,000       52,000       —       —       52,000  
Larry Hirst
     55,000       —       —       —       55,000       —       —       55,000       52,000       —       —       52,000  
Eric Meurice (appointed July 1, 2013)
     27,500       —       —       —       27,500       —       —       27,500       —       —       —       —  
Kathleen O’Donovan
     70,000       —       —       —       70,000       —       —       70,000       65,000       —       —       65,000  
Philip Rowley
     70,000       —       —       —       70,000       —       —       70,000       65,000       —       —       65,000  
Janice Roberts
     61,399       —       —       —       61,399       —       —       61,399       58,314       —       —       58,314  
Doug Dunn (retired May 3, 2012)
     —       —       —       —       —       —       —       —       62,069       —       —       62,069  
Young Sohn (retired December 31, 2012)
     —       —       —       —       —       —       —       —       59,906       —       —       59,906  
Total
     728,899       —       —       —       728,899       —       —       728,899       673,168       —       —       673,168  
Total
     728,899       1,421,250       1,546,546       174,616       3,871,311       120,304       2,824,081       6,815,696       4,952,773       115,882       1,816,057       6,884,712  
(1)
The bonus payments above represent the full bonus earned during 2013. According to the terms of the DAB Plan, 50% of this bonus is not paid in cash, but is deferred and becomes payable in shares after three years. Details of the awards made in February 2014 in respect of these deferrals are detailed in “—Share Ownership—The Deferred Annual Bonus Plan” below.
 
(2)
All the executive directors receive family healthcare and annual travel insurance as part of their benefits in kind. In addition, Tim Score has the use of a company car with fuel benefit and Warren East, Tudor Brown, Mike Inglis and Mike Muller received a car and petrol allowance. Simon Segars also receives living, transportation and other allowances as part of his placement in the US. Warren East, Mike Inglis and Tudor Brown received an additional cash allowance in place of Company pension contributions that can no longer be contributed in a tax-efficient way.

(3)
Share based payments represent each director’s individual compensation charge as calculated under IFRS 2, which the Company adopted from January 1, 2005. Further details of this are given in Note 20 to the Consolidated Financial Statements.
 
It is the Company’s policy to allow executive directors to hold non-executive positions at other companies and receive remuneration for their services. The Board believes that experience of the operations of other companies and their boards and Committees is valuable to the development of the executive directors. Details of executive’s roles within other companies and their remuneration are as follows:
 
Tim Score was a non-executive director of National Express Group plc until February 25, 2014 and he received remuneration totaling £60,500 in 2013 (2012: £60,500). Mike Muller became a non-executive director of Intelligent
 
 
Energy Limited in July 2012 and he received fees totaling £40,000 in 2013 (2012: £16,666 from appointment in July 2012)
 
Warren East (who retired on June 30, 2013) is a non-executive director of De La Rue plc and he received remuneration totaling £26,100 up to the date of his retirement (2012: £49,000 for the full year). Mike Inglis (who retired on March 31, 2013) was a non-executive director of Pace plc and he received remuneration totaling £10,500 up to the date of his retirement (2012: £42,000 for the full year).
 
All the executive directors are accruing benefits under a money purchase pension scheme as a result of their services to the Company, contributions for which were fully paid during the year.
 
The Company has defined total directors’ pay for 2013 as the total of basic salary, benefits, bonus and pension contributions during 2013, plus the gains made on share schemes where the performance period relating to those schemes concluded in 2013. The LTIP and DAB matching shares that vested in February 2014 have been included since December 31, 2013 is the end of the three year performance period for these awards.
 
The total directors pay for 2013 for each of the executive directors was as follows:
 
 
Director
  
Basic Salary
    
All taxable benefits
    
Bonus Payments
    
Money and other assets receivable for periods of more than one financial year
    
All pension related benefits
    
Total
  
    £     £     £     £     £     £  
Simon Segars
     400,000       73,186       543,454       1,207,360       44,000       2,268,000  
Tim Score
     415,000       26,031       599,374       1,727,783       44,156       2,812,344  
Mike Muller
     285,000       14,940       403,718       1,193,633       32,148       1,929,439  
Warren East (retired June 30, 2013) (1)
     250,000       17,041       —       3,123,688       25,000       3,415,729  
Mike Inglis (retired March 31, 2013) (1)
     71,250       11,293       —       1,680,367       7,125       1,770,035  
Total
     1,421,250       142,491       1,546,546       8,932,831       152,429       12,195,547  
(1)
These represent gains made by Warren East and Mike Inglis on LTIP and DAB matching shares on their retirements.
 
The total directors pay for 2012 for each of the executive directors was as follows:
 
 
Director
  
Basic Salary
    
All taxable benefits
    
Bonus Payments
    
Money and other assets receivable for periods of more than one financial year
    
All pension related benefits
    
Total
  
    £     £     £     £     £     £  
Simon Segars
     280,000       93,284       370,605       3,319,547       30,800       4,094,236  
Tim Score
     400,000       25,178       529,436       4,783,187       42,560       5,780,361  
Mike Muller
     275,000       15,087       349,428       3,276,928       31,020       3,947,463  
Warren East
     490,000       15,087       622,617       5,532,865       49,000       6,709,569  
Mike Inglis
     280,000       14,692       355,781       3,341,919       28,418       4,020,810  
Tudor Brown (retired May 3, 2012)
     77,586       9,741       —       1,380,904       10,167       1,478,398  
Total
     1,802,586       173,069       2,227,867       21,635,350       191,965       26,030,837  
(1)
These represent gains made by Tudor Brown on LTIP and DAB matching shares on his retirement.
 
Directors’ Interests
 
Save as disclosed in “—Share Ownership” below none of the directors has any interest in the issued share capital of the Company which is required to be notified to the Company pursuant to the UK Listing Authority’s rules (LR 9.8.6R(1)).
 
 
SHARE OWNERSHIP
 
The following table sets forth, as of March 3, 2014, certain information as to the shares and outstanding options to subscribe for shares held by (i) each executive officer and director of the Company holding options and (ii) all executive officers and directors of the Company, as a group. As of March 3, 2014, there were 1,408,911,772 shares outstanding and options with respect to 376,891 underlying shares are exercisable and nil RSUs expected to vest within 60 days of March 3, 2014.
 
 
Name
  
Beneficial Ownership Number(2)
    
Beneficial Ownership Percentage
    
Number of Shares underlying
options(1)
    
Weighted average exercise price
(per Share)(1)
    
Exercise
prices and Expiration dates
  
Sir John Buchanan
     —       —       —       —       —  
Stuart Chambers
     10,000    
less than 0.01%
                          
Simon Segars
     557,222       0.04 %     —       —       —  
Tim Score
     864,824       0.06 %     18,208     £ 0.854       (2 )
Mike Muller
     1,425,442       0.10 %     —       —       —  
Andy Green
     —       —       —       —       —  
Larry Hirst
     —       —       —       —       —  
Eric Meurice
                                        
Kathleen O’Donovan
     —       —       —       —       —  
Philip Rowley
     40,000    
less than 0.01%
       —       —       —  
Janice Roberts
     —       —       —       —       —  
All current directors and senior management as a group (11 persons)
     2,897,488       0.21 %     18,208     £ 0.854       —  
(1)
Shares that are not outstanding but that may be acquired upon exercise of options within 60 days of the date of this report are deemed outstanding for the purpose of computing the number and percentage of outstanding shares beneficially owned by the relevant person. However, such shares are not deemed to be outstanding for the purpose of computing the percentage of outstanding shares beneficially owned by any other person.
 
(2)
Options to subscribe for 18,208 shares at £0.854 per share expire on January 31, 2015.
 
Share Option Schemes and Plans
 
The Company operates the following share option schemes and plans under which employees may acquire shares: the Deferred Annual Bonus Plan, the Employee Equity Plan and the U.S. Employee Stock Purchase Plan. For a description of these plans, see “—Board Practices—Incentive Arrangements” above.
 
Since 2006, the Company has issued Restricted Stock Units (RSUs) to employees, which are actual share awards on vesting rather than options to buy shares at a fixed exercise price.
 
The main RSU awards (to employees in all jurisdictions other than France) vest 25% on each anniversary over four years. RSU awards to our French employees vest 50% after two years, and then a further 25% after three and four years.
 
Additionally, the Company operates a Deferred Annual Bonus plan (DAB). Under the DAB, which is for directors and selected senior management within the Group, participants are required to defer 50% of any related annual bonus into shares on a compulsory basis. These shares will be deferred for three years, and then a matching award will be made depending on the achievement of an EPS performance condition over that time. This scheme will be replaced after the February 2014 grant and replaced with a cash only bonus. For details of the new scheme, see “Board Practises -Remuneration Policy”
 
The Company also operates the Long Term Incentive Plan (LTIP), also for directors and selected senior management, whereby share awards are made and vest depending on the Company’s TSR performance compared to two comparator groups over the three year performance period. Grants were made for the last time under this scheme in February 2013 and it will be replace by a new LTIP for 2014 grants onwards. For details of the new scheme, see “Board Practises - Remuneration Policy”
 
The Company also offers savings-related share option schemes (SAYE) for employees and executive directors of the Group. The number of options granted is related to the value of savings made by the employee. The period of savings is three or five years. The option price for grants is set at 80% of the market share price prior to the
 
 
announcement of the grant, and the right to exercise normally only arises for a six-month period once the savings have been completed. The Company also operates a savings-related option scheme for employees in the US and India, namely the Employee Share Purchase Plan (ESPP). The number of options granted is related to the value of savings made by the employee. The period of savings is six months, with the option price being at 85% of the lower of the market share price at the beginning and end of the scheme.
 
During 2013, the Company operated the ARM Holdings plc Deferred Annual Bonus Plan (the “Deferred Annual Bonus Plan”), ARM Holdings plc Employee Equity Plan (the “Employee Equity Plan”), the ARM Holdings plc Savings Related Share Option Scheme (the “Save As You Earn Scheme” or “SAYE Scheme”), the Long Term Incentive Plan (“LTIP”) and the Employee Share Purchase Plan (ESPP).
 
In the past the Company also made awards under the ARM Holdings plc Executive Share Option Scheme (the “Executive Scheme”), the ARM Holdings plc Unapproved Share Option Scheme (the “Unapproved Scheme”), the ARM Holdings plc Unapproved Share Option Scheme French Operation (the “French Scheme”), the ARM Holdings plc Stock Option Plan (the “US Incentive Stock Option Scheme” or “US ISO Scheme”) and the ARM Holdings plc Savings Related Share Option Plan (the “Savings Related Plan”) (together, the “Schemes and Plans”). Following the adoption of the Deferred Annual Bonus Plan and the Employee Equity Plan at the 2006 AGM, awards are no longer made pursuant to the Executive Scheme, the Unapproved Scheme, the French Scheme and the US ISO Scheme, although existing grants of options under such schemes remain exercisable. See “—Board Practices—Incentive Arrangements” above. Upon the acquisition of Artisan in 2004, the Company assumed the share plans of Artisan, namely the 1993 Plan, the 1997 Plan, the 2000 Plan, the 2003 Plan, the Director Plan, the Executive Plan and the ND00 Plan. Following the acquisition of Artisan, the Artisan plans were closed to new grants. None of the benefits under the Schemes and Plans are pensionable. Options granted under the SAYE Scheme and the Savings Related Plan are at an option price equal to not less than 80% of the market value of the shares.
 
Details of the active Schemes and Plans are set out below.
 
Save As You Earn (“SAYE”) Scheme
 
Issue of Invitations. Invitations to join the SAYE Scheme are normally issued within 42 days of the announcement of the Company’s results for any period.
 
Eligibility. All employees of the Company and any subsidiaries designated by the Board of Directors who have worked for the Company or a participating subsidiary for a qualifying period as determined by the Board of Directors (but not to exceed five years) and any other employees nominated by the Board of Directors are eligible to participate in the SAYE Scheme.
 
Savings contract. Employees joining the SAYE Scheme must enter into a savings contract with a designated savings carrier under which they make a monthly saving for a period of three or five years or, if the Board of Directors so allows, any other period permitted under the relevant legislation. The monthly saving must not exceed such limit as is fixed by the Board of Directors within the ceiling imposed by the relevant legislation (currently £250 per month). With the three-year savings period, the employee receives  no tax-free bonus. With the five-year savings period, the employee receives a tax-free bonus of 1.8 monthly payments. With the five-year savings period, the employee has the choice of leaving the money for a further two years to receive an additional bonus of 3.1 monthly payments, making a total bonus of 4.9 monthly payments over seven years (which sum cannot be used to buy shares in the Company). An option is granted to the employee to acquire shares in the Company which is exercisable within six months of maturity after the bonus is payable under the savings contract.
 
Option price. Options are granted at an option price which is not less than 80% of the market value of the shares on the day before the date of invitation (or some other date agreed with HM Revenue and Customs) and, where shares are to be subscribed, their nominal value (if greater). Market value means a value for the shares agreed in advance with HM Revenue and Customs if the shares are not listed or, if they are listed, the middle market quotation on the immediately preceding business day, or the average of the middle market quotations over the three preceding business days.
 
Exercise of options. Options are normally exercisable for a six-month period following the maturity date under the relevant savings contract. If the option is not exercised within this six-month period, the option will lapse. Options may also, however, be exercised, in certain circumstances, for example on an option holder ceasing to be an
 
 
employee due to injury, disability, redundancy, retirement, following change of control of the employing company and in the event of a takeover or winding up of the Company. If any option is exercised early in one of these circumstances, the option holder may only use the savings made under his savings contract at that time to exercise the option. Options are not transferable and may only be exercised by the person to whom they are granted, except in certain specific circumstances (e.g., death of employee).
 
Exchange of options. In the event of a change of control of the Company in certain circumstances, option holders may exchange their options for options over shares in the acquiring company.
 
Issue of shares. Shares issued on the exercise of options rank equally with shares of the same class in issue on the date of allotment, except in respect of rights arising by reference to a prior record date. Application has been made to and approved by the London Stock Exchange for the listing of shares issued under the SAYE Scheme.
 
Variation in share capital. Options may be adjusted following certain variations in the share capital of the Company, including a capitalization or rights issue, subdivision or consolidation or reduction of the share capital.
 
Termination of the SAYE Scheme. No options may be granted under the SAYE Scheme after the tenth anniversary of the date of the adoption of the rules.
 
 
Employee Share Purchase Plan (ESPP)
 
The company operates a savings-related option scheme for U.S. employees, namely the ESPP. The number of options granted is related to the value of savings made by the employee. The period of savings is six months, with the option price being 85% of the lower of the market share price of the beginning and end of the scheme.
 
Long-Term Incentive Plan
 
A Long-Term Incentive Plan was approved by shareholders at the 2003 Annual General Meeting. Conditional share awards held by directors are as follows:
 
 
Director
 
Performance period ending December 31
 
Award date
  
Market price at date of award
£
    
As at January 1
Number
    
Conditional award
Number
    
Vested* Number
    
Lapsed Number
    
As at December 31
Number
    
 
Vesting date
Simon Segars
2012
February 8, 2010
     2.05       125,853       —       (125,853 )     —       —    
February 2013
 
2013
February 8, 2011
     6.11       43,863       —       —       —       43,863 **  
February 2014
 
2014
February 8, 2012
     5.68       49,295       —       —       —       49,295    
February 2015
 
2015
February 8, 2013
     9.245       —       32,449       —       —       32,449    
February 2016
 
2015
August 13, 2013
     8.865       —       11,280       —       —       11,280    
August 2016
                  219,011       43,729       (125,853 )     —       136,887      
Tim Score
2012
February 8, 2010
     2.05       180,487       —       (180,487 )     —       —    
February 2013
 
2013
February 8, 2011
     6.11       62,684       —       —       —       62,684 **  
February 2014
 
2014
February 8, 2012
     5.68       70,422       —       —       —       70,422    
February 2015
 
2015
February 8, 2013
     9.245       —       44,889       —       —       44,889    
February 2016
                  313,593       44,889       (180,487 )     —       177,995      
Mike Muller
2012
February 8, 2010
     2.05       124,390       —       (124,390 )     —       —    
February 2013
 
2013
February 8, 2011
     6.11       43,372       —       —       —       43,372 **  
February 2014
 
2014
February 8, 2012
     5.68       48,415       —       —       —       48,415    
February 2015
 
2015
February 8, 2013
     9.245       —       30,827       —       —       30,827    
February 2016
                  216,177       30,827       (124,390 )     —       122,614      
Warren East
2012
February 8, 2010
     2.05       209,756       —       (209,756 )     —       —    
February 2013
(retired June 30, 2013)
2013
February 8, 2011
     6.11       77,741       —       (77,741 )     —       —    
February 2014
 
2014
February 8, 2012
     5.68       86,267       —       (83,109 )     (3,158 )     —    
February 2015
 
2015
February 8, 2013
     9.245       —       54,083       —       (54,083 )     —    
February 2016
                  373,764       54,083       (370,606 )     (57,241 )     —      
Mike Inglis
2012
February 8, 2010
     2.05       126,829       —       (126,829 )     —       —    
February 2013
(retired March 31, 2013)
2013
February 8, 2011
     6.11       44,190       —       (44,190 )     —       —    
February 2014
 
2014
February 8, 2012
     5.68       49,295       —       (35,374 )     (13,921 )     —    
February 2015
                                                         
                  220,314       —       (206,393 )     (13,921 )     —      
*
The performance conditions applicable to the 2010 conditional awards were satisfied to the extent of 200% plus dividend shares as detailed below.
 
**
The performance conditions applicable to the 2011 conditional awards were satisfied to the extent of 183.7% plus dividend shares as detailed below.
 
Conditional awards will vest to the extent that the performance criteria are satisfied over a three-year performance period from January 1 of the year of award, and no re-testing thereafter is possible. The performance conditions are based on the Company’s TSR when measured against that of two comparator groups (each testing half of the shares comprised in the award). The first index comprises UK companies across all sectors (FTSE 350) and the second comprises predominantly US companies within the Hi Tech sector (All World Technology Index). For each comparator group, the number of shares that may vest may be up to a maximum of 200% of the shares if the Company’s TSR ranks in the upper decile, 50% will vest in the event of median performance and between median and upper decile performance vesting will increase on a straight-line basis. Additional shares may vest to cover dividends paid by the Company during the performance period. No shares will be received for below-median performance. In addition, no shares will vest unless the committee is satisfied that there has been a sustained improvement in the underlying financial performance of the Company.
 
The performance conditions applicable to the conditional awards granted on February 8, 2010 were satisfied in respect of the performance period ended December 31, 2012 to the extent of 200% plus dividend shares which vested on February 8, 2013, as follows:
 
 
 
Director
  
Conditional award
Number
    
Vested award Number
    
Dividend shares Number
    
Total award Number
    
Market value at vesting
£
  
Simon Segars
     125,853       251,706       5,346       257,052       2,376,446  
Tim Score
     180,487       360,974       7,667       368,641       3,408,086  
Mike Muller
     126,826       253,658       5,388       259,046       2,394,880  
Warren East (retired June 30, 2013)
     209,756       419,512       8,911       428,423       3,960,771  
Mike Inglis (retired March 31, 2013)
     124,390       248,780       5,284       254,064       2,348,822  
Total
     767,315       1,534,630       32,596       1,567,226       14,489,005  
 
The amount vested above represents the maximum award under the LTIP. This is based on the total shareholder return as calculated below:
 
 
Comparator group
  
ARM TSR
percentile rank
    
Implied vesting
  
FTSE 350 index
     99.4 %     200 %
FTSE All World Technology index
     100.0 %     200 %
Overall
             200 %

The performance conditions applicable to the conditional awards granted on February 8, 2011 were satisfied in respect of the performance period ended December 31, 2013 to the extent of 183.7% plus dividend shares which vested on February 8, 2014, as follows:
 
 
Director
  
Conditional award
Number
    
Vested award
Number
    
Dividend shares Number
    
Total award Number
    
Market value at vesting
£
  
Simon Segars
     43,863       80,576       1,392       81,968       734,433  
Tim Score
     62,684       115,150       1,989       117,139       1,049,565  
Mike Muller
     43,372       79,674       1,376       81,050       726,208  
Total
     149,919       275,400       4,757       280,157       2,510,206  

The amount vested above is based on the total shareholder return as calculated below:
 
 
Comparator group
  
ARM TSR
percentile rank
    
Implied vesting
  
FTSE 350 index
     81.3 %     167.4 %
FTSE All World Technology index
     90.0 %     200.0 %
Overall
             183.7 %
 
In accordance with the rules of the LTIP, on his retirement on March 31, 2013, Mike Inglis received the following shares under the Plan calculated on a pro rata basis and reflecting the extent to which the performance conditions were satisfied at that date:
 
 
Grant
  
Conditional award
Number
    
Vested award
Number
    
Dividend shares Number
    
Total award Number
    
Market value at vesting
£
  
February 8, 2011
     44,190       52,683       —       52,683       551,064  
February 8, 2012
     49,295       35,375       —       35,374       370,012  
Total
     93,485       88,057       —       88,057       921,076  
 
In accordance with the rules of the LTIP, on his retirement on June 30, 2013, Warren received the following shares under the Plan calculated on a pro rata basis and reflecting the extent to which the performance conditions were satisfied at that date:
 
 
Grant
  
Conditional award
Number
    
Vested award
Number
    
Dividend shares Number
    
Total award Number
    
Market value at vesting
£
  
February 8, 2011
     77,741       122,434       —       122,434       1,085,377  
February 8, 2012
     86,267       83,109       —       83,109       736,761  
Total
     164,008       205,543       —       205,543       1,822,138  
 
The following conditional awards over ordinary shares were made under the LTIP on February 8, 2014:Simon Segars 107,770; Tim Score 89,449 and Mike Muller 61,429; The mid-market closing price of an ordinary share on February 7, 2014 being the business day prior to the date of these conditional awards was 896 pence.
 
The Deferred Annual Bonus Plan
 
As described above, there is compulsory deferral of 50% of the annual bonus earned by executive directors in the year. The emoluments detailed below include the full bonus earned for 2013, although only half has been settled in cash and the deferred elements will be settled in shares after three years.
 
The total number of deferred shares held under the deferred annual bonus plan by the directors following confirmation of the 2013 bonus is:
 
 
Director
  
Shares deferred as part of the 2011 bonus
Number
    
Shares deferred as part of the 2012 bonus
Number
    
Shares deferred as part of the 2013 bonus
Number
    
Total
awards
Number
  
Simon Segars
     35,387       20,045       30,327       85,759  
Tim Score
     50,572       28,637       33,447       112,656  
Mike Muller
     34,991       18,900       22,501       76,392  
Total
     120,950       67,582       86,275       274,807  
 
The performance conditions applicable to the matching awards relating to the deferred elements of the annual bonus for 2010 were satisfied to the extent of 200% matching shares plus dividend shares which vested on February 8, 2014, as follows:
 
 
Director
  
Shares deferred as part of the 2010 bonus
Number
    
Matching Shares Number
    
Dividend shares
Number
    
Total
award
Number
  
Simon Segars
     26,391       52,782       456       79,629  
Tim Score
     37,847       75,694       654       114,195  
Mike Muller
     26,084       52,168       451       78,703  
Total
     90,322       180,644       1,561       272,527  

The market value of an ARM share on the date of vesting was 896 pence. The matching shares vesting represent the maximum award under the DAB Plan. This award is based on an EPS growth rate before inflation of 120% compared with a target growth rate of CPI plus 12% per annum on average for the three years making up the performance period.
 
In accordance with the rules of the DAB  Plan, on his retirement on 31 March 2013, Mike Inglis received the following shares calculated on a pro-rata basis and reflecting the extent to which the performance conditions were satisfied at that date:
 
 
Grant
  
Shares deferred as part of the bonus
Number
    
Matching shares
Number
    
Matching shares value
£
    
Total
award
Number
  
2011
     26,595       39,831       416,632       66,426  
2012
     35,651       29,629       309,919       65,280  
2013
     19,244       3,130       32,740       22,374  
Total
     81,490       72,590       759,291       154,080  
 
In accordance with the rules of the DAB  Plan, on his retirement on 1 July 2013, Warren East received the following shares calculated on a pro-rata basis and reflecting the extent to which the performance conditions were satisfied at that date:
 
 
Grant
  
Shares deferred as part of the bonus
Number
    
Matching shares
Number
    
Matching shares value
£
    
Total
award
Number
  
2011
     43,985       73,186       648,794       117,171  
2012
     62,720       62,550       554,506       125,270  
2013
     33,677       11,083       98,251       44,760  
Total
     140,382       146,819       1,301,550       287,201  
 
Except as described above, there have been no changes in directors’ interests under the Company’s equity schemes since the end of the 2013 financial year up to the date of approval of the Remuneration report.
 
The Company’s register of directors’ interests contains full details of directors’ shareholdings and options to subscribe and conditional awards under the LTIP.
 
Amendments to the Schemes and Plans
 
The directors may amend the Schemes and Plans, except that any amendment relating to the identity of option holders, the limitations on their benefits, the number of shares which may be issued under the Schemes and Plans, the basis for determining an option holder’s entitlement to shares (other than provided for in accordance with the rules) or the adjustment of rights for option holders in the event of a variation in share capital may not be made to the advantage of option holders without prior approval of the shareholders of the Company in general meeting, except for minor amendments relating to tax and administrative matters. Amendments to the Executive Scheme and the SAYE Scheme are subject to the prior approval of HM Revenue and Customs, while they are to retain their approved status.
 
Limits
 
In any five-year period, not more than 10% of the issued ordinary share capital of the Company may in aggregate be issued or issuable under the Schemes and Plans and any other employee share schemes or plans operated by the Company. Shares issued to satisfy options granted under the Artisan Plans are excluded from this 10% limit.
 
EMPLOYEES
 
At December 31, 2013, the Company had 2,833 full-time employees, including 1,187 in the United Kingdom, 116 in France, 30 in Germany, 116 in Norway, 71 in Sweden, 11 in Finland, 5 in Slovenia, 3 in Israel, 2 in Belgium, 668 in the United States where Simon Segars is President of ARM, Inc., 26 in Japan, 16 in South Korea, where Young Sub Kim is president of ARM Korea Limited, 33 in Taiwan, 154 in P.R. China where Allen Wu is President of ARM Consulting (Shanghai) Co. Ltd, and 395 in India where Guru Ganesan is Managing Director of ARM Embedded Technologies Pvt. Limited.
 
The table below sets forth the number of Company employees by function and by location at year end for the periods indicated:
 
   
At December 31,
  
   
2011
    
2012
    
2013
  
Total
     2,116       2,392       2,833  
Function
                        
Research and Development
     1,459       1,652       1,987  
Marketing and Sales
     359       400       447  
Finance and Administration
     298       340       399  
Location
                        
Europe
     1,116       1,289       1,541  
United States
     555       583       668  
Far East and India
     445       520       624  

Overall, approximately three-quarters of the Company’s employees have technical degrees and approximately one third of the Company’s employees have advanced technical degrees. The Company’s future success will depend on its ability to attract, retain and motivate highly qualified technical and management personnel who are in great demand in the microprocessor industry. The Company’s employees are not represented by any collective bargaining agreements and the Company has never experienced a work stoppage. The Company believes that its employee relations are good. See “Item 3. Key Information—Risk Factors—We Are Dependent on Our Senior Management Personnel and on Hiring and Retaining Both Qualified Engineers and Experienced Sales and Marketing Personnel” for a discussion of the dependence of the Company on identifying, attracting, motivating and retaining qualified engineers and other personnel.
 
 
MAJOR SHAREHOLDERS
 
The following table sets forth certain information as at March 3, 2014, with respect to each person who is known by the Company to be the beneficial owner of more than 3% of outstanding shares.
 
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. As at March 3, 2014 the number of our shares held in the US in the form of ordinary shares or ADSs amounts to approximately half of our total outstanding share capital. We believe that the persons named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them. The shareholders listed below have the same voting rights as our other shareholders. As far as the Company is aware, it is neither directly nor indirectly owned or controlled by one or more corporations or by any government.
 
As at March 3, 2014, which is the most recent practicable date prior to the date of this annual report, except as noted below, we are not aware of:
 
 
·
any arrangements that might lead to a change in control of our business;
 
 
·
any person who is interested in 3% or more of our capital; or
 
 
·
any person who can, will or could directly or indirectly, jointly or severally, exercise control over us.

 
Beneficial owners (March 3, 2014)
  
Shares Beneficially Owned (Number)
    
Percent
  
Baillie Gifford & Co
     70,530,313       5.05  
Thornburg Investment Management     65,856,520        5.01  
Fidelity Management and Research Corporation
     67,972,760       4.92  
The Capital Group Companies, Inc.
     58,256,483       4.16  
Janus Capital Corporation
     42,639,790       3.05  

 
Beneficial owners (February 25, 2013)
  
Shares Beneficially Owned (Number)
    
Percent
  
The Capital Group Companies, Inc.
     95,690,311       6.95  
BlackRock, Inc.
     69,206,509       5.01  
Fidelity Management and Research Corporation
     68,672,912       4.99  
Thornburg Investment Management
     65,856,520       5.01  
Legal & General Investment Management
     49,884,833       3.80  
Janus Capital Corporation
     48,594,165       3.61  

 
Beneficial owners (February 27, 2012)
  
Shares Beneficially Owned (Number)
    
Percent
  
Capital Research and Management Company
     81,238,500       6.00  
Fidelity Management and Research Corporation
     66,018,481       5.01  
Thornburg Investment Management
     65,856,520       5.00  
Legal & General Investment Management
     49,884,833       3.80  
Janus Capital Management
     48,594,165       3.61  
 
RELATED PARTY TRANSACTIONS
 
During the year ended December 31, 2013, the Company incurred subscription costs of £7.0 million (2012: nil) from Linaro Limited, an associated company, representing ARM’s committed aggregate contributions to Linaro for a period of two years. In respect of the subscription fees, the Group was invoiced £4.3 million during the year to December 31, 2013 (2012: £4.2 million). As at December 31, 2013, £1.0 million (2012: £1.0 million) was owing to Linaro.
 
In addition, the Company provided consulting and other services to Linaro amounting to £1.6 million (2012: £1.7 million). All fees have been charged in accordance with the terms of the agreement. As at December 31, 2013, £0.3 million (2012: £1.0 million) was owed to the Company.
 
There were no other related party transactions during 2013 which require disclosure.
 
 
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
 
Consolidated financial statements are set forth under “Item 18. Financial Statements.”
 
 
LEGAL PROCEEDINGS
 
It is common industry practice for licensors of technology to offer to indemnify their licensees for loss suffered by the licensee in the event that the technology licensed is held to infringe the intellectual property of a third-party. Consistent with such practice, the Company provides such indemnification to its licensees but subject, in all cases, to a limitation of liability. The obligation for the Company to indemnify its licensees is subject to certain provisos and is usually contingent upon a third-party bringing an action against the licensee alleging that the technology licensed by the Company to the licensee infringes such third-party’s intellectual property rights. The indemnification obligations typically survive any termination of the license and will continue in perpetuity.
 
The Company does not provide for any such indemnities unless it has received notification from the other party that they are likely to invoke the indemnity. A provision is made if both of the following conditions are met: (i) information available prior to the issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements; and (ii) the amount of the liability can be reliably estimated. Any such provision is based upon the directors’ estimate of the expected costs of any such claim.
 
At present, the Company is not a party in any legal proceedings in which the directors believe that it is probable that the resolution of such proceedings will result in a material liability for the Company. Currently, there are legal proceedings  against some of Company’s licensees in which it is asserted that certain of the Company’s technology infringes third-party patents, but in each of those proceedings the Company either presently has no obligation to indemnify, because certain preconditions to indemnification have not been satisfied by such licensees, or to the extent that there is any present obligation to indemnify, the Company does not believe that it is probable that the resolution of such proceedings will result in a material liability for the Company. If preconditions to indemnification are satisfied then an indemnification obligation may arise which could result in a material liability for the Company.
 
DIVIDEND DISTRIBUTION POLICY
 
The directors recommend payment of a final dividend in respect of 2013 of 3.6 pence per share which, taken together with the interim dividend of 2.10 pence per share paid in October 2013, gives a total dividend in respect of 2013 of 5.70 pence per share, an increase of 27% over 4.50 pence per share in 2012 following a 29% increase from 3.48 pence in 2011. Subject to shareholder approval at the AGM on May 1, 2014, the final dividend will be paid on May 16, 2014 to shareholders on the register on April 22, 2014.
 
It is the Board’s intention to increase the dividend over time, taking into account the opportunity for continued investment in the business and the Company’s underlying operational performance.
 
SIGNIFICANT CHANGES
 
We have not experienced any significant changes since the date of the annual financial statements.
 
 
The information in this section has been extracted from publicly available documents from various sources, including officially prepared materials from the London Stock Exchange and the Nasdaq National Market and has not been prepared or independently verified by us. This is the latest available information to our knowledge.
 
MARKET PRICE INFORMATION
 
Shares
 
The Company’s ordinary shares were listed on the London Stock Exchange in April 1998 under the symbol ARM. The London Stock Exchange is the principal trading market for the Company’s ordinary shares.
 
The following table sets forth, for the periods indicated, the high and low closing prices of the ordinary shares reported on the London Stock Exchange:
 
   
Price per share
(£)
  
   
High
    
Low
  
Annual prices:
            
2009
     1.78       0.81  
2010
     4.40       1.84  
2011
     6.51       4.38  
2012
     7.83       4.69  
2013
     11.10       7.59  
                 
Quarterly prices:
                
2012:
                
First Quarter
     6.13       5.36  
Second Quarter
     6.11       4.70  
Third Quarter
     5.89       4.69  
Fourth Quarter
     7.83       5.77  
2013:
                
First Quarter
     9.72       7.68  
Second Quarter
     10.97       7.59  
Third Quarter
     10.10       8.06  
Fourth Quarter
     11.10       9.24  
2014:
                
First Quarter (through March 3, 2014)
  
10.95
    
8.75
  
                 
Monthly prices:
                
September 2013
     10.10       8.75  
October 2013
     10.39       9.46  
November 2013
     10.18       9.24  
December 2013
     11.10       9.72  
January 2014
     10.95       9.35  
February 2014
 
10.10
    
8.75
  
March 2014 (through  March 3, 2014)   9.86     9.86  

ADSs
 
The Company’s ordinary shares were listed in April 1998 on the Nasdaq Stock Market in the United States in the form of American Depositary Shares (“ADSs”), evidenced by American Depositary Receipts, under the symbol ARMHY. One of the Company’s ADSs, for which The Bank of New York Mellon is the depositary, represents three ordinary shares.
 
 
100
 
The following table sets forth, for the periods indicated, the reported high and low closing prices on the Nasdaq National Market for the outstanding ADSs.
 
   
Price per ADS
(£)
  
   
High
    
Low
  
Annual prices:
            
2009
     8.65       3.44  
2010
     20.75       8.85  
2011
     31.63       20.86  
2012
     38.32       21.70  
2013
  
54.83
    
35.17
  
                 
Quarterly prices:
                
2012:
                
First Quarter
     28.88       25.37  
Second Quarter
     29.01       22.10  
Third Quarter
     28.72       21.70  
Fourth Quarter
     38.32       27.66  
2013:
                
First Quarter
     44.21       38.45  
Second Quarter
     50.11       35.17  
Third Quarter
     49.05       36.41  
Fourth Quarter
     54.83       44.72  
2014
                
First Quarter (through March 3, 2014) 
  
54.01
    
43.80
  
                 
Monthly prices:
                
September 2013
     49.05       41.37  
October 2013
     51.78       45.83  
November 2013
     49.90       44.72  
December 2013
     54.83       47.64  
January 2014
     54.01       46.07  
February 2014
  50.20     43.80  
March 2014 (through March 3, 2014)   
49.26
    
49.26
  
 
 
CORPORATE GOVERNANCE
 
Differences in our corporate governance and Nasdaq corporate governance practices
 
In February 2005, the SEC approved Nasdaq’s new corporate governance rules for listed companies. Under these new rules, as a Nasdaq-listed foreign private issuer, we must disclose any significant ways in which our corporate governance practices differ from those followed by US companies under Nasdaq listing standards. We believe the following to be the significant differences between our corporate governance practices and Nasdaq corporate governance rules applicable to US companies.
 
Independent Directors
 
Nasdaq listing standards require that a majority of the company's board of directors be comprised of independent directors. The UK Corporate Governance Code 2012 requires that at least half the Board excluding the Chairman should comprise independent non-executive directors and the Board currently comprises three executive directors, seven independent non-executive directors and the Chairman. In accordance with the Combined Code, the Chairman of the Board of Directors is not considered independent although he was regarded as independent at the time of his appointment.
 
 
101
 
The Board has considered the overall balance between executive and non-executive directors and believes that the number of executive directors is fully justified by the contribution made by each of them.
 
Nomination of Directors. Nasdaq listing standards require that nominees to a company’s board of directors be selected, or recommended for the board’s selection, either by a majority of the company’s independent directors or by a nomination committee comprised solely of independent directors. The nomination committee leads the process for board appointments and makes recommendations to the board in relation to new appointments of executive and non-executive directors and on succession planning, board composition and balance. It is chaired by Stuart Chambers, Chairman of the Board of Directors, and the other members are Kathleen O’Donovan, Andy Green and Philip Rowley.
 
Shareholder Approval
 
Stock option plans. Nasdaq listing standards require listed companies to obtain shareholder approval before a stock option or purchase plan is established or materially amended or other equity compensation arrangement is made pursuant to which stock may be acquired by officers, directors, employees or consultants of the Company, subject to certain exceptions. The Company’s directors may amend the Schemes and Plans, except that any amendment relating to the identity of option holders, the limitations on their benefits, the number of shares which may be issued under the Schemes and Plans, the basis for determining an option holder’s entitlement to shares (other than provided for in accordance with the rules) or the adjustment of rights for option holders in the event of a variation in share capital may not be made to the advantage of option holders without prior approval of the shareholders of the Company in general meeting, except for minor amendments relating to tax and administrative matters. Amendments to the UK Approved Executive Scheme and the SAYE Scheme are subject to the prior approval of the HM Revenue and Customs, while they are to retain their approved status.
 
Other transactions. Nasdaq listing standards require listed companies to obtain shareholder approval prior to the issuance of securities in certain circumstances related to a change of control of the issuer, the acquisition of the stock or assets of another company under certain circumstances and in connection with certain transactions involving the sale, issuance or potential issuance of 20% or more of common stock or voting power of the issuer. As a foreign private issuer, the Company complies with corporate governance practices customary in its home jurisdiction, the United Kingdom. While not dealing directly with the transactions enumerated in the Nasdaq listing requirements, there are various provisions requiring shareholder vote, which can best be summarized as follows.
 
Under the Listing Rules of the UK Financial Services Authority, shareholder approval is usually required for an acquisition or disposal by a listed company if, generally, the size of the company or business to be acquired or disposed of represents 25% or more of the assets, profits or gross capital of the listed company or if the consideration to be paid represents 25% or more of the aggregate market value of the listed company’s equity shares. Shareholder approval may also be required for an acquisition or disposal of assets between a listed company and parties, including: (a) directors or shadow directors of the company or its subsidiaries; (b) any person who is, or was in the last 12 months preceding the date of the transaction, a holder of 10% or more of the nominal value of any class of the company’s or any holding company’s or its subsidiary’s shares having the right to vote in all circumstances at general meetings; or (c) any of the associates of persons described in (a) or (b).
 
Quorum
 
Nasdaq rules require that the quorum for any meeting of shareholders must not be less than 33⅓% of the outstanding shares of a company’s common voting stock. We comply with the relevant quorum standards applicable to companies in the United Kingdom, as set forth in our Articles of Association summarized below.
 
Independent by Regulatory Body
 
The Company’s auditors are registered with the US Public Company Accounting Oversight Board and, therefore, are subject to its inspection regime.
 
ARTICLES OF ASSOCIATION
 
The following summarizes certain rights of holders of shares. The following summary does not purport to be complete and is qualified in its entirety by reference to the Articles of Association of the Company.
 
 
102
 
Shareholder Meetings
 
An Annual General Meeting of shareholders must be held once in every year (within the period of six months after the end of the Company’s financial year). The Board of Directors may convene an Extraordinary General Meeting of shareholders whenever they think fit. General meetings may be held at such time and place as may be determined by the Board of Directors. An Annual General Meeting may be convened on at least 21 days’ written notice to shareholders entitled to receive notices. Following the passing of a special resolution at the 2013 AGM, an Extraordinary General Meeting for any purpose can be convened on 14 days’ written notice. The Company may determine that only those persons entered on the register at the close of business on a day determined by the Company, such day being no more than 21 days before the day the notice of the meeting is sent, shall be entitled to receive such a notice. Three shareholders must be present in person or by proxy to constitute a quorum for all purposes at general meetings.
 
Voting Rights
 
Subject to disenfranchisement in the event of (i) non-payment of any call or sum due and payable in respect of any ARM ordinary share or (ii) a shareholder, or other person interested in ARM ordinary shares held by a shareholder, being in default for a period of 14 days of a notice requiring them to supply ARM with information under Section 793 of the UK Companies Act 2006, on a show of hands every shareholder who is present in person or by proxy or by representative has one vote and, on a poll, every shareholder present in person or by proxy or by representative has one vote for each share held. In the case of joint holders of ordinary shares the vote of the person whose name stands first in the share register in respect of the shares who tenders a vote, whether in person or by proxy, is accepted to the exclusion of any votes tendered by any other joint holders.
 
Voting at any general meeting is by a show of hands or by poll. A poll is required for any special resolution which is proposed. A poll may be demanded by (i) the chairman of the meeting, (ii) not less than five shareholders present in person or by proxy and entitled to vote, (iii) any shareholder or shareholders present in person or by proxy and representing not less than one-tenth of the total voting rights of all shareholders having the right to vote at such meeting or (iv) any shareholder or shareholders present in person or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all the shares conferring that right. Where a poll is not demanded, the interests of beneficial owners of shares who hold through a nominee, such as a holder of an ADR, may not be reflected in votes cast on a show of hands if such nominee does not attend the meeting or receives conflicting voting instructions from different beneficial owners for whom it holds as nominee. A nominee such as a depositary is able to appoint any ADR holder as its proxy in respect of the ADR holders’ underlying ordinary shares. Since under English law voting rights are only conferred on registered holders of shares, a person holding through a nominee may not directly demand a poll unless such person has been appointed as the nominee’s proxy with respect to the relevant meeting. In line with UK corporate governance best practice, all resolutions set out in the Circular and Notice of the 2014 Annual General Meeting will be decided on a poll.
 
Unless a special resolution is required by law or the Articles (see below), voting in a general meeting is by ordinary resolution. An ordinary resolution (e.g., a resolution for the election of directors, the approval of financial statements, the declaration of a final dividend, the appointment of auditors or the grant of authority to allot shares), in the case of a vote by show of hands, requires the affirmative vote of a majority of the shareholders present in person or by proxy who vote on the resolution, or, on a poll, a majority of the votes actually cast by those present in person or by proxy. A special resolution (e.g., a resolution amending the Articles of Association, changing the name of the Company or waiving the statutory pre-emption rights which would otherwise apply to an allotment of equity securities to be paid up wholly in cash), the voting for which must be taken on a poll, requires at least three-fourths of the votes actually cast on the resolution by those present in person or by proxy.
 
The Articles of Association provide that holders of ADRs are entitled to attend, speak and vote on a poll or show of hands, at any general meeting of the Company following appointment by The Bank of New York Mellon, as the depositary, as proxies in respect of the underlying ordinary shares represented by the ADRs. Each such proxy may also appoint a substitute proxy. Alternatively, holders of ADRs are entitled to vote on a poll by supplying their voting instructions to the depositary, who will vote the ordinary shares underlying their ADRs on their behalf.
 
 
Directors
 
A director shall not vote in respect of any contract or arrangement in which he has, or can have, a direct or indirect interest and shall not be counted in the quorum at a meeting in relation to any resolution on which he is not entitled to vote. Subject to the provisions of law, a director shall (in the absence of some other material interest) be entitled to vote and be counted in the quorum in respect of any resolution concerning the giving of any security, guarantee or indemnity in respect of money lent or obligations incurred by him or by any other person for the benefit of the Company or any of its subsidiaries or in respect of any debt or other obligation of the Company or its subsidiaries for which he himself has assumed responsibility under a guarantee or indemnity or by the giving of security. A director shall also (in the absence of some other material interest) be entitled to vote and be counted in the quorum in respect of any resolution regarding an offer of shares or other securities of or by the Company or any of its subsidiaries in which offer he is or may be entitled to participate, subject to the provisions of law.
 
A director shall not be required to retire by reason of his having attained any particular age, and any provision of law which would have the effect of rendering any person ineligible for appointment or election as a director or liable to vacate office as a director on account of his having reached any specified age or of requiring special notice or any other special formality in connection with the appointment or election of any director over a specified age, shall not apply to the Company. A director shall not be required to hold any shares of the Company by way of qualification.
 
Dividends
 
The Company may by ordinary resolution declare dividends but no such dividend shall exceed the amount recommended by the directors. If and so far as in the opinion of the directors the profits of the Company justify such payments, the directors may also, from time to time, pay interim dividends of such amounts and on such dates and in respect of such periods as they think fit. The directors may also pay fixed dividends on any class of shares carrying a fixed dividend expressed to be payable on fixed dates on the dates prescribed for the payment thereof. Subject to the extent that rights attached to any shares or the terms of issue thereof provide otherwise, all dividends shall be apportioned and paid proportionately to the amounts paid up during any portion or portions of the period in respect of which the dividend is paid. No amount paid on a share in advance of calls shall be treated as paid on the share. Dividends may be paid in such currency as the Board of directors may decide; however, the Company intends to pay cash dividends denominated in pounds sterling.
 
No dividend shall be paid otherwise than out of profits available for distribution (determined in accordance with the provisions of the UK Companies Act 2006). No dividend or other moneys payable on or in respect of a share shall bear interest as against the Company. Any dividend unclaimed after a period of 12 years from the date on which such dividend was declared, or became due for payment, shall be forfeited and shall revert to the Company. With the sanction of an ordinary resolution and the recommendation of the Board of Directors, payment of any dividend may be satisfied wholly or in part by the distribution of specific assets and in particular of paid-up shares or debentures in any other company. The Board of directors may, if authorized by an ordinary resolution, offer a scrip dividend to ordinary shareholders.
 
Winding Up
 
If the Company shall be wound up, the liquidator may, with the authority of a special resolution of the Company: (i) divide amongst the members in specie or in kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and, for that purpose, set such value as he deems fair upon any property to be divided and determine how the division shall be carried out between the members; or (ii) vest any part of the assets in trustees upon such trusts for the benefit of members as the liquidator shall think fit; but no member shall be compelled to accept any shares or other property in respect of which there is a liability.
 
Issues of Shares and Pre-emptive Rights
 
Without prejudice to any special rights previously conferred on the holders of any issued shares or class of shares, any share in the Company may be issued with such preferred, deferred or other special rights, or subject to such restrictions, whether as regards dividend, return of capital, voting or otherwise, as an ordinary resolution of a general meeting of shareholders may from time to time determine (or, in the absence of any such determination, as
 
 
the Board of directors may determine). The Company may issue redeemable shares provided that there are shares outstanding at the time which are not redeemable at the relevant time.
 
Subject to the provisions of the UK Companies Act 2006 relating to authority, pre-emption rights and otherwise and of any resolution of the Company in general meeting, all unissued shares shall be at the disposal of the directors and they may allot (with or without conferring a right of renunciation), grant options over or otherwise dispose of them to such persons, at such times and on such terms as they think proper.
 
The UK Companies Act 2006 confers on shareholders, to the extent not disapplied, rights of pre-emption in respect of the issue of equity securities that are, or are to be, paid up wholly in cash. The term “equity securities” means: (i) shares other than shares which, with respect to dividends and capital, carry a right to participate only up to a specified amount in a distribution and other than shares allotted pursuant to an employees’ shares scheme; and (ii) rights to subscribe for, or to convert securities into, such shares. These provisions may be disapplied by a special resolution of the shareholders, either generally or specifically, for a maximum period not exceeding five years.
 
Subject to the restrictions summarized below and to the passing of a resolution to renew the directors’ authority to allot at the 2014 AGM, the directors will be generally and unconditionally authorized for the purpose of Section 551 of the UK Companies Act 2006 to exercise all or any powers of the Company to allot relevant securities (within the meaning of that Section) up to an aggregate nominal amount of £232,470 (i.e., a total of 464,940,884 shares). In addition to this general authority to allot relevant securities, in connection with a rights issue by the Company, the directors will also be authorized to allot an additional aggregate nominal amount of relevant securities of up to £35,222 i.e., a total of 70,445,588 shares). Both allotment authorities will continue for a period expiring (unless previously renewed, varied or revoked by the Company in general meeting) on the earlier of the end of the AGM of the Company held in 2015 or June 30, 2015 (on terms that, during such period, the Company may make an offer or agreement which would or might require relevant securities to be allotted after the expiry of such period).
 
Subject to the passing of a resolution at the 2014 AGM, the directors will be empowered pursuant to Section 561 of the UK Companies Act 2006 to allot equity securities (within the meaning of Section 560(1) of the UK Companies Act 2006) for cash pursuant to the authorities described above as if Section 561 of the UK Companies Act 2006 did not apply to any such allotment (on terms that the Company may make an offer or agreement which would or might require equity securities to be allotted after the expiry of such authority), such power to be limited to (a) allotments of equity securities up to an aggregate nominal amount equal to 33% of the issued share capital of the Company in connection with an offer of such securities open for acceptance for a period fixed by the directors to holders of shares on the register on the record date fixed by the directors in proportion to their prospective holdings, but subject to such exclusions or other arrangements as the directors may deem necessary or expedient in relation to fractional entitlements or legal or practical problems under the laws of, or the requirements of any recognized regulatory body or any stock exchange, in any territory; (b) allotments of equity securities up to a further aggregate nominal amount equal to 33% of the issued share capital of the Company in connection with an offer to holders of shares in proportion (as nearly as may be practicable) to their existing holdings to subscribe further securities by means of the issue of a renounceable letter (or other negotiable document) which may be traded for a period before payment for the securities is due, but subject to such exclusions or other arrangements as the directors may deem necessary or expedient in relation to treasury shares, fractional entitlements, record dates or legal, regulatory or practical problems in, or under the laws of, any territory; and (c) allotments (otherwise than as described in (a) or (b) above) of equity securities for cash up to an aggregate nominal amount equal to 5% of the issued share capital of the Company.
 
Transfer of Shares
 
Any holder of ordinary shares which are in certificated form may transfer in writing all or any of such holder’s shares in any usual or common form or in any other form which the directors may approve and may be made under hand only. The instrument of transfer of a share which is in certificated form shall be signed by or on behalf of the transferor and (except in the case of fully paid shares which are in certificated form) by or on behalf of the transferee. All instruments of transfer which are registered may be retained by the Company. All transfers of shares which are in uncertificated form may be effected by means of the CREST settlement system.
 
The directors may in their absolute discretion, and without assigning any reason therefore, refuse to register any transfer of shares (not being fully paid shares) which are in certificated form provided that, where such shares are admitted to the Official List maintained by the UK Listing Authority, such discretion may not be exercised in such a
 
 
way as to prevent dealings in the shares of that class on a proper and open basis. The directors may also refuse to register an allotment or transfer of shares (whether fully paid or not) to more than four persons jointly. The directors may also refuse to register a transfer of shares which are in certificated form unless the instrument of transfer is both (i) in respect of only one class of shares and (ii) lodged at the transfer office accompanied by the relevant share certificate(s) and such other evidence as the directors may reasonably require to show the right of the transferor to make such transfer.
 
Disclosure of Interests
 
Chapter 5 of the Disclosure and Transparency Rules published by the Financial Services Authority provides that if the percentage of voting rights that a person (including a company and other legal entities) holds directly or indirectly as a shareholder or through other financial instruments (such as derivatives) exceeds 3% of the voting rights attached to all shares (whether or not the voting rights are suspended and including voting rights held through ADRs) is required to notify the company of its interest within two trading days following the day on which the notification obligation arises. After the 3% level is exceeded, similar notifications must be made in respect of increases or decreases of 1% or more.
 
For the purposes of the notification obligation, a person is an indirect holder of voting rights to the extent that it is able to acquire, dispose of or exercise voting rights in any of the following cases: (i) voting rights held by a third-party with whom that person has concluded an agreement, which obliges them to adopt, by concerted exercise of the voting rights they hold, a lasting common policy towards the management of the issuer in question; (ii) voting rights held by a third-party under an agreement concluded with that person providing for the temporary transfer for consideration of the voting rights in question; (iii) voting rights attaching to shares which are lodged as collateral with that person provided that person controls the voting rights and declares its intention of exercising them; (iv) voting rights attaching to shares in which that person has the life interest; (v) voting rights which are held, or may be exercised within the meaning of points (i) to (iv) or, in points (vi) and (viii) by a firm undertaking investment management, or by a management company, by an undertaking controlled by that person; (vi) voting rights attaching to shares deposited with that person which the person can exercise at its discretion in the absence of specific instructions from the shareholders; (vii) voting rights held by a third-party in his own name on behalf of that person; and (viii) voting rights which that person may exercise as a proxy where that person can exercise the voting rights at his discretion in the absence of specific instructions from the shareholders.
 
Certain interests (e.g., those held by certain investment fund managers) may be disregarded for the purposes of calculating the 3% threshold, but the disclosure obligation will still apply where such interests exceed 5% or 10% or more of voting rights, and to increases or decreases of 1% or more at above the 10% threshold.
 
In addition, Section 793 of the UK Companies Act 2006 gives the Company the power by written notice to require a person whom the Company knows or has reasonable cause to believe to be, or to have been at any time during the three years immediately preceding the date on which the notice is issued, interested in its voting shares to confirm that fact or to indicate whether or not that is the case and, where such person holds or during the relevant time had held an interest in such shares, to give such further information as may be required relating to such interest and any other interest in the shares of which such person is aware.
 
Where any such notice is served by a company under the foregoing provisions on a person who is or was interested in shares of the company and that person fails to give the company any information required by the notice within the time specified in the notice, the company may apply to the English court for an order directing that the shares in question be subject to restrictions prohibiting, among other things, any transfer of those shares, the exercise of the voting rights in respect of such shares, the taking up of rights in respect of such shares and, other than in liquidation, payments in respect of such shares. In this context, the term “interest” is widely defined and will generally include an interest of any kind whatsoever in voting shares, including the interest of a holder of an ADR.
 
A person who fails to fulfill the obligations imposed by Chapter 5 of the Disclosure and Transparency Rules may be subject to a penalty by the Financial Services Authority. The Financial Services Authority may use its powers to ensure that the relevant information is disclosed to the Company (and to the market) and may order that information be disclosed to it. A person who fails to fulfill the obligations imposed by Section 793 of the UK Companies Act 2006 described above is subject to criminal penalties.
 
 
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Restrictions on Voting
 
No shareholder shall, unless the directors otherwise determine, be entitled in respect of any share held by him to vote either personally or as a proxy if any call or other sum payable by him to the Company in respect of that share remains unpaid.
 
If a shareholder, or a person appearing to be interested in shares held by such shareholder, has been duly served with a notice under Section 793 of the UK Companies Act 2006 (as described above), and is in default for a period of 14 days in supplying to the Company the information thereby required, then (unless the directors otherwise determine) the shareholder shall not (for so long as the default continues) nor shall any transferee to whom any such shares are transferred (other than pursuant to an approved transfer (as defined in the Articles) or pursuant to the paragraph below), be entitled to attend or vote either personally or by proxy at a shareholders’ meeting or exercise any other right conferred by membership in relation to shareholders’ meetings in respect of the shares in relation to which the default occurred (“default shares”) or any other shares held by the shareholder.
 
Where the default shares represent 0.25% or more of the issued shares of the class in question, the directors may by notice to the shareholder direct that any dividend or other money which would otherwise be payable on the default shares shall be retained by the Company without liability to pay interest and the shareholder shall not be entitled to elect to receive shares in lieu of dividends and/or that no transfer of any of the shares held by the shareholder shall be registered unless transfer is an approved transfer or the shareholder is not himself in default in supplying the information required and the transfer is of part only of the shareholders holdings and is accompanied by a certificate given by the shareholder in a form satisfactory to the directors to the effect that after due and careful inquiry the shareholder is satisfied that none of the shares which are the subject of the transfer are default shares. In the case of shares in uncertificated form, the directors may only exercise their discretion not to register a transfer if permitted to do so under the UK Uncertificated Securities Regulations 2001. Any direction notice may treat shares of a member in certificated and uncertificated form as separate holdings and either apply only to the former or to the latter or make different provisions for the former and the latter.
 
Alteration of Share Capital
 
The Company may from time to time by ordinary resolution of its shareholders:
 
 
(i)
increase its share capital by the creation of new shares of such amount as the resolution shall prescribe;
 
 
(ii)
consolidate and divide all or any of its share capital into shares of larger amounts than its existing shares;
 
 
(iii)
cancel any shares which, at the date of the passing of the resolution, have not been taken, or agreed to be taken, by any person and diminish the amount of its capital by the amount of the shares so canceled;
 
 
(iv)
subdivide its shares, or any of them, into shares of smaller amount than is fixed by the Memorandum of Association so that the resolution in question may determine that one or more of the shares in question  may have preferred, deferred or other special rights, or be subject to any such restrictions, as the Company has power to attach to unissued or new shares; and
 
 
(v)
subject to the provisions of the UK Companies Act 2006:
 
 
by ordinary resolution, purchase all or any of its shares of any class; and
 
 
by special resolution, reduce its share capital, any capital redemption reserve and any share premium account or other undistributable reserve in any way.
 
The following resolution was passed at the 2013 AGM:
 
That the Company be and is hereby unconditionally and generally authorized for the purpose of Section 701 of the UK Companies Act 2006 to make market purchases (as defined in Section 701 of that Act) of ordinary shares of 0.05 pence each in the capital of the Company provided that:
 
 
(a)
the maximum number of shares which may be purchased is 139,650,000;
 
 
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(b)
the minimum price which may be paid for each share is 0.05 pence;
 
 
(c)
the maximum price (excluding expenses) which may be paid for any ordinary share is an amount equal to 105% of the average of the closing mid market price of the Company’s ordinary shares as derived from the Daily Official List of the London Stock Exchange plc for the five business days immediately preceding the day on which such share is contracted to be purchased; and
 
 
(d)
this authority shall expire at the conclusion of the AGM of the Company held in 2014 or, if earlier, on June 30, 2014 (except in relation to the purchase of shares the contract for which was concluded before the expiry of such authority and which might be executed wholly or partly after such expiry) unless such authority is renewed prior to such time.
 
The following resolution is proposed for approval by shareholders at the 2014 AGM:
 
That the Company be and is hereby unconditionally and generally authorized for the purpose of Section 693 of the UK Companies Act 2006 to make market purchases (as defined in Section 693 of that Act) of ordinary shares of 0.05 pence each in the capital of the Company provided that:
 
 
(a)
the maximum number of shares which may be purchased is 140,891,000;
 
 
(b)
the minimum price which may be paid for each share is 0.05 pence;
 
 
(c)
the maximum price (excluding expenses) which may be paid for any ordinary share is an amount equal to 105% of the average of the closing mid market price of the Company’s ordinary shares as derived from the Daily Official List of the London Stock Exchange plc for the five business days immediately preceding the day on which such share is contracted to be purchased; and
 
 
(d)
this authority shall expire at the conclusion of the AGM of the Company held in 2015 or, if earlier, on June 30, 2015 (except in relation to the purchase of shares the contract for which was concluded before the expiry of such authority and which might be executed wholly or partly after such expiry) unless such authority is renewed prior to such time.
 
Reserves
 
The directors may from time to time set aside out of the profits of the Company and carry to reserve such sums as they think proper which, at the discretion of the directors, shall be applicable for any purpose to which the profits of the Company may properly be applied and pending such application may either be employed in the business of the Company or be invested. The directors may divide the reserve into such special funds as they think fit and may consolidate into one fund any special funds or any parts of any special funds into which the reserve may have been divided. The directors may also without placing the same to reserve, carry forward any profits.
 
Capitalization of Profits and Reserves
 
The directors may, with the sanction of an ordinary resolution of the Company, capitalize any sum standing to the credit of any of the Company’s reserve accounts (including any share premium account, capital redemption reserve or other undistributable reserve) or any sum standing to the credit of its profit and loss account. Such capitalization shall be effected by appropriating such sum to the holders of ordinary shares on the register on the date of the resolution (or such other date as may be specified therein or determined as therein provided) in proportion to their then holdings of ordinary shares and applying such sum in paying up in full unissued ordinary shares (or, subject to any special rights previously conferred on any shares or class of shares for the time being issued, unissued shares of any other class). The directors may do all acts and all things considered necessary for the purpose of such capitalization, with full power to the directors to make such provisions as they think fit in respect of fractional entitlements which would arise on the basis aforesaid (including provisions whereby fractional entitlements are disregarded or the benefit thereof accrues to the Company rather than to the members concerned). The directors may authorize any person to enter into, on behalf of all the members, an agreement with the Company providing for any such capitalization and matters incidental thereto, and any such agreement shall be effective and binding on all concerned.
 
 
MATERIAL CONTRACTS
 
Service Agreements
 
Executive directors (as referred to in “Item 6. Directors, Senior Management and Employees”) have service contracts that may be terminated by either party on one year’s notice. These agreements provide for each of the executive directors to provide services to the Company on a full-time basis. The agreements contain restrictive covenants for periods of three or six months following termination of employment relating to non-competition, non-solicitation of the Company’s customers, non-dealing with customers and non-solicitation of the Company’s suppliers and employees. In addition, each employment agreement contains an express obligation of confidentiality in respect of the Company’s trade secrets and confidential information and provides for the Company to own any intellectual property rights created by the executives in the course of their employment.
 
The service contracts for each of Mr. Muller, Mr. Score and Mr. Segars, all of whom served as directors during the financial year, are as described above. Mr. Muller’s contract is dated January 31, 1996, Mr. Score’s contract is dated March 1, 2002 and Mr. Segars’ contract is dated January 4, 2005.
 
EXCHANGE CONTROLS
 
There are currently no government laws, decrees or regulations in the United Kingdom that restrict the export or import of capital, including, but not limited to, UK foreign exchange controls on the payment of dividends, interest or other payments to non-resident holders of the shares.
 
TAXATION
 
The following is a discussion of material US federal and UK tax consequences of the ownership and disposition of shares or ADSs by a beneficial owner of shares or ADSs that for US federal income tax purposes (i) is a citizen or individual resident of the United States, a corporation or other entity taxable as a corporation, created or organized under the laws of the United States or any political subdivision thereof, or an estate or trust the income of which is subject to US federal income tax regardless of its source, and (ii) owns such shares or ADSs as capital assets (a “US Holder”).
 
Except where expressly stated otherwise, this discussion does not address the tax consequences to a US Holder (i) that is resident in the United Kingdom for UK tax purposes or that is subject to UK taxation by virtue of carrying on a trade, profession or vocation in the United Kingdom, (ii) to whom, in the case of an individual, “split gear” treatment applies for UK tax purposes, or (iii) that is a person which alone or together with one or more associated person owns, directly or indirectly, 10% or more of the voting stock of the Company. This discussion is not exhaustive of all possible tax considerations that may be relevant in the particular circumstances of each US Holder, including alternative minimum tax consequences and the potential application of the provisions of the US Internal Revenue Code known as the Medicare contribution tax. In addition, it does not address all tax considerations that may be relevant to all categories of holders, some of whom may be subject to special rules, such as (i) certain financial institutions, (ii) insurance companies, (iii) dealers and traders in securities or foreign currencies, (iv) persons holding shares or ADSs as part of a hedge, straddle, conversion transaction or other integrated transaction, (v) persons whose functional currency for US federal income tax purposes is not the US dollar, (vi) partnerships or other entities classified as partnerships for US federal income tax purposes, (vii) tax-exempt organizations, or (viii) persons who acquired shares or ADSs pursuant to the exercise of any employee stock option or otherwise as compensation or in connection with an employment. Shareholders and ADS holders are advised to satisfy themselves as to the tax consequences, including the consequences under foreign, US federal, state and local laws applicable in their own particular circumstances, of the acquisition, ownership and disposition of shares or ADSs by consulting their tax advisers.
 
The statements regarding US and UK tax laws and practices set forth below, including the statements regarding the US / UK double taxation convention relating to income and capital gains (the “Treaty”) and the US / UK double taxation convention relating to estate and gift taxes (the “Estate Tax Treaty”), are based on those laws and practices and the Treaty and the Estate Tax Treaty as in force and as applied in practice on the date of this annual report. These laws and practices and the Treaty and the Estate Tax Treaty are subject to change subsequent to the date of this annual report, possibly on a retroactive basis. This discussion is further based in part upon representations by the
 
 
depositary and assumes that each obligation provided for in, or otherwise contemplated by, the deposit agreement between the Company and The Bank of New York Mellon and any related agreement will be performed in accordance with its respective terms. In general, US Holders of ADSs will be treated as owners of the shares underlying their ADSs for US federal income tax purposes. Accordingly, except as noted, the US federal and UK tax consequences discussed below apply equally to US Holders of ADSs and shares.
 
The US Treasury has expressed concerns that parties to whom American depositary shares are released before shares are delivered to the depositary (“pre-release”), or intermediaries in the chain of ownership between holders and the issuer of the shares underlying the American depositary shares, may be taking actions that are inconsistent with the claiming of foreign tax credits by US holders of American depositary shares. Such actions would also be inconsistent with the claiming of the favorable tax rates, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the availability of the favorable tax rates for dividends received by certain non-corporate US Holders, as described below, could be affected by actions taken by parties to whom the American depositary shares are pre-released or such intermediaries.
 
Taxation of Dividends
 
Under current UK tax law, no withholding tax will be deducted from dividends paid by the Company.
 
For US federal income tax purposes, subject to the passive foreign investment company (“PFIC”) rules described below, distributions paid on ADSs or shares, other than certain pro rata distributions of shares, will be treated as dividends to the extent paid out of the Company’s current or accumulated earnings and profits as determined under US federal income tax principles. Because the Company does not maintain calculations of its earnings and profits under US federal income tax principles, it is expected that distributions generally will be reported to US Holders as dividends. Dividends paid in pounds sterling will be included in a US Holder’s income, in a US dollar amount calculated by reference to the exchange rate in effect on the date that the depositary, in the case of ADSs, or US Holder, in the case of shares, actually or constructively receives the dividend, regardless of whether the payment is in fact converted into US dollars on such date. If the dividend is converted into US dollars on the date of receipt, a US Holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. A US Holder may have foreign currency gain or loss if the dividend is converted into US dollars after the date of receipt.
 
Subject to applicable limitations and the discussion above regarding concerns expressed by the US Treasury, dividends paid to certain non-corporate US Holders may be taxable at rates applicable to long-term capital gains. US Holders should consult their tax advisers regarding the availability of these favorable tax rates on dividends in their particular circumstances. Dividends will not be eligible for the dividends received deduction generally allowed to US corporations under the Internal Revenue Code.
 
Taxation of Capital Gains
 
Subject to the comments set out below in relation to temporary non-residents, a US Holder not resident in the UK will not ordinarily be liable for United Kingdom taxation on capital gains realized on the disposition of such US Holder’s shares or ADSs. However, if in the case of a corporate US Holder, such US Holder carries on a trade in the United Kingdom through a permanent establishment or, in the case of any other US Holder, such US Holder carries on a trade, profession or vocation in the United Kingdom through a branch or agency and such shares or ADSs are, or have been, used, held or acquired by or for the purposes of such trade (or profession or vocation), permanent establishment, branch or agency, such US Holder may, depending on the circumstances, be liable for UK tax on a gain realized on disposal of such holder’s shares or ADSs.
 
An individual US Holder who has ceased to be resident for UK tax purposes in the United Kingdom for a period of five years or less of assessment and who disposes of shares or ADSs during that period may, for the year of assessment when that individual returns to the United Kingdom, be liable to UK tax on gains arising during the period of absence, subject to any available exemption or relief.
 
A US Holder will generally recognize gain or loss for US federal income tax purposes on the sale or exchange of shares or ADSs in an amount equal to the difference between the amount realized and such holder’s adjusted tax basis in the shares or ADSs (in each case as determined in US dollars). Subject to the PFIC rules discussed below, such gain or loss will be long-term capital gains or loss if the US Holder held the shares or ADSs for more than one
 
 
year. The gain or loss will generally be US-source for foreign tax credit purposes. The deductibility of capital losses may be subject to limitations.
 
PFIC Rules
 
The Company believes that it was not a PFIC for US federal income tax purposes for the year ended December 31, 2013. However, since PFIC status depends upon the composition of the Company’s income and assets and the market value of its assets (including, among others, goodwill and equity investments in less than 25% owned entities) from time to time, which may be determined based upon the market value of its shares, which will vary over time and may be especially volatile in a technology-related enterprise such as the Company, there can be no assurance that the Company will not be a PFIC for any taxable year. If the Company were a PFIC for any taxable year during which a US Holder held shares or ADSs, certain adverse consequences could apply to the US Holder.
 
If the Company were a PFIC for any taxable year during a US Holder’s holding period for the shares or ADSs, gain recognized by such US Holder on a sale or other disposition of the shares or ADSs would be allocated ratably over the US Holder’s holding period for the shares or ADSs. The amounts allocated to the taxable year of the sale or other disposition and to any year before the Company became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate for that taxable year, and an interest charge would be imposed on the tax attributable to the allocated amount. Further, any distribution in respect of ADSs or shares in excess of 125% of the average of the annual distributions on ADSs or shares received by the US Holder during the preceding three years or the US Holder’s holding period, whichever is shorter, would be subject to taxation in the same manner. Certain elections may be available to US persons that would result in alternative treatments (such as a mark-to-market treatment) of the shares or ADSs. If a US Holder owns shares or ADSs during the year in which the Company is a PFIC, the holder generally must file annual reports containing such information as the US Treasury may require on IRS Form 8621 (or any successor form) with respect to the Company, generally with the holder’s federal income tax return for that year. US Holders should consult their tax advisers to determine whether any such elections would be available and, if so, what the consequences of the alternative treatments would be in those holders’ particular circumstances.
 
In addition, if the Company were to be a PFIC in a taxable year in which it pays a dividend or the prior taxable year, the favorable rates discussed above applicable to certain dividends paid to certain non-corporate US Holders would not apply. US Holders should consult their tax advisers concerning the potential application of the PFIC rules to their ownership and disposition of the shares and ADSs.
 
UK Estate and Gift Tax
 
Subject to the discussion of the Estate Tax Treaty in the next paragraph, shares or ADSs beneficially owned by an individual may, depending on the circumstances, be subject to UK inheritance tax on the death of the individual or, in certain circumstances, if the shares or ADSs are the subject of a gift (including a transfer at less than full market value) by such individual. Inheritance tax is not generally chargeable on gifts to individuals or to certain types of settlement made more than seven years before the death of the donor. Special rules apply to shares or ADSs held in a settlement.
 
Shares or ADSs held by an individual whose domicile is determined to be the United States for purposes of the Estate Tax Treaty, and who is not a national of the United Kingdom, will not be subject to UK inheritance tax on the individual’s death or on a lifetime transfer of the shares or ADSs except where the shares or ADSs (i) are part of the business property of a UK permanent establishment of an enterprise or (ii) pertain to a UK fixed base of an individual used for the performance of independent personal services. The Estate Tax Treaty generally provides a credit against US federal tax liability for the amount of any tax paid in the United Kingdom in a case where the shares or ADSs are subject both to UK inheritance tax and to US federal estate or gift tax.
 
UK Stamp Duty and Stamp Duty Reserve Tax
 
Transfers of ADRs are usually effected without recourse to a stampable document and, in any event, are generally executed outside the United Kingdom. For that reason, UK stamp duty is not in practice generally payable on the acquisition or subsequent transfer of an ADR. The acquisition or transfer of an ADR is also not subject to stamp duty reserve tax (“SDRT”).
 
 
111
 
UK stamp duty and/or SDRT will however, subject to certain exceptions, be payable at an aggregate rate of 1.5% of the amount of consideration or, if none, of the value of the shares (rounded up to the next multiple of £5) on any instrument transferring the shares: (i) to, or to a nominee for, a person whose business is or includes the provision of clearance services; or (ii) to, or to a nominee or agent for, a person whose business is or includes issuing depositary receipts. This includes transfers of shares to the custodian for deposits under the ADR deposit agreement, but excludes an issue of new shares, which, following recent changes, may now be issued to the custodian without incurring any stamp duty or SDRT.
 
In accordance with the terms of the ADR deposit agreement, any tax or duty payable by the ADR depositary or the custodian on any such transfers of shares in registered form will be charged by the ADR depositary to the party to whom ADRs are delivered against such transfers.
 
US Information Reporting and Backup Withholding
 
Payment of dividends and sales proceeds that are made within the United States or through certain US-related financial intermediaries generally are subject to information reporting and backup withholding unless (i) they are received by a corporation or other exempt recipient or (ii) in the case of backup withholding, the recipient provides a correct taxpayer identification number and certifies that it is not subject to backup withholding.
 
The amount of any backup withholding from a payment to a US Holder will be allowed as a credit against the US Holder’s US federal income tax liability and may entitle such US holder to a refund, provided that the required information is timely furnished to the Internal Revenue Service.
 
DOCUMENTS ON DISPLAY
 
The documents concerning us which are referred to herein may be inspected at the Securities and Exchange Commission. You may read and copy any document filed or furnished by us at the SEC’s public reference rooms in Washington D.C., New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the reference rooms.
 
 
FOREIGN CURRENCY EXCHANGE RATE RISK
 
The Company’s earnings and liquidity are affected by fluctuations in foreign currency exchange rates, principally the US dollar rate, as most of the Company’s revenues and cash receipts are denominated in US dollars while a significant proportion of its costs are in sterling.
 
The Company seeks to use currency exchange contracts and currency options to manage the US dollar/sterling risk as appropriate, by monitoring the timing and value of anticipated US dollar receipts (which tend to arise from low-volume, high-value license deals and royalty receipts) in comparison with its requirement to settle certain expenses in US dollars. The fair values of the financial instruments outstanding at December 31, 2011, 2012 and 2013 are disclosed in Notes 17 to the Consolidated Financial Statements. The settlement period of the forward contracts outstanding at December 31, 2013 was between January 8, 2014 and July 15, 2015. The settlement period of the option contracts outstanding at December 31, 2013 was between January 21, 2014 and December 31, 2014.
 
During the fiscal year, the Company was exposed to foreign currency exchange risk inherent in its sales commitments, anticipated sales, anticipated purchases and assets and liabilities denominated in currencies other than sterling. ARM transacts business in approximately nine foreign currencies worldwide, of which the most significant to the Company’s operations were the US dollar, the Indian Rupee, the Euro and the Japanese Yen for 2013. Generally, the Company is a net receiver of US dollars, and therefore benefits from a weaker sterling and is adversely affected by a stronger sterling relative to the dollar. It is a net payer of other foreign currencies but at a significantly lower level than the US dollar receivables. The Company has performed a sensitivity analysis at December 31, 2013, 2012 and 2011, using a modeling technique that measures the changes in the fair values arising from a hypothetical 10% adverse movement in the levels of foreign currency exchange rates relative to sterling with all other variables held constant. The analysis covers all of the Company’s foreign currency contracts offset by the underlying exposures. The foreign currency exchange rates used were based on market rates in effect at December 31, 2013, 2012 and 2011. The sensitivity analysis indicated that a hypothetical 10% adverse movement in foreign
 
 
currency exchange rates would result in a loss in the fair values of ARM’s foreign exchange derivative financial instruments, net of exposures, of £9.5 million at December 31, 2013 (2012: £12.1 million; 2011: £4.7 million).
 
 
INTEREST RATE RISK
 
At December 31, 2013, the Company had £713.7 million (2012: £523.6 million) of interest-bearing assets. At December 31, 2013, 93% (2012: 91%) of interest-bearing assets, comprising cash equivalents; short-term and long-term deposits and short-term marketable securities were at fixed rates and are therefore exposed to fair value interest rate risk. Floating rate cash earns interest based on relevant national LIBID equivalents and is therefore exposed to cash flow interest rate risk.
 
Other financial assets, such as available-for-sale investments, are not directly exposed to interest rate risk.
 
A 1% (100 basis points) decrease in the average interest rate during the year would have reduced interest income by approximately £5.8 million (2012: £5.3 million; 2011: £3.4 million) and profit after tax by £4.6 million (2012: £4.0 million; 2011: £2.6 million).
 
During 2012, the Company entered into a number of lease agreements for IT equipment which have been classified as finance leases. Furthermore, the Company entered into a three-month fixed-rate debt facility for $160 million to facilitate the purchase of some IP assets. This facility was fully settled by December 31, 2012. The Company had no borrowings during 2013.
 
The Company has no derivative financial instruments to manage interest rate fluctuations in place at year end since it has no loan financing, and as such no hedge accounting is applied.
 
The Company’s cash flow is carefully monitored on a daily basis. Excess cash, considering expected future cash flows, is placed on either short-term or medium-term deposit to maximize the interest income thereon. Daily surpluses are swept into higher-interest earning accounts overnight. The Company manages its proportion of fixed-to-floating deposits based on the prevailing economic climate at the time (with reference to forward interest rates) and also on the required maturity of the deposits (as driven by the expected timing of the Company’s cash receipts and payments over the short- to medium-term).
 
 
Fees and charges payable to the depositary
 
The Company’s ADS program is administered by The Bank of New York Mellon, One Wall Street, New York, New York, US, as depositary.
 
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees.  The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
 
 
Persons depositing or withdrawing
shares must pay:
  
For:
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
  
·      Issuance and delivery of ADSs including issuances resulting from a dividend or free distribution of shares or rights
·      Surrender of ADSs for the purpose of withdrawal of shares including if the deposit agreement terminates
     
$.02 (or less) per ADS (or portion thereof)
  
·      Any cash distribution to ADS registered holders
     
A fee equivalent to the fee that would be payable if securities distributed to investors had been shares and the shares had been deposited for issuance of ADSs
  
·      Distribution of securities (other than shares or rights) distributed to holders of deposited securities which are distributed by the depositary to ADS registered holders
     
Registration fees
  
·      Registration of shares on the share register to or from the name of the depositary or its agent when the investor deposits or withdraws shares
     
Expenses of the depositary
  
·      Cable telex and facsimile transmissions (when expressly provided in the deposit agreement)
·      Reasonable expenses incurred by the depositary in the conversion of dividends and other distributions in foreign currency to U.S. dollars
     
Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes
  
·      As necessary

Fees and charges payable by the depositary
 
In August 2011, the Company received $0.5 million from the depositary. In June 2012, the Company received $0.3 million from the depositary and in March 2013 received $0.8 million. These amounts were for continuing annual stock exchange listing fees, standard out-of pocket maintenance costs for the ADRs (for expenses relating to postage and envelopes for mailing annual reports and proxy materials, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, facsimile and telephone calls), and legal fees. In addition, the 2010 payments included $50,000 and $100,000, respectively, for the achievement by the Company of certain performance indicators relating to the ADR facility and in 2011, the Company received a further $0.1 million for achieving these performance indicators.
 
The depositary has agreed to reimburse the Company for expenses related to the administration and maintenance of the ADS program. The depositary has agreed to reimburse the Company for its continuing annual stock exchange listing fees. The depositary has also agreed to pay its standard out-of-pocket administration, maintenance and shareholder services expenses for providing services to the ADR holders, including expenses of postage and envelopes for mailing annual and interim financial reports, issuance of initial and replacement dividend checks, U.S. Federal and U.K. Inland Revenue tax reporting, mailing required tax forms, stationery, postage, facsimile, and telephone calls. It has also agreed to reimburse the Company annually for certain investor relationship programs or special investor relations promotional activities. In certain instances, the depositary has agreed to increase the reimbursement payments to the Company based on the performance of the ADR facility. There are limits on the amount of expenses for which the depositary will reimburse the Company, but the amount of reimbursement available to the Company is not related to the amount of fees the depositary collects from investors.
 
 
 
 
Not applicable.
 
 
Not applicable.
 
 
Disclosure controls and procedures. As of December 31, 2013, the Company, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures. The Company’s management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature can provide only reasonable assurance regarding management’s control objectives. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective as of December 31, 2013 to provide reasonable assurance that the information required to be disclosed by the Company in reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time specified in the rules and forms of the SEC and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
 
Changes in internal control over financial reporting. There has been no change in the Company’s internal control over financial reporting that occurred during the period covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Management’s Report on Internal Control over Financial Reporting
 
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS and includes those policies and procedures that:
 
 
·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transaction and disposition of the assets of the Company;
 
 
·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
 
 
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
The Company’s management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control-Integrated Framework 1992 issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2013.
 
 
116
 
The Company’s independent auditors, PricewaterhouseCoopers LLP, which have audited the consolidated financial statements of the Company for the fiscal year ended December 31, 2013, have also assessed the effectiveness of the Company’s internal controls over financial reporting; their report is included herein.
 
 
 
Philip Rowley, an independent non-executive director and Chairman of the Company’s audit committee until January 26, 2011, was regarded as an Audit Committee financial expert for the purposes of the Sarbanes-Oxley Act of 2002 up to that date. Kathleen O’Donovan, who was appointed to the Board as an independent non-executive director in December 2006 and became a member of the audit committee in January 2007 is also qualified to be an audit committee financial expert and became the financial expert on January 26, 2011 when she assumed the Chairmanship of the Audit Committee.
 
 
The Company has in place a Code of Business Conduct and Ethics, which is applicable to all directors, officers and employees, including the Chief Executive Officer, Chief Financial Officer, VP Finance, ARM Group and any person performing similar functions. The policy contains provisions relating to honest and ethical conduct (including the handling of conflicts of interest between personal and professional relationships), the preparation of full, fair, accurate, timely and understandable disclosure in reports and documents filed with the Securities and Exchange Commission and in other public communications made by the Company, compliance with applicable laws, rules and regulations, prompt internal reporting of violations of company policies, accountability for adherence to the policy and other matters. This policy is available on our website at www.arm.com and upon written request from ARM Holdings plc, 110 Fulbourn Road, Cambridge, CB1 9NJ, UK. Any amendment to or waiver from a provision of the policy relating to directors and executive officers will be promptly disclosed on the Company’s website.
 
 
   
2013
    
2012
    
2011
  
      £’000       £’000       £’000  
Fees payable to the Company’s auditor and its associates for the audit of the Company Audit Fees
     0.3       0.3       0.3  
Fees payable to the Company’s auditor and its associates for other services:
                        
The audit of the Company’s subsidiaries
     0.2       0.2       0.2  
Audit-related assurance services (services pursuant to Section 404 of the Sarbanes-Oxley Act)
     0.3       0.3       0.2  
Other assurance services
     0.1       0.1       0.1  
Tax advisory services
     0.1       0.2       0.1  
Tax compliance services
     —       0.1       0.1  
All other non-audit services (1)
     0.1       0.1       0.1  
(1)
All other non-audit services consist primarily of fees for the performance of royalty audits.
 
The audit of ARM Holdings plc (included in Audit Fees) and the royalty audits (categorized as All Other Fees) were specifically pre-approved by the Audit Committee. The remaining services (including the annual audit services performed for each subsidiary of the Company) received general pre-approval from the Audit Committee.
 
 
Not applicable.
 
 
The Board intends to undertake a limited share buyback program to maintain a flat share-count over time. No share buybacks were made in 2011, 2012 or 2013.
 
 
117
 
 
Not applicable.
 
 
Please refer to “Item 10. Additional Information—Corporate Governance”.
 
 
Not applicable.
 
 
 
The Company has responded to Item 18 in lieu of this item.
 
 
The following financial statements, together with the report of PricewaterhouseCoopers LLP thereon, are filed as part of this Form 20-F.
 
Report of Independent Registered Public Accounting Firm
F-1
Consolidated Income Statements
F-2
Consolidated Statement of Comprehensive Income
F-2
Consolidated Balance Sheets
F-3
Consolidated Cash Flow Statements
F-4
Consolidated Statements of Changes in Shareholders’ Equity
F-6
Notes to the Financial Statements
F-7
 
 
 
*****1.1
  
Articles of Association of ARM Holdings plc.
*4.1
  
Executive Service Agreement between Advanced Risc Machines Limited and Michael Peter Muller, dated January 31, 1996.
**4.2
  
Executive Service Agreement between ARM Limited and Tim Score, dated March 1, 2002.
****4.3
  
Executive Service Agreement between ARM Limited and Simon Segars, dated January 4, 2005.
***4.4
  
ARM Holdings plc Employee Equity Plan.
***4.5
  
ARM Holdings plc Deferred Annual Bonus Plan.
***4.6
  
ARM Holdings plc U.S. Employee Stock Purchase Plan.
8.1
  
List of significant subsidiaries.
12.1
  
CEO certification required by Rule 13a-14(a).
12.2
  
CFO certification required by Rule 13a-14(a).
13.1
  
Certification required by Rule 13a-14(b).
15.1
  
Consent of the Independent Registered Public Accounting firm.
*
Previously filed with the Securities and Exchange Commission as part of the annual report on Form 20-F as filed on June 15, 2001 and incorporated herein by reference.
 
**
Previously filed with the Securities and Exchange Commission as part of the annual report on Form 20-F as filed on June 23, 2003 and incorporated herein by reference.
 
***
Previously filed with the Securities and Exchange Commission as part of the registration statement on Form S-8 on May 8, 2006 and incorporated herein by reference.
 
****
Previously filed with the Securities and Exchange Commission as part of the annual report on Form 20-F as filed on May 23, 2006 and incorporated herein by reference.
 
*****
Previously filed with the Securities and Exchange Commission as part of the annual report on Form 20-F as filed on March 4, 2011 and incorporated herein by reference.
 
 
119
 
SIGNATURE
 
The registrant certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
 
ARM Holdings plc
  
   
       
By:
/s/ Tim Score
  
  Name:
Tim Score
  
  Title:
Chief Financial Officer
  
 
 
Dated: March 6, 2014
 
 

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Shareholders of ARM Holdings plc
 
In our opinion, the accompanying consolidated balance sheets and the related consolidated income statements, consolidated statements of comprehensive income, consolidated cash flow statements and consolidated statements of changes in shareholders’ equity present fairly, in all material respects, the financial position of ARM Holdings plc and its subsidiaries at December 31, 2013 and December 31, 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework 1992 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s report on internal control over financial reporting included under Item 15 of the Annual Report on Form 20-F. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and International Standards on Auditing. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
By: /s/ PricewaterhouseCoopers LLP  
  Name:
PricewaterhouseCoopers LLP
London
United Kingdom
March 5, 2014
  
 
 
 
Consolidated Income Statement
for the Year Ended December 31
 
   
Note
    
2011
£ million
    
2012
£ million
    
2013
£ million
  
Revenues
     2       491.8       576.9       714.6  
                                 
Cost of revenues
             (27.7 )     (31.9 )     (39.3 )
Gross profit
             464.1       545.0       675.3  
Operating expenses
                                
Research and development
             (158.6 )     (166.3 )     (202.9 )
Sales and marketing
             (72.6 )     (72.9 )     (89.4 )
General and administrative
             (84.0 )     (97.7 )     (128.2 )
Total operating expenses before exceptional items
             (315.2 )     (336.9 )     (420.5 )
Exceptional items
     6       —       —       (101.3 )
Total operating expenses after exceptional items
             (315.2 )     (336.9 )     (521.8 )
Profit from operations
             148.9       208.1       153.5  
Investment income
             8.0       13.9       13.3  
Interest payable and similar charges
             —       (0.3 )     (0.2 )
Share of results in joint venture
     26       —       (0.7 )     (4.0 )
Profit before tax
     2, 5       156.9       221.0       162.6  
Tax (including £8.6 million in respect of exceptional items)
     7       (44.3 )     (60.3 )     (57.8 )
Profit for the year
     2       112.6       160.7       104.8  
Earnings per share
                                
Basic and diluted earnings
             112.6       160.7       104.8  
Number of shares (millions)
                                
Basic weighted average number of shares
             1,345.0       1,375.1       1,396.4  
Effect of dilutive securities: Employee incentive schemes
             31.0       20.7       15.4  
Diluted weighted average number of shares
             1,376.0       1,395.8       1,411.8  
Basic EPS
             8.4 p     11.7 p     7.5 p
Diluted EPS
             8.2 p     11.5 p     7.4 p

The accompanying notes are an integral part of the financial statements. Details of dividends paid and proposed are in note 8 and 25 of the financial statements respectively.
 
Consolidated Statements of Comprehensive Income
for the Year Ended December 31
 
   
Note
    
2011
£ million
    
2012
£ million
    
2013
£ million
  
Profit for the year
           112.6       160.7       104.8  
Other comprehensive income:
                              
Unrealized holding gain/(loss) on available-for-sale financial assets (net of tax of £0.1 million; 2011: £0.1 million; 2010: £nil) (1)
     11       0.3       (0.3 )     —  
Currency translation adjustment (1)
             1.2       (26.8 )     (17.9 )
Other comprehensive income/(loss) for the year
             1.5       (27.1 )     (17.9 )
Total comprehensive income for the year
             114.1       133.6       86.9  

 
(1)  
These items may be reclassified to the income statement if certain conditions are met.
 
The accompanying notes are an integral part of the financial statements.
 

Consolidated Balance Sheet
At December 31
 
   
Note
    
2012
£ million
    
2013
£ million
  
Assets
                  
Current assets:
                  
Cash and cash equivalents
     17       46.3       43.8  
Short-term deposits
     17       340.0       544.1  
Fair value of currency exchange contracts
     17       1.4       5.1  
Accounts receivable
     9       124.5       136.2  
Available-for-sale financial assets
     11,17       —       1.2  
Prepaid expenses and other assets
     10       135.6       39.8  
Current tax assets
             13.9       6.9  
Inventories
             2.3       3.0  
Total current assets
             664.0       780.1  
Non-current assets:
                        
Long-term deposits
     17       141.3       125.6  
Loans and receivables
     17       2.1       3.0  
Available-for-sale financial assets
     11, 17       13.8       13.9  
Investment in joint venture
     26       6.8       6.5  
Prepaid expenses and other assets
     10       2.0       1.6  
Property, plant and equipment
     12       36.1       33.6  
Goodwill
     13       519.4       525.9  
Other intangible assets
     14       11.2       82.9  
Deferred tax assets
     7       70.1       65.3  
Total non-current assets
             802.8       858.3  
Total assets
             1,466.8       1,638.4  
Liabilities
                        
Current liabilities:
                        
Accounts payable
     17       5.9       7.0  
Embedded derivatives
     17       2.5       7.0  
Accrued and other liabilities
     15       79.3       88.1  
Finance lease liabilities
     16       2.9       2.7  
Current tax liabilities
             16.6       18.8  
Deferred revenue
             126.4       156.7  
Total current liabilities
             233.6       280.3  
Non-current liabilities:
                        
Accrued and other liabilities
     15       —       2.6  
Finance lease liabilities
     16       2.9       1.5  
Deferred tax liabilities
     7       —       0.1  
Deferred revenue
             24.2       42.5  
Total non-current liabilities
             27.1       46.7  
Total liabilities
             260.7       327.0  
Net assets
             1,206.1       1,311.4  
Capital and reserves attributable to owners of the Company
                        
Share capital
     18       0.7       0.7  
Share premium account
             12.2       18.1  
Capital reserve
             354.3       354.3  
Share option reserve
             61.4       61.4  
Retained earnings
             703.3       820.6  
Cumulative translation adjustment
             74.2       56.3  
Total equity
             1,206.1       1,311.4  

The accompanying notes are an integral part of the financial statements.
 

Consolidated Cash Flow Statement
for the Year Ended December 31
 
   
Note
    
2011
£ million
    
2012
£ million
    
2013
£ million
  
Profit before tax
           156.9       221.0       162.6  
Investment income, net of interest payable and similar charges
           (8.0 )     (13.6 )     (13.1 )
Share of results in joint venture
           —       0.7       4.0  
Profit from operations
           148.9       208.1       153.5  
Adjustments for:
                              
Depreciation and amortization of property, plant and equipment and intangible assets
           13.2       17.4       28.0  
Compensation charge in respect of share-based payments
           40.5       37.1       59.2  
Provision for impairment of available-for-sale assets (including non-cash exceptional item of £59.5 million)
           1.6       1.4       66.3  
Loss/(profit) on disposal of available-for-sale financial assets
           0.1       (0.8 )     (3.3 )
Loss on disposal of property, plant and equipment
           —       —       0.6  
Provision for doubtful debts
           —       0.4       4.0  
Non-cash foreign currency gains
           (2.2 )     (0.7 )     (3.6 )
Movement in fair value of currency exchange contracts
           1.3       (2.9 )     (3.7 )
Movement in fair value of embedded derivatives
           1.2       3.7       4.4  
Changes in working capital
                              
Accounts receivable
           (13.4 )     (5.7 )     (19.8 )
Inventories
           (0.6 )     0.1       (0.7 )
Prepaid expenses and other assets (1)
           (12.3 )     (1.1 )     (8.8 )
Accounts payable
           4.3       (2.8 )     1.1  
Deferred revenue
           23.3       37.3       53.1  
Accrued and other liabilities
           10.2       (4.8 )     8.3  
Cash generated by operations before tax
           216.1       286.7       338.6  
Income taxes paid
           (22.3 )     (26.1 )     (23.3 )
Net cash from operating activities
           193.8       260.6       315.3  
Investing activities
                              
Interest received
           4.2       11.5       13.4  
Interest paid
           —       (0.3 )     (0.2 )
Purchases of property, plant and equipment
           (12.1 )     (20.2 )     (13.5 )
Advance payment to acquire intangible asset and available-for-sale financial asset (1)
     10       —       (103.7 )     —  
Purchases of other intangible assets
             (0.8 )     (5.4 )     (31.8 )
Purchases of available-for-sale financial assets
     11       (8.3 )     (3.0 )     (8.9 )
Proceeds on disposal of available-for-sale financial assets
             —       11.8       5.5  
Purchase of short and long-term deposits, net
             (136.4 )     (76.8 )     (188.5 )
Purchase of subsidiaries, net of cash and borrowings acquired
     19       (9.0 )     —       (21.1 )
Investment in joint venture
     26       —       (7.5 )     (3.7 )
Provision of long-term loan
             —       —       (0.7 )
Net cash used in investing activities
             (162.4 )     (193.6 )     (249.5 )
Financing activities
                                
Proceeds from borrowings
             —       99.8       —  
Proceeds received on issuance of shares from treasury
             1.9       —       —  
Proceeds received on issuance of shares
     18       6.6       5.6       5.9  
Refund of costs related to share issue
             —       2.7       —  
Dividends paid to shareholders
     8       (42.2 )     (51.8 )     (68.9 )
Repayment of borrowings
             —       (99.8 )     (1.1 )
Repayment of finance lease liabilities
             —       (3.3 )     (3.3 )
 
   
Note
    
2011
£ million
    
2012
£ million
    
2013
£ million
  
Net cash used in financing activities
             (33.7 )     (46.8 )     (67.4 )
Net (decrease)/increase in cash and cash equivalents
             (2.3 )     20.2       (1.6 )
Cash and cash equivalents at beginning of the year
             29.4       26.8       46.3  
Effect of foreign exchange rate changes
             (0.3 )     (0.7 )     (0.9 )
Cash and cash equivalents at end of the year
             26.8       46.3       43.8  
(1) As described in note 1b, the classification of the advance payment in 2012 to acquire rights to MIPS Technologies, Inc.’s portfolio of patents has been revised.
 
The accompanying notes are an integral part of the financial statements.
 

Consolidated Statement of Changes in Shareholders’ Equity
for the Year Ended December 31
 
   
Attributable to equity holders of the Company
  
   
Share
capital
£ million
    
Share
premium
account
£ million
    
Capital reserve*
£ million
    
Share
option
reserve **
£ million
    
Retained
earnings
£ million
    
Revaluation
reserve***
£ million
    
Cumulative
translation
adjustment
£ million
    
Total
£ million
  
Balance at January 1, 2011
     0.7       —       351.6       61.4       381.4       —       99.8       894.9  
Profit for the year
     —       —       —       —       112.6       —       —       112.6  
Other comprehensive income
                                                                
Unrealized holding gain on available-for-sale financial assets (net of tax of £0.1 million)
     —       —       —       —       —       0.3       —       0.3  
Currency translation adjustment
     —       —       —       —       —       —       1.2       1.2  
Total comprehensive income for the year
     —       —       —       —       112.6       0.3       1.2       114.1  
Shares issued on exercise of share options and awards (note 18)
     —       6.6       —       —       —       —       —       6.6  
Dividends (see note 8)
     —       —       —       —       (42.2 )     —       —       (42.2 )
Credit in respect of employee share schemes
     —       —       —       —       40.5       —       —       40.5  
Movement on tax arising on share options and awards
     —       —       —       —       45.4       —       —       45.4  
Proceeds from sale of own shares
     —       —       —       —       1.9       —       —       1.9  
      —       6.6       —       —       45.6       —       —       52.2  
Balance at December 31, 2011
     0.7       6.6       351.6       61.4       539.6       0.3       101.0       1,061.2  
Profit for the year
     —       —       —       —       160.7       —       —       160.7  
Other comprehensive income
                                                                
Unrealized holding loss on available-for-sale financial assets (net of tax of £0.1 million)
     —       —       —       —       —       (0.3 )     —       (0.3 )
Currency translation adjustment
     —       —       —       —       —       —       (26.8 )     (26.8 )
Total comprehensive income for the year
     —       —       —       —       160.7       (0.3 )     (26.8 )     133.6  
Shares issued on exercise of share options and awards (note 18)
     —       5.6       —       —       —       —       —       5.6  
Dividends (see note 8)
     —       —       —       —       (51.8 )     —       —       (51.8 )
Credit in respect of employee share schemes
     —       —       —       —       37.1       —       —       37.1  
Movement on tax arising on share options and awards
     —       —       —       —       17.7       —       —       17.7  
Refund of costs related to share issue****
     —       —       2.7       —       —       —       —       2.7  
      —       5.6       2.7       —       3.0       —       —       11.3  
Balance at December 31, 2012
     0.7       12.2       354.3       61.4       703.3       —       74.2       1,206.1  
Profit for the year
     —       —       —       —       104.8       —       —       104.8  
Other comprehensive income
                                                                
Currency translation adjustment
     —       —       —       —       —       —       (17.9 )     (17.9 )
Total comprehensive income for the year
     —       —       —       —       104.8       —       (17.9 )     86.9  
Shares issued on exercise of share options and awards (note 18)
     —       5.9       —       —       —       —       —       5.9  
Dividends (see note 8)
     —       —       —       —       (68.9 )     —       —       (68.9 )
Credit in respect of employee share schemes
     —       —       —       —       59.2       —       —       59.2  
Movement on tax arising on share options and awards
     —       —       —       —       22.2       —       —       22.2  
      —       5.9       —       —       12.5       —       —       18.4  
Balance at December 31, 2013
     0.7       18.1       354.3       61.4       820.6       —       56.3       1,311.4  
*
Capital reserve. In 2004, the premium on the shares issued in part consideration for the acquisition of Artisan Components Inc. was credited to reserves on consolidation in accordance with Section 131 of the Companies Act 1985. The reserve has been classified as a capital reserve to reflect the nature of the original credit to equity arising on acquisition.
 
 
F-6
 
**
Share option reserve. This represents the fair value of options granted on the acquisition of Artisan Components Inc. in 2004.
 
***
Revaluation reserve. The Company includes on its balance sheet equity investments that are not publicly traded, which are classified as available-for-sale financial assets. These are carried at fair value plus transaction costs. Unrealized holding gains or losses on such investments are included, net of related taxes, within the revaluation reserve (except where there is evidence of permanent impairment, in which case losses would be recognized within the income statement). Any unrealized gains within this reserve are undistributable.
 
****
Refund of costs related to share issue.  This represents the refund of stamp duty costs incurred on the issue of shares for the acquisition of Artisan Components Inc. in 2004.
 
 
NOTES TO THE FINANCIAL STATEMENTS
 
1 
The Company and a summary of its significant accounting policies and financial risk management
 
1a 
General information about the Company
 
The business of the Company
 
ARM Holdings plc and its subsidiary companies (“ARM” or “the Company”) design microprocessors, physical IP and related technology and software, and sell development tools to enhance the performance, cost-effectiveness and energy-efficiency of high-volume embedded applications.
 
The Company licenses and sells its technology and products to leading international electronics companies, which in turn manufacture, market and sell microcontrollers, application-specific integrated circuits (ASICs) and application-specific standard processors (ASSPs) based on ARM’s technology to systems companies for incorporation into a wide variety of end products.
 
By creating a network of Partners, and working with them to best utilize ARM’s technology, the Company is establishing its processor architecture and physical IP for use in many high-volume embedded microprocessor applications, including mobile phones, tablets, digital televisions and PC peripherals, enterprise networking and servers, and smart cards and microcontrollers.
 
The Company also licenses and sells development tools direct to systems companies and provides support services to its licensees, systems companies and other systems designers.
 
The Company’s principal geographic markets are Europe, the United States and Asia Pacific.
 
Incorporation and history
 
ARM is a public limited company incorporated and domiciled under the laws of England and Wales. The registered office of the Company is 110 Fulbourn Road, Cambridge, CB1 9NJ, UK.
 
The Company was formed on October 16, 1990, as a joint venture between Apple Computer (UK) Limited and Acorn Computers Limited, and operated under the name Advanced RISC Machines Holdings Limited until March 10, 1998, when its name was changed to ARM Holdings plc. Its initial public offering was on April 17, 1998.
 
Company undertakings include ARM Limited (incorporated in the UK), Geomerics Limited (incorporated in the UK), ARM France SAS (incorporated in France), ARM Germany GmbH (incorporated in Germany), ARM Norway AS (incorporated in Norway), ARM Sweden AB (incorporated in Sweden), ARM Finland Oy (incorporated in Finland), ARM Inc. (incorporated in the US), ARM Consulting (Shanghai) Co. Limited (incorporated in PR China), ARM KK (incorporated in Japan), ARM Korea Limited (incorporated in South Korea), ARM Taiwan Limited (incorporated in Taiwan), and ARM Embedded Technologies Pvt. Limited (incorporated in India).
 
 
F-7
 
1b 
Summary of significant accounting policies
 
The principal accounting policies applied in the presentation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
 
Basis of preparation
 
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the IASB, IFRIC interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements were authorized for issuance on March 5, 2014 by the Board of directors.
 
The consolidated financial statements have been prepared on a going concern basis and in accordance with the historical cost convention as modified by: the revaluation to fair value of available-for-sale financial assets; financial assets and liabilities at fair value through the income statement (including embedded derivatives and derivative instruments). 
 
The cash flow statement for 2012 includes a revision in respect of the advance payment to acquire rights to MIPS Technologies, Inc.’s portfolio of patents.  £103.7 million has been moved from ‘prepayments and other assets’ within working capital movements to ‘advance payment to acquire intangible asset and available-for-sale (“AFS”) financial asset’ within investing activities.  The revision has been made to reflect the nature of the payment following the completion of the transaction in 2013. We believe the revision is not material to the financial statements taken as a whole.
 
Critical accounting estimates and judgments
 
The preparation of financial statements in accordance with IFRS requires the directors to make critical accounting estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates and judgments are continually evaluated and are based on historical experiences and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
 
Impairment of goodwill
 
The Company tests goodwill for impairment at least annually. This requires an estimation of the value in use of the cash generating units (CGUs) to which goodwill is allocated. As discussed in detail in note 13, estimating the value in use requires the Company to make an estimate of the expected future cash flows from the CGUs and also to choose a suitable discount rate in order to calculate the present values of those cash flows. The discount rate is based on an estimate of the Company’s weighted average cost of capital. The Company uses a post-tax discount rate of 10% (2012: 10%) (pre-tax discount rate of approximately 11% (2012: 11%)).
 
The most significant balance of goodwill is that allocated to the Physical IP Division (PIPD). The cash flows relevant to this CGU are those of both the division itself and also a proportion of the cash flows generated by the Processor Division (PD). The directors make an estimate of the PD cash flows that are considered to be generated as a result of the incremental value provided by the combination of PD and PIPD products. Although these PD cash flows are not cross allocated to PIPD in the segmental reporting note the directors consider that it is necessary to include them in the estimation of the value in use of the PIPD CGU. This is because PD products are enhanced when combined with certain PIPD products. As a result the directors believe that PD is able, and will be able in future, to achieve higher revenues than it would have done as a stand-alone entity. The amount of these revenues is estimated by considering the percentage of revenue that is achieved as a result of the combination for each class of PD product. While these percentages are not derived from external sources of information, as no such sources exist, the directors utilize their considerable knowledge and experience of the semiconductor industry in estimating the amounts that would be re-charged if PD and PIPD were independent entities. Among other things, they consider the number of additional licenses that may be signed and the additional value that may be achieved per license as a result of the processors’ enhanced performance.
 
 
F-8
 
Revenue recognition
 
The Company makes significant estimates in applying its revenue recognition policies. In particular, as discussed in detail in the revenue recognition policy below, estimates are made in relation to the use of the percentage-of-completion accounting method, which requires that the extent of progress toward completion of contracts can be anticipated with reasonable certainty. The use of the percentage-of-completion method is itself based on the assumption that, at the outset of license agreements, there is an insignificant risk that customer acceptance is not obtained. The Company also makes assessments, based on prior experience, of the extent to which future milestone receipts represent a probable future economic benefit to the Company. In addition, when allocating revenue to various components of arrangements involving several components, it is assumed that the fair value of each element is reflected by its price when sold separately. The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent with the application of the revenue recognition policy affect the amounts reported in the financial statements. If different assumptions were used, it is possible that different amounts would be reported in the financial statements.
 
Provisions for income taxes
 
The Company is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the world-wide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
 
Legal settlements and other contingencies
 
Determining the amount to be accrued for legal settlements requires the directors to estimate the committed future legal and settlement fees the Company is expecting to incur, either where suits are filed against the Company for infringement of patents, or where the Company may be required to indemnify a licensee. The directors assess the extent of any potential infringement based on legal advice and written opinions received from external counsel and then estimate the level of accrual required.
 
Contingent consideration for an acquisition is recognized at fair value as part of the purchase consideration if the contingent conditions are expected to be satisfied. This requires the directors to estimate the acquiree’s future financial performance, typically more than one year post-acquisition.
 
Participation in trust to acquire patent rights
 
During 2013, the Company has participated in a consortium, via a trust, to acquire certain patent rights and has made various judgments regarding these transactions.
 
The directors believe that the Company does not control or have significant influence over the trust since, amongst other factors it does not have voting rights on the board or significant influence over the relevant activities of the trust. The results of the trust have therefore not been consolidated or equity accounted in the Company financial statements. The Company has determined that the participation in the consortium conferred on the Company two separate rights: an intangible asset, conferring the right to use the assets in the Company’s own business, and an AFS financial asset conferring the right to certain potential future revenue streams arising from the licensing activities of the trust. The amount expected to be recovered through this licensing program was estimated by the Company in conjunction with the management of the trust, which has considerable experience of managing the assets of similar trusts.
 
The Company assesses its intangible assets for impairment at each reporting date and has reviewed the valuation of the patent rights acquired in this transaction. Given the design freedom that these rights provide and the size of the future opportunity afforded, the directors have concluded that no impairment of the patent rights is required.
 
In Q4 2013, the trust made a strategic decision not to pursue a licensing program and the portfolio was instead put up for sale by auction. The Company acquired the patents in January 2014 for $4.0 million (£2.4 million), which will be accounted for as an additional intangible asset. The auction process means that there are no further potential
 
 
cash flows in relation to the AFS financial asset and the asset has therefore been impaired down to the value of the Company’s share of the auction proceeds, resulting in a non-cash exceptional charge of $98.5 million (£59.5 million).
 
Provision for impairment of trade receivables
 
The Company assesses trade receivables for impairment which requires the directors to estimate the likelihood of payment forfeiture by customers.
 
New standards, amendments and interpretations
 
New and amended standards adopted by the Company
 
IFRS 10 “Consolidated financial statements” IFRS 10 replaces the guidance on control and consolidation in IAS 27 “Consolidated and separate financial statements”, and SIC-12 “Consolidation – special purpose entities” and changes the definition of control so that the same criteria are applied to all entities. The revised definition of control focuses on the need to have both power and variable returns before control is present. Power is the current ability to direct the activities that significantly influence returns. Returns must vary and can be positive, negative or both. This standard has not had a material impact on the results of the Company. The standard is effective for annual periods beginning on or after 1 January 2013.
 
IFRS 11 “Joint arrangements” Changes in the definitions have reduced the “types” of joint arrangements to two: joint operations and joint ventures. The existing policy choice of proportionate consolidation for jointly controlled entities has been eliminated. Equity accounting is mandatory for participants in joint ventures. Entities that participate in joint operations will follow accounting much like that for joint assets or joint operations today, whereby a joint operator will recognize its interest based on its involvement in the joint operation (that is, based on its direct rights and obligations) rather than on the participation interest it has in the joint arrangement. In contrast, a joint venture does not have rights to individual assets or obligations for individual liabilities of the joint venture. Instead, joint venturers share in the net assets and, in turn, the outcome (profit or loss) of the activity undertaken by the joint venture. This standard has not had a material impact on the results of the Company. This standard is effective for annual periods beginning on or after 1 January 2013.
 
IFRS 12 “Disclosure of interests in other entities” IFRS 12 sets out the required disclosures for entities reporting under the two new standards, IFRS 10 “Consolidated financial statements”, and IFRS 11 “Joint arrangements”. The new standard, IFRS 12, requires entities to disclose information that helps financial statement readers to evaluate the nature, risks and financial effects associated with the entity’s interests in subsidiaries, associates, joint arrangements and unconsolidated structured entities. This standard has not had a material impact on the results of the Company. The standard is effective for annual periods beginning on or after 1 January 2013.
 
IFRS 13 “Fair value measurement” The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards. IFRS 13 aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The standard is effective for annual periods beginning on or after 1 January 2013. The Company has included the relevant disclosure requirements within note 1c ‘Financial risk management’, and note 17 ‘Financial instruments’.
 
IAS 28 (Revised) “Investments in associates and joint ventures” IAS 28 defines “significant influence” and the “equity method” and provides guidance on their practical application. The revised standard incorporates the accounting for joint ventures as well as the consensus from SIC-13 “Jointly controlled entities”. The disclosure requirements have now been relocated to IFRS 12. This new guidance may impact the classification of investments acquired in the future. This standard is effective for annual periods beginning on or after 1 January 2013.
 
Amendment to IAS 1 “Financial statement presentation” The main change resulting from this amendment is a requirement for entities to group items presented in other comprehensive income (OCI) on the basis of whether they are potentially reclassifiable to the income statement subsequently (reclassification adjustments). This standard is effective for accounting periods beginning on or after 1 July 2012. The Company has included relevant disclosures within the financial statements.
 
 
F-10
 
IAS 27 (revised 2011) “Separate financial statements” This standard includes the provisions on separate financial statements that are left after the control provisions of IAS 27 have been included in the new IFRS 10. This standard is effective for accounting periods beginning on or after 1 January 2013. There has been no material impact on the Company.
 
Amendment to IAS 36 “Impairment of assets” This amendment relates to the recoverable amount disclosures for non-financial assets. The amendment removes certain disclosures of the recoverable amount of CGUs that had been included in IAS 36 by the issue of IFRS 13. The amendment is effective for accounting periods beginning on or after 1 January 2014.
 
Standards, amendments and interpretations that are not yet effective and have not been early adopted
 
IFRS 9 “Financial instruments” addresses the classification, measurement and recognition of financial assets and financial liabilities. This is the first part of a new standard to replace IAS 39. IFRS 9 has two measurement categories: amortized cost and fair value. All equity instruments are measured at fair value. A debt instrument is measured at amortized cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and interest. Otherwise it is measured at fair value through the income statement. This standard is not expected to have a material impact on the results of the Company. Published by the IASB in November 2009, the effective date is currently open, pending the finalization of the impairment and classification and measurement requirements.
 
Amendment to IAS 32 “Financial instruments: Presentation” This amendment updates the application guidance in IAS 32 to clarify some of the requirements for offsetting financial assets and financial liabilities on the balance sheet. This standard is effective for accounting periods beginning on or after 1 January 2014. It is not expected to have a material impact on the Company.
 
Revenue recognition
 
The Company follows the principles of IAS 18, “Revenue recognition”, in determining appropriate revenue recognition policies. In principle, therefore, revenue associated with the sale of goods is recognized when all of the following conditions have been satisfied:
 
 
·
the Company has transferred to the buyer the significant risks and rewards of ownership of the goods;
 
 
·
the Company does not retain either continuing managerial involvement to the degree usually associated with ownership or effective control over the goods sold;
 
 
·
the amount of revenue can be measured reliably;
 
 
·
it is probable that the economic benefits associated with the transaction will flow to the Company; and
 
 
·
the costs incurred or to be incurred in respect of the sale can be measured reliably.
 
Revenue associated with the rendering of services is recognised when all of the following conditions have been satisfied:
 
 
·
the amount of revenue can be measured reliably;
 
 
·
it is probable that the economic benefits associated with the transaction will flow to the Company;
 
 
·
the stage of completion of the transaction at the end of the reporting period can be measured reliably; and
 
 
·
the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.
 
Revenue is shown net of value added tax, returns, rebates and discounts, and after eliminating sales within the Company.
 
 
F-11
 
Revenue comprises the value of sales of licences to ARM technology, royalties arising from the resulting sale of licensees’ ARM technology-based products, revenues from support, maintenance and training and the sale of development boards and software toolkits.
 
License revenues:
 
Revenue from standard license products that are not modified to meet the specific requirements of each customer is recognized when all of the conditions relevant to revenue associated with the sale of goods have been satisfied:
 
 
·
the significant risks and rewards of ownership are transferred when a licence arrangement has been agreed and the IP has been delivered to the customer;
 
 
·
continuing managerial involvement and effective control over licensed IP is relinquished at the point at which the IP is delivered to the customer;
 
 
·
the amount of revenue can be measured reliably; any consideration due under the licensing arrangement that is not deemed to be reliably measurable is deferred until it can be measured reliably; and
 
 
·
it is probable that the economic benefits associated with the transaction will flow to the Company; any economic benefits of the transaction that are deemed unlikely to flow to the Company are deferred until it becomes probable that they will flow to the Company.
 
The majority of the Company’s revenues come from the licensing of IP and subsequent receipt of royalty revenues and there are therefore very few direct costs associated with the sale of goods; where there are direct costs of revenues, these are measured with reference to the purchasing agreements in place with the Company’s suppliers.
 
Many license agreements are for products which are designed to meet the specific requirements of each customer. Revenue from the sale of such licenses is recognized on a percentage-of-completion basis over the period from signing of the license to customer acceptance. Under the percentage-of-completion method, provisions for estimated losses on uncompleted contracts are recognized in the period in which the likelihood of such losses is determined. The percentage-of-completion is measured by monitoring progress using records of actual time incurred to date in the project compared with the total estimated project requirement, which approximates to the extent of performance.
 
Where invoicing milestones in license arrangements are such that the receipts fall due significantly outside the period over which the customization is expected to be performed or significantly outside its normal payment terms for standard license arrangements, the Company evaluates whether it is probable that economic benefits associated with these milestones will flow to the Company and therefore whether these receipts should initially be included in the arrangement consideration.
 
In particular, it considers:
 
 
·
whether there is sufficient certainty that the invoice will be raised in the expected timeframe, particularly where the invoicing milestone is in some way dependent on customer activity;
 
 
·
whether it has sufficient evidence that the customer considers that the Company’s contractual obligations have been, or will be, fulfilled;
 
 
·
whether there is sufficient certainty that only those costs expected to be incurred will indeed be incurred before the customer will accept that a future invoice may be raised; and
 
 
·
the extent to which previous experience with similar product groups and similar customers supports the conclusions reached.
 
Where the Company considers that there is insufficient evidence that it is probable that the economic benefits associated with such future milestones will flow to the Company, taking into account these criteria, such milestones are excluded from the arrangement consideration until there is sufficient evidence that it is probable that the
 
 
economic benefits associated with the transaction will flow to the Company. The Company does not discount future invoicing milestones, as the effect of so doing would be immaterial.
 
Where agreements involve several components, the entire fee from such arrangements is allocated to each of the individual components based on each component’s fair value, where fair value is the price that is regularly charged for an item when sold separately. Where a component in a multiple-component agreement has not previously been sold separately, the assessment of fair value for that component is based on other factors including, but not limited to, the price charged when it was sold alongside other items and the book price of the component relative to the book prices of the other components in the agreement. If fair value of one or more components in a multiple-component agreement is not determinable (where such component is not considered incidental to the overall arrangement), the entire arrangement fee is deferred until such fair value is determinable, or the component has been delivered to the licensee. Where, in substance, two or more elements of a contract are linked and fair values cannot be allocated to the individual components, the revenue recognition criteria are applied to the elements as if they were a single element.
 
Agreements including rights to unspecified future products (as opposed to unspecified upgrades and enhancements) are accounted for using subscription accounting, with revenue from the arrangement being recognized on a straight-line basis over the term of the arrangement, or an estimate of the economic life of the products offered if no term is specified, beginning with the delivery of the first product.
 
Royalty revenues:
 
Royalty revenues are earned on sales by the Company’s customers of products containing ARM technology. Royalty revenues are recognized when it is probable that the economic benefits associated with the transaction will flow to the Company, the amount of revenue can be reliably measured and when the Company receives notification from the customer of product sales. Notification is typically received in the quarter following shipment of the products by the customer.
 
Other revenues:
 
In addition to license fees, contracts generally contain an agreement to provide post-delivery service support (in the form of support, maintenance and training) which consists of the right to receive services and/or unspecified product upgrades or enhancements that are offered on a when-and-if-available basis. Fees for post-delivery service support are generally specified in the contract. Revenue related to post-delivery service support is recognized based on fair value, which is determined with reference to contractual renewal rates. Where renewal rates are specified, revenue for post-delivery service support is recognized on a straight-line basis over the period for which support and maintenance is contractually agreed by the Company with the licensee.
 
Sales of software, including development systems, which are not specifically designed for a given license (such as off-the-shelf software) are recognized upon delivery, when the significant risks and rewards of ownership have been transferred to the customer. At that time, the Company has no further obligations except that, where necessary, the costs associated with providing post-delivery service support have been accrued. Services (such as training) that the Company provides which are not essential to the functionality of the IP are separately stated and priced in the contract and, therefore, accounted for separately. Revenue is recognized as services are performed and it is probable that the economic benefits associated with the transaction will flow to the Company.
 
For all types of revenue, if the amount of revenue recognized exceeds the amounts invoiced to customers, the excess amount is recorded as amounts recoverable on contracts within accounts receivable. The excess of license fees and post-delivery service support invoiced over revenue recognized is recorded as deferred revenue.
 
Intangible assets
 
(a) Goodwill Goodwill represents the excess of the fair value of the consideration paid on acquisition of a business over the fair value of the assets, including any intangible assets identified, and liabilities acquired. Goodwill is not amortized but is measured at cost less impairment losses. In determining the fair value of consideration, the fair value of equity issued is the market value of equity at the date of completion, the fair value of share options is calculated using the Black-Scholes valuation model, and the fair value of contingent consideration is based upon whether the directors believe any performance conditions will be met and thus whether any further consideration will be payable.
 
 
F-13
 
(b) Other intangible assets Computer software, purchased patents and licenses to use technology are capitalized at cost and amortized on a straight-line basis over an estimate of the time that the Company is expected to benefit from them. Costs that are directly attributable to the development of new business application software and that are incurred during the period prior to the date that the software is placed into operational use, are capitalized. External costs and internal costs are capitalized to the extent they enhance the future economic benefit of the asset.
 
Although an independent valuation is made of any intangible assets purchased as part of a business combination, the directors are primarily responsible for determining the fair value of intangible assets.
 
In-process research and development projects purchased as part of a business combination may meet the criteria set out in IFRS 3 (revised), “Business combinations”, for recognition as intangible assets other than goodwill. Management tracks the status of in-process research and development intangible assets such that their amortization commences when the assets are brought into use.
 
Order backlog is derecognized when it has been fully amortised.
 
Amortization is calculated so as to write off the cost of intangible assets, less their estimated residual values, which are adjusted (if appropriate) at each balance sheet date, on a straight-line basis over the expected useful economic lives of the assets concerned. The principal economic lives used for this purpose are:
 
Computer software
Three to five years
Patents and licences
Three to eleven years
In-process research and development
One to five years
Developed technology
One to seven years
Existing agreements and customer relationships
One to six years
Core technology
Five years
Trademarks and tradenames
One to five years
Order backlog
One year
 
Income taxes
 
The current income tax charge is calculated on the basis of tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company’s subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
 
During the period, legislation was enacted to allow UK companies to elect for the Research and Development Expenditure Credit (RDEC) on qualifying expenditure incurred since April 1, 2013, instead of the existing super-deduction rules. At the balance sheet date, management has concluded that the election will be made and therefore the RDEC is recorded as income in profit before tax, netted against research and development expenses as the RDEC is of the nature of a government grant.  In previous periods there was a reduction in the income tax expense.
 
Deferred income taxes are computed using the liability method. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted rates and laws that will be in effect when the differences are expected to reverse. The deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax assets are recognized to the extent that it is probable that future taxable profits will arise against which the temporary differences will be utilized.
 
Deferred tax is provided on temporary differences arising on investments in subsidiaries except where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets and liabilities arising in the same tax jurisdiction are offset, where the taxation authority permits a single net payment.
 
In the period a decision to elect into the UK patent box regime was made. The UK patent box regime seeks to tax all profits attributable to patented technology at a reduced rate of 10%.  The rules are to be phased in over 5 years from April 1, 2013 – a company will be entitled to only 60% of the deduction in financial year 2013/14, rising
 
 
to 100% by 2017/18. As ‘relevant’ patent box profits are taxed at 10% and other profits are taxed at UK statutory rates, deferred tax assets and liabilities are measured using the average rates expected to apply on realization or settlement.
 
In the UK and the US, the Company is entitled to a tax deduction for amounts treated as compensation on exercise of certain employee share options or vest of share awards under each jurisdiction’s tax rules. As explained under “Share-based payments” below, a compensation expense is recorded in the Company’s income statement over the period from the grant date to the vesting date of the relevant options and awards. As there is a temporary difference between the accounting and tax bases, a deferred tax asset is recorded. The deferred tax asset arising is calculated by comparing the estimated amount of tax deduction to be obtained in the future (based on the Company’s share price at the balance sheet date) with the cumulative amount of the compensation expense recorded in the income statement. If the amount of estimated future tax deduction exceeds the cumulative amount of the compensation expense at the statutory rate, the excess is recorded directly in equity, against retained earnings.
 
Impairment of assets
 
Non-financial assets that have an indefinite useful life, for example goodwill, are not subject to amortization but are tested annually for impairment.
 
Non-financial assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
 
An impairment loss is recognized for the amount by which the non-financial asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value-in-use. For purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (each a cash generating unit, “CGU”). Where the recoverable amount of a CGU is measured based on a value-in-use calculation, all cash inflows and outflows associated with the CGU are taken into account whether these are explicitly charged or not. Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.
 
The annual impairment tests in 2013 and 2012 showed there was no impairment with respect to goodwill. Furthermore, no trigger events have been identified that would suggest the impairment of any of the Company’s other intangible assets.
 
The Company considers at each reporting date whether there is any indication that financial assets are impaired. If there is such an indication, the Company carries out an impairment test by measuring the assets’ recoverable amounts, which are the higher of the assets’ fair values less costs to sell and their values in use. If the recoverable amounts are less than the carrying amounts an impairment loss is recognized, and the assets are written down to their recoverable amounts.
 
In the case of equity securities classified as AFS, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are permanently impaired. If any such evidence exists for AFS financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any permanent impairment loss on that financial asset previously recognized in the income statement – is removed from equity and recognized in the income statement. Impairment losses recognized in the income statement on equity instruments are not reversed.
 
When securities classified as AFS are sold, the accumulated fair value adjustments recognized through other comprehensive income are recycled through the income statement.
 
Impairment testing of trade receivables is described under “Accounts receivable” below.
 
Provisions
 
Provisions for legal claims are recognized when: the Company has a present legal or constructive obligation as a result of past events; and it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount of the outflow can be reliably estimated.
 
 
F-15
 
Exceptional items
 
Exceptional items are disclosed separately in the financial statements where it is necessary to do so to provide further understanding of the financial performance of the Company. They are material items of income or expense that have been shown separately due to the significance of their nature.
 
Segment reporting
 
At December 31, 2013, the Company was organized on a worldwide basis into three business segments, namely the Processor Division (PD), the Physical IP Division (PIPD) and the System Design Division (SDD). This is based upon the Company’s internal organization and management structure and is the primary way in which the Chief Operating Decision Maker (CODM) and the rest of the Board are provided with financial information. The directors believe that the CODM is the Chief Executive Officer of the Company.
 
Segment expenses are expenses that are directly attributable to a segment together with the relevant portion of other expenses that can reasonably be allocated by segment. Foreign exchange gains or losses, investment income, interest payable and similar charges, share of joint venture results and tax are not allocated by segment.
 
Segment assets and liabilities include items that are directly attributable to a segment plus an allocation on a reasonable basis of shared items. Corporate assets and liabilities are not included in business segments and are thus unallocated. At December 31, 2013 and 2012, these comprised cash and cash equivalents, short and long-term deposits, AFS financial assets, loans and receivables, embedded derivatives and the fair value of currency exchange contracts. Current and deferred tax assets and liabilities and VAT are also not included in business segments and are thus unallocated.
 
As part of the ongoing evolution of the business, the Company’s divisional structure was re-organized on January 1, 2014.  As a result of this change, the Company’s business segments may change for future reporting periods in order to reflect this new organization.
 
Principles of consolidation
 
The consolidated financial statements incorporate the financial statements of the Company and all its subsidiaries. Intra-group transactions, including sales, profits, receivables and payables, have been eliminated on consolidation. All subsidiaries use uniform accounting policies.
 
 
F-16
 
Business combinations The results of subsidiaries acquired are included in the income statement from the date of acquisition. Assets and liabilities existing at the date of acquisition are recorded at their fair values reflecting their condition at that date. Earn-outs paid as part of an acquisition are assessed on an individual basis and treated as either part of the acquisition consideration or as employee compensation depending on the nature of the agreement.
 
Subsidiaries Subsidiaries are all entities (including structured entities) over which the Company has control.  The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are deconsolidated from the date that control ceases.
 
Associates Associates are all entities over which the Company has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting. Under the equity method, the investment is initially recognized at cost, and the carrying amount is increased or decreased to recognize the Company’s share of the profit or loss of the investee after the date of acquisition.
 
Joint ventures Joint ventures are all arrangements in which the Company has joint control with one or more other parties, whereby each party has a right to a share of the net assets of the arrangement.  Investments in joint ventures are accounted for using the equity method of accounting. Under the equity method, the investment is initially recognized at cost, and the carrying amount is increased or decreased to recognize the Company’s share of the profit or loss of the investee after the date of acquisition.
 
Research and development expenditure
 
All ongoing research expenditure is expensed in the period in which it is incurred. Where a product is technically feasible, production and sale are intended, a market exists, expenditure can be measured reliably, and sufficient resources are available to complete the project, development costs are capitalized and amortized on a straight-line basis over the estimated useful life of the respective product. The Company believes its current process for developing products is essentially completed concurrently with the establishment of technological feasibility, which is evidenced by a working model. Accordingly, development costs incurred after the establishment of technological feasibility have not been significant and, therefore, no costs have been capitalized to date.
 
Where no internally-generated intangible asset can be recognized, development expenditure is recognized as an expense in the period in which it is incurred. Any collaborative agreement whereby a third-party agrees to partially fund the Company’s research and development is recognized over the period of the agreement as a credit within research and development expenses.
 
Government grants
 
Grants in respect of specific research and development projects are recognized as receivable when there is reasonable assurance that they will be received and the conditions to obtain them have been complied with. They are credited to the income statement in the same period as the related research and development costs for which the grant is compensating. The grant income is presented as a deduction from the related expense.
 
Share-based payments
 
The Company issues equity-settled share-based payments to certain employees. In accordance with IFRS 2, “Share-based payments,” equity-settled share-based payments are measured at fair value at the date of grant. Fair value is measured by use of the Black-Scholes pricing model. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of the number of shares that will eventually vest.
 
The Company operates Save As You Earn (SAYE) schemes in the United Kingdom and an Employee Share Purchase Plan (ESPP) in the United States, India, Japan, South Korea and Taiwan. Options under the SAYE schemes are granted at a 20% discount to the market price of the underlying shares on the date of announcement of the scheme and at a 15% discount to the lower of the market prices at the beginning and end of the scheme for the ESPP. The UK SAYE schemes are approved by the UK tax authorities, which stipulates that the saving period must
 
 
be at least 36 months. The Company has recognized a compensation charge in respect of the SAYE plans and ESPPs. The charges for these are calculated as detailed above.
 
The Company also has a LTIP on which it is also required to recognize a compensation charge under IFRS 2, calculated as detailed above.
 
The share-based payments charge is allocated to cost of sales, research and development expenses, sales and marketing expenses, and general and administrative expenses on the basis of headcount.
 
Employer’s taxes on share options
 
Employer’s National Insurance in the United Kingdom and equivalent taxes in other jurisdictions are payable on the exercise of certain share options and vesting of share awards. In accordance with IFRS 2, this is treated as a cash-settled transaction. A provision is made, calculated using the intrinsic value of the relevant options and awards at the balance sheet date, pro-rated over the vesting period of the options and awards.
 
Retirement benefit costs
 
The Company contributes to defined contribution plans substantially covering all employees in Europe and the United States and to government pension schemes for employees in Japan, South Korea, Taiwan, PR China, Israel and India. The Company contributes to these plans based upon various fixed percentages of employee compensation, and such contributions are expensed as incurred.
 
Operating leases
 
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Costs, net of any lease incentives, in respect of operating leases are charged on a straight-line basis over the lease term even if payments are not made on such a basis.
 
Finance leases
 
Leases in which substantially all of the risks and rewards of ownership are transferred to the lessee are classified as finance leases. Assets held under finance leases are recognized as assets of the Company at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease liability. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to the income statement.
 
Foreign currency translation
 
(a)   Functional and presentation currency. The functional currency of each Company entity is the currency of the primary economic environment in which that entity operates. The consolidated financial statements are presented in sterling, which is the presentation currency of the Company.
 
(b)   Transactions and balances. Transactions denominated in foreign currencies have been translated into the functional currency of each Company entity at actual rates of exchange at the date of transaction. Monetary assets and liabilities denominated in foreign currencies have been translated at closing rates of exchange at the balance sheet date. Exchange differences have been included in general and administrative expenses.
 
(c)   Group companies. The results and financial positions of all Company entities (none of which has the currency of a hyper-inflationary economy) not based in the UK are translated into sterling as follows:
 
 
(i)
assets and liabilities for each balance sheet presented are translated at the closing rates of exchange at the balance sheet date;
 
 
(ii)
income and expenses for each income statement presented are translated at the rates of exchange at the time of each transaction during the period; and
 
 
F-18
 
 
(iii)
all resulting exchange differences are recognized as a separate component of equity, being taken through other comprehensive income via the cumulative translation adjustment.
 
When a foreign operation is partially disposed of or sold, exchange differences that were recognized through other comprehensive income are recognized in the income statement as part of the gain or loss on sale.
 
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rates of exchange.
 
Derivative financial instruments
 
The Company utilizes currency exchange contracts to manage the exchange risk on actual transactions related to accounts receivable, denominated in a currency other than the functional currency of the business. The Company’s currency exchange contracts do not subject the Company to risk from exchange rate movements because the gains and losses on such contracts offset losses and gains, respectively, on the transactions being hedged. The currency exchange contracts are recorded at fair value and the related foreign currency accounts receivable are revalued to spot rates at each period end. The fair value of forward exchange contracts is determined using quoted forward exchange rates at the balance sheet date. The fair value of foreign currency options is based upon valuations performed by management and the respective banks holding the currency instruments. All recognized gains and losses resulting from the settlement of the contracts are recorded within general and administrative expenses in the income statement. The Company does not enter into currency exchange contracts for the purpose of hedging anticipated transactions.
 
Embedded derivatives
 
In accordance with IAS 39, “Financial instruments: recognition and measurement,” the Company has reviewed all its contracts for embedded derivatives that are required to be separately accounted for if they do not meet certain requirements set out in the standard. From time to time, the Company may enter into contracts denominated in a currency (typically US dollars) that is neither the functional currency of the Company entity nor the functional currency of the customer or the collaborative partner. Where there are uninvoiced amounts on such contracts, the Company carries such derivatives at fair value. The resulting gain or loss is recognized in the income statement under general and administrative expenses.
 
Investment income, and interest payable and similar charges
 
Investment income, and interest payable and similar charges relate to interest income and expense, which is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable.
 
Dividends
 
Distributions to owners of the Company are not recognized in the income statement under IFRS, but are disclosed as a component of the movement in shareholders’ equity. A liability is recorded for a dividend when the dividend is approved by the Company’s shareholders. Interim dividends are recognized as a distribution when paid.
 
Earnings per share
 
Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period, excluding treasury shares, which are treated as cancelled.
 
 For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The Company had two categories of dilutive potential ordinary shares during the year: those being share options granted to employees and directors where the exercise price is less than the average market price of the Company’s ordinary shares during the year and the awards made under the Company’s RSU, DAB and LTIP schemes. For 2013 and 2012, no shares that were allocated for awards under the LTIP were included in the diluted EPS calculation as the performance criteria could not be measured until the conclusion of the performance period.
 
 
F-19
 
Reconciliations of the earnings and weighted average number of shares used in the calculations are shown on the face of the consolidated income statement.
 
Cash and cash equivalents
 
Cash and cash equivalents includes cash in hand, deposits held with banks, and other short-term highly liquid investments with original maturities of three months or less. The carrying amount approximates to fair value because of the short-term maturity of these instruments.
 
Short- and long-term deposits
 
The Company considers all highly-liquid investments with original maturity dates of greater than three months and maturing in less than one year to be short-term deposits. Deposits with a maturity date of greater than one year from the balance sheet date are classified as long-term.
 
Accounts receivable
 
Accounts receivable are recognized initially at fair value. A provision for impairment of trade receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables.
 
Accounts receivable are first assessed individually for impairment. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments (more than 90 days overdue) are considered indicators that the trade receivable may be impaired.
 
Where there is no objective evidence of impairment for an individual receivable, it is included in a group of receivables with similar credit risk characteristics and these are collectively assessed for impairment.
 
In the case of impairment, the carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in the income statement within general and administrative expenses. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against general and administrative expenses in the income statement.
 
Property, plant and equipment
 
Property, plant and equipment is stated at historic cost less accumulated depreciation and any recognized impairment loss. The cost of property, plant and equipment is their purchase cost, together with any costs directly attributable to bringing the asset to its working condition for its intended use. External costs and internal costs are capitalized to the extent they enhance the future economic benefit of the asset.
 
Assets in the course of construction are carried at cost less any recognized impairment loss.  Depreciation of these assets commences when the assets are ready for their intended use.
 
Depreciation is calculated so as to write off the cost of property, plant and equipment, less their estimated residual values, which are adjusted, if appropriate, at each balance sheet date, on a straight-line basis over the expected useful economic lives of the assets concerned. The principal economic lives used for this purpose are:
 
Freehold buildings
25 years
Leasehold improvements
Five to ten years or term of lease, whichever is shorter
Computer equipment
Three to five years
Fixtures and fittings and motor vehicles
Three to five years

Provision is made against the carrying value of property, plant and equipment where an impairment in value is deemed to have occurred. Asset lives and residual values are reviewed on an annual basis.
 
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within general and administrative expenses in the income statement.
 
 
Financial assets
 
The Company classifies its financial assets in the following categories: at fair value through the income statement, loans and receivables, and available-for-sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of financial assets at initial recognition.
 
(a)  Financial assets at fair value through the income statement. Financial assets at fair value through the income statement are financial assets held for trading – that is, assets that have been acquired principally for the purpose of selling in the short-term. Assets in this category are classified as current assets. They are initially recognized at fair value with transaction costs being expensed in the income statement. Specifically, the Company’s currency exchange contracts and embedded derivatives fall within this category. Gains or losses arising from changes in the fair value of “financial assets at fair value through the income statement” are presented in the income statement within general and administrative expenses in the period in which they arise.
 
(b)  Loans and receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. “Accounts receivable”, “cash and cash equivalents” and “short and long term deposits” are classified as “Loans and receivables.” (See note 17).
 
Loans and receivables are measured initially at fair value and then subsequently measured at amortized cost.
 
(c)  Available-for-sale financial assets. AFS financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the assets within 12 months of the balance sheet date.
 
Equity investments that are not publicly traded are also classified as AFS and are initially recorded at fair value plus transaction costs. Given that the markets for these assets are not active, the Company establishes fair value by using valuation techniques. The estimated fair value of these investments approximated to cost less any permanent diminution in value (based on estimates determined by management), except where independent valuation information is obtained.  Unrealized holding gains or losses on such securities are recognized, net of related taxes, through other comprehensive income via a revaluation reserve, except where there is evidence of permanent impairment (in which case the loss is recognized through the income statement within general and administrative expenses or exceptional items where appropriate).
 
Current investments have been valued based on the amount that is recoverable.
 
Accounts payable
 
Accounts payable are recognized at face value as they are settled within 12 months.
 
Share capital
 
Ordinary shares issued by the Company are recorded at the proceeds received, net of direct issue costs.
 
1c 
Financial risk management
 
The Company operates in the intensely competitive semiconductor industry, which has been characterized by price erosion, rapid technological change, short product life cycles, cyclical market patterns, and heightened foreign and domestic competition. Significant technological changes in the industry could affect operating results.
 
The Company’s operations expose it to a variety of financial risks that include currency risk, interest rate risk, securities price risk, credit risk and liquidity risk.
 
Given the size of the Company, the directors have not delegated the responsibility for monitoring financial risk management to a sub-committee of the Board. The policies set by the directors are implemented by the Company’s finance and treasury departments. The Company has a treasury policy that sets out specific guidelines to manage currency risk, interest rate risk, credit risk and liquidity risk, and also sets out circumstances where it would be appropriate to use financial instruments to manage these.
 
 
F-21
 
Currency risk
 
The Company’s earnings and liquidity are affected by fluctuations in foreign currency exchange rates, principally in respect of the US dollar, reflecting the fact that most of its revenues and cash receipts are denominated in US dollars, while a significant proportion of its costs are settled in sterling. The Company seeks to use currency exchange contracts and currency options to manage the US dollar/sterling risk as appropriate, by monitoring the timing and value of anticipated US dollar receipts (which tend to arise from low-volume, high-value license deals and royalty receipts) in comparison with its requirement to settle certain expenses in US dollars. The Company reviews the resulting exposure on a regular basis and hedges this exposure using currency exchange contracts and currency options for the sale of US dollars as appropriate. Such contracts are entered into with the objective of matching their maturity with projected US dollar cash receipts.
 
The Company is also exposed to currency risk in respect of the foreign currency denominated assets and liabilities of its overseas subsidiaries. At present, the Company does not consider this to be a significant risk since the Company does not intend to move assets between group companies.
 
The Company has elected not to apply hedge accounting, and all movements in the fair value of derivative foreign exchange instruments are recorded in the income statement, offsetting the foreign exchange movements on the accounts receivable, cash and cash equivalents and short-term deposits balances being hedged.
 
In addition, certain customers remit royalties and license fees in other currencies, primarily the Euro and Japanese yen. The Company is also required to settle certain expenses in these currencies, primarily in its French, German and Japanese subsidiaries, and as the net amounts involved are not considered significant, the Company does not take out forward-settling currency exchange contracts in these currencies.
 
Interest rate risk
 
Floating rate cash earns interest based on relevant national LIBID or base rate equivalents and is therefore exposed to cash flow interest rate risk. The proportion of funds held in fixed rather than floating rate deposits is determined in accordance with the policy outlined under “Liquidity risk” below. Other financial assets, such as AFS financial assets, are not directly exposed to interest rate risk.
 
The Company had no derivative financial instruments to manage interest rate fluctuations in place at the year-end since the level of financing was not considered significant, and as such no hedge accounting is applied. The Company’s cash flow is carefully monitored on a daily basis. Excess cash, considering expected future cash flows, is placed on either short- or long-term deposits to maximize the interest income thereon. Daily surpluses are swept into higher-interest earning accounts overnight.
 
Securities price risk
 
The Company is exposed to equity securities price risk on AFS financial assets. As there can be no guarantee that there will be a future market for securities (which are generally unlisted at the time of investment) or that the value of such investments will rise, the directors evaluate each investment opportunity on its merits before committing the Company’s funds. The directors review holdings in such companies on a regular basis to determine whether continued investment is in the best interests of the Company. Funds for such ventures are limited in order that the financial effect of any potential decline of the value of investments will not be substantial in the context of the Company’s financial results.
 
Credit risk
 
Credit risk is managed on a Company basis. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions.
 
At December 31, 2012 and 2013, the Company had no significant concentrations of credit risk. The amount of exposure to any individual counterparty is subject to a limit, which is reassessed periodically by the directors.
 
The Company has implemented policies that require appropriate credit checks on potential customers before sales commence. The Company generally does not require collateral on accounts receivable, as many of its
 
 
customers are large, well-established companies. The Company has not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area.
 
The Company markets and sells to a relatively small number of customers with individually large value transactions. The Company performs credit checks on all customers (other than those paying in advance) in order to assess their creditworthiness and ability to pay its invoices as they become due. As such, the balance of accounts receivable not owed by large companies is still deemed by the directors to be of low risk of default due to the nature of the checks performed on them, and accordingly a relatively small allowance against these receivables is in place to cover this low risk of default.
 
No credit limits were exceeded during the reporting period and the directors do not expect any significant losses from non-performance by these counterparties, other than those already provided for.
 
Liquidity risk
 
The Company’s policy is to maintain balances of cash and cash equivalents and short- and long-term deposits, such that highly liquid resources exceed the Company’s projected cash outflows at all times. Surplus funds are placed on fixed- or floating-rate deposits depending on the prevailing economic climate at the time (with reference to forward interest rates) and also on the required maturity of the deposit (as driven by the expected timing of the Company’s cash receipts and payments over the short- to medium-term).
 
Management monitors rolling forecasts of the Company’s short- and medium-term expected cash flows. This is carried out at both a local and a Company level with the local subsidiaries being funded by the Company as required.
 
Capital risk management
 
The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an appropriate capital structure. The capital structure of the Company consists of cash, cash equivalents, short- and long-term deposits, and capital and reserves attributable to owners of the Company, as disclosed on the consolidated balance sheet.
 
In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, sell assets to raise cash or take on debt.
 
The Company’s strategy is to have a capital structure that takes into account opportunities to invest in long-term profitable growth, prevailing trading conditions and the desire to improve balance sheet efficiency over time. The Company introduced a dividend in 2004 which has grown each year since. Between 2005 and 2008, an ongoing share buyback program was in place whereby 16% of the issued share capital was bought back at an average price of £1.22. In 2013, the interim dividend was increased by 26% and the directors are proposing a 27% increase in the final dividend, reflecting the Board’s long-term confidence in the business. As well as continuing to grow the dividend, the Board intends to undertake a limited share buyback program to maintain a flat share-count over time. No share buybacks were made in the current year. The capital structure is continually monitored by the Company.
 
Valuation hierarchy
 
The Company classifies its financial instruments as follows: level 1 instruments are those valued using unadjusted quoted prices in active markets for identical instruments; level 2 instruments are those valued using techniques based significantly on observable market data; and level 3 instruments are those valued using information other than observable market data.
 
The Company has a team that performs the valuations of financial assets required for financial reporting purposes, including level 3 fair values. This team reports to the Chief Financial Officer and to the Audit Committee.
 
The fair value of accounts and other receivables, other current financial assets, cash and cash equivalents, short- and long-term deposits, and accounts and other payables approximate to their carrying amount.
 
 
F-23
 
2 
Segmental reporting
 
At December 31, 2013, the Company was organized on a worldwide basis into three main business segments:
 
Processor Division (PD), encompassing those resources that are centered around microprocessor cores, including specific functions such as graphics IP, system IP, embedded software and configurable digital signal processing (DSP) IP.
 
Physical IP Division (PIPD), concerned with the building blocks necessary for translation of a circuit design into actual silicon.
 
System Design Division (SDD), focused on the tools and models used to create and debug software and system-on-chip (SoC) designs.
 
This is based upon the Company’s internal organization and management structure and is the primary way in which the CODM is provided with financial information. Whilst revenues are also reported into four main revenue streams (namely licensing, royalties, software and tools, and services), the costs, operating results and balance sheets are only analyzed into these three divisions. Further, the information provided to the CODM is based on the normalized profit before tax, a non-GAAP measure, and therefore this information is provided as well as the equivalent profit stated under IFRS.
 
The reconciling items: intangible amortization; acquisition-related charges; share-based payment costs including payroll taxes; disposal/impairment of investments; exceptional items; share of results in joint venture; and Linaro-related charges are analyzed below. Also analyzed are revenues; operating costs; investment income net of interest payable and similar charges; profit/(loss) before tax; tax; profit/(loss) after tax; depreciation; total assets and liabilities; net assets; and goodwill for each segment and the Company in total.
 
Business segment information
 
 
For the year ended December 31, 2013
  
 
Processor
Division
£ million
    
 
Physical IP
Division
£ million
    
System
Design
Division
£ million
    
 
Unallocated
£ million
    
 
Company
£ million
  
Segmental income statement
                              
Revenues
     596.2       82.0       36.4       —       714.6  
Operating costs
     (426.6 )     (90.7 )     (42.6 )     (1.2 )     (561.1 )
Investment income, net of interest payable and similar charges
     —       —       —       13.1       13.1  
Share of results in joint venture
     —       —       —       (4.0 )     (4.0 )
Profit/(loss) before tax
     169.6       (8.7 )     (6.2 )     7.9       162.6  
Tax
     —       —       —       (57.8 )     (57.8 )
Profit/(loss) for the year
     169.6       (8.7 )     (6.2 )     (49.9 )     104.8  
Reconciliation to normalized profit/(loss) before tax
                                        
Amortization on acquired intangibles and other acquisition related charges
     9.6       2.0       —       —       11.6  
Share-based payment cost including payroll taxes
     54.5       12.1       7.4       —       74.0  
Impairment of investments, net of profit on disposal
     3.5       —       —       —       3.5  
Exceptional items
     101.3       —       —       —       101.3  
Share of results in joint venture and Linaro-related charges
     7.0       —       —       4.0       11.0  
Normalized profit/(loss) before tax
     345.5       5.4       1.2       11.9       364.0  
Segmental balance sheet
                                        
Total assets
     389.4       400.1       31.6       817.3       1,638.4  
Total liabilities
     (243.2 )     (46.0 )     (12.0 )     (25.8 )     (327.0 )
Net assets
     146.2       354.1       19.6       791.5       1,311.4  
Other segmental items
                                        
Depreciation
     9.6       2.8       2.0       —       14.4  
Goodwill
     151.5       360.2       14.2       —       525.9  
Revenues (US dollar millions)
     $931.5       $129.1       $57.1       —       $1,117.7  

 
F-24
 
 
For the year ended December 31, 2012
  
 
Processor
Division
£ million
    
 
Physical IP
Division
£ million
    
System
Design
Division
£ million
    
 
Unallocated
£ million
    
 
Company
£ million
  
Segmental income statement
                              
Revenues
     473.9       68.3       34.7       —       576.9  
Operating costs
     (243.3 )     (82.8 )     (40.1 )     (2.6 )     (368.8 )
Investment income, net of interest payable and similar charges
     —       —       —       13.6       13.6  
Share of results of joint venture
     —       —       —       (0.7 )     (0.7 )
Profit/(loss) before tax
     230.6       (14.5 )     (5.4 )     10.3       221.0  
Tax
     —       —       —       (60.3 )     (60.3 )
Profit/(loss) for the year
     230.6       (14.5 )     (5.4 )     (50.0 )     160.7  
Reconciliation to normalized profit/(loss) before tax
                                        
Amortization on acquired intangibles and other acquisition related charges
     5.5       2.5       —       0.8       8.8  
Share-based payment cost including payroll taxes
     30.0       8.6       6.8       —       45.4  
Profit on sale of investments, net of impairment
     0.6       —       —       —       0.6  
Share of results in joint venture
     —       —       —       0.7       0.7  
Normalized profit/(loss) before tax
     266.7       (3.4 )     1.4       11.8       276.5  
Segmental balance sheet
                                        
Total assets
     284.6       409.2       32.5       740.5       1,466.8  
Total liabilities
     (182.6 )     (43.9 )     (15.1 )     (19.1 )     (260.7 )
Net assets
     102.0       365.3       17.4       721.4       1,206.1  
Other segmental items
                                        
Depreciation
     6.7       2.5       1.6       —       10.8  
Goodwill
     138.0       367.0       14.4       —       519.4  
Revenues (US dollar millions)
   $ 749.8     $ 108.4     $ 54.9       —     $ 913.1  

 
For the year ended December 31, 2011
  
 
Processor
Division
£ million
    
 
Physical IP
Division
£ million
    
 
Systems
Design
Division
£ million
    
 
Unallocated
£ million
    
 
Company
£ million
  
Segmental income statement
                              
Revenues
     397.6       61.3       32.9       —       491.8  
Operating costs
     (223.8 )     (81.1 )     (41.2 )     3.2       (342.9 )
Investment income, net of interest payable and similar charges
     —       —       —       8.0       8.0  
Profit/(loss) before tax
     173.8       (19.8 )     (8.3 )     11.2       156.9  
Tax
     —       —       —       (44.3 )     (44.3 )
Profit/(loss) for the year
     173.8       (19.8 )     (8.3 )     (33.1 )     112.6  
Reconciliation to normalized profit/(loss) before tax
                                        
Amortization on acquired intangibles and other acquisition related charges
     4.6       1.6       0.2       —       6.4  
 
 
F-25
 
 
For the year ended December 31, 2011
  
 
Processor
Division
£ million
    
 
Physical IP
Division
£ million
    
Systems
Design
Division
£ million
    
 
Unallocated
£ million
    
 
Company
£ million
  
Share-based payment cost including payroll taxes
     36.9       12.1       8.7       —       57.7  
Disposal/impairment of investments
     —       1.7       0.1       —       1.8  
Linaro-related charges
     6.9       —       —       —       6.9  
Normalized profit/(loss) before tax
     222.2       (4.4 )     0.7       11.2       229.7  
Segmental balance sheet
                                        
Total assets
     274.6       419.9       30.9       574.4       1,299.8  
Total liabilities
     (155.3 )     (40.1 )     (15.0 )     (28.2 )     (238.6 )
Net assets
     119.3       379.8       15.9       546.2       1,061.2  
Other segmental items
                                        
Depreciation
     4.2       2.6       0.7       —       7.5  
Goodwill
     143.7       383.9       14.9       —       542.5  
Revenues (US dollar millions)
     $634.7       $97.9       $52.4       —       $785.0  
 
There are no inter-segment revenues. Unallocated operating costs consist of foreign gains and losses. Unallocated assets and liabilities include: cash and cash equivalents; short- and long-term deposits; AFS financial assets; loans and receivables; embedded derivatives; fair value of currency exchange contracts; deferred tax balances; current tax and VAT.
 
During the year ended December 31, 2013 one customer (within all three business segments) accounted for 12% of the Company’s total revenues amounting to £87.6 million (2012: one customer accounted for 15%).
 
The results of each segment have been prepared using accounting policies consistent with those of the Company as a whole.
 
Geographical information
 
The Company manages its business segments on a global basis. The operations are based in three main geographical areas. The United Kingdom is the home country of the parent company. The main operations are in the following principal territories:
 
 
·
Europe
 
 
·
United States
 
 
·
Asia Pacific
 
Analysis of revenue by destination*:
   
2011
£ million
    
2012
£ million
    
2013
£ million
  
United States
     187.7       215.9       280.3  
South Korea
     63.8       95.0       101.7  
Taiwan
     63.6       69.2       99.4  
China
     47.6       71.2       90.0  
Japan
     50.0       46.6       47.6  
Switzerland
     11.7       14.0       24.8  
Singapore
     13.0       9.2       24.6  
Germany
     21.7       15.4       13.4  
Netherlands
     15.4       15.8       8.5  
Rest of Europe
     12.2       19.0       19.7  
Rest of Asia Pacific
     3.3       4.4       3.6  
Rest of North America
     1.8       1.2       1.0  
      491.8       576.9       714.6  
*
Destination is defined as the location of the Company’s customers’ operations.
 
 
F-26
 
The Company’s revenue within the home country of the parent company amounted to £4.9 million, £5.5 million and £1.5 million for the years ended December 31, 2013, 2012 and 2011, respectively.
 
The Company’s exports from the United Kingdom were £699.2 million, £560.3 million and £480.1 million for the years ended December 31, 2013, 2012 and 2011, respectively.
 
Analysis of revenue by origin:
   
2011
£ million
    
2012
£ million
    
2013
£ million
  
Europe*
     483.5       567.8       705.3  
United States
     8.2       9.1       9.3  
Asia Pacific
     0.1       —       —  
      491.8       576.9       714.6  
*
Includes the United Kingdom, which had total revenues of £704.1 million in 2013 (2012: £565.8 million, 2011: £481.6 million).
 
Analysis of revenue by revenue stream:
   
2011
£ million
    
2012
£ million
    
2013
£ million
  
Royalties
     252.4       299.8       358.3  
Licensing
     180.5       214.0       285.6  
Software and tools
     32.9       34.7       36.4  
Services
     26.0       28.4       34.3  
      491.8       576.9       714.6  

Analysis of non-current assets (excluding deferred tax assets, goodwill and other intangible assets):
   
2011
£ million
    
2012
£ million
    
2013
£ million
  
Europe*
     122.9       193.8       172.0  
United States
     6.9       5.2       7.2  
Asia Pacific
     3.0       3.1       5.0  
      132.8       202.1       184.2  
*
Includes the United Kingdom which had non-current assets (excluding deferred tax assets, goodwill and other intangible assets) of £171.0 million in 2013 (2012: £192.8 million, 2011: £122.4 million), of which long-term deposits accounted for £125.6 million (2012: £141.3 million, 2011: £83.1 million).
 
3
Key management compensation and directors’ emoluments
 
Key management compensation
 
The directors are of the opinion that the key management of the Company comprises the executive and non-executive directors of ARM Holdings plc together with the Executive Committee (comprising all directors of ARM Limited and certain senior management). These persons have authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly. At December 31, 2013, key management comprised 21 people (2012: 19).
 
 
F-27
 
The aggregate amounts of key management compensation are set out below:
   
2011
£ million
    
2012
£ million
    
2013
£ million
  
Salaries and short-term employee benefits
     9.9       8.9       9.5  
Share-based payments
     3.5       3.4       6.1  
Post-employment benefits
     0.4       0.2       0.2  
      13.8       12.5       15.8  

Directors’ emoluments
 
The aggregate emoluments of the directors of the Company are set out below:
   
2011
£ million
    
2012
£ million
    
2013
£ million
  
Aggregate emoluments in respect of qualifying services
     5.5       4.9       3.8  
Aggregate payments for pension-related benefits
     0.2       0.2       0.2  
Aggregate gains on exercise of share options
     1.1       1.8       3.9  
Aggregate amounts receivable in shares under the Deferred Annual Bonus Plan
     6.4       11.5       12.9  
Aggregate amounts receivable under the Long Term Incentive
     24.2       21.2       17.2  
      37.4       39.6       38.0  

4 
Employee information
 
The average number of persons, including executive directors, employed by the Company during the year was:
   
2011
Number
    
2012
Number
    
2013
Number
  
By segment
                  
Processor Division
     1,225       1,398       1,667  
Physical IP Division
     488       557       615  
Systems Design Division
     283       306       316  
      1,996       2,261       2,598  

   
2011
Number
    
2012
Number
    
2013
Number
  
By activity
                  
Research and development
     1,366       1,581       1,803  
Sales and marketing
     349       367       425  
General and administrative
     281       313       370  
      1,996       2,261       2,598  

   
2011
£ million
    
2012
£ million
    
2013
£ million
  
Staff costs (for the above persons)
                  
Wages and salaries
     142.2       161.5       185.4  
Medical care costs
     4.4       5.0       5.5  
Share-based payments (note 20)
     40.5       37.1       59.2  
Social security costs
     26.2       30.2       35.1  
Movement on provision for social security costs on share awards
     4.9       (6.1 )     (1.4 )
Other pension costs
     6.8       8.0       8.7  
      225.0       235.7       292.5  

5 
Profit before tax: analysis of expenses by nature
 
The following items have been charged/(credited) to the income statement in arriving at profit before tax:
 
 
F-28
 
   
2011
£ million
    
2012
£ million
    
2013
£ million
  
Staff costs, including share-based payments (note 4)
     225.0       235.7       292.5  
Cost of inventories recognized as an expense
     2.8       3.2       2.8  
Depreciation of property, plant and equipment – owned assets (note 12)
     7.5       9.5       11.6  
Depreciation of property, plant and equipment – under finance leases (note 12)
     —       1.3       2.8  
Amortization of other intangible assets (note 14)
                        
Cost of revenues
     0.3       0.3       0.3  
Research and development expenses
     2.4       2.3       6.9  
Sales and marketing expenses
     0.8       0.9       0.6  
General and administrative expenses
     2.2       3.1       5.8  
Government grants – research and development expenditure credit
     —       —       (5.8 )
Exceptional items (note 6)
                        
Impairment of current AFS asset
     —       —       59.5  
IP indemnity and similar charges
     —       —       41.8  
Impairment of non-current AFS financial assets (note 11)
     1.6       1.4       6.8  
Loss/(profit) on disposal of AFS financial assets
     0.1       (0.8 )     (3.3 )
Other operating lease rentals payable:
                        
Plant and machinery
     24.9       24.0       26.2  
Property
     6.8       7.6       8.7  
Accounts receivables impairment (including movement in provision)
     —       0.4       4.0  
Fair value movement on embedded derivatives
     1.2       3.7       4.5  
Other foreign exchange gains
     (4.2 )     (1.9 )     (3.3 )

Services provided by the Company’s auditor and its associates
 
During the year the Company (including its overseas subsidiaries) obtained the following services from the Company’s auditor and its associates:
 
   
2011
£ million
    
2012
£ million
    
2013
£ million
  
Fees payable to the Company’s auditor and its associates for the audit of the Company and consolidated financial statements
     0.3       0.3       0.3  
Fees payable to the Company’s auditor and its associates for other services:
                        
The audit of the Company’s subsidiaries
     0.2       0.2       0.2  
Audit related assurance services (services pursuant to Section 404 of the Sarbanes-Oxley Act)
     0.2       0.3       0.3  
Other assurance services
     0.1       0.1       0.1  
Statutory audit, financial reporting and other related services
     0.8       0.9       0.9  
Tax advisory services
     0.1       0.2       0.1  
Tax compliance services
     0.1       0.1       —  
All other non-audit services*
     0.1       0.1       0.1  
      1.1       1.3       1.1  
*
All other non-audit services consist predominantly of fees for the performance of royalty audits
 
6 
Exceptional items
 
IP indemnity and similar charges
 
As noted in prior financial statements, the Company had been in discussions with a licensee to re-negotiate the terms upon which the Company would indemnify that licensee. During 2013, terms were executed and the Company incurred indemnification costs amounting to $18.0 million. Further in relation to legal proceedings regarding the
 
 
same patent portfolio, for a consideration of $45.4 million, ARM entered into a licence agreement with a third party covering patents being asserted against ARM technology in litigation between the patentee and a number of licensees of ARM technology. The licence was entered into in full and final settlement of any indemnity claims with respect to the asserted patents and will prevent any future assertion of the patents against ARM technology.  Total indemnification, settlement and licence costs of $63.4 million (£41.8 million) were expensed, as an exceptional item in 2013, resulting in a tax deduction in current tax of £9.7 million.
 
Impairment of available for sale financial assets (current)
 
During the year, the Company has participated in a consortium, via a trust, to acquire certain patent rights. These rights were not subject to actual or threatened legal proceedings. Of the Company’s total contribution to the consortium, $100.5 million was classified within current AFS financial assets (£60.7 million after translation at 31 December 2013 exchange rates) and $67 million, the residual, was classified within other intangible assets (£37.4 million after amortization to 31 December 2013). The available-for-sale financial asset represented ARM’s right to receive cash from the Company's financial interest in the consortium as it was anticipated that a program of licensing the patents to third parties would be undertaken by the trust. The other intangible asset consists of IP rights that are being amortized over a period of eight and a half years, being the average remaining life of the underlying patent portfolio.
 
In Q4 2013, the trust made a strategic decision not to pursue a licensing program and the portfolio was put up for sale by auction. The Company acquired the Patents in January 2014 for $4.0 million (£2.4 million) which will be accounted for as an additional intangible asset.  As there is no longer an expectation of any future cash flows with respect to licensing of the patents by the trust, the AFS financial asset has been impaired down to the value of the Company’s share of the auction proceeds, giving rise to a non-cash exceptional charge of $98.5 million (£59.5 million).  As disclosed in note 7, a deferred tax asset has not been recognized in relation to this exceptional item, increasing the current tax charge by £18.3 million.
 
7
Tax
 
Analysis of charge in the year:
   
2011
£ million
    
2012
£ million
    
2013
£ million
  
Current tax:
                  
Current tax on profits for the year
     45.7       47.5       56.5  
Adjustments in respect of prior years
     (0.1 )     (0.5 )     (0.2 )
Total current tax
     45.6       47.0       56.3  
Deferred tax:
                        
Origination and reversal of temporary differences
     (2.3 )     11.8       (4.1 )
Impact of change in the UK tax rate
     1.0       1.5       0.1  
Impact of change due to UK patent box regime
     —       —       5.5  
Total deferred tax
     (1.3 )     13.3       1.5  
Income tax expense
     44.3       60.3       57.8  

Analysis of tax on items charged to equity:
   
2011
£ million
    
2012
£ million
    
2013
£ million
  
Deferred tax (credit)/charge on outstanding share options and awards
     (23.2 )     9.7       4.8  
Current tax benefit on share options and awards
     (22.2 )     (27.4 )     (27.0 )
Deferred tax charge/(credit) on AFS financial assets
     0.1       (0.1 )     —  

The tax charge for the year was different from the standard rate of corporation tax in the United Kingdom as explained below:
 
 
F-30
 
   
2011
£ million
    
2012
£ million
    
2013
£ million
  
Profit before tax
     156.9       221.0       162.6  
Profit before tax at the corporation tax rate of 23.25%
(2012: 24.5%, 2011: 26.5%)
     41.6       54.2       37.8  
Effects of:
                        
Adjustments to tax in respect of prior years
     (0.1 )     (0.5 )     (0.2 )
Adjustments in respect of foreign tax rates
     2.9       5.0       4.1  
Research and development tax credits*
     (10.2 )     (5.5 )     (6.6 )
Current impact of the UK patent box regime
     —       —       (4.8 )
Remeasurement of deferred tax assets due to reduction in UK statutory tax rates
     1.0       1.5       0.1  
Remeasurement of deferred tax assets due to the UK patent box regime
     —       —       5.5  
U.S. deferred tax assets not recognised**
     —       3.4       17.5  
Foreign withholding tax
     10.4       1.0       3.0  
Amortization of other intangible assets
     (0.1 )     —       —  
Impact of share-based payments
     0.9       0.3       (1.5 )
Other***
     (2.1 )     0.9       2.9  
Total taxation
     44.3       60.3       57.8  
*
The provisions extending the US federal R&D tax credits into 2012 were signed on January 2, 2013. As a result of the provisions being enacted in 2013. 2012 R&D tax credits of £2.1 million have been accounted for in 2013.
 
**
Includes the tax impact of the exceptional charge of £59.5 million for the impairment of an AFS financial asset which gave rise to a tax loss that has not been recognized because it is not probable that the loss will be utilized.
 
***
Includes expenditure disallowable for tax purposes.
 
Deferred tax
 
Deferred tax is calculated in full on temporary differences under the liability method using the tax rate relevant to each tax jurisdiction.
 
The movement on the deferred tax account is shown below:
   
2011
£ million
    
2012
£ million
    
2013
£ million
  
At January 1
     78.3       105.9       70.1  
Amount acquired with subsidiary undertaking
     —       —       (1.2 )
Income statement credit/(charge)
     1.3       (13.3 )     (1.5 )
Adjustment in respect of share-based payments
     23.2       (9.7 )     (4.8 )
Prior year movement from/(to) current tax assets
     2.6       (11.6 )     3.0  
Exchange differences
     0.6       (1.3 )     (0.4 )
Revaluation of AFS financial assets
     (0.1 )     0.1       —  
At December 31
     105.9       70.1       65.2  

Deferred tax assets have been partially recognized in respect of tax losses and other temporary differences giving rise to deferred tax assets because it is not probable that the unrecognized portion of these assets will be recovered.
 
The amount of deferred tax assets unrecognized at December 31, 2013 was £23.2 million (2012: £4.4 million, 2011: £1.2 million). The unrecognized deferred tax asset relates to historic losses of acquired subsidiaries and the loss arising on the impairment of an AFS financial asset. The losses may remain unutilized due to restrictions imposed by local tax legislation and availability of relevant future profits.
 
No deferred tax has been recognized in respect of a further £33.2 million (2012: £35.0 million, 2011: £65.0 million) of unremitted earnings of overseas subsidiaries because the Company is in a position to control the timing
 
 
F-31
 
of the reversal of the differences and either it is probable that such differences will not reverse in the foreseeable future or no tax is payable on the reversal.
 
The March 2012 Budget included changes to the main rates of tax for UK companies. The main rate of corporation tax decreased from 25% to 24% from April 1, 2012. At the balance sheet date the UK Government had enacted a 2% reduction in the main rate of UK corporation tax from 23% to 21% from April 1, 2014 and a further 1% reduction to 20% from April 1, 2015. The UK Government has also introduced the new patent box regime which seeks to tax all profits attributable to patented technology at a reduced rate of 10%. The rules are to be phased in over five years from April 1, 2013 – a company will be entitled to only 60% of the deduction in financial year 2013/14, rising to 100% by 2017/18. The impact of these changes on the deferred tax balances of the Company is included in the tax charge.
 
The movements in deferred tax assets and liabilities (prior to offsetting of balances within the same tax jurisdiction as permitted by IAS 12) during the year are shown below. Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle the balances net.
 
Deferred tax assets
   
 
Amounts relating to share-based payments
 £ million
    
Temporary differences relating to fixed assets
£ million
    
 
Tax losses and R&D tax credits carried forward
£ million
    
 
Temporary differences relating to reserves
£ million
    
 
Other
£ million
    
 
Total
£ million
  
At January 1, 2013
     43.5       2.6       15.1       9.5       0.6       71.3  
Amount acquired with subsidiary undertaking
     —       —       0.5       —       —       0.5  
Prior year movement to current tax assets
     —       —       3.0       —       —       3.0  
Income statement credit/(charge)
     0.8       1.3       (2.8 )     (1.5 )     0.3       (1.9 )
Movement on deferred tax arising on outstanding share options and awards
     (4.8 )     —       —       —       —       (4.8 )
Unutilized current year share option deductions
     (6.7 )     —       6.7       —       —       —  
Exchange differences
     —       —       (0.4 )     —       —       (0.4 )
At December 31, 2013 (prior to offsetting)
     32.8       3.9       22.1       8.0       0.9       67.7  
Offsetting of deferred tax liabilities
                                             (2.4 )
At December 31, 2013 (after offsetting)
                                             65.3  
At January 1, 2012
     59.5       4.6       30.9       12.7       —       107.7  
Prior year movement to current tax assets
     —       —       (11.6 )     —       —       (11.6 )
Income statement (charge)/credit
     (0.1 )     (2.0 )     (9.1 )     (3.2 )     0.6       (13.8 )
Movement on deferred tax arising on outstanding share options and awards
     (9.7 )     —       —       —       —       (9.7 )
Unutilized current year share option deductions
     (6.2 )     —       6.2       —       —       —  
Exchange differences
     —       —       (1.3 )     —       —       (1.3 )
At December 31, 2012 (prior to offsetting)
     43.5       2.6       15.1       9.5       0.6       71.3  
Offsetting of deferred tax liabilities
                                             (1.2 )
At December 31, 2012 (after offsetting)
                                             70.1  

 
F-32
 
The deferred tax asset to be recovered after more than one year is £35.2 million (2012: £29.6 million)

Deferred tax liabilities
   
Amounts relating to intangible assets arising on acquisition
£ million
    
 
Temporary difference on AFS financial assets
£ million
    
 
Other
£ million
    
 
Total
£ million
  
At January 1, 2013
     1.1       —       0.1       1.2  
Amount acquired with subsidiary undertaking
     1.7       —       —       1.7  
Movement in respect on amortization of intangible assets
     (0.2 )     —       —       (0.2 )
Other short-term differences
     (0.1 )     —       (0.1 )     (0.2 )
At December 31, 2013 (prior to offsetting)
     2.5       —       —       2.5  
Offsetting of deferred tax assets
                             (2.4 )
At December 31, 2013 (after offsetting)
                             0.1  
At January 1, 2012
     1.3       0.1       0.4       1.8  
Movement in respect on amortization of intangible assets
     (0.2 )     —       —       (0.2 )
Movement through reserves
     —       (0.1 )     —       (0.1 )
Other short-term differences
     —       —       (0.3 )     (0.3 )
At December 31, 2012 (prior to offsetting)
     1.1       —       0.1       1.2  
Offsetting of deferred tax assets
                             (1.2 )
At December 31, 2012 (after offsetting)
                             —  

The deferred tax liability due after more than one year prior to offsetting is £1.2 million (2012: £0.8 million, 2011: £1.0 million).
 
8 
Dividends
   
2011
£ million
    
2012
£ million
    
2013
£ million
  
Final 2010 paid at 1.74 pence per share
     23.4       —       —  
Interim 2011 paid at 1.39 pence per share
     18.8       —       —  
Final 2011 paid at 2.09 pence per share
     —       28.8       —  
Interim 2012 paid at 1.67 pence per share
     —       23.0       —  
Final 2012 paid at 2.83 pence per share
     —       —       39.5  
Interim 2013 paid at 2.1 pence per share
     —       —       29.4  
      42.2       51.8       68.9  

In addition, the directors are proposing a final dividend in respect of the financial year ended December 31, 2013 of 3.6 pence per share, which will absorb an estimated £51 million of shareholders’ funds. Subject to approval at the 2014 AGM, it will be paid on May 16, 2014 to shareholders who are on the register of members on April 22, 2014.
 
 
F-33
 
9 
Accounts receivable
   
2012
£ million
    
2013
£ million
  
Trade debtors (including receivables from related parties – see note 24)
     119.1       140.3  
Less: Provision for impairment of trade debtors
     (2.4 )     (9.7 )
Trade debtors, net
     116.7       130.6  
Amounts recoverable on contracts
     7.8       5.6  
Current accounts receivable
     124.5       136.2  

Movements in the Company’s provision for impairment of trade debtors are as follows:
   
2011
£ million
    
2012
£ million
    
2013
£ million
  
At January 1
     (2.1 )     (1.7 )     (2.4 )
Charge to income statement
     —       (0.4 )     (4.0 )
Utilized/(Reclassified from deferred income)
     0.4       (0.4 )     (3.5 )
Foreign exchange
     —       0.1       0.2  
At December 31
     (1.7 )     (2.4 )     (9.7 )

See also note 17 for further disclosure regarding the credit quality of the Company’s gross trade debtors.
 
10
Prepaid expenses and other assets
   
2012
£ million
    
2013
£ million
  
Other receivables
     10.4       18.1  
Prepayments and accrued income
     125.2       21.7  
Current prepaid expenses and other assets
     135.6       39.8  
Plus: non-current prepayments and accrued income
     2.0       1.6  
Total prepaid expenses and other assets
     137.6       41.4  

Included within prepayments and accrued income at December 31, 2012 was a prepayment amounting to £103.7 million, being the Company’s advance contribution to acquire rights to MIPS Technologies, Inc.’s portfolio of patents. The Company has determined that the participation in the consortium conferred on the Company two separate rights: an intangible asset, conferring the right to use the assets in the Company’s own business of £41.9 million (see note 14), and an AFS financial asset of £63.4 million (see note 11), conferring the right to certain potential future revenue streams arising from the licensing activities of the trust.
 
11
Available-for-sale financial assets
 
Non-current investments
    
2012
£ million
      
2013
£ million
  
Net book value
                
At January 1
     27.3       13.8  
Additions (including capitalized interest of £0.2 million in 2012)
     3.2       8.9  
Revaluation recognized through other comprehensive income
     (0.4 )     —  
Disposals
     (14.9 )     (1.7 )
Foreign exchange translation     —       (0.3 )
Impairment recognized through income statement (general and administrative expenses)
     (1.4 )     (6.8 )
At December 31
     13.8       13.9  

 
F-34
 
 
Current investments
    
2012
£million
        2013
£million
  
Net book value
                
At January 1
     —       —  
Additions
     —       63.4  
Foreign exchange translation
     —       (2.7 )
Impairment recognized through income statement (as an exceptional item, see note 6)
     —       (59.5 )
At December 31
     —       1.2  

All investments noted above are considered to be level 3 financial assets (see note 17)

Non-current investments
 
Those unlisted companies in which the Company has invested are generally early-stage development enterprises, which are generating value for shareholders through research and development activities, and most do not currently report profits. The fair value of these investments is considered to approximate to cost or is determined using independent valuation information where available.
 
The Company’s investments include the following companies:
 
 
·
Amantys Limited
 
 
·
Ambiq Micro Inc.
 
 
·
Cambridge Innovation Capital plc
 
 
·
Carbon Design Systems Inc.
 
 
·
Cyclos Semiconductor Inc.
 
 
·
Marmalade Technologies Ltd. (formerly Ideaworks 3D Limited)
 
 
·
Shanghai Walden Venture Capital Enterprise
 
 
·
Thunder Software Technology Co. Ltd.
 
 
·
Triad Semiconductor Inc.
 
During the year the Company disposed of its investments in Arteris Holdings Inc and eSol Co. Ltd. Inc.
 
At December 31, 2013 and 2012, the Company had no listed investments.
 
Available-for-sale financial assets include the following:
   
2012
£ million
    
2013
£ million
  
Unlisted equity securities – United Kingdom
     3.7       6.2  
Unlisted equity securities – China
     2.0       1.9  
Unlisted equity securities – Japan
     0.9       —  
Unlisted equity securities – United States
     5.9       1.4  
Convertible loan notes – United Kingdom
     1.3       1.3  
Convertible loan notes – United States
     —       3.1  
Total non-current financial assets
     13.8       13.9  

Available-for-sale financial assets are denominated in the following currencies:
   
2012
£ million
    
2013
£ million
  
Sterling
     12.5       9.5  
US dollars
     1.3       4.4  
Total financial assets
     13.8       13.9  

 
A permanent 10% fall in the underlying value of those unlisted companies in which the Company has invested as at December 31, 2013 would have reduced the Company’s post-tax profit by £1.1 million (2012: £1.0 million) and resulted in a £nil (2012: £nil) reduction in other components of equity.
 
12
Property, plant and equipment
   
Freehold buildings
£ million
    
Leasehold improvements
£ million
    
Computer equipment
£ million
    
Fixtures, fittings and motor vehicles
£ million
    
Assets in the course of construction
£ million
    
Total
£ million
  
Cost
                                    
At January 1, 2013
     0.2       23.1       48.8       6.4       3.5       82.0  
Additions
     —       2.5       8.1       1.8       2.6       15.0  
Acquisitions
     —       —       0.1       0.1       —       0.2  
Transfers
     —       0.9       2.3       —       (3.2 )     —  
Reclassification*
     —       —       (3.2 )     —       (1.7 )     (4.9 )
Disposals
     —       (1.7 )     (5.7 )     (1.0 )     (0.4 )     (8.8 )
Exchange differences
     —       (0.6 )     (1.0 )     (0.3 )     (0.1 )     (2.0 )
At December 31, 2013
     0.2       24.2       49.4       7.0       0.7       81.5  
Accumulated depreciation
                                                
At January 1, 2013
     0.1       13.9       27.5       4.4       —       45.9  
Charge for the year
     —       2.3       11.0       1.1       —       14.4  
Acquisitions
     —       —       0.1       —       —       0.1  
Reclassification*
     —       —       (3.2 )     —       —       (3.2 )
Disposals
     —       (1.5 )     (5.7 )     (1.0 )     —       (8.2 )
Exchange differences
     —       (0.2 )     (0.8 )     (0.1 )     —       (1.1 )
At December 31, 2013
     0.1       14.5       28.9       4.4       —       47.9  
Net book value At
December 31, 2013
     0.1       9.7       20.5       2.6       0.7       33.6  

   
 
Freehold buildings
£ million
    
 
Leasehold improvements
£ million
    
 
Computer equipment
£ million
    
 
Fixtures, fittings and motor vehicles
£ million
    
 
Assets in the course of construction
£ million
    
 
Total
£ million
  
Cost
                                    
At January 1, 2012
     0.2       18.0       32.5       5.7       0.9       57.3  
Additions
     —       1.7       14.0       1.1       12.4       29.2  
Transfers
     —       4.9       4.9       —       (9.8 )     —  
Disposals
     —       (1.1 )     (1.8 )     (0.2 )     —       (3.1 )
Exchange differences
     —       (0.4 )     (0.8 )     (0.2 )     —       (1.4 )
At December 31, 2012
     0.2       23.1       48.8       6.4       3.5       82.0  
Accumulated depreciation
                                                
At January 1, 2012
     0.1       13.5       21.8       3.8       —       39.2  
Charge for the year
     —       1.8       8.1       0.9       —       10.8  
Disposals
     —       (1.1 )     (1.8 )     (0.2 )     —       (3.1 )
Exchange differences
     —       (0.3 )     (0.6 )     (0.1 )     —       (1.0 )
At December 31, 2012
     0.1       13.9       27.5       4.4       —       45.9  
Net book value
At December 31, 2012
     0.1       9.2       21.3       2.0       3.5       36.1  
Net book value
At January 1, 2012
     0.1       4.5       10.7       1.9       0.9       18.1  

Included within computer equipment are assets with net book value of £6.6 million (2012: £7.7 million) held under finance leases.
 
*Reclassification from property plant and equipment to intangible assets (software).
 
 
F-36
 
13
Goodwill
   
£ million
  
At January 1, 2012
     542.5  
Exchange differences
     (23.1)  
At December 31, 2012
     519.4  
Exchange differences
     (9.9)  
Acquisition – Sensinode (note 19)
     6.4  
Acquisition – Geomerics (note 19)
     10.0  
At December 31, 2013
     525.9  

During the fourth quarter of 2013, the Company tested its balance of goodwill for impairment in accordance with IAS 36, “Impairment of assets.” No impairment charge was recorded as a result of this annual impairment test.
 
Goodwill is allocated to the Company’s CGUs according to business segment. The carrying amounts of goodwill by CGU at December 31, 2013 are summarized below:
 
   
 
Processor
Division
£ million
    
 
Physical
IP Division
£ million
    
 
System Design Division
£ million
    
 
Company
£ million
  
Goodwill relating to Artisan
     119.0       357.1       —       476.1  
Goodwill relating to Geomerics
     10.0       —       —       10.0  
Goodwill relating to Falanx
     9.4       —       —       9.4  
Goodwill relating to Axys
     —       —       7.3       7.3  
Goodwill relating to KEG and KSI
     —       —       6.9       6.9  
Goodwill relating to Sensinode
     5.8       —       —       5.8  
Goodwill relating to Prolific
     —       3.1       —       3.1  
Goodwill relating to Obsidian
     3.0       —       —       3.0  
Goodwill relating to Logipard
     2.2       —       —       2.2  
Goodwill relating to other acquisitions
     2.1       —       —       2.1  
Goodwill at December 31, 2013
     151.5       360.2       14.2       525.9  
Goodwill at December 31, 2012
     138.0       367.0       14.4       519.4  

The recoverable amount for each CGU has been measured based on a value-in-use calculation.
 
Allocation of goodwill relating to Artisan
 
The directors believed that, in addition to forming the basis of the Physical IP Division (PIPD), the Company’s acquisition of Artisan in 2004 would provide a benefit to the Processor Division (PD) for the following reasons:
 
 
·
The development of faster and more power-efficient microprocessors as a result of collaboration between PD and PIPD engineering teams. This is expected to generate more PD licensing deals at higher values.
 
 
·
The potential for PD to win more microprocessor licensing business as a result of ARM being able to offer both processor and physical IP in-house.
 
The goodwill relating to Artisan was allocated between the two divisions accordingly.
 
PD
 
PD encompasses those resources that are centered around microprocessor cores, including specific functions such as graphics IP, system IP, embedded software IP and configurable DSP IP.
 
The key assumptions in the value-in-use calculations were:
 
Period of projected cash flows The directors have used a ten-year forecast period with an assumed terminal growth rate after 2023 of 3% per annum. Given the long-term nature of the ARM licensing and royalty business
 
 
model, it is considered appropriate to use a ten-year forecast period to assess the expected future cash flows to be generated from the assets under review.
 
Revenue growth Revenue growth assumptions are based on financial budgets and forecasts approved by senior management, taking into account typical semiconductor industry growth rates and ARM’s historical experience in the context of wider industry and economic conditions.
 
Operating margins Operating margins have been assumed to remain constant over the period of the calculation.
 
Discount rate Future cash flows are discounted at a rate of 10% per annum post tax.
 
Conclusion The directors are confident that the amount of goodwill allocated to PD is appropriate and that the assumptions used in estimating its fair value are appropriate. Whilst it is conceivable that a key assumption in the calculation could change, the directors believe that no reasonably foreseeable changes to key assumptions would result in an impairment of goodwill, such is the margin by which the estimated fair value exceeds the carrying value.
 
PIPD
 
PIPD is concerned with the building blocks necessary for translation of a circuit design into actual silicon.
 
The key assumptions in the value-in-use calculations were:
 
Period of projected cash flows The directors have used a ten-year forecast period with an assumed terminal growth rate after 2023 of 3% per annum. Given the long-term nature of the ARM licensing and royalty business model, it is considered appropriate to use a ten-year forecast period to assess the expected future cash flows to be generated from the assets under review.
 
This timescale is consistent with ARM’s experience in developing the processor licensing and royalty model. ARM has signed more than 1000 licenses with around 350 customers since the formation of the Company with less than half of these paying royalties thus far. As royalty revenues are a function of cumulative licensing, royalty growth gathers momentum as the licensing base grows – ARM processor royalties have increased from $72 million in 2003 to $495 million in 2013.
 
Revenue growth Revenue growth assumptions are based on financial budgets and forecasts approved by senior management, taking into account typical semiconductor industry growth rates and ARM’s historical experience in the context of wider industry and economic conditions. Since the acquisition of Artisan at the end of 2004, PIPD has accelerated the development of leading-edge physical IP technology. As semiconductor process geometries shrink, PIPD is expected to have more licensing opportunities across a broader range of foundries and other semiconductor companies.
 
US dollar license revenues increased by 25% year-on-year in 2013 and royalty revenues increased by 13%. The increase in revenues was due mainly to the successful delivery of new products licensed in the previous year. Further licensing of new technology was achieved in the year and as a result, backlog at the end of 2013 was at a similar level to the beginning of the year. This continuing licensing activity is expected to translate into growth in royalty revenues in future years. The directors believe that the investment in the physical IP technology portfolio in recent years will not only generate growth in physical IP revenue in future years, but also contribute significantly to the success of PD due to the synergistic benefits of the combined technologies. An estimate of the increased benefits to PD arising as a result of the combination with physical IP products is taken in to account in calculating the value-in-use for PIPD. Over the ten year period of the forecast it is estimated that on average 8% of PD revenues would be allocated to PIPD. Demand for Processor Optimization Packs (POPs) continued to be strong in 2013, with a number of Partners taking licenses alongside PD processors.  POPs enable an enhanced and deterministic outcome for licensees when implementing ARM processors.
 
Operating margins Operating margins are assumed to increase gradually over time to approximately 15% by the end of the forecast period. In 2013, PIPD continued to make progress and recorded a profit on a normalized basis for the first time. This was mostly as a result of increased revenues offset by continued investment in the development of leading-edge technology.  Margins are expected to improve significantly in future years as license revenues from leading-edge products gather pace. Growth in high-margin royalty revenues will further improve profitability. Costs are expected to grow relatively slowly in real terms.
 
 
F-38
 
Discount rate Future cash flows are discounted at a rate of 10% per annum post tax.
 
Conclusion The directors are confident that the amount of goodwill allocated to PIPD and the assumptions used in estimating its fair value are appropriate. Whilst it is conceivable that a key assumption in the calculation could change, the directors believe that no reasonably foreseeable changes to key assumptions would result in an impairment of goodwill, such is the margin by which the estimated fair value exceeds the carrying value. The overall assessment is most sensitive to changes in the assumed revenues and benefits to the Processor Division (see Note 1, Critical, Estimates and Judgments). The directors have considered the impact of a number of scenarios on the overall valuation of the PIPD business, including a considerable reduction in the benefits assumed to be provided to the Processor Division. The results of this sensitivity analysis showed that applying a range of reasonable variations to the key assumptions would not change the conclusion that no impairment in the carrying value of the goodwill is required at December 31, 2013.
 
System Design Division
 
SDD develops and sells the tools and models used to create and debug software and SoC designs.
 
The key assumptions in the value-in-use calculations were:
 
Period of projected cash flows The directors have used a five-year forecast period with an assumed terminal growth rate after 2018 of 3% per annum. It is considered appropriate to use a five-year forecast period to properly reflect the weighted average period over which the benefits of the acquisitions of Axys, KEG and KSI are expected to accrue.
 
Revenue growth Revenue growth assumptions are based on financial budgets and forecasts approved by senior management, taking into account typical semiconductor industry growth rates and ARM’s historical experience in the context of wider industry and economic conditions.
 
Operating margins Operating margins are assumed to grow gradually during the period.
 
Discount rate Future cash flows are discounted at a rate of 10% per annum post tax.
 
Conclusion The directors are confident that the amount of goodwill allocated to SDD and the assumptions used in estimating its fair value are appropriate. Whilst it is conceivable that a key assumption in the calculation could change, the directors believe that no reasonably foreseeable changes to key assumptions would result in an impairment of goodwill, such is the margin by which the estimated fair value exceeds the carrying value.
 
14 
Other intangible assets
   
 
Computer software
£ million
    
 
Patents and licenses
£ million
    
 
In-process research and development
£ million
    
 
Developed technology
£ million
    
Existing agreements and customer relationships
£ million
    
 
Core technology
£ million
    
 
Trademarks and tradenames
£ million
    
 
Order backlog
£ million
    
 
Total
£ million
  
Cost
                                                      
At January 1, 2013
     14.1       26.8       5.9       39.6       53.3       16.8       4.5       2.0       163.0  
Additions
     2.0       74.1       —       7.5       0.3       —       —       —       83.9  
Reclassification*
     4.9       —       —       —       —       —       —       —       4.9  
Disposals and derecognitions
     (1.5 )     —       —       —       —       —       —       (2.0 )     (3.5 )
Exchange differences
     (0.1 )     —       (0.1 )     (0.4 )     (0.8 )     (0.3 )  
(0.1
 )      —       (1.8 )
At December 31, 2013
     19.4       100.9       5.8       46.7       52.8       16.5       4.4       —       246.5  
Accumulated amortization
                                                                        
At January 1, 2013
     10.3       23.1       5.9       37.7       52.8       15.5       4.5       2.0       151.8  
Charge for the year
     2.3       8.3       —       1.5       0.6       0.9       —       —       13.6  

 
F-39
 
   
 
Computer software
£ million
    
 
Patents and licenses
£ million
    
 
In-process research and development
£ million
    
 
Developed technology
£ million
    
 
Existing agreements and customer relationships
£ million
    
 
Core technology
£ million
    
 
Trademarks and tradenames
£ million
    
 
Order backlog
£ million
    
 
Total
£ million
  
Reclassification*
     3.2       —       —       —       —       —       —       —       3.2  
Disposals and derecognitions
     (1.5 )     —       —       —       —       —       —       (2.0 )     (3.5 )
Exchange differences
     —       —       (0.1 )     (0.2 )     (0.8 )     (0.3 )     (0.1 )     —       (1.5 )
At December 31, 2013
     14.3       31.4       5.8       39.0       52.6       16.1       4.4       —       163.6  
Net book value at December 31, 2013
     5.1       69.5       —       7.7       0.2       0.4       —       —       82.9  
 
*Reclassification from property, plant and equipment to intangible assets (software).
 
The net book value of patents and licenses includes a patent license agreement for interconnect technology used in SoCs, with a carrying value of £16.0 million at December 31, 2013 (2012: £nil) and a remaining useful life of 9 years,, and IP rights acquired from Bridge Crossing LLC (see note 6) with a carrying value of £37.4 million at December 31, 2013 (2012: £nil) and a remaining useful life of 8 years,.
 
   
 
Computer software
£ million
    
 
Patents and licenses
£ million
    
 
In-process research and development
£ million
    
 
Developed technology
£ million
    
 
Existing agreements and customer relationships
£ million
    
 
Core technology
£ million
    
 
Trademarks and tradenames
£ million
    
 
Order backlog
£ million
    
 
Total
£ million
  
Cost
                                                      
At January 1, 2012
     10.4       25.4       6.2       41.0       55.5       17.6       4.7       2.1       162.9  
Additions
     4.0       1.4       —       —       —       —       —       —       5.4  
Disposals
     (0.2 )     —       —       —       —       —       —       —       (0.2 )
Exchange differences
     (0.1 )     —       (0.3 )     (1.4 )     (2.2 )     (0.8 )     (0.2 )     (0.1 )     (5.1 )
At December 31, 2012
     14.1       26.8       5.9       39.6       53.3       16.8       4.5       2.0       163.0  
Accumulated amortization
                                                                        
At January 1, 2012
     9.0       20.8       6.2       37.7       54.6       15.3       4.7       2.1       150.4  
Charge for the year
     1.6       2.3       —       1.4       0.4       0.9       —       —       6.6  
Disposals
     (0.2 )     —       —       —       —       —       —       —       (0.2 )
Exchange differences
     (0.1 )     —       (0.3 )     (1.4 )     (2.2 )     (0.7 )     (0.2 )     (0.1 )     (5.0 )
At December 31, 2012
     10.3       23.1       5.9       37.7       52.8       15.5       4.5       2.0       151.8  
Net book value at December 31, 2012
     3.8       3.7       —       1.9       0.5       1.3       —       —       11.2  

15 
Accrued and other liabilities
   
2012
£ million
    
2013
£ million
  
Accruals
            
Provision for payroll taxes on share awards
     16.5       15.1  
Employee bonus and sales commissions
     23.8       26.5  
Other accruals (including £2.6 million non-current (2012: £nil))
     31.0       40.0  
Total Accruals
     71.3       81.6  
Other taxation and social security
     3.4       4.4  
Other payables
     4.6       4.7  
Total accrued and other liabilities
     79.3       90.7  

 
16 
Finance lease liabilities
   
2012
£ million
    
2013
£ million
  
Gross finance lease liabilities – minimum lease payments:
            
Within one year
     3.1       2.9  
In the second to fifth years inclusive
     3.0       1.5  
Less: future finance charges
     (0.3 )     (0.2 )
Present value of lease obligations
     5.8       4.2  
Amounts due for settlement within 12 months
     2.9       2.7  
Amounts due for settlement after 12 months
     2.9       1.5  
Present value of lease obligations
     5.8       4.2  
 
The Company has entered into a three- and a four- year finance lease arrangement in respect of certain IT equipment.
 
17 
Financial instruments
 
 
(a) 
Financial instruments by category
 
The accounting policies for financial instruments have been applied to the line items below:
 
Financial assets
   
 
Loans and receivables
£ million
    
Assets at fair value through the income statement
£ million
    
 
Available-for-sale
£ million
    
 
Total
£ million
  
At December 31, 2013
                        
Cash and cash equivalents
     43.8       —       —       43.8  
Short-term deposits
     544.1       —       —       544.1  
Currency exchange contracts
     —       5.1       —       5.1  
Accounts receivable (gross of impairment provision)
     145.9       —       —       145.9  
Available-for-sale financial assets - unlisted
     —       —       1.2       1.2  
Total current financial assets
     733.8       5.1       1.2       740.1  
Long-term deposits
     125.6       —       —       125.6  
Loans and receivables
     3.0       —       —       3.0  
Available-for-sale financial assets - unlisted
     —       —       13.9       13.9  
Total non-current financial assets
     128.6       —       13.9       142.5  
Total financial assets
     862.4       5.1       15.1       882.6  
At December 31, 2012
                                
Cash and cash equivalents
     46.3       —       —       46.3  
Short-term deposits
     340.0       —       —       340.0  
Currency exchange contracts
     —       1.4       —       1.4  
Accounts receivable (gross of impairment provision)
     126.9       —       —       126.9  
Total current financial assets
     513.2       1.4       —       514.6  
Long-term deposits
     141.3       —       —       141.3  
Loans and receivables
     2.1       —       —       2.1  
Available-for-sale financial assets - unlisted
     —       —       13.8       13.8  
Total non-current financial assets
     143.4       —       13.8       157.2  
Total financial assets
     656.6       1.4       13.8       671.8  

 
F-41
 
Financial liabilities
   
2012
£ million
    
2013
£ million
  
Liabilities at amortized cost at December 31:
            
Accounts payable
     5.9       7.0  
Accrued and other liabilities *
     46.8       56.3  
Finance lease liabilities
     5.8       4.2  
      58.5       67.5  
Liabilities at fair value through the income statement at December 31:
                
Embedded derivatives
     2.5       7.0  
Total financial liabilities
     61.0       74.5  
*
Non-financial liabilities are excluded from the accrued and other liabilities balance as this analysis is required only for financial instruments
 
Valuation hierarchy
 
As at December 31, 2013, the Company’s financial instrument assets consisted of currency exchange contracts at fair value through the income statement (level 2) of £5.1 million (2012: £1.4 million) and AFS financial assets (level 3) of £1.2 million (current) and £13.9 million (non-current) (2012: 13.8 million non-current).
 
As at December 31, 2013, the Company’s financial instrument liabilities consisted of embedded derivatives (level 2) of £7.0 million (2012: £2.5 million). The Company had no level 1 financial instruments as at December 31, 2013 (2012: £nil).
 
Level 2 currency exchange contracts comprise forward exchange contracts and foreign currency options.  The fair value of the forward exchange contracts is determined using forward exchange rates as quoted in an active market. The fair value of foreign currency options is based upon valuations performed by management and the respective banks holding the currency instruments.
 
Level 2 embedded derivatives are fair valued using forward exchange rates that are quoted in an active market.
 
Level 3 AFS financial assets consist of unlisted equity investments and other current investments. The estimated fair value of the unlisted equity investments approximates to cost less any permanent diminution in value (based on management’s estimate of forecast profitability and achievement of set objectives by the relevant entity), except where independent valuation information is obtained, e.g. through the occurrence of funding or other transactions in the relevant entity's equity instruments.
 
The current investment was initially held at the value of the expected licensing program related to the MIPs patent portfolio.  This was estimated by reference to the amounts that it was expected certain potential licensees would be prepared to pay for a license.  At December 31, 2013 the value of the current investment has been based on the amount that is recoverable from an auction process which was held in January 2014.
 
Whilst it is conceivable that a key assumption in the Level 3 calculation could change, the directors believe that no reasonably foreseeable changes to key assumptions would result in a significant change in fair value.
 
Maturity of financial liabilities
 
The table below analyses the Company’s financial liabilities into relevant maturity groupings based on the remaining period from the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant.
 
 
F-42
 
   
 
Less than
six months
    
 
Between six months and one year
    
 
Between one year and two years
    
 
Over two years
  
      £ million       £ million       £ million       £ million  
At December 31, 2013:
                                
Accounts payable
     7.0       —       —       —  
Accrued and other liabilities
     52.8       0.9       2.6       —  
Finance lease liabilities
     1.0       1.7       1.2       0.3  
Embedded derivatives
     2.4       1.6       2.2       0.8  
At December 31, 2012:
                                
Accounts payable
     5.9       —       —       —  
Accrued and other liabilities
     46.8       —       —       —  
Finance lease liabilities
     0.8       2.1       2.2       0.7  
Embedded derivatives
     0.8       0.7       0.6       0.4  

During 2012, the Company entered into a three-month fixed-rate debt facility for $160 million (£99.8 million) to facilitate the contribution to acquire rights to MIPS Technologies, Inc’s portfolio of patents (see note 6). This facility was fully settled by December 31, 2012. The Company had no borrowings during 2013.
 
Loans and receivables
 
During 2010 the Company invested £2.5 million in an interest-free charitable bond with Future Business. This was recognized in loans and receivables at its initial fair value of £1.9 million, measured using the effective interest method, which resulted in a charge of £0.6 million being recognized as interest payable and similar charges during 2010. In addition, during 2013, the Company invested a further £0.7 million with Future Business. The carrying value of the total loan amounted to £3.0 million at December 31, 2013 (2012: £2.1 million), with £0.1 million being recognized as interest receivable during 2013 (2012: £0.1 million).
 
Short-term deposits
 
The effective interest rate on short-term deposits outstanding at the year end was 1.85% (2012: 2.70%) and these deposits have an average maturity of 178 days (2012: 190 days).
 
Long-term deposits
 
The effective interest rate on long-term deposits outstanding at the year end was 1.65% (2012: 3.32%)  and these deposits have an average maturity of 531days (2012: 489 days).
 
Derivative financial instruments
 
The table analyses the Company’s derivative financial instruments into relevant maturity groupings based on the remaining period from the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Amounts due within 12 months equal their carrying balances as the impact of discounting is not significant.
 
   
 
Less than three months
million
    
Over three months but less than
six months
million
    
Between six months and one year
million
    
 
Greater than one year
million
  
Foreign exchange forward contracts – held-for-trading at December 31, 2013
                        
Outflow
   $ 98.0     $ 13.0     $ 23.0     $ 9.0  
Inflow
   £ 60.9     £ 8.0     £ 14.7     £ 6.0  
Foreign exchange options – held-for-trading at December 31, 2013
                                
Outflow (maximum)
   $ 41.0     $ 29.3     $ 26.2       —  
Inflow (maximum)
   £ 26.8     £ 19.4     £ 17.6       —  
Foreign exchange forward contracts – held-for-trading at December 31, 2012
                                
 
 
F-43
 
   
 
Less than three months
million
    
 
Over three months but less than
six months
million
    
 
Between six months and one year
million
    
 
Greater than one year
million
  
Outflow
   $ 51.0     $ 8.0     $ 12.0       —  
Inflow
   £ 31.9     £ 5.0     £ 7.5       —  
Foreign exchange options – held-for-trading at December 31, 2012
                                
Outflow (maximum)
   $ 38.9     $ 37.3     $ 13.5       —  
Inflow (maximum)
   £ 25.3     £ 24.3     £ 8.6       —  

Fair value of currency exchange contracts
 
The fair value of currency exchange contracts is estimated using the settlement rates. The estimation of the fair value of the asset in respect of currency exchange contracts was £5.1 million at December 31, 2013 (2012: liability of £1.4 million). The resulting gains and losses on the movement of the fair value of currency exchange contracts are recognized in the income statement under general and administrative expenses, amounting to a gain of £3.4 million (2012: £8.3 million; 2011: £2.7 million).
 
(b)  Credit quality of financial assets
 
Trade debtors
 
On a quarterly basis, all trade debtors more than three months overdue are considered for impairment on a line-by-line basis. Either a provision is made or the lack thereof is justified, with review by senior members of the Company’s finance team.
   
2012
£ million
    
2013
£ million
  
Trade debtors (gross of impairment provision):
            
Not yet due
     80.1      
76.1
  
Under 90 days overdue
     27.3    
41.2
  
Over 90 days but not provided for
     9.3    
13.2
  
Fully provided for
     2.4    
9.8
  
Total
     119.1    
140.3
  

As shown above, at December 31, 2013 trade debtors less than 90 days overdue amounted to £41.2 million. Of those outstanding at December 31, 2013, £22.8 million had been collected by March 3, 2014 and £15.3 million were owed by large, established customers. Similarly, debtors more than 90 days overdue and not provided for amounted to £13.2 million of which £5.0 million had been collected by March 3, 2014 and £4.2 million was owed by large, established customers. For the remainder, discussions regarding repayment are ongoing and repayment schedules have been agreed with the customers concerned. These will be monitored on a quarterly basis in accordance with the control outlined above. No further analysis has been provided here on the quality of these debts as they are not felt to pose a material threat to the Company’s future results.
 
As shown above, at December 31, 2013, trade debtors fully provided for amounted to £9.8 million (2012: £2.4 million). Of those provided for at December 31, 2013, £4.0 million relates to trade debtors that are up to six months overdue (2012: £0.6 million) and £5.8 million relates to trade debtors that are over six months overdue (2012: £1.8 million).
 
At December 31, 2013 no individual customer accounted for over 10% of accounts receivable (2012: one).
 
Credit Risk
 
Financial instrument counterparties are subject to pre-approval by the directors and such approval is limited to financial institutions with a Moody’s rating of at least A2/P-1, a Fitch rating of at least A/F1, or UK building societies with over £2 billion in assets, except in certain jurisdictions where the cash holding concerned is immaterial. At December 31, 2013 and 2012, the majority of the Company’s cash and cash equivalents, short- and long-term deposits were deposited with major clearing banks and building societies in the UK and US in the form of money market deposits and corporate bonds for varying periods of up to three years. At December 31, 2013, 98%
 
 
(2012: 93%) of the Company’s cash and cash equivalents, and short- and long-term deposits were deposited with major clearing banks and building societies fulfilling these criteria. The majority of the Company’s cash currently falling outside of the counterparty criteria is held with building societies that were within criteria when the deposits were placed.
 
Interest rate risk
 
At December 31, 2013, the Company had £713.7 million (2012: £523.6 million) of interest-bearing assets. At December 31, 2013, 93% (2012: 91%) of interest-bearing assets (comprising cash and cash equivalents, short- and long-term deposits, loans and receivables, and the Company’s convertible loan notes) are at fixed rates and are therefore exposed to fair value interest rate risk. Had interest rates been 1% (100 basis points) lower throughout the year, interest receivable would have reduced by approximately £5.8 million (2012: £5.3 million) and profit after tax by £4.6 million (2012: £4.0 million).
 
Currency risk
 
At December 31, 2013, the Company had outstanding currency exchange contracts to sell $143 million (2012: $71 million) for sterling. In addition, the Company utilizes option instruments which have various provisions that, depending on the spot rate at maturity, give either the Company or the counterparty the option to exercise. At December 31, 2013, the Company had outstanding currency options under which the Company may, under certain circumstances, be required to sell up to $97 million (2012: $90 million) for sterling. A common scenario with options of this type is that the spot price at expiry is such that neither the Company nor the counterparty chooses to exercise the option. At December 31, 2013, the Company had $230 million (2012: $190 million) of accounts receivable denominated in US dollars at that date, and US dollar cash and cash equivalents, and short-term deposits of $14 million (2012: $22 million). Thus the Company’s US dollar assets exceeded its currency exchange contracts and currency options at the year end. Management assesses the volume and timing of currency exchange contracts taking into consideration both the current and expected future level of US dollar assets. Based on the predictable nature of the Company’s cash flows, the Company typically has a greater value of currency exchange contracts outstanding than US dollar assets held. As such, after the balance sheet date, the Company has entered into additional currency exchange contracts, returning the Company to its usual position in this regard, at the date of this report.
 
At December 31, 2013, if sterling had strengthened by 10% against foreign currencies with all other variables held constant, post-tax profit for the year would have been £9.5 million lower (2012: £12.1 million lower), mainly as a result of the mix of financial instruments at respective year ends.
 
18 
Share capital
 
Authorized
  
2012
£ million
    
2013
£ million
  
2,200,000,000 ordinary shares of 0.05 pence each (2012: 2,200,000,000)
     1.1       1.1  

   
2012
    
2013
  
   
Number of shares (millions)
    
Value
£ million
    
Number of shares (millions)
    
 
Value
£ million
  
Issued and fully paid
                        
At January 1
     1,351.3       0.7       1,380.8       0.7  
Alloted under employee incentive schemes
     29.5       —       19.5       —  
December 31
     1,380.8       0.7       1,400.3       0.7  

During 2013, the aggregate consideration received on issue of new share capital allotted under employee incentive schemes was £5.9 million (2012: £5.6 million).
 
 
F-45
 
19 
Acquisitions
 
There were two acquisitions made in 2013: Sensinode Oy, acquired on July 19, 2013 for $11.7 million (£7.7 million), and Geomerics Limited, acquired on December 12, 2013 for £13.4 million. The Company acquired the entire share capital of both entities, which have been accounted for as acquisitions.
 
Sensinode, a company based in Oulu, Finland, is a provider of software technology for the Internet of Things (IoT). Sensinode is a pioneer in software for low-cost, low-power internet-connected devices and has been a key contributor to open standards for IoT. This acquisition enables Sensinode’s expertise and technology to be accessible to the ARM Partnership and through the ARM mbed project it will enable rapid deployment of new and innovative IoT applications.
 
Geomerics, a company based in Cambridge, United Kingdom, is a leader in lighting technology for the gaming and entertainment industries. The acquisition expands ARM's position at the forefront of the visual computing and graphics industries. Additionally, the agreement enables Geomerics to build on their existing partnerships as well as accelerate their development in the mobile market.
 
For the above reasons, combined with the ability to hire the workforce of both Sensinode and Geomerics, including the founders and the management team, the Company paid a premium for both companies, giving rise to goodwill.  All intangible assets were recognized at their fair values, with the residual excess over net assets being recognized as goodwill.
 
From July 19, 2013 to 31 December 2013, the acquisition of Sensinode contributed £0.1 million in revenue and incurred a loss of £nil. If Sensinode had been consolidated from January 1, 2013, the consolidated income statement would have included £0.2 million of revenue and £0.9 million of pre-tax loss.
 
From December 12, 2013 to December 31, 2013, the acquisition of Geomerics contributed £nil in revenue and incurred a loss of £0.1 million. If Geomerics had been consolidated from January 1, 2013, the consolidated income statement would have included £0.7 million of revenue and £1.1 million of pre-tax loss.
 
The following table summarises the consideration and provisional fair values of the assets acquired and liabilities assumed at the date of each acquisition.
 
     Sensinode      Geomerics  
   
 July 19, 2013
    
December 12, 2013
  
      £ millon       $ million       £ million  
Cash, accounts receivable, other current assets and property, plant and equipment
     0.3       0.5       0.2  
Intangible assets
     2.8       4.3       5.0  
Accrued and other liabilities
     (0.5 )     (0.8 )     (0.8 )
Loans payable
     (1.1 )     (1.6 )     —  
Deferred tax liabilities (net)
     (0.2 )     (0.3 )     (1.0 )
Net assets acquired
     1.3       2.1       3.4  
Goodwill
     6.4       9.6       10.0  
Consideration
     7.7       11.7       13.4  
 
The consideration for both acquisitions was paid in cash.  All transaction expenses incurred by the Company have been charged to the income statement within general and administrative expenses.
 
Other
 
There were no acquisitions in 2012, but the following acquisitions were made in 2011.
 
Obsidian Software Inc.
 
On June 15, 2011, the Company purchased the entire share capital of Obsidian Software Inc. for $5.6 million in cash, plus a further $9.5 million payable as an earn-out to the shareholders subject to them remaining in employment
 
 
F-46
 
with ARM for up to three years and meeting certain performance criteria. The earn-out is being expensed in the income statement, within research and development expenses, as the services are provided.  During 2012, the Company made a payment of £2.2 million in respect of these time-based and performance bonuses due under the acquisition agreement for Obsidian. This purchase has been accounted for as an acquisition.
 
Obsidian, a company based in Austin, Texas, was a market leader in verification and validation products and services used in the design of increasingly complex processors. The company’s RAVEN software has been used by many of the world’s leading semiconductor companies.  As SoC and processors grow in complexity there is an increasing need to develop more sophisticated verification strategies. This acquisition augments ARM’s drive in matching its verification strategies with the rate of change in its high performance, complex SoC IP components.  For these reasons, combined with the ability to hire the entire workforce of Obsidian including the founders and management team, the Company paid a premium for the company giving rise to goodwill.  All intangible assets were recognized at their fair values, with the residual excess over net assets being recognized as goodwill. All of the goodwill recognized is expected to be deductible for income tax purposes.
 
The following table summarizes the consideration and fair values of the assets acquired and liabilities assumed as at June 15, 2011. There have been no changes to fair values during 2012 or 2013.
 
   
£ million
    
$ million
  
Accounts receivable
     0.5       0.8  
Other current assets
     0.1       0.1  
Property, plant and equipment
     —       0.1  
Intangible assets
     2.7       4.4  
Deferred revenue
     (0.4 )     (0.6 )
Accrued and other liabilities
     (2.6       (4.3 )
Net assets acquired
     0.3       0.5  
Goodwill
     3.2       5.1  
Consideration
     3.5       5.6  

The consideration was all paid in cash.  All transaction expenses incurred by the Company have been charged to the income statement within general and administrative expenses.
 
 During 2013, the Company made a payment of £2.0 million (2012: £2.2 million) in respect of time-based and performance bonuses due as a result of the acquisition of Obsidian Software Inc.
 
Prolific Inc
 
On October 31, 2011, the Company purchased the entire share capital of Prolific Inc. for $7.7 million in cash, plus a further $8.5 million payable as an earn-out to the shareholders subject to them remaining in employment with ARM for up to five years and meeting certain performance criteria. The earn-out is being expensed in the income statement, within research and development expenses, as the services are provided. During 2012, the Company made payments totaling £0.8 million in respect of these time-based and performance bonuses due under the acquisition agreement. This purchase has been accounted for as an acquisition.
 
Prolific, a company based in Newark, California, develops leading-edge IC design optimization software tools that significantly reduce development time and improve the performance of cell-based designs. The increasing complexity of 20nm and below process technologies is driving the need for automated layout optimization solutions. This acquisition augments ARM’s strategy to provide innovative physical IP products that will enable the ARM partnership to continue to lead in the implementation of highly integrated, low-power SoC solutions.
 
For these reasons, combined with the ability to hire the entire engineering workforce of Prolific, including the founders and the management team, the Company paid a premium for the company giving rise to goodwill.  All intangible assets were recognized at their fair values, with the residual excess over net assets being recognized as goodwill.  All of the goodwill recognized is expected to be deductible for income tax purposes.
 
The following table summarizes the consideration and fair values of the assets acquired and liabilities assumed as at October 31, 2011. There have been no changes to fair values during 2012 or 2013.
 
 
F-47
 
   
 
£ million
    
 
$ million
  
Intangible assets
     2.4       3.7  
Deferred revenue
     (0.2 )     (0.3 )
Accrued and other liabilities
     (0.5 )     (0.8 )
Net assets acquired
     1.7       2.6  
Goodwill
     3.3       5.1  
Consideration
     5.0       7.7  

The consideration was all paid in cash.  All transaction expenses incurred by the Company have been charged to the income statement within general and administrative expenses.
 
During 2013, the Company made payments of £0.6 million (2012: £0.8 million) in respect of time-based and performance bonuses due as a result of the acquisition of Prolific Inc.
 
During 2011, the Company made a payment of £0.5 million in respect of final consideration for the acquisition of Keil Elektronik GmbH. This payment was in respect of a previously accrued liability and therefore had no impact on the income statement.
 
20 
Share-based payments
 
Since 2006, the Company has issued RSUs to employees, which are actual share awards on vesting rather than options to buy shares at a fixed exercise price.
 
The main RSU awards (to employees in all jurisdictions other than France) vest 25% on each anniversary over four years. RSU awards to our French employees vest 50% after two years, and then a further 25% after three and four years.
 
Additionally, the Company operates a DAB plan. Under the DAB plan, which is for directors and selected senior management within the Group, participants are required to defer 50% of any related annual bonus into shares on a compulsory basis. These shares will be deferred for three years, and then a matching award will be made depending on the achievement of an EPS performance condition over that time. This scheme will be replaced after the February 2014 grant and replaced with a cash-only bonus. For details of the new scheme, see “Board Practices - Remuneration Policy”
 
The Company also operates the LTIP, also for directors and selected senior management, whereby share awards are made and vest depending on the Company’s TSR performance compared to two comparator groups over the three-year performance period. Grants were made for the last time under this scheme in February 2013 and it will be replace by a new LTIP for 2014 grants onwards. For details of the new scheme, see “Board Practices – Remuneration Policy”
 
The Company also offers SAYE schemes for employees and executive directors of the Company. The number of options granted is related to the value of savings made by the employee. The period of savings is three or five years. The option price for grants is set at 80% of the market share price prior to the announcement of the grant, and the right to exercise normally only arises for a six-month period once the savings have been completed. The Company also operates a savings-related option scheme for employees in the US, India, Japan, South Korea and Taiwan, namely the ESPP. The number of options granted is related to the value of savings made by the employee. The period of savings is six months, with the option price being at 85% of the lower of the market share price at the beginning and end of the scheme.
 
The Company has in the past issued share options under several additional schemes, whereby shares in the Company can be granted to employees and directors. Options are granted with a fixed exercise price equal to the market price of the shares under option at the date of grant. These schemes are the UK Inland Revenue Executive Approved Share Option Plan (the “Executive Scheme”), the Unapproved Scheme (the “Unapproved Scheme”), the French Scheme and various schemes that the Company assumed on the acquisition of Artisan in 2004. Shares options in these schemes are no longer granted, although the Company reserves the right to award options to employees
 
 
going forward. Shares relating to these schemes have all vested in prior years and therefore there is no share-based payment charge associated with them for 2012 or 2013.
 
As disclosed in note 4, staff expenses arising from these share-based compensation schemes of £59.2 million (2012: £37.1 million; 2011: £40.5 million) were charged to the income statement in the year. This is in line with the Company’s policies for recognition and measurement of the costs associated with these remuneration schemes as outlined in note 1.
 
The fair value of options granted was estimated on the date of grant using the Black-Scholes option pricing model, except for the ESPP whose fair value is the intrinsic value of the award at the date of vest. The following assumptions for each option grant during 2010, 2011 and 2012 were as follows:
 
Grant date
  
Feb 16, 2013
    
Jun 23, 2013
    
Apr 30, 2013
    
Oct 31, 2013
    
Feb 16, 2012
  
Scheme
  
ESPP
    
SAYE
    
ESPP
    
ESPP
    
ESPP
  
Share price at grant date
   £ 9.25     £ 7.725     £ 9.96     £ 9.94     £ 5.905  
Exercise price
     4.964       7.9616       5.6525       8.449       4.42  
Number of employees
     391       350       151       605       373  
Shares under option
     330,676       210,605       35,386       228,335       333,464  
Vesting period (years)
     —       3-5       —       —       —  
Expected volatility
     —       37%-40 %     —       —       —  
Expected life (years)
     —       3-5       —       —       —  
Risk-free rate
     —       0.5 %     —       —       —  
Dividend yield
     —       0.58 %     —       —       —  
Fair value per option
   £ 4.286     £ 1.828-2.510     £ 4.3075     £ 1.491     £ 1.485  

Grant date
  
Jun 23, 2012
    
Aug 16, 2012
    
Feb 16, 2011
    
Jun 23, 2011
    
Aug 16, 2011
  
Scheme
  
SAYE
    
ESPP
    
ESPP
    
SAYE
    
ESPP
  
Share price at grant date
   £ 5.06     £ 5.74     £ 6.225     £ 5.68     £ 5.26  
Exercise price
     3.916       4.876       2.62       4.464       4.471  
Number of employees
     490       372       294       423       319  
Shares under option
     720,922       306,497       451,423       552,903       279,806  
Vesting period (years)
     3-5       —       —       3-5       —  
Expected volatility
     38%-43 %     —       —       42%-43 %     —  
Expected life (years)
     3-5       —       —       3-5       —  
Risk-free rate
     0.5 %     —       —       0.5 %     —  
Dividend yield
     0.69 %     —       —       0.51 %     —  
Fair value per option
   £ 1.728-2.175     £ 0.864     £ 3.605     £ 2.13-2.423     £ 0.789  

The fair value of RSUs, LTIP and DAB awards granted was estimated on the date of grant using the Black-Scholes option pricing model. As all are share awards with no exercise price, all awards have been deemed to have an exercise price of £0.0000001 in the Black-Scholes model. The following assumptions for each grant during 2013, 2012 and 2011 were as follows:
 
Grant date
  
Feb 8, 2013
    
Feb 8, 2013
    
Feb 8, 2013
    
Feb 8, 2013
  
Scheme
  
DAB
    
RSU
    
French RSU
    
LTIP
  
Share price at grant date
   £ 9.245     £ 9.245     £ 9.245     £ 9.245  
Number of employees
     53       2,207       93       55  
Shares awarded
     466,174       7,686,539       286,900       742,469  
Vesting period (years)
     3       1-4       2-4       3  
Expected volatility
     37 %     30%-37 %     35%-37 %     37 %
Expected life (years)
     3       1-4       2-4       3  
Risk-free rate
     0.5 %     0.5 %     0.5 %     0.5 %
Dividend yield
     0.49 %     0.49 %     0.49 %     0.49 %
Fair value per option
   £ 9.111     £ 9.067-9.200     £ 9.067-9.155     £ 9.111  

 
F-49
 
 
Grant date
  
 
May 8, 2013
    
 
May 8, 2013
    
 
Aug 13, 2013
    
 
Aug 13, 2013
  
Scheme
  
RSU
    
French RSU
    
RSU
    
French RSU
  
Share price at grant date
   £ 10.46     £ 10.46     £ 8.89     £ 8.89  
Number of employees
     102       3       134       4  
Shares awarded
     258,224       6,645       318,934       6,347  
Vesting period (years)
     1-4       2-4       1-4       2-4  
Expected volatility
     30%-38 %     34%-38 %     31%-36 %     32%-36 %
Expected life (years)
     1-4       2-4       1-4       2-4  
Risk-free rate
     0.5 %     0.5 %     0.5 %     0.5 %
Dividend yield
     0.43 %     0.43 %     0.55 %     0.55 %
Fair value per option
   £ 10.282-10.415     £ 10.282-10.37     £ 8.69-8.836     £ 8.69-8.787  
 
Grant date
  
 
Aug 13, 2013
    
 
Nov 12, 2013
    
 
Nov 12, 2013
          
Scheme
  
LTIP
    
RSU
    
French RSU
          
Share price at grant date
   £ 8.89     £ 9.495     £ 9.495          
Number of employees
     1       252       9          
Shares awarded
     11,280       494,746       16,478          
Vesting period (years)
     3       1-4       2-4          
Expected volatility
     36 %     31%-36 %     31%-36 %        
Expected life (years)
     3       1-4       2-4          
Risk-free rate
     0.5 %     0.5 %     0.5 %        
Dividend yield
     0.55 %     0.52 %     0.52 %        
Fair value per option
   £ 8.738     £ 9.30-9.446     £ 9.30-9.397          
 
Grant date
  
Feb 8, 2012
    
Feb 8, 2012
    
Feb 8, 2012
    
Feb 8, 2012
    
May 8, 2012
  
Scheme
  
DAB
    
RSU
    
French RSU
    
LTIP
    
RSU
  
Share price at grant date
   £ 5.68     £ 5.68     £ 5.68     £ 5.68     £ 5.07  
Number of employees
     50       1,918       91       54       108  
Shares awarded
     850,741       3,012,604       128,067       1,102,625       159,720  
Vesting period (years)
     —       1-4       2-4       3       1-4  
Expected volatility
     39 %     34%-45 %     39-45 %     39 %     37-42 %
Expected life (years)
     3       1-4       2-4       3       1-4  
Risk-free rate
     0.5 %     0.5 %     0.5 %     0.5 %     0.5 %
Dividend yield
     0.61 %     0.61 %     0.61 %     0.61 %     0.69 %
Fair value per share
   £ 5.577     £ 5.542-5.671     £ 5.542-5.611     £ 5.577     £ 4.933-5.035  

Grant date
  
May 8, 2012
    
Aug 13, 2012
    
Aug 13, 2012
    
Nov 12, 2012
    
Nov 12, 2012
  
Scheme
  
French RSU
    
RSU
    
French RSU
    
RSU
    
French RSU
  
Share price at grant date
   £ 5.07     £ 5.74     £ 5.74     £ 7.125     £ 7.125  
Number of employees
     4       126       1       159       3  
Shares awarded
     4,230       213,201       960       275,270       2,490  
Vesting period (years)
     2-4       1-4       2-4       1-4       2-4  
Expected volatility
     38-42 %     35-41 %     38-41 %     31-40 %     38-40 %
Expected life (years)
     2-4       1-4       2-4       1-4       2-4  
Risk-free rate
     0.5 %     0.5 %     0.5 %     0.5 %     0.5 %
Dividend yield
     0.69 %     0.66 %     0.66 %     0.53 %     0.53 %
Fair value per share
   £ 4.933-5.001     £ 5.592-5.703     £ 5.592-5.665     £ 6.976-7.087     £ 6.976-7.05  

Grant date
  
Feb 8, 2011
    
Feb 8, 2011
    
Feb 8, 2011
    
Feb 8, 2011
    
May 8, 2011
  
Scheme
  
DAB
    
RSU
    
French RSU
    
LTIP
    
RSU
  
Share price at grant date
   £ 6.11     £ 6.11     £ 6.11     £ 6.11     £ 5.95  
Number of employees
     43       1,675       92       46       58  
Shares awarded
     641,059       5,945,805       316,888       921,443       186,820  
Vesting period (years)
     —       1-4       2-4       3       1-4  
Expected volatility
     46 %     37-46 %     37-46 %     46 %     39-44 %

 
F-50
 
 
Grant date
  
 
Feb 8, 2011
    
 
Feb 8, 2011
    
 
Feb 8, 2011
    
 
Feb 8, 2011
    
 
May 8, 2011
  
Scheme
  
DAB
    
RSU
    
French RSU
    
LTIP
    
RSU
  
Expected life (years)
     3       1-4       2-4       3       1-4  
Risk-free rate
     0.5 %     0.5 %     0.5 %     0.5 %     0.5 %
Dividend yield
     0.47 %     0.47 %     0.47 %     0.47 %     0.49 %
Fair value per share
   £ 6.024     £ 5.995-6.081     £ 5.995-6.052     £ 6.024     £ 5.835-5.921  
 
Grant date
  
May 8, 2011
    
Aug 13, 2011
    
Aug 13, 2011
    
Nov 12, 2011
    
Nov 12, 2011
  
Scheme
  
French RSU
    
RSU
    
French RSU
    
RSU
    
French RSU
  
Share price at grant date
   £ 5.95     £ 5.26     £ 5.26     £ 6.345     £ 6.345  
Number of employees
     2       87       4       80       1  
Shares awarded
     8,750       385,420       7,950       189,380       765  
Vesting period (years)
     2-4       1-4       2-4       1-4       2-4  
Expected volatility
     39-44 %     39-45 %     39-45 %     41-46 %     41-46 %
Expected life (years)
     2-4       1-4       2-4       1-4       2-4  
Risk-free rate
     0.5 %     0.5 %     0.5 %     0.5 %     0.5 %
Dividend yield
     0.49 %     0.60 %     0.60 %     0.49 %     0.49 %
Fair value per share
   £ 5.835-5.892     £ 5.136-5.229     £ 5.136-5.198     £ 6.221-6.314     £ 6.221-6.283  

The expected volatility was primarily based upon historical volatility adjusted for past one-time events that are not expected to re-occur. The expected life is the expected period to exercise.
 
A reconciliation of option and share award movements during the year to December 31, 2013 is shown below. Share awards do not have an exercise price and therefore the reconciliation below shows only the number of awards, with no corresponding weighted average exercise prices.
 
   
2012
    
2013
  
   
Options Number
    
Weighted average exercise price
    
RSUs/
LTIP/DAB
Number
    
Options Number
    
Weighted average exercise price
    
RSUs/
LTIP/DAB
Number
  
Outstanding at January 1
     6,581,438     £ 1.221       35,215,062       3,738,922     £ 1.994     £ 23,255,834  
Granted
     1,360,883     £ 4.280       14,448,979       805,002       6.765       14,972,806  
Forfeited
     (234,196 )   £ 3.570       (914,068 )     (57,969 )     4.257       (974,255 )
Lapsed
     (10,589 )   £ 0.910       —       (47,313 )     0.575       —  
Exercised
     (3,958,614 )   £ 1.404       (25,494,139 )     (2,468,723 )     2.414       (17,026,729 )
Outstanding at December 31
     3,738,922     £ 1.994       23,255,834       1,969,919     £ 3.385       20,227,656  
Exercisable at December 31
     985,557     £ 0.685       —       392,451     £ 0.723       —  

   
2011
  
   
 
Options Number
    
Weighted average exercise price
    
RSUs/
LTIP/DAB
Number
  
Outstanding at January 1
     13,452,860     £ 0.899       42,469,526  
Granted
     1,284,132     £ 3.815       14,696,383  
Forfeited
     (171,095 )   £ 1.113       (831,400 )
Lapsed
     (219,847 )   £ 1.186       —  
Exercised
     (7,764,612 )   £ 1.096       (21,119,447 )
Outstanding at December 31
     6,581,438     £ 1.221       35,215,062  
Exercisable at December 31
     3,020,599     £ 0.681       —  
 
The weighted average share price at the date of exercise or vest of the above share options and awards was £9.29 (2012: £5.72; 2011: £5.90).
 
The following options over ordinary shares were in existence at December 31:
 
 
F-51
 
 
2013 Exercise price (£)
    
 
Number
outstanding
    
 
Weighted average
exercise price
£
    
 
Weighted average
remaining life
Expected
Years
    
 
Weighted average
remaining life
Contractual
Years
  
Outstanding options:
                          
0.7–0.854       571,846       0.76       0.49       0.78  
1.01–1.055       19,166       1.04       0.52       1.05  
1.25       1,360       1.25       0.04       0.08  
1.948–7.96       1,377,547       4.51       2.00       2.25  
Total
       1,969,919       3.38       1.55       1.81  
                                   
Outstanding RSU/LTIP/DAB awards:
                                  
0.00 (RSUs)
       16,792,567       —       1.20       1.20  
0.00 (LTIP)
       2,054,203       —       1.12       1.12  
0.00 (DAB)
       1,380,886       —       1.06       1.06  
Total
       20,227,656       —       1.18       1.18  

 
2012 Exercise price (£)
    
Number outstanding
    
Weighted average exercise price
£
    
Weighted average remaining life Expected
Years
    
Weighted average remaining life Contractual
Years
  
Outstanding options:
                          
 0.47–0.854       1,514,873       0.72       0.87       1.37  
1.005–1.055       46,114       1.04       1.03       2.05  
1.25       32,813       1.25       0.54       1.08  
1.325–4.464       2,145,122       2.93       1.77       1.97  
Total
       3,738,922       1.99       1.38       1.72  
                                   
Outstanding RSU/LTIP/DAB awards:
                                  
0.00 (RSUs)
       16,750,069       —       0.93       0.93  
0.00 (LTIP)
       4,189,314       —       0.82       0.82  
0.00 (DAB)
       2,316,451       —       1.06       1.06  
Total
       23,255,834       —       0.92       0.92  
 
 
2011 Exercise price (£)
    
Number outstanding
    
Weighted average exercise price
£
    
Weighted average remaining life Expected
Years
    
Weighted average remaining life Contractual
Years
  
Outstanding options:
                          
0.27–0.4375       129,632       0.35       0.44       0.88  
0.47–0.854       4,020,157       0.69       1.16       1.89  
1.005–1.055       561,523       1.05       0.27       0.53  
1.104–1.25       84,308       1.18       1.12       1.49  
1.325–4.464       1,785,818       2.52       1.87       2.23  
Total
       6,581,438       1.22       1.26       1.84  
                                   
Outstanding RSU/LTIP/DAB awards:
                                  
0.00 (RSUs)
       23,735,397       —       1.09       1.09  
0.00 (LTIP)
       8,327,095       —       0.62       0.62  
0.00 (DAB)
       3,152,570       —       0.83       0.83  
Total
       35,215,062       —       0.95       0.95  

 
21
Capital and other financial commitments
   
2012
£ million
    
2013
£ million
  
Contracts placed for future capital and other financial expenditure not provided in the financial statements
     0.6       9.8  

Included in the amount for 2013 is £9.1 million relating to the expansion of the US high-performance computing cluster.

22
Operating lease commitments–minimum lease payments
 
At December 31, 2012 and 2013, the Company had commitments under non-cancellable operating leases as follows:
 
   
2012
    
2013
  
   
Land and buildings
£ million
    
Other
£ million
    
Total
£ million
    
Land and buildings
£ million
    
Other
£ million
    
Total
£ million
  
The future aggregate minimum lease payments under non-cancellable operating leases are as follows:
                                    
Within one year
     6.8       20.4       27.2       8.5       18.3       26.8  
Later than one year and less than five years
     16.9       21.5       38.4       23.1       5.3       28.4  
After five years
     6.7       —       6.7       9.0       —       9.0  
At December 31
     30.4       41.9       72.3       40.6       23.6       64.2  

The Company leases office buildings and EDA tools software under non-cancellable operating lease agreements. The remaining lease terms are between two and ten years, and the majority of lease agreements are renewable at the end of the lease period at market rate.
 
23 
Financial contingencies
 
It is common industry practice for licensors of technology to offer to indemnify their licensees for loss suffered by the licensee in the event that the technology licensed is held to infringe the IP of a third-party. Consistent with such practice, the Company provides such indemnification to its licensees. The obligation for the Company to indemnify its licensees is subject to certain provisos and is usually contingent upon a third-party bringing an action against the licensee alleging that the technology licensed by the Company to the licensee infringes such third-party’s IP rights. The indemnification obligations typically survive any termination of the license and will continue in perpetuity.
 
The Company does not provide for any such indemnities unless it has received notification from the other party that they are likely to invoke the indemnity. A provision is made if both of the following conditions are met: (i) information available prior to the issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements; and (ii) the amount of the liability can be reasonably estimated. Any such provision is based upon the directors’ estimate of the fair value of expected costs of any such claim.
 
At present, the Company is not a party in any legal proceedings in which the directors believe that it is probable that the resolution of such proceedings will result in a material liability for the Company. Currently, there are legal proceedings against some of the Company’s licensees in which it is asserted that certain of the Company’s technology infringes third-party patents, but in each of those proceedings the Company either presently has no obligation to indemnify, because certain preconditions to indemnification have not been satisfied by such licensees, or to the extent that there is any present obligation to indemnify, the Company does not believe that it is probable
 
 
that the resolution of such proceedings will result in a material liability for the Company. If preconditions to indemnification are satisfied then an indemnification obligation may arise which could result in a material liability for the Company.
 
24 
Related party transactions
 
During the year ended December 31, 2013, the Company incurred subscription costs of £7.0 million from Linaro Limited, an associated company of the Company, representing ARM’s committed aggregate contributions to Linaro for a period of two years.  In respect of the subscription fees, the Company was invoiced £4.3 million during the year to December 31, 2013 (2012: £4.2 million).  As at December 31, 2013, £1.0 million (2012: £1.0 million) was owing to Linaro.
 
In addition, the Company provided consulting and other services to Linaro amounting to £1.6 million (2012: £1.7 million). All fees have been charged in accordance with the terms of the agreement. As at December 31, 2013, £0.3 million (2012: £1.0 million) was owed to the Company. Further information relating to Linaro is disclosed in note 26.
 
Key management compensation is disclosed in note 3.
 
There were no other related party transactions during 2013 which require disclosure.
 
25
Post-balance sheet events
 
After the year end, the directors proposed payment of a final dividend in respect of 2013 of 3.6 pence per share. Subject to shareholder approval, the final dividend will be paid on May 16, 2014 to shareholders on the register on April 22, 2014. The final dividend has not been recognized as a distribution during the year ended December 31, 2013.
 
26
Principal subsidiaries, associates and joint ventures
 
Details of principal subsidiary undertakings are shown below. Not all subsidiaries are included as the list would be excessive in length. A full list is filed in the Company’s annual return. All investments are indirectly held unless otherwise shown.
 
 
Name of undertaking
  
 
Country of registration
  
 
Principal activity
  
Proportion of total nominal value of issued shares held
ARM Limited
  
England and Wales
  
Marketing and research and development of RISC-based microprocessors and graphics IP.
  
100*
ARM Inc.
  
US
  
Marketing and research and development of RISC-based microprocessors and physical IP.
  
100
ARM France SAS
  
France
  
Marketing and research and development of RISC-based microprocessors and physical IP.
  
100
ARM Norway AS
  
Norway
  
Research and development of graphics IP.
  
100
ARM Embedded Technologies Pvt. Limited.
  
India
  
Marketing and research and development of RISC-based microprocessors and physical IP.
  
100
ARM Consulting (Shanghai) Co. Limited.
  
PR China
  
Marketing and research and development of graphics IP.
  
100
*
The Company itself owns less than 1% of the share capital of ARM Limited, the remaining shares are held indirectly through ARM Finance UK Limited and ARM Finance UK Three Limited. Both ARM Finance UK Limited and ARM Finance UK Three Limited are 100% owned within the Company.
 
 
Associate
 
During 2010, the Company became a founder member of Linaro, a not-for-profit engineering company created to foster innovation in the Linux community. Linaro (a company incorporated in the UK) is a company limited by guarantee and as such has no shareholders. The Company controls only 25% of the board and therefore considers Linaro to be an associate rather than a subsidiary. The Company has not recognized any associate profit or loss, or net assets on the basis that the entity is not-for-profit.
 
Joint venture
 
In 2012, the Company invested £7.5 million ($12.0m million) in a joint venture, Trustonic Limited (a company incorporated in the UK), representing a 40% shareholding. With the establishment of industry standards and demand for security enhanced services the focus of Trustonic is to accelerate the wide deployment of secure, smart devices.  During 2013 the Company invested a further £3.7 million (€4.4 million) into the joint venture, maintaining the 40% shareholding.
 
 
Investment in joint venture
  
2012
£ million
    
2013
£ million
  
At January 1
     —       6.8  
Investment
     7.5       3.7  
Share of results for period
     (0.7 )     (4.0 )
At December 31
     6.8       6.5  
 
The Company’s share of the results of the joint venture, and its aggregated assets and liabilities are as follows:
 
   
Current Assets
£ million
    
Non-current assets
£ million
    
Current Liabilities
£ million
    
Income
£ million
    
Expenses
£ million
    
Tax
£ million
    
Loss for year
£ million
  
Trustonic Limited
                                          
At December 31, 2013
     3.9       6.5       (3.9 )     2.5       (6.7 )     0.2       (4.0 )
At December 31, 2012
     3.7       4.6       (1.5 )     —       (0.7 )     —       (0.7 )
 
The Company’s share of joint venture capital commitments amount to £0.1 million at December 31, 2013 (2012: £0.6 million).
 
F-55