10-Q 1 d10q.htm FORM 10-Q Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2010

OR

 

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

Commission File Number: 000-50460

 

 

TESSERA TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   16-1620029

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

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

(408) 321-6000

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter time period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

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

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

As of October 15, 2010, 50,461,537 shares of the registrant’s common stock were outstanding.

 

 

 


 

TESSERA TECHNOLOGIES, INC.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTER ENDED SEPTEMBER 30, 2010

TABLE OF CONTENTS

 

     Page  
  PART I   

Item 1.

  Financial Statements (unaudited)      3   
  Condensed Consolidated Balance Sheets – September 30, 2010 and December 31, 2009      3   
  Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2010 and 2009      4   
  Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2010 and 2009      5   
  Notes to Condensed Consolidated Financial Statements      6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      35   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      48   

Item 4.

  Controls and Procedures      48   
  PART II   

Item 1.

  Legal Proceedings      49   

Item 1A.

  Risk Factors      60   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      72   

Item 3.

  Defaults Upon Senior Securities      72   

Item 4.

  [Removed and Reserved]      72   

Item 5.

  Other Information      72   

Item 6.

  Exhibits      73   

Signatures

     74   

Exhibit Index

     75   

 

2


 

PART I—FINANCIAL INFORMATION

Item  1. Financial Statements (unaudited)

TESSERA TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for par value)

(unaudited)

 

     September 30,
2010
    December 31,
2009
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 119,675      $ 107,873   

Short-term investments

     353,980        280,085   

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

     8,804        10,237   

Inventories

     1,924        1,571   

Short-term deferred tax assets

     6,241        6,240   

Other current assets

     4,499        6,255   
                

Total current assets

     495,123        412,261   

Property and equipment, net

     47,568        42,483   

Intangible assets, net

     81,758        77,753   

Goodwill

     49,422        45,150   

Long-term deferred tax assets

     19,299        19,299   

Long-term investments

     329        15,691   

Other assets

     2,714        3,681   
                

Total assets

   $ 696,213      $ 616,318   
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 2,776      $ 2,354   

Accrued legal fees

     6,035        3,064   

Accrued liabilities

     22,540        21,633   

Deferred revenue

     3,767        5,334   

Income tax payable

     3,566        317   
                

Total current liabilities

     38,684        32,702   

Long-term deferred tax liabilities

     6,733        6,684   

Other long-term liabilities

     6,326        4,747   

Commitments and contingencies (Note 11)

    

Stockholders’ equity:

    

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

     —          —     

Common stock: $0.001 par value; 150,000 shares authorized; 51,104 and 50,490 shares issued, respectively, and 50,459 and 49,845 shares outstanding, respectively

     51        50   

Additional paid-in capital

     429,989        402,330   

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

     (10,505     (10,505

Accumulated other comprehensive income (loss)

     732        (55

Retained earnings

     224,203        180,365   
                

Total stockholders’ equity

     644,470        572,185   
                

Total liabilities and stockholders’ equity

   $ 696,213      $ 616,318   
                

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

 

3


 

TESSERA TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

     Three Months Ended      Nine Months Ended  
     September 30,
2010
     September 30,
2009
     September 30,
2010
     September 30,
2009
 

Revenues:

           

Royalty and license fees

   $ 76,041       $ 62,743       $ 203,250       $ 234,470   

Product and service revenues

     6,070         3,380         17,700         8,500   
                                   

Total revenues

     82,111         66,123         220,950         242,970   
                                   

Operating expenses:

           

Cost of revenues

     5,492         3,941         16,473         11,941   

Research, development and other related costs

     20,769         16,780         54,922         50,259   

Selling, general and administrative

     19,031         19,455         58,441         54,233   

Litigation expense

     4,753         6,066         15,693         20,229   
                                   

Total operating expenses

     50,045         46,242         145,529         136,662   

Operating income

     32,066         19,881         75,421         106,308   

Other income and expense, net

     716         590         1,679         4,448   
                                   

Income before taxes

     32,782         20,471         77,100         110,756   

Provision for income taxes

     13,754         8,337         33,262         47,317   
                                   

Net income

   $ 19,028       $ 12,134       $ 43,838       $ 63,439   
                                   

Basic and diluted net income per share:

           

Net income per share-basic

   $ 0.38       $ 0.25       $ 0.88       $ 1.31   
                                   

Net income per share-diluted

   $ 0.38       $ 0.24       $ 0.87       $ 1.30   
                                   

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

     50,247         49,201         49,862         48,598   
                                   

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

     50,476         49,862         50,192         48,981   
                                   

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

 

4


 

TESSERA TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Nine Months Ended  
     September 30,
2010
    September 30,
2009
 

Cash flows from operating activities:

    

Net income

   $ 43,838      $ 63,439   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization of property and equipment

     8,736        6,795   

Amortization of intangible assets

     10,695        8,809   

Impairment on long-term investments and assets, net of gain

     —          774   

Loss (gain) on property and equipment

     (208     515   

Stock-based compensation expense

     21,171        20,437   

Deferred income tax, net

     (101     529   

Tax benefits from employee stock option plan

     2,066        8,476   

Excess tax benefit from stock-based compensation

     (758     (4,609

Changes in operating assets and liabilities, net of acquisitions:

    

Accounts receivable, net

     1,441        1,073   

Inventories

     (353     193   

Other assets

     1,812        3,009   

Accounts payable

     (59     599   

Accrued legal fees

     2,971        (7,419

Accrued and other liabilities

     (2,898     (769

Deferred revenue

     (1,567     554   

Income tax payable

     3,247        (1,373
                

Net cash provided by operating activities

     90,033        101,032   
                

Cash flows from investing activities:

    

Purchases of property and equipment

     (9,187     (12,327

Proceeds from sale of property and equipment

     1,621        17   

Purchases of short-term available-for-sale investments

     (345,139     (195,366

Proceeds from maturities and sales of marketable securities

     288,520        172,147   

Acquisitions, net of cash acquired

     (14,971     (6,633

Purchases of intangible assets

     (4,256     (9,618

Other investing activities

     —          912   
                

Net cash used in investing activities

     (83,412     (50,868
                

Cash flows from financing activities:

    

Excess tax benefit from stock-based compensation

     758        4,609   

Proceeds from exercise of stock options

     585        15,335   

Proceeds from employee stock purchase program

     3,838        2,414   
                

Net cash provided by financing activities

     5,181        22,358   
                

Net increase in cash and cash equivalents

     11,802        72,522   

Cash and cash equivalents at beginning of period

     107,873        87,890   
                

Cash and cash equivalents at end of period

   $ 119,675      $ 160,412   
                

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

 

5


 

TESSERA TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION

Tessera Technologies, Inc. (together with its subsidiaries, herein referred to as “Tessera” or the “Company”), is a technology innovator that invests in, licenses and delivers innovative miniaturization technologies for next-generation electronic devices. Tessera licenses its technologies worldwide, as well as delivers products based on its technologies, which is done in part to promote the development of supply chain infrastructure. The condensed consolidated financial statements include the accounts of Tessera Technologies, Inc. and each of its wholly owned subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.

The accompanying interim unaudited condensed consolidated financial statements as of September 30, 2010 and 2009, and for the three and nine months then ended, have been prepared by the Company in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial information. The amounts as of December 31, 2009 have been derived from the Company’s annual audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the financial position of the Company and its results of operations and cash flows as of and for the periods presented. These financial statements should be read in conjunction with the annual audited financial statements and notes thereto as of and for the year ended December 31, 2009, included in the Company’s Annual Report on Form 10-K, filed on February 25, 2010.

The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2010 or any future period and the Company makes no representations related thereto.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no significant changes in the Company’s significant accounting policies during the three and nine months ended September 30, 2010, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

Adopted

In June 2009, the Financial Accounting Standards Board (“FASB”) issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities which changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. This amendment will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. This amendment will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. In January 2010, the Company adopted this guidance, which did not have a significant impact on its consolidated financial position, results of operations or cash flows.

On January 21, 2010, the FASB issued an update to the authoritative guidance for fair value measurements and disclosures. The update includes a requirement that reporting entities provide information about movements of assets among Levels 1 and 2 of the three-tier fair value hierarchy established by existing authoritative guidance; adding separate disclosures about purchases, sales, issuances, and settlements relative to Level 3 measurements; and clarifying, among other things, the existing fair value disclosures about the level of disaggregation. This update is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. In January 2010, the Company adopted this guidance, which did not have a significant impact on its consolidated financial position, results of operations or cash flows.

Issued

In September 2009, the FASB issued an update to the authoritative guidance for revenue recognition related to multiple-deliverable arrangements. This update removes the objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting, replaces references to “fair value” with “selling price” to distinguish from the fair value measurements required under the authoritative guidance for fair value measurements and disclosures, provides a hierarchy that entities must use to estimate the selling price, eliminates the use of the residual method for allocation, and

 

6


expands the ongoing disclosure requirements. In addition, this update removes non-software components of tangible products and certain software components of tangible products from the scope of existing software revenue guidance. This update is effective in fiscal years beginning on or after June 15, 2010 and can be applied prospectively or retrospectively. Early adoption is permitted. The Company is currently evaluating the effect the adoption of this update will have, if any, on its consolidated financial position, results of operations or cash flows.

In April 2010, the FASB issued an update to the authoritative guidance for revenue recognition related to the milestone method. This update provides that an entity can make an accounting policy election to recognize a payment that is contingent upon the achievement of a substantive milestone in its entirety as revenues in the period in which the milestone is achieved. The milestone method is not required and is not the only acceptable method of revenue recognition for milestone payments. This update is effective in fiscal years beginning on or after June 15, 2010 and can be applied prospectively or retrospectively. Early adoption is permitted. The Company is currently evaluating the effect the adoption of this update will have, if any, on its consolidated financial position, results of operations or cash flows.

NOTE 4 – COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

Inventories consisted of the following (in thousands):

 

     September 30,
2010
    December 31,
2009
 

Raw materials

   $ 714      $ 513   

Work in process

     883        739   

Finished goods

     327        319   
                
   $ 1,924      $ 1,571   
                

 

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

 

  

     September 30,
2010
    December 31,
2009
 

Furniture and equipment

   $ 57,186      $ 46,836   

Land and buildings

     21,282        19,886   

Leasehold improvements

     5,653        3,979   
                
     84,121        70,701   

Less: Accumulated depreciation and amortization

     (36,553     (28,218
                
   $ 47,568      $ 42,483   
                

 

Accrued liabilities consisted of the following (in thousands):

 

  

     September 30,
2010
    December 31,
2009
 

Employee compensation and benefits

   $ 11,204      $ 12,295   

Other

     11,336        9,338   
                
   $ 22,540      $ 21,633   
                

 

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

 

  

     September 30,
2010
    December 31,
2009
 

Unrealized gain (loss) on available-for-sale investments, net of tax

   $ 732      $ (55
                

Accumulated other comprehensive income (loss)

   $ 732      $ (55
                

 

7


 

NOTE 5 – BUSINESS COMBINATIONS

Siimpel Corporation

In May 2010, Tessera completed its acquisition of Siimpel Corporation (“Siimpel”), a Delaware corporation and a developer and manufacturer of MEMS (Micro Electro Mechanical Systems) based camera solutions for mobile imaging applications for cash consideration of $15.0 million. Approximately $1.9 million of the consideration has been placed in escrow and is subject to forfeiture to satisfy indemnification obligations, if any, of the former stockholders of Siimpel. The escrow will expire in November 2011.

As a result of the acquisition, Siimpel became a wholly owned subsidiary of the Company in a business combination transaction accounted for using the purchase method of accounting, with the results of the acquired entity included in the Imaging and Optics segment as of the acquisition date. This contributed to a purchase price in excess of the fair value of the underlying net assets and identified intangible assets acquired from Siimpel and, as a result, the Company has recorded goodwill in connection with this transaction.

Preliminary purchase price allocation

In accordance with the accounting guidance on business combinations, the total purchase price is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The preliminary allocation of the purchase price was based upon a preliminary valuation and the estimates and assumptions used are subject to change. Based upon the fair values acquired, the purchase price allocation is as follows (in thousands):

 

     Amount     Estimated
Useful Life
(Years)
 

Net tangible assets:

    

Property and equipment, net

   $ 6,312        1-5   

Other current assets

     105        N/A   

Other assets

     148        N/A   

Current liabilities

     (1,837 )     N/A   

Long-term liabilities

     (700 )     N/A   
          
     4,028     

Identified intangible assets:

    

Existing technology

     3,000        9   

Patents/core technology

     1,800        14   

In-process research and development

     1,900        N/A   

Goodwill

     4,272        N/A   
          
     10,972     
          

Total preliminary purchase price

   $ 15,000     
          

Approximately $4.0 million has been allocated to acquired net tangible assets consisting of property and equipment and various assumed assets and liabilities. Approximately $4.8 million has been allocated to amortizable intangible assets acquired. Included in the purchase price allocation is $1.9 million related to acquired in-process research and development related to various in-process development projects which are expected to be completed by the end of 2011.

Proforma results of operations have not been presented because the impact of the acquisition on prior period results was not considered material.

NOTE 6 – GOODWILL AND INTANGIBLE ASSETS

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and identified intangible assets acquired under a business combination. Also included in the balance for intangible assets are assets purchased through asset acquisitions. The amounts and useful lives assigned to intangible assets acquired, other than goodwill, impact the amount and timing of future amortization. The value of the Company’s identified intangible assets and goodwill could be impacted by future adverse changes such as a decline in future cash flows, slow adoption of products by customers or significant decline in growth rates in the industry in which the reporting unit operates.

The Company reviews goodwill for impairment annually during its fourth quarter and whenever events or changes in circumstances indicate the carrying value may not be recoverable. To evaluate for impairment of goodwill, the Company determines the fair value of its reporting units using an average of the results derived from an income approach and a market approach. The income approach is estimated through the discounted cash flow method based on assumptions about future conditions such as future gross margins, operating expenses, discount rates

 

8


and other assumptions. The market approach estimates the fair value of the Company’s equity by utilizing the market comparable method which is based on comparable companies in similar lines of business. The assumptions used in the fair value calculation change from year to year and include revenue growth rates, operating margins, risk adjusted discount rates and future economic and market conditions. Changes in these assumptions based on changed economic conditions or business strategies, whereby anticipated future results of the business do not materialize as expected , could result in material impairment charges in future periods which would negatively impact the operating results.

To evaluate for impairment of long-lived assets such as intangible assets, tangible assets or equity investments, the Company monitors events and changes in circumstances that could indicate carrying value of these assets that may not be recoverable. When such events or changes in circumstances occur, the Company assesses the recoverability of these assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the undiscounted future cash flows is less than the carrying value of those assets, we recognize an impairment charge based on the excess of the carrying value over the fair value of the assets.

The process of evaluating the potential impairment of goodwill and long-lived assets is highly subjective and requires significant judgment. Changes in circumstances indicating that the carrying value of the Company’s goodwill, long-lived assets such as intangible assets and tangible assets or equity investments may not be recoverable may include but not limited to: a decline in future cash flows, slow adoption of the products by customers, significant decline in growth rates in units or revenues in the industry in which the reporting unit operates in, a more-likely-than-not expectation that fair value of goodwill or assets is adversely impact when a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of, or if our market capitalization is below our net book value.

There was no impairment of goodwill and long-lived assets for the three and nine months ended September 30, 2010 and 2009. On October 27, 2010, the Company concluded that an impairment charge will be recorded for certain equipment to be disposed of by sale in connection with the cessation of development activity of Wafer-level Optics technology.

See Note 16—“Subsequent Event” for additional detail.

The allocation of goodwill to segments and the changes to the carrying value from December 31, 2009 through September 30, 2010 is reflected below (in thousands):

 

     Imaging and Optics  

Balance at December 31, 2009

   $ 45,150   

Goodwill acquired through the Siimpel Corporation acquisition

     4,272   
        

Balance at September 30, 2010

   $ 49,422   
        

See Note 12—“Segment and Geographic Information” for additional detail.

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

 

     Average
Life
(Years)
     September 30, 2010      December 31, 2009  
      Gross
Assets
     Accumulated
Amortization
    Net      Gross
Assets
     Accumulated
Amortization
    Net  

Existing technology

     5-10       $ 54,161       $ (23,370   $ 30,791       $ 51,162       $ (18,284   $ 32,878   

Acquired patents

     3-15         51,696         (11,555     40,141         41,895         (7,651     34,244   

Customer contracts

     3-9         11,900         (5,031     6,869         11,900         (3,687     8,213   

Trade name

     4-10         3,620         (1,593     2,027         3,620         (1,288     2,332   

In-process research and development

     Indefinite         1,900         —          1,900         —           —          —     

Non-competition agreements

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

Assembled workforce

     4         300         (270     30         300         (214     86   
                                                      
      $ 124,977       $ (43,219   $ 81,758       $ 110,277       $ (32,524   $ 77,753   
                                                      

 

9


 

Amortization expense for the three months ended September 30, 2010 and 2009 amounted to $3.6 million and $3.0 million, respectively. Amortization expense for the nine months ended September 30, 2010 and 2009 amounted to $10.7 million and $8.8 million, respectively.

As of September 30, 2010, the estimated future amortization expense of intangible assets is as follows (in thousands):

 

2010 (remaining 3 months)

   $ 3,718   

2011

     14,799   

2012

     14,031   

2013

     13,168   

2014

     11,357   

Thereafter

     22,785   
        
   $ 79,858   
        

 

10


 

NOTE 7 – NET INCOME PER SHARE

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

 

     Three Months Ended     Nine Months Ended  
     September 30,
2010
    September 30,
2009
    September 30,
2010
    September 30,
2009
 

Numerator:

        

Net income

   $ 19,028      $ 12,134      $ 43,838      $ 63,439   

Denominator:

        

Weighted average common shares outstanding

     50,390        49,564        50,048        48,992   

Less: Unvested common shares subject to repurchase

     (143     (363     (186     (394
                                

Total shares-basic

     50,247        49,201        49,862        48,598   

Effect of dilutive securities:

        

Stock awards

     107        489        135        236   

Restricted stock awards and units

     122        172        195        147   
                                

Total shares-diluted

     50,476        49,862        50,192        48,981   
                                

Net income per common share-basic

   $ 0.38      $ 0.25      $ 0.88      $ 1.31   
                                

Net income per common share-diluted

   $ 0.38      $ 0.24      $ 0.87      $ 1.30   
                                

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

For the three months ended September 30, 2010 and 2009, approximately 6.4 million and 2.5 million shares of common stock, respectively, subject to stock options, restricted stock awards and units were excluded from the computation of diluted net income per share as they were anti-dilutive. For the nine months ended September 30, 2010 and 2009, approximately 5.8 million and 5.9 million shares of common stock, respectively, subject to stock options, restricted stock awards and units were excluded from the computation of diluted net income per share as they were anti-dilutive.

NOTE 8 – STOCKHOLDERS’ EQUITY

Stock Repurchase Programs

In August 2007, the Board of Directors authorized a plan to repurchase up to a maximum total of $100.0 million of the Company’s outstanding shares of common stock dependent on market conditions, share price and other factors. As of September 30, 2010 and December 31, 2009, the Company had repurchased a total of 645,000 shares of common stock since inception of the plan, at an average price of $16.26 per share for a total cost of $10.5 million. The shares repurchased are recorded as treasury stock and are accounted for under the cost method. No expiration date has been specified for this plan. As of September 30, 2010, the total amount available for repurchase was $89.5 million. The Company may continue to execute authorized repurchases from time to time under the plan.

Stock Option Plans

The 1996 Plan and the 1999 Plan

In December 1996, the Board of Directors adopted the 1996 Stock Option Plan (“1996 Plan”). In February 1999, the Board of Directors adopted the 1999 Stock Option Plan (“1999 Plan”) which was approved by the stockholders in May 1999. Under the 1996 Plan and the 1999 Plan, incentive stock options may be granted to the Company’s employees at an exercise price of no less than 100% of the fair value on the date of grant, and nonstatutory stock options may be granted to the Company’s employees, non-employee directors and consultants at an exercise price of no less than 85% of the fair value. In both cases, when the optionees own stock representing more than 10% of the voting power of all classes of stock of the Company, the exercise price shall be no less than 110% of the fair value on the date of grant. For options granted with an exercise price below fair market value, a stock-based compensation charge has been determined. Options granted under these

 

11


plans generally have a term of ten years from the date of grant and vest over a four-year period. Shares issued in connection with the exercise of unvested options are subject to repurchase by the Company until such options vest. After February 1999, no further options were granted from the 1996 Plan. After December 2000, no further options were granted from the 1999 Plan. The Company has no intention of issuing additional grants under these plans. As of September 30, 2010, there were no shares reserved for grant under these plans and only cancellations under the 1999 Plan are recorded as available for grant. Based on a Board of Directors decision, cancellations under the 1996 Plan are not considered available for grant.

The 2003 Plan

In February 2003, the Board of Directors adopted and the Company’s stockholders approved the 2003 Equity Incentive Plan (“2003 Plan”). Under the 2003 Plan, incentive stock options may be granted to the Company’s employees at an exercise price of no less than 100% of the fair value on the date of grant, and nonstatutory stock options may be granted to the Company’s employees, non-employee directors and consultants at an exercise price of no less than 85% of the fair value. In both cases, when the optionees own stock representing more than 10% of the voting power of all classes of stock of the Company, the exercise price shall be no less than 110% of the fair value on the date of grant. Options, restricted stock awards, and restricted stock units granted under this plan generally have a term of ten years from the date of grant and vest over a four-year period. Restricted stock, performance awards, dividend equivalents, deferred stock, stock payments and stock appreciation rights may also be granted under the 2003 Plan either alone, in addition to, or in tandem with any options granted thereunder. Restricted stock awards and units are full-value awards that reduce the number of shares reserved for grant under this plan by one and one-half shares for each share granted. The vesting criteria for restricted stock awards and units is generally the passage of time or meeting certain performance-based objectives, and continued employment through the vesting period generally over four years. As of September 30, 2010, there were 5,497,000 shares reserved for grant under this plan.

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

 

     Shares Outstanding  
                 Number             
of

Shares
            Weighted         
Average

Exercise
Price  Per
Share
 

Balance at December 31, 2009

     5,859      $ 22.74   

Options granted

     920      $ 17.42   

Options exercised

     (85   $ 6.86   

Options cancelled / forfeited / expired

     (163   $ 28.02   
          

Balance at September 30, 2010

     6,531      $ 22.06   
          

Information with respect to outstanding restricted stock awards and units as of September 30, 2010 is as follows (in thousands, except per share amounts):

 

     Restricted Stock  
     Number of Shares
Subject to
Time-based Awards
    Number of Shares
Subject to
Performance-

based Awards
    Total Number
of Shares
    Weighted Average
Grant Date

Fair Value Per Share
 

Balance at December 31, 2009

     526        395        921      $ 27.07   

Awards and units granted

     756        228        984      $ 16.58   

Awards and units vested / earned

     (230     (49     (279   $ 31.09   

Awards and units cancelled / forfeited

     (31     —          (31   $ 25.59   
                          

Balance at September 30, 2010

     1,021        574        1,595      $ 19.92   
                          

Performance Awards

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

 

12


 

Employee Stock Purchase Plan

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

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

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

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

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

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

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

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

As of September 30, 2010, there were 362,000 shares reserved for grant under the ESPP.

NOTE 9 – STOCK-BASED COMPENSATION EXPENSE

The effect of recording stock-based compensation expense for the three and nine months ended September 30, 2010 and 2009 is as follows (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,
2010
     September 30,
2009
     September 30,
2010
     September 30,
2009
 

Cost of revenues

   $ 136       $ 199       $ 432       $ 450   

Research, development and other related costs

     2,960         2,379         8,210         8,489   

Selling, general and administrative

     3,798         4,312         12,529         11,498   
                                   

Total stock-based compensation expense

   $ 6,894       $ 6,890       $ 21,171       $ 20,437   
                                   

 

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Stock-based compensation expense categorized by various equity components for the three and nine months ended September 30, 2010 and 2009 is summarized in the table below (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,
2010
     September 30,
2009
     September 30,
2010
     September 30,
2009
 

Employee stock options

   $ 3,428       $ 4,152       $ 11,230       $ 12,106   

Restricted stock awards and units

     2,918         2,298         8,299         7,016   

Employee stock purchase plan

     548         440         1,642         1,315   
                                   

Total stock-based compensation expense

   $ 6,894       $ 6,890       $ 21,171       $ 20,437   
                                   

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

Expected life – The expected life assumption is based on analysis of the Company’s historical employee exercise patterns. The expected life of options granted under the ESPP represents the offering period of 2 years.

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

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

Dividend yield – The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option pricing model.

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

The following assumptions were used to value the options granted:

 

     Three Months Ended     Nine Months Ended  
     September 30,
2010
    September 30,
2009
    September 30,
2010
    September 30,
2009
 

Expected life (in years)

     3.8        3.7        3.8        3.7   

Risk-free interest rate

     1.0     1.5     1.0-2.6     1.2-1.6

Dividend yield

     0.0     0.0     0.0     0.0

Expected volatility

     75.5     75.9     75.4-75.7     73.5-75.9

NOTE 10 – INCOME TAXES

The provision for income taxes for the three and nine months ended September 30, 2010 was $13.8 million and $33.3 million, respectively, and was comprised of domestic income tax and foreign income and withholding tax. The provision for income taxes for the three and nine months ended September 30, 2009 was $8.3 million and $47.3 million, respectively, and was comprised of domestic income tax and foreign income and withholding tax. The Company’s provision for income taxes is based on its worldwide estimated annualized effective tax rate, except for jurisdictions for which a loss is expected for the year and no benefit can be realized for those losses. Such jurisdictions’ tax is based on actual withholding taxes for the quarter. The increase in the income tax provision for the three months ended September 30, 2010 as compared to the three months ended September 30, 2009 was primarily attributable to the increase in pre-tax income for the period and the effect of the reduced benefit for domestic research and foreign tax credits. The decrease in the income tax provision for the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009 was primarily attributable to income taxes related to the $64.1 million settlement received from Amkor in February 2009.

 

14


 

As of September 30, 2010 and December 31, 2009, unrecognized tax benefits approximated $4.5 million, of which $3.5 million would affect the effective tax rate if recognized. The change in the unrecognized tax benefits was immaterial for the periods. As of September 30, 2010, the Company is unable to estimate significant increases or decreases to unrecognized tax benefits that are reasonably possible within the next 12 months.

It is the Company’s policy to classify accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. For the three and nine months ended September 30, 2010 and 2009, interest and penalties related to unrecognized tax benefits were immaterial and are included in unrecognized tax benefits.

At September 30, 2010, the Company’s 2005 through 2009 tax years were open and may be subject to potential examination in one or more jurisdictions. In addition, in the U.S., any net operating losses or credits that were generated in prior years but utilized in the open years may also be subject to examination. The Company is not currently under federal income tax examination. The Company is currently under a state tax examination in California for the years 2006 and 2007 and under a foreign income tax examination in Israel for the years 2006 through 2008 and in Japan for the years 2007 through 2009.

NOTE 11 – COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases office and research facilities and office equipment under operating leases which expire at various dates through 2015. Under lease agreements that contain escalating rent provisions, lease expense is recorded on a straight-line basis over the lease term. Rent expense for the three and nine months ended September 30, 2010 was $0.7 million and $2.1 million, respectively. Rent expense for the three and nine months ended September 30, 2009 was $0.7 million and $2.0 million, respectively.

As of September 30, 2010, future minimum lease payments are as follows (in thousands):

 

     Lease Obligations  

2010 (remaining 3 months)

   $ 892   

2011

     2,766   

2012

     2,462   

2013

     2,145   

2014

     1,735   

Thereafter

     814   
        
   $ 10,814   
        

Litigation

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

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

On December 16, 2005, Tessera filed a first amended complaint to add Spansion Inc. and Spansion Technology, Inc. to the lawsuit.

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

On May 24, 2007, the parties stipulated to temporarily stay this action pending completion of Investigation No. 337-TA-605, including appeals, before the International Trade Commission (“ITC”). On August 5, 2008, the court ordered that this action be further stayed pending completion, including appeals, of Investigation No. 337-TA-649 before the ITC, which Investigation was terminated in July 2009. The matter currently remains stayed, with a Case Management Conference currently set for December 14, 2010. The Company expects that potential damages continued to accrue during the stay period through the expiration of the asserted patents in September of 2010. Upon completion of Investigation No. 337-TA-605, including any appeals, the proceeding may continue, with Tessera seeking to recover its damages attributable to the alleged infringement.

 

15


 

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

Tessera Technologies, Inc. v. Hynix Semiconductor Inc. et. al, Case No. 106CV-076688

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

On September 17, 2009, the judge to whom the case previously had been assigned filed a petition with the Judicial Council to coordinate the Tessera v. Hynix action with the Rambus v. Micron action pending before Judge Kramer in the San Francisco County Superior Court (Case No. 04-0431105). On October 15, 2009, the Judicial Council issued an order appointing Judge Kramer as the coordination motion judge. In December 2009, the action was formally coordinated with the Rambus v. Micron action.

Fact and expert discovery in the action are closed. On June 12, 2009, Hynix filed three motions for summary adjudication, addressing among other things Tessera’s standing to bring antitrust claims, its permitted damages, and the propriety of its causes of action for violation of certain California state laws. Tessera’s oppositions to the summary adjudication motions were filed on August 14, 2009. The hearing on Hynix’s motions took place on February 22, 2010 and February 24, 2010. The court denied Hynix’s motion for summary adjudication for alleged lack of standing and Hynix’s motion for summary adjudication regarding Tessera’s claims for damages. The court granted Hynix’s motion to dismiss Tessera’s intentional interference claim. At present, no trial date has been set. The parties are proceeding with trial preparation activities and are next scheduled to appear for pretrial matters on December 16, 2010.

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

In re Certain Semiconductor Chips With Minimized Chip Package Size and Products Containing Same, ITC No. 337-TA-605

On April 17, 2007, the Company filed a complaint with the ITC, requesting that the ITC commence an investigation under Section 337 of the Tariff Act of 1930, as amended. The ITC officially instituted an investigation as requested by Tessera on May 21, 2007. The respondents are ATI Technologies, Inc., Freescale Semiconductor, Inc., Motorola, Inc., Qualcomm, Inc., Spansion, Inc., Spansion, LLC and ST Microelectronics N.V. The ITC, among other things, investigated infringement of U.S. Patent Nos. 5,852,326 and 6,433,419, and considered Tessera’s request for issuance of an order excluding from entry into the United States infringing packaged semiconductor components, assemblies thereof, and products containing the same, as well as cease and desist orders directing the respondents with domestic inventories to desist from activities with respect to infringing products.

On September 19, 2007, the ITC issued an order setting key dates for the investigation, including for the ITC hearing which was scheduled to run from February 25, 2008 to February 29, 2008. On October 17, 2007, the investigation was assigned to Administrative Law Judge Theodore Essex.

On June 11, 2007, the respondents filed a motion to stay the investigation pending the completion of reexamination proceedings relating to the asserted Tessera patents. Tessera opposed the motion on June 21, 2007; Judge Essex did not rule on the motion. On February 22, 2008, the respondents filed a renewed motion to stay the ITC action pending completion of reexamination proceedings relating to the patents at issue, in view of office actions issued by the United States Patent and Trademark Office (“PTO”) in the reexamination of these patents described below in Reexamination Proceedings. An initial hearing of the matter was held on February 25, 2008, and Tessera further opposed the motion in writing on that date. On February 26, 2008, Judge Essex ruled that the action would be stayed in view of the pending reexamination proceedings relating to the patents at issue.

On March 4, 2008, Tessera filed a Request for Emergency Review with the ITC, seeking reversal of the order staying the case, and seeking reinstatement of the hearing date. On March 27, 2008, the ITC issued an order reversing the stay, and requiring that the hearing proceedings be rescheduled for the earliest practicable date. On April 29, 2008, the ITC issued its confidential written opinion regarding reversal of the stay.

The five-day hearing began on July 14, 2008, and was completed on July 18, 2008. On October 16, 2008, Judge Essex issued an order extending the target date for completion of the investigation by the ITC from February 20, 2009 to April 3, 2009, and extended the target date for issuance of the initial determination regarding violation from October 20, 2008 to December 1, 2008.

 

16


 

On December 1, 2008, Judge Essex issued the Initial Determination on Violation of Section 337 and Recommended Determination on Remedy and Bond. He found, among other things, that Tessera had established a domestic industry in the United States due to Tessera’s licensing program, that the asserted patents are valid, but that Tessera had failed to prove infringement of the asserted claims of the patents-in-suit.

On December 15, 2008, Tessera, certain respondents, and the Staff filed petitions for review of the Initial Determination. The parties filed replies to each others’ petitions for review on December 23, 2008.

On January 29, 2009, the Commission announced that it had decided to review the Initial Determination in part. Specifically, the Commission determined to review, among other issues, Judge Essex’s findings that the respondents’ accused devices do not infringe the asserted claims and that a particular prior art device does not anticipate the asserted patents under 35 U.S.C. §§ 102(b) or (g). The Commission originally set a deadline of February 13, 2009 for the parties to submit responses to particular questions posed by the Commission, with February 23, 2009 set as the deadline for reply submissions. The Commission later extended those deadlines to February 23, 2009 and March 5, 2009, respectively.

On March 12, 2009, respondents Spansion, Inc. and Spansion LLC (collectively, “Spansion”) filed a Notice of Commencement of Bankruptcy Proceedings and Automatic Stay, notifying the Commission of Spansion’s recent filings for bankruptcy and asserting that certain administrative claims against Spansion must be stayed pursuant to Section 362 of the Bankruptcy Code. On March 18, 2009, Tessera filed a response to Spansion’s filing, noting that Spansion did not expressly claim that the bankruptcy filing required a stay of this action. On March 23, 2009, the ITC staff submitted a response to Spansion’s filing, asserting that Spansion’s bankruptcy filing does not require any stay of the investigation against Spansion. On May 20, 2009, the ITC denied Spansion’s request to stay the investigation against Spansion.

On March 26, 2009, the Commission issued a Notice of Commission Decision to Request Additional Briefing on Remedy and to Extend the Target Date. Pursuant to the notice, the Commission requested additional briefing from the parties, or from any interested third parties, addressing three issues specified in the notice regarding the appropriateness of Tessera’s proposed remedy. The Commission also determined that the target date for issuance of its final determination would be extended from April 14, 2009 until May 20, 2009. Initial written submissions in response to the Commission’s notice were filed by Tessera, certain respondents, the ITC staff, and by certain third parties on April 10, 2009. Reply submissions were filed by Tessera, certain respondents, the ITC staff and certain third parties on April 20, 2009. On April 20, 2009, the Commission also issued an order permitting interested third parties to have an extra nine days, until April 29, 2009, to file additional reply submissions.

On May 20, 2009, the Commission issued its Final Determination in the action. The Commission, among other things, reversed Judge Essex’s ruling that Tessera had not proven infringement by the respondents, and ruled that Tessera had established infringement. The Commission affirmed Judge Essex’s ruling that the patents are not invalid. The Commission denied Tessera’s request for a General Exclusion Order, but granted a Limited Exclusion Order against all respondents (and certain related entities) and Cease and Desist Orders against certain respondents (and certain related entities).

On or about July 19, 2009, the Presidential Review period expired, and no alterations were made to the ITC’s orders in the investigation. The Investigation by the ITC is now being appealed, as discussed immediately below.

On or about June 2, 2009, Motorola, Inc. and Tessera entered into a settlement and license agreement regarding certain Tessera technology, including the patents at issue in the ITC investigation.

In September 2010, the patents asserted in this action expired together with certain portions of the ITC’s orders.

The Company cannot predict the outcome of this proceeding, which may be impacted by appellate proceedings, as discussed immediately below. An adverse decision in proceedings regarding this action could significantly harm the Company’s business and consolidated financial position, results of operations or cash flows.

Spansion, Inc. et al., v. International Trade Commission and Tessera, Inc., U.S. Court of Appeals for the Federal Circuit Case Nos. 2009-1460, 2009-1461, 2009-1462, and 2009-1465

On or about July 20, 2009, respondents ATI Technologies, Inc., Freescale Semiconductor, Inc., Qualcomm, Inc., Spansion, Inc., Spansion LLC and ST Microelectronics N.V. filed appeals of the ITC’s Final Determination in Investigation No. 337-TA-605 with the United States Court of Appeals for the Federal Circuit. The appellants also filed certain “emergency” motions seeking a stay of the ITC’s limited exclusion order and cease and desist orders during the pendency of the appeal proceedings, as well as an immediate stay of those ITC orders while the Federal Circuit considered briefing as to whether to grant a stay during the appeal.

On July 22, 2009, the Federal Circuit issued an order consolidating appeals from the ITC’s 337-TA-605 investigation, and ordering Tessera and the ITC to file responses to the appellants’ motion to stay no later than July 29, 2009. On July 29, 2009, Tessera and the ITC each filed their briefing in opposition to a stay of the ITC’s orders during the appeal. On August 3, 2009, the respondents filed a reply brief in support of their motion. On August 4, 2009, Tessera filed a supplemental response to the respondents’ reply brief. Also on August 4, 2009, the Federal Circuit issued an order denying Tessera’s request for leave to file a brief in excess of the usual page limits, and ordered Tessera to file a corrected version of its July 29, 2009 brief consisting of no more than 20 pages. Tessera filed its corrected brief on August 6, 2009. On September 8, 2009, the Federal Circuit denied the motions for a stay.

 

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On September 22, 2009, respondents ATI Technologies, Inc. and Freescale Semiconductor, Inc. filed a Combined Motion for Reconsideration and Suggestion for Rehearing En Banc of the Federal Circuit’s denial of their stay motion. Tessera opposed the motion on October 5, 2009. The ITC also opposed the motion on October 5, 2009. On October 23, 2009, the Federal Circuit ruled in the Company’s favor, denying the respondents’ request to stay the limited exclusion order and cease and desist orders during the appeal. The Federal Circuit also notified the parties that it had circulated the petition for rehearing en banc to the court. On November 5, 2009, the petition for rehearing en banc was denied.

On October 30, 2009, the respondents filed their appellate briefing regarding the merits of the ITC’s ruling. Tessera filed its response brief in the appeal on January 15, 2010, and the respondents’ reply briefs were filed on February 19, 2010. Oral argument occurred on June 9, 2010, and the parties now await a decision from the Federal Circuit.

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

Tessera, Inc. v. Motorola, Inc., et. al, Case No. 2:07cv143 (E.D. Tex.)

On April 17, 2007, the Company filed a complaint against Motorola, Inc., Qualcomm, Inc., Freescale Semiconductor, Inc., and ATI Technologies, Inc. in the United States District Court for the Eastern District of Texas, alleging infringement of Tessera’s U.S. Patent Nos. 5,852,326 and 6,433,419, arising from, among other things, the defendants’ respective manufacture, use, sale, offer to sell and/or importation of certain packaged semiconductor components and assemblies thereof. The Company seeks to recover damages, up to treble the amount of actual damages, together with attorney’s fees, interest and costs. The Company also seeks other relief, including enjoining the defendants from continuing to infringe these patents. The defendants have not yet answered Tessera’s complaint. The parties have agreed that the case will be temporarily stayed pending completion, including appeals, of ITC Investigation No. 337-TA-605 titled In re Certain Semiconductor Chips With Minimized Chip Package Size and Products Containing Same.

On or about June 2, 2009, Motorola, Inc. and Tessera entered into a settlement and license agreement regarding certain Tessera technology, including the patents at issue in this action. Tessera’s request to dismiss Motorola, Inc. from the action was granted by the Court on June 8, 2009.

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

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

On December 7, 2007, the Company filed a complaint with the ITC, requesting that the ITC commence an investigation under Section 337 of the Tariff Act of 1930, as amended. The ITC officially instituted an investigation as requested by Tessera on January 3, 2008. The respondents named in the complaint were A-Data Technology Co., Ltd., A-Data Technology (U.S.A.) Co., Ltd., Acer, Inc., Acer America Corp., Centon Electronics, Inc., Elpida Memory, Inc., Elpida Memory (USA) Inc., International Products Sourcing Group, Inc., Kingston Technology Co., Inc., Nanya Technology Corporation, Nanya Technology Corp., U.S.A., Peripheral Devices & Products Systems, Inc. d/b/a Patriot Memory, Powerchip Semiconductor Corp., ProMOS Technologies Inc., Ramaxel Technology Ltd., Smart Modular Technologies, Inc., TwinMOS Technologies, Inc., and TwinMOS Technologies USA Inc. In the Notice of Institution, the ITC stated that it would, among other things, investigate infringement of U.S. Patent Nos. 5,679,977, 6,133,627, 5,663,106, and 6,458,681, and consider Tessera’s request for issuance of an order excluding from entry into the United States infringing packaged semiconductor components, assemblies thereof, and products containing the same, as well as cease and desist orders directing parties with domestic inventories to desist from activities with respect to infringing products.

The action was assigned to Administrative Law Judge Bullock. On January 14, 2008, Judge Bullock issued a protective order in the action, and ground rules setting case procedures. On January 23, 2008, Judge Bullock issued an order setting the target date for completion of the investigation at April 14, 2009. On February 27, 2008, Judge Bullock ordered the hearing date to be set for September 22, 2008.

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

On May 15, 2008, the Company filed a motion to withdraw U.S. Patent No. 6,458,681 from the ITC action. The respondents did not oppose the motion, and the motion was granted. In July 2008, the action was assigned to Judge Essex.

On May 21, 2008, the Company settled its dispute with one of the respondents, International Products Sourcing Group (“IPSG”), and entered into a settlement and license agreement with IPSG and its parent, Micro Electronics, Inc. As part of the settlement, IPSG and Micro Electronics acknowledged the validity and enforceability of the asserted patents, and further acknowledged that their accused products infringe those patents. IPSG has been dismissed from the ITC action. On August 14, 2008, Company settled its dispute with another respondent, Peripheral Devices & Products Systems, Inc. (“PDP”), and entered into a settlement and license agreement with PDP. As part of the settlement, PDP, on

 

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behalf of itself and its parents, affiliates and subsidiaries, acknowledged the validity and enforceability of the asserted patents, and further acknowledged that its accused products infringe those patents. On September 22, 2008, Judge Essex granted the motion of A-DATA Technology Co., Ltd. and A-DATA Technology (USA) Co., Ltd. to dismiss those respondents from the ITC action based on their stipulation to a consent order pursuant to which they agreed not to import or sell for importation into the United States any products infringing Tessera’s asserted patents.

A nine-day hearing in this action began on September 22, 2008 and was completed on October 3, 2008. The parties completed their initial post-hearing briefing on October 31, 2008. On January 2, 2009, Judge Essex issued an order extending the date for issuance of his initial determination regarding violation from January 14, 2009 until March 6, 2009. On February 10, 2009, Judge Essex again extended the date for issuance of his initial determination regarding violation until May 22, 2009, and extended the target date for completion of the Commission’s investigation until September 22, 2009. On April 2, 2009, Judge Essex again extended the date for issuance of his initial determination regarding violation until July 17, 2009, and extended the target date for completion of the Commission’s investigation until November 17, 2009. On June 12, 2009, Judge Essex again extended the date for issuance of his initial determination until August 28, 2009. The June 12, 2009 order also extended the target date for completion of the Commission’s investigation until December 29, 2009.

In a separate June 12, 2009 order, Judge Essex requested briefing from the parties as to the effect, if any, of the Commission’s opinion in the 337-TA-605 investigation on the infringement analysis that Judge Essex should undertake in the 377-TA-630 investigation. The parties submitted their initial briefing on this issue on June 26, 2009, and their reply briefing on July 6, 2009.

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

On September 17, 2009, Tessera and the ITC Staff filed petitions for review of portions of the Initial Determination. Certain respondents also conditionally sought review of portions of the Initial Determination. The parties filed replies to each others’ petitions for review on October 1, 2009. On October 30, 2009, the ITC announced that it will review portions of the Initial Determination. The Commission stated that it would review, among other things, whether the respondents infringed the Tessera patents asserted in the action.

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

The Company cannot predict the outcome of this proceeding, which may be impacted by appellate proceedings, as discussed immediately below. An adverse decision in proceedings regarding this action could significantly harm the Company’s business and consolidated financial position, results of operations or cash flows.

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

On January 28, 2010, the Company filed a Notice of Appeal of the ITC’s Final Determination in Investigation No. 337-TA-630 with the United States Court of Appeals for the Federal Circuit. Principal briefing has been completed. Oral argument in the case has not yet been scheduled.

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

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

On December 7, 2007, the Company filed a complaint against A-Data Technology Co., Ltd., A-Data Technology (U.S.A.) Co., Ltd., Acer, Inc., Acer America Corp., Centon Electronics, Inc., Elpida Memory, Inc., Elpida Memory (USA) Inc., International Products Sourcing Group, Inc.,

 

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Kingston Technology Co., Inc., Nanya Technology Corporation, Nanya Technology Corp., U.S.A., Peripheral Devices & Products Systems, Inc. d/b/a Patriot Memory, Powerchip Semiconductor Corp., ProMOS Technologies Inc., Ramaxel Technology Ltd., Smart Modular Technologies, Inc., TwinMOS Technologies, Inc., and TwinMOS Technologies USA Inc. in the United States District Court for the Eastern District of Texas, alleging infringement of Tessera’s U.S. Patent Nos. 5,679,977, 6,133,627, 5,663,106 and 6,458,681, arising from, among other things, the defendants’ respective manufacture, use, sale, offer to sell and/or importation of certain packaged semiconductor components and assemblies thereof. The Company seeks to recover damages, up to treble the amount of actual damages, together with attorney’s fees, interest and costs. The Company also seeks other relief, including enjoining the defendants from continuing to infringe these patents.

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

As noted above, on May 21, 2008, the Company settled its dispute with one of the defendants, International Products Sourcing Group (“IPSG”), and entered into a settlement and license agreement with IPSG and its parent, Micro Electronics, Inc. As part of the settlement, IPSG and Micro Electronics acknowledged the validity and enforceability of the asserted patents, and further acknowledged that their accused products infringe those patents. IPSG was dismissed from the Texas district court action on June 30, 2008. On August 14, 2008, Company settled its dispute with another defendant, Peripheral Devices & Products Systems, Inc. (“PDP”), and entered into a settlement and license agreement with PDP. As part of the settlement, PDP, on behalf of itself and its parents, affiliates and subsidiaries, acknowledged the validity and enforceability of the asserted patents, and further acknowledged that its accused products infringe those patents. On September 9, 2008, PDP was dismissed from the Texas district court action.

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

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

On July 31, 2008, Siliconware Precision Industries Co., Ltd. and Siliconware U.S.A., Inc. (collectively, “Siliconware”) filed a complaint against the Company in the United States District Court for the Northern District of California seeking a declaratory judgment of noninfringement, invalidity, and unenforceability of Tessera’s U.S. Patent No. 5,663,106. The Company filed its Answer and Counterclaims on September 5, 2008, asserting infringement of the patent at issue by Siliconware. On September 11, 2008, the case was related to Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal) and assigned to the same judge. On December 19, 2008, the court ordered this action be stayed pending completion of Investigation No. 337-TA-649 before the ITC, which Investigation was terminated in July 2009. The matter currently remains stayed, with a Case Management Conference currently set for December 14, 2010.

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

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

On August 4, 2008, Advanced Semiconductor Engineering Inc., ASE Test Limited, and ASE (U.S.) Inc. (collectively, “ASE”) filed a complaint against the Company in the United States District Court for the Northern District of California seeking a declaratory judgment of noninfringement and invalidity of Tessera’s U.S. Patent No. 5,663,106. On September 11, 2008, the case was related to Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal) and assigned to the same judge. The Company filed its Answer and Counterclaims on December 1, 2008, asserting infringement of the patent at issue by ASE. On December 19, 2008, the court ordered this action be stayed pending completion of Investigation No. 337-TA-649 before the ITC, which Investigation was terminated in July 2009. The matter currently remains stayed, with a Case Management Conference currently set for December 14, 2010.

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

ChipMOS Technologies Inc., ChipMOS U.S.A. Inc. and ChipMOS Technologies (Bermuda) Ltd. v. Tessera, Inc., Civil Action No. 08-04063 (N.D. Cal.)

On August 11, 2008, ChipMOS Technologies Inc., ChipMOS U.S.A. Inc. and ChipMOS Technologies (Bermuda) Ltd. (collectively, “ChipMOS”) filed a complaint against the Company in the United States District Court for the Northern District of California seeking a declaratory judgment of noninfringement and invalidity of Tessera’s U.S. Patent No. 5,663,106. On September 11, 2008, the case was related to Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal) and assigned to the same judge. The Company filed its Answer and Counterclaims on September 12, 2008, asserting infringement of the patent at issue by ChipMOS. On December 19, 2008, the court ordered this action be stayed pending completion of Investigation No. 337-TA-649 before the ITC, which Investigation was terminated in July 2009. The matter currently remains stayed, with a Case Management Conference currently set for December 14, 2010.

 

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

Powertech Technology Inc. v. Tessera, Inc., Civil Action No. 10-00945 (N.D. Cal.)

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

On April 1, 2010, the Company filed a motion to dismiss the complaint for lack of subject matter jurisdiction. The hearing on Tessera’s motion occurred on May 13, 2010. On June 1, 2010, the judge granted Tessera’s motion, and dismissed the action.

On June 29, 2010, PTI filed a motion seeking reconsideration of the June 1, 2010 order dismissing the action. Tessera’s opposition to PTI’s motion for reconsideration was filed on July 15, 2010. On August 3, 2010, PTI’s motion was denied. On August 6, 2010, PTI filed a notice of appeal with the U.S. Court of Appeals for the Federal Circuit.

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

Tessera, Inc. v. United Test and Assembly Center Limited, et al., Case No. RG08410327

On September 18, 2008, the Company filed a complaint in the Superior Court for the State of California against United Test and Assembly Center, Ltd. and UTAC America, Inc. (collectively, “UTAC”) alleging breach of contract for failure to pay Tessera the full royalty due under its license agreement. The Company also alleged violations of California unfair competition laws and seeking compensatory and punitive damages.

On October 20, 2008, UTAC removed the action to the U.S. District Court for the Northern District of California. On October 31, 2008, Judge Claudia Wilken issued an order that Tessera’s case against UTAC was related to Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal.) and that the UTAC case should be reassigned to her.

On November 19, 2008, Tessera filed a motion to remand the case to state court. On January 6, 2009, Judge Wilken granted Tessera’s motion, and remanded the case to state court.

On January 16, 2009, UTAC filed a cross-complaint against Tessera, asserting claims for declaratory judgment, breach of contract, breach of the implied covenant of good faith and fair dealing and violation of California unfair competition law. Tessera’s response to UTAC’s cross-complaint was filed on February 18, 2009. Tessera’s answer denied generally the allegations in UTAC’s cross-complaint, and asserted various affirmative defenses.

On March 25, 2009, UTAC filed a motion to designate the action as complex, and have the case reassigned to a judge on the State Court’s complex panel. Tessera opposed the motion. On April 17, 2009, the Court granted UTAC’s motion, and the case was reassigned to Judge Robert Freedman.

On March 19, 2009, Tessera filed a Special Motion to Strike Cross-Complaint under California Code of Civil Procedure Section 425.16, asserting that UTAC’s claims for breach of contract, breach of implied covenant of good faith and fair dealing, and violation of the unfair competition law were barred by California’s “anti- SLAPP” statute. On April 16, 2009, UTAC voluntarily moved to dismiss with prejudice its causes of action for breach of contract and breach of implied covenant of good faith and fair dealing. Tessera did not oppose UTAC’s motion to voluntarily dismiss with prejudice, and the dismissal was entered by the Court. On April 22, 2009, a hearing was held before Judge Freedman and Tessera’s motion was taken under submission. On May 4, 2009, Judge Freedman issued an order granting Tessera’s motion, and striking UTAC’s causes of action for breach of contract, breach of implied covenant of good faith and fair dealing, and violation of the unfair competition law. On June 25, 2009, Tessera filed a motion seeking recovery from UTAC of its costs and attorneys’ fees incurred in connection with the successful motion. Tessera’s motion for costs and attorneys’ fees was heard by the Court on October 23, 2009, and the Court took the matter under submission. On January 21, 2010, the Court granted Tessera’s motion in part and ordered UTAC to pay Tessera’s attorneys’ fees in the amount of $110,812.50, and costs in the amount of $1,957.00.

Tessera sought summary adjudication regarding certain contract issues, and hearings on those motions took place on November 20, 2009 and December 11, 2009, respectively. On December 10, 2009, the Court denied summary adjudication regarding interpretation of UTAC’s royalty obligations under the contract. On December 14, 2009, the Court granted summary adjudication to Tessera regarding UTAC’s cause of action and asserted affirmative defenses of patent misuse, finding that UTAC had presented no evidence of patent misuse by Tessera. In addition, the Court denied summary adjudication regarding whether certain UTAC products meet certain parameters set forth in the parties’ agreement.

 

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On December 11, 2009, the Court reset the trial date from January 11, 2010 to February 1, 2010. On January 15, 2010, the Court again reset the trial date for March 1, 2010. On February 18, 2010 and February 23, 2010, the Court held the Pretrial Management Conference, including hearing the parties’ motions in limine.

On March 1, 2010, the parties entered into a settlement agreement, agreed to a mutual dismissal of the action, and entered into an updated license agreement. The initial term of the updated license agreement runs through the end of 2016. UTAC has the option to renew the license for an additional five year term. Among other consideration to Tessera, under the terms of the agreement UTAC is required to pay $15.0 million in cash to address past royalties owed under the initial license, of which $9.0 million has been received from UTAC.

Reexamination Proceedings

On February 9, 2007 and February 15, 2007, Silicon Precision Industries Co., Ltd. and Siliconware USA, Inc. (collectively, “Siliconware”) filed with the PTO requests for inter partes reexamination relating to U.S. Patent Nos. 6,433,419 and 6,465,893, and ex parte reexamination relating to U.S. Patent Nos. 5,679,977, 6,133,627 and 5,852,326. On April 19, 2007, the PTO granted the requests for ex parte reexamination. On May 4, 2007, the PTO granted the requests for inter partes reexamination. The PTO denied the Company’s petition to vacate the inter partes reexamination proceeding on the ground that the request did not name the real party in interest, and a related request for reconsideration of that decision.

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

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

A first official action rejecting some claims and confirming other claims as patentable was mailed February 21, 2008 in the reexamination of U.S. Patent No. 5,852,326. A response to the official action in the reexamination of U.S. Patent No. 5,852,326 was filed on April 21, 2008. A second office action rejecting some claims and confirming other claims as patentable was mailed on August 1, 2008. Tessera filed a response to the official action on October 1, 2008. A third, final official action rejecting all claims under reexamination was mailed on March 6, 2009. Tessera filed a response to the official action on April 6, 2009. An advisory action was mailed by the PTO on June 22, 2009, maintaining all of the rejections presented in the Action of March 6, 2009. On July 1, 2009, Tessera filed a petition to withdraw the finality of the official action mailed on March 6, 2009. The PTO issued a decision on July 10, 2009 dismissing Tessera’s petition of July 1, 2009. Tessera filed a Notice of Appeal on August 6, 2009, and timely filed an appeal brief on October 13, 2009. The PTO’s Answer to Tessera’s appeal brief was mailed on May 28, 2010. On July 28, 2010, Tessera filed a reply brief and a request for oral hearing.

A first official action was mailed February 22, 2008 in the reexamination of U.S. Patent No. 5,861,666 rejecting those claims which were subject to reexamination. Such official action was superseded by a substantively identical action mailed March 11, 2008 restarting the period for response. A response to such official action was filed on May 12, 2008. A second official action was mailed on September 30, 2008 and Tessera filed an amendment to the claims and response to the second official action on October 30, 2008. On March 13, 2009, the PTO issued a Notice of Intent to Issue Ex Parte Reexamination Certificate, after which a Supplemental Notice of Intent to Issue Ex Parte Reexamination Certificate (Corrected Status) was issued on April 2, 2009, finding certain amended and newly presented claims to be patentable. The Reexamination Certificate issued on June 30, 2009.

On February 12, 2008, the PTO issued decisions merging the three reexaminations of U.S. Patent No. 5,679,977 with one another and also merging the two reexaminations of U.S. Patent No. 6,133,627 with one another. A first official action was issued on February 29, 2008 in the merged reexaminations of U.S. Patent No. 6,133,627, rejecting those claims subject to reexamination. A response to the official action in the merged reexaminations of U.S. Patent No. 6,133,627 was filed on April 29, 2008. On August 10, 2008, the PTO issued a second official action, to which Tessera filed a Request to Vacate the Second Official Action on August 26, 2008 on procedural grounds. As a result, on September 11, 2008, the PTO issued a third non-final official action. Tessera filed a response to the non-final office action on October 17, 2008.

A first official action was issued on March 28, 2008 in the merged reexaminations of U.S. Patent No. 5,679,977, rejecting those claims subject to reexamination. On May 28, 2008, a response to the official action in the merged reexaminations of U.S. Patent No. 5,679,977 was filed. On October 10, 2008, the PTO issued a second non-final official action, to which Tessera filed a response on November 10, 2008. On October 1, 2009, the PTO issued a final official action. Tessera filed a response to the final official action on December 1, 2009. On January 14, 2010, the PTO issued an Advisory Action indicating that Tessera’s response of December 1, 2009 failed to overcome all of the rejections set forth in the final official action mailed October 1, 2009. Tessera filed a Notice of Appeal on February 1, 2010, and timely filed an appeal brief on April 5, 2010. The PTO’s Answer to Tessera’s appeal brief withdrew certain rejections previously applied to the claims, but continued to apply other rejections as to all claims under reexamination.

 

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On February 19, 2008, the PTO issued a second official action maintaining the rejections in U.S. Patent No. 6,433,419. On March 10, 2008, Tessera filed a petition to vacate the second official action in the reexamination of U.S. Patent No. 6,433,419 on the ground that the second official action did not properly take account of an amendment to the specification of U.S. Patent No. 6,433,419. On March 19, 2008, Tessera filed a substantive response to such second official action. On June 3, 2008, Tessera filed a renewed petition to vacate the inter partes reexamination on the ground that the request for such reexamination did not name the real party in interest. On June 11, 2008, Siliconware filed an opposition to such petition. The petition was denied on September 10, 2008. On June 13, 2008, the PTO issued a third official action in the inter partes reexamination of U.S. Patent No. 6,433,419 which was denominated as an action closing prosecution. On July 14, 2008, Tessera filed a substantive response to the action closing prosecution, to which a response was filed by Siliconware on August 8, 2008. A Right of Appeal Notice was issued on September 17, 2008, and Tessera filed a Notice of Appeal on October 17, 2008. On November 3, 2008, the PTO issued a decision withdrawing the Right of Appeal Notice and returning the case to the examiner for issuance of a further action. On December 23, 2008, the PTO issued a non-final official action, also denominated as an action closing prosecution, to which Tessera filed a response on January 23, 2009. On February 23, 2009, Siliconware filed a response to Tessera’s January 23, 2009 response. A Right of Appeal Notice was issued on June 19, 2009. On July 1, 2009, Tessera filed a petition to withdraw the Right of Appeal Notice. Having not yet received a decision on the petition of July 1, 2009, Tessera filed a Notice of Appeal on July 20, 2009. On July 30, 2009, the PTO issued a decision dismissing Tessera’s petition of July 1, 2009. Tessera timely filed an appeal brief on October 5, 2009, to which Siliconware filed a Response Brief on November 5, 2009. Siliconware refiled their Response Brief on March 17, 2010. The PTO’s Answer to Tessera’s appeal brief was mailed on July 13, 2010. On August 13, 2010, Tessera filed a rebuttal brief and a request for oral hearing.

On February 15, 2008, the PTO issued a second official action, also denominated as an action closing prosecution, maintaining the rejections of U.S. Patent No. 6,465,893. On March 28, 2008, Tessera filed a petition to vacate the second official action in the reexamination of U.S. Patent No. 6,465,893 on the ground that the second official action did not properly take account of an amendment to the specification of U.S. Patent No. 6,465,893. On April 15, 2008, Tessera filed a response to the second official action in the reexamination of U.S. Patent No. 6,465,893, to which Siliconware filed comments on May 15, 2008. On June 9, 2008, Tessera filed a renewed petition to vacate the inter partes reexamination on the ground that the request for such reexamination did not name the real party in interest, which petition was denied on September 10, 2008. On August 21, 2008, a non-final office action was issued. Tessera filed a response on October 21, 2008. On February 5, 2009, the PTO issued a non-final official action, also denominated as the second action closing prosecution. Tessera filed a response on March 5, 2009, to which Siliconware filed a response on April 6, 2009. A Right of Appeal Notice was issued on June 22, 2009. Tessera filed a Notice of Appeal on July 22, 2009. Tessera timely filed an appeal brief on October 5, 2009, to which Siliconware filed a Response Brief on November 5, 2009, and a Corrected Response Brief on June 14, 2010.

On March 26, 2008, a request for a third ex parte reexamination of U.S. Patent No. 6,133,627 patent was filed, ostensibly by PowerChip Semiconductor Corporation (“Powerchip”). On May 2, 2008, the PTO granted this request. On November 18, 2008, the PTO issued a first non-final official action, to which Tessera filed a response on December 18, 2008. On February 13, 2009, the PTO issued an order merging all of the reexaminations of U.S. Patent No. 6,133,627. On March 17, 2009, the PTO issued a non-final official action rejecting all claims under reexamination, to which Tessera filed a response on April 17, 2009. On July 14, 2009, the PTO issued a final official action which held certain claims patentable but rejected other claims to which Tessera filed a response on August 14, 2009. On December 1, 2009, the PTO issued an Advisory Action indicating that Tessera’s response of August 14, 2009 failed to overcome all of the rejections set forth in the final official action mailed July 14, 2009. Tessera filed a Notice of Appeal on December 14, 2009. Tessera timely filed an appeal brief on February 17, 2010. The PTO’s Answer to Tessera’s appeal brief was mailed on May 28, 2010. On July 28, 2010, Tessera filed a reply brief and a request for oral hearing.

On April 2, 2008, a request for inter partes reexamination of Tessera’s U.S. Patent No. 6,458,681 was filed, ostensibly by Powerchip. On June 6, 2008, the PTO granted this request and issued an official action rejecting certain claims of the ‘681 patent, to which Tessera filed a response on August 6, 2008, and to which Powerchip filed responsive comments on October 10, 2008. On September 21, 2009, the PTO issued an Action Closing Prosecution rejecting certain claims and holding one claim patentable, to which Tessera timely filed a response on October 21, 2009. On November 20, 2009, Powerchip filed comments to Tessera’s response of October 21, 2009. A Right of Appeal Notice was issued on February 22, 2010. On July 20, 2010, the PTO issued a Notice of Intent to Issue Inter Partes Reexamination Certificate, canceling the claims subject to reexamination. The reexamination certificate issued on October 6, 2010. On March 22, 2010, Tessera filed an application for reissue of the ‘681 patent to further address the matters raised during the reexamination proceedings and to pursue additional claims.

On July 18, 2008, a request for ex parte reexamination of Tessera’s U.S. Patent No. 5,663,106 was filed, ostensibly by Powerchip. On September 4, 2008, the PTO granted the request for reexamination. On April 10, 2009, the PTO issued a non-final official action rejecting all claims under reexamination. Tessera filed a response on June 10, 2009. On November 19, 2009, the PTO issued a final official action finding certain claims patentable and rejecting other claims. Tessera filed a response on January 19, 2010. On April 7, 2010, the PTO issued a non-final official action withdrawing the rejections previously made but rejecting all claims under reexamination on new grounds. Tessera filed a response on June 7, 2010. On October 18, 2010, the PTO issued a new final official action to which Tessera will have an opportunity to respond.

 

23


 

On or about January 3, 2006, Koninklijke Phillips Electronics N.V. and Philips Semiconductors B.V. (“Philips”), MICRON Semiconductor Deutschland GmbH (“Micron GmbH”), Infineon and STMicroelectronics, Inc. (“STM”) filed oppositions to Tessera’s European Patent No. EP1111672 (the “EP672 Patent”) before the European Patent Office (the “EPO”). Micron GmbH and Infineon withdrew their oppositions on July 24, 2006 and November 4, 2006, respectively. On October 10, 2006, Tessera filed its response to the remaining oppositions with the EPO. On December 4, 2006, Phillips withdrew its opposition. On September 16, 2008, the EPO Opposition Division issued a “Summons to attend oral proceedings” which states “preliminary” opinions unfavorable to the claims of the EP672 Patent. The Company filed a written response to the summons on January 5, 2009. STM also filed comments responsive to the summons on December 31, 2008, to which the Company filed a response to STM’s comments on January 12, 2009. An oral hearing before the EPO Opposition Division, was held on June 4, 2009, resulting in a decision to revoke the EP672 Patent. Tessera filed a Notice of Appeal on August 24, 2009. On October 26, 2009, Tessera filed a Statement of Grounds for Appeal with the EPO. STM filed comments to the Grounds for Appeal on March 8, 2010. The Company cannot predict the outcome of this proceeding. If the opposition results in a limitation or a revocation of the EP672 Patent, this could significantly harm the Company’s business and consolidated financial position, results of operations or cash flows.

The following Tessera patents expired on September 24, 2010: U.S. Patent Nos. 6,433,419, 6,465,893, 5,679,977, 6,133,627 and 5,852,326. The reexamination proceedings will continue after expiration.

The patents that are subject to the above-described reexamination proceedings include some of the key patents in Tessera’s portfolio, and claims that have been preliminarily rejected in the current official actions are being asserted in certain of Tessera’s various litigations. The Company cannot predict the outcome of these proceedings. An adverse decision in any of these proceedings could significantly harm the Company’s business and financial condition. An adverse decision could also significantly affect Tessera’s ongoing litigations, as described in this Note 11 – “Commitments and Contingencies,” in which patents are being asserted, which in turn could significantly harm the Company’s business and consolidated financial position, results of operations or cash flows.

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

On January 23, 2009, Qimonda AG filed a bankruptcy petition with the Local Court of Munich, Insolvency Court. On April 1, 2009, the Court opened insolvency proceedings over the estate of Qimonda AG and appointed Rechtsanwalt Dr. Michael Jaffé as the insolvency administrator. On or about May 27, 2009, Dr. Jaffé chose non-performance of Tessera’s license agreement with Qimonda AG under Section 103 of the German Insolvency Code and purported to terminate the license agreement. On June 12, 2009, Tessera filed a Proof of Claim in the Qimonda AG bankruptcy alleging amounts due of approximately 15.7 million Euros. On December 2, 2009, Dr. Jaffé preliminarily contested Tessera’s claim in full. Tessera is in ongoing discussions with the insolvency administrator.

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

On or about March 1, 2009, Spansion LLC, Spansion, Inc. and Spansion Technology LLC (collectively, “Spansion”) initiated bankruptcy proceedings in the United States Bankruptcy Court for the District of Delaware. On or about July 17, 2009, Tessera filed a Proof of Claim in each of the above Spansion bankruptcy proceedings alleging amounts due of not less than $25 million. On July 28, 2009, the Company sought permission under the Bankruptcy rules to serve certain discovery requests in the actions, seeking various documents and testimony regarding potential administrative claims that Tessera may assert in the action. Tessera’s request for such discovery was denied without prejudice on August 11, 2009. The parties thereafter completed certain fact and expert discovery relating to Tessera’s administrative expense claim in December and January of 2010.

On January 12, 2010, Spansion filed a motion to determine and estimate the amount of Tessera’s administrative expense claim, for the purpose of demonstrating the feasibility of Spansion’s Second Amended Joint Plan of Reorganization. Tessera’s administrative expense claim at issue relates to the damages that would be owed to Tessera for Spansion’s post-petition (post-March 1, 2009) infringement of certain Tessera patents. Tessera filed its objection to Spansion’s motion on January 22, 2010. On January 29, 2010, the court held a hearing on Spansion’s motion. The parties submitted post-hearing letter briefs on February 3, 2010. The Court announced its ruling that a reasonable royalty rate for Spansion products sold in the United States during the administrative period was 56.7 cents per unit. On April 6, 2010, the Court entered an order estimating the amount of any alleged administrative expensive claim of Tessera for purposes of plan confirmation in the amount of $4,232,986.13 for the period from March 1, 2009 to July 20, 2009.

On February 5, 2010, Spansion filed a motion for an order estimating the amount of “certain contingent, unliquidated, duplicative and/or overstated claims” for purposes of establishing class 5 plan distribution reserves. Tessera filed its objection to the estimation motion on February 17, 2010 and on that same date submitted three Amended Proofs of Claim based in part on the Court’s 56.7 cents per unit royalty rate. On February 18, 2010, Tessera filed a motion for authority to file its Amended Proofs of Claim. On March 23, 2010, the Court entered an order allowing Tessera to file its Amended Proofs of Claim. Tessera voluntarily withdrew its three prior proofs of claim.

On January 26, 2010, Tessera filed its objection to Spansion’s Second Amended Joint Plan of Reorganization, asserting that the plan is not feasible and that it fails to provide for the payout of administrative expense claims on the plan effective date. On February 2, 2010, Tessera submitted three ballots, one for each previously submitted Proof of Claim. The ballots, among other things, rejected Spansion’s Second Amended Joint Plan of Reorganization.

 

24


 

On April 1, 2010, the Court issued its Order and Opinion on Confirmation in which, among other things, it denied Spansion’s request for plan confirmation due to, among other reasons, the failure to set aside a reserve for Tessera’s administrative expense claim in the amount of $4,232,986. 13. The Court overruled certain Tessera objections regarding irregularities in the plan voting solicitation and tabulation and Spansion’s failure to properly count Tessera’s three plan ballots. On April 7, 2010, Spansion filed an amended plan that included a reserve for the alleged administrative expense claim of Tessera in the amount of $4,232,986.13. On April 16, 2010, the Court issued its finding of facts, conclusions of law, and Order confirming the plan as amended. On May 10, 2010, the plan became effective.

On February 23, 2010, Tessera filed a motion for allowance and payment of its administrative expense claim in the amount of $96,765,070, as of January 29, 2010, plus all damages that arise from and after that date, with interest thereon. Spansion filed an objection to the Request for Administrative Expense Claim on March 16, 2010 and the Official Committee of Unsecured Creditors joined in Spansion’s objection on March 16, 2010.

On March 25, 2010, the parties reached a stipulation regarding the estimated amount of Tessera’s pre-petition claim. On May 26, 2010, the Court issued its Order approving the stipulation and estimating Tessera’s pre-petition claims in the amount of $130 million. In its June 15, 2010 Order, the Court disallowed two of Tessera’s Amended Proofs of Claim, leaving one proof of claim of not less than $219 million. On July 6, 2010, Spansion filed an objection to the remaining proof of claim.

On July 13, 2010, Spansion and Tessera filed joint motions seeking to withdraw the reference from the bankruptcy court insofar as it relates Tessera’s administrative expense claim and remaining proof of claim to the United States District Court for the District of Delaware and to transfer venue of that matter to the United States District Court for the Northern District of California where a prior matter between Tessera and Spansion is pending. At a hearing held on July 28, 2010, the Court indicated that it would approve an order permitting the parties to submit their joint motion to the United States District Court for the District of Delaware for determination. The parties filed the joint motion with the District Court that same date where it remains pending.

Amkor Technology, Inc. v. Tessera, Inc.

On or about August 7, 2009, Amkor filed a request for arbitration against the Company before the International Chamber of Commerce (“ICC”). The request, among other things, accuses the Company of interference with Amkor’s existing and prospective business relationships, of improperly claiming that Amkor had breached the parties’ license agreement, and of improperly threatening to terminate that agreement. Amkor seeks relief including judgment that it is in compliance with the license agreement and is a licensee in good standing under the license agreement; judgment that the license agreement remains in effect and no breach alleged by the Company against Amkor has terminated the License Agreement; judgment that Amkor’s method of calculating royalties on a going-forward basis complies with Amkor’s obligations under the license agreement; an injunction against the Company forbidding it from making statements to Amkor’s customers and potential customers inconsistent with the above; an injunction against the Company forbidding it from attempting to terminate the license agreement or threatening to terminate the license agreement during the arbitration or based on events occurring prior to the conclusion of the arbitration; a damage award against the Company for attorneys fees and costs to Amkor associated with this arbitration, together with all other damages resulting from the Company’s alleged acts of tortious interference and punitive damages; all other relief recoverable under the Rules of Arbitration of the ICC; such other and further relief as the arbitrators deem just and proper.

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

On January 15, 2010, Amkor filed its response to Tessera’s counterclaims, along with certain new counterclaims by Amkor and a motion for priority consideration of certain issues. In its responsive pleading, Amkor denied Tessera’s counterclaims, arguing in part that Tessera’s counterclaims for royalties are barred by the doctrines of collateral estoppel and res judicata, and sought a declaratory judgment that it has not infringed and that its packages are not made under any of the patents asserted in Tessera’s answer and that the patents are invalid and unenforceable. Tessera filed an answer denying Amkor’s counterclaims and a response to Amkor’s motion on February 12, 2010. Amkor also claims a credit for royalties it alleges it overpaid Tessera. On March 28, 2010, the arbitrators ruled on Amkor’s motion for priority consideration, holding that certain issues—including royalties payable on a going-forward basis for the patents addressed in the previous arbitration, including but not limited to royalties applicable to packages assembled for Qualcomm, Inc., and Tessera’s counterclaim for breach of the audit provision—would be considered in an early hearing which is currently scheduled to last two days starting on December 9, 2010. The arbitrators scheduled a two-week hearing on the remaining issues for August 15, 2011.

 

25


 

On May 14, 2010, Amkor filed a motion to bar Tessera’s counterclaims for royalties owed based on Amkor’s activities prior to December 1, 2008 as barred by the doctrine of res judicata. A hearing on Amkor’s motion occurred on August 25, 2010. A ruling on that motion has not yet been issued.

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

Tessera, Inc. v. UTAC (Taiwan) Corporation, Case No. CV10 4435 HRL (N.D. Cal.)

On September 30, 2010, Tessera filed a complaint against UTAC (Taiwan) Corporation (“UTAC Taiwan”) in the United States District Court for the Northern District of California. The case was initially assigned to Magistrate Judge Howard R. Lloyd and was reassigned to Judge Jeremy Fogel on October 8, 2010. Tessera’s complaint names as defendant UTAC Taiwan and alleges causes of action for breach of contract, declaratory relief, and breach of the implied covenant of good faith and fair dealing. The complaint requests of the Court, among other things, a judicial determination and declaration that UTAC Taiwan remains contractually obligated to pay royalties to Tessera, an accounting and restitution in an amount to be determined at trial, and an award of damages in an amount to be determined at trial, plus interest on damages, costs, disbursements, attorneys’ fees, and such other and further relief as the Court may deem just and proper. The case is in the pleading stage.

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

Tessera, Inc. v. Sony Electronics, Inc. et al., Case No. 1:99-mc-0999 (D. Del.)

On October 1, 2010, Tessera filed a complaint against Sony Electronics, Inc., Sony Corporation, and Renesas Electronics Corporation in the United States District Court for the District of Delaware. The case was assigned to Renee Marie Bumb of the District of New Jersey and then referred to Magistrate Judge Karen M. Williams in the same District. Tessera’s complaint alleges that defendants Sony Electronics, Inc., Sony Corporation, and Renesas Electronics Corporation infringed and are currently infringing, including by directly infringing, contributorily infringing and/or inducing infringement, U.S. Patent No. 6,885,106. The complaint requests of the Court, among other things, a judgment that the defendants willfully infringed, induced others to infringe, and/or committed acts of contributory infringement of one or more claims of the ‘106 patent; an order that defendants, their affiliates, subsidiaries, directors, officers, employees, attorneys, agents, and all persons in active concert or participation with any of them be preliminarily and permanently enjoined from further acts of infringement, inducing infringement, and contributory infringement of the ‘106 patent; an order for an accounting; and an award of damages that result from the defendants’ infringing acts, interest on damages, costs, expenses, attorneys’ fees and such other and further relief as the Court deems just and proper. The case is in the pleading stage.

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

NOTE 12 – SEGMENT AND GEOGRAPHIC INFORMATION

The Company has two reportable segments: Micro-electronics and Imaging and Optics. In addition to these reportable segments, the Corporate Overhead division includes certain operating amounts that are not allocated to the reportable segments because these operating amounts are not considered in evaluating the operating performance of the Company’s business segments.

The Micro-electronics segment is primarily composed of the Company’s licensing business in its core markets, including DRAM, Flash, SRAM, DSP, ASIC, ASSP, micro-controllers, general purpose logic and analog devices, and the Company’s development and licensing efforts in emerging areas of packaging, interconnect, miniaturization such as its µPILR™ platform, and thermal management technology.

The Imaging and Optics segment is composed of two elements. The first is the licensing business in the imaging and optics market, such as wafer-level image sensor packaging and image enhancement technologies. The second is the product and service business, which includes manufacturing small form factor micro-optics and non-recurring services such as engineering, design, assembly and infrastructure improvement.

The Chief Operating Decision Maker (“CODM”), as defined by the authoritative guidance on segment reporting, is the Company’s President and Chief Executive Officer.

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

 

26


 

The following table sets forth the Company’s segment revenues, operating expenses and operating income for the three and nine months ended September 30, 2010 and 2009 (in thousands):

 

     Three Months Ended     Nine Months Ended  
     September 30,
2010
    September 30,
2009
    September 30,
2010
    September 30,
2009
 

Revenues:

        

Micro-electronics:

        

Royalty and license fees

   $ 72,052      $ 59,060      $ 192,902      $ 221,199   

Product and service revenues

     —          3        —          48   
                                

Total Micro-electronics revenues

     72,052        59,063        192,902        221,247   

Imaging and Optics:

        

Royalty and license fees

     3,989        3,683        10,348        13,271   

Product and service revenues

     6,070        3,377        17,700        8,452   
                                

Total Imaging and Optics revenues

     10,059        7,060        28,048        21,723   
                                

Total revenues

     82,111        66,123        220,950        242,970   
                                

Operating expenses:

        

Micro-electronics Segment

     15,483        15,327        44,943        48,807   

Imaging and Optics Segment

     23,769        19,312        66,890        55,967   

Corporate overhead

     10,793        11,603        33,696        31,888   
                                

Total operating expenses

     50,045        46,242        145,529        136,662   

Operating income (loss):

        

Micro-electronics Segment

     56,569        43,736        147,959        172,440   

Imaging and Optics Segment

     (13,710     (12,252     (38,842     (34,244

Corporate overhead

     (10,793     (11,603     (33,696     (31,888
                                

Total operating income

   $ 32,066      $ 19,881      $ 75,421      $ 106,308   
                                

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

 

     Three Months Ended     Nine Months Ended  
     September 30,
2010
    September 30,
2009
    September 30,
2010
    September 30,
2009
 

Asia Pacific

   $ 55,973         68   $ 43,227         65   $ 144,016         65   $ 116,759         48

U.S.

     21,831         27     19,229         29     61,912         28     114,896         47

Europe and other

     4,307         5     3,667         6     15,022         7     11,315         5
                                                                    
   $ 82,111         100   $ 66,123         100   $ 220,950         100   $ 242,970         100
                                                                    

For the three months ended September 30, 2010, four customers each accounted for 10% or more of total revenues. For the three months ended September 30, 2009, three customers each accounted for 10% or more of total revenues. For the nine months ended September 30, 2010, three customers each accounted for 10% or more of total revenues. For the nine months ended September 30, 2009, three customers each accounted for 10% or more of total revenues.

 

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Net property and equipment are presented below by geographical area (in thousands):

 

     September 30 ,  
     2010      2009  

U.S.

   $ 45,855       $ 39,971   

Japan

     511         1,174   

Romania

     570         493   

Ireland

     354         487   

Israel and other

     278         304   
                 

Total

   $ 47,568       $ 42,429   
                 

 

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NOTE 13 – FINANCIAL INSTRUMENTS

The following is a summary of marketable securities at September 30, 2010 and December 31, 2009 (in thousands):

 

     September 30, 2010  
     Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair
Values
 

Available-for-sale securities

          

Commercial paper

   $ 120,280       $ 7       $ (14   $ 120,273   

Money market funds

     2,044         —           —          2,044   

Bank deposits

     2,181         —           —          2,181   

Corporate bonds and notes

     114,808         377         (24     115,161   

Treasury and agency notes and bills

     96,176         285         (3     96,458   

Municipal bonds and notes

     103,111         121         (19     103,213   

Asset-backed securities

     327         2         —          329   
                                  

Total available-for-sale securities

   $ 438,927       $ 792       $ (60   $ 439,659   

Reported in:

          

Cash and cash equivalents

           $ 85,350   

Short-term investments

             353,980   

Long-term investments

             329   
                

Total marketable securities

           $ 439,659   
                
     December 31, 2009  
     Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair
Values
 

Available-for-sale securities

          

Commercial paper

   $ 82,347       $ 7       $ (6   $ 82,348   

Money market funds

     13,971         —           —          13,971   

Bank deposits

     5,808         —           —          5,808   

Corporate bonds and notes

     84,245         452         (142     84,555   

Treasury and agency notes and bills

     59,680         62         (78     59,664   

Municipal bonds and notes

     119,886         168         (69     119,985   

Asset-backed securities

     1,642         —           (449     1,193   
                                  

Total available-for-sale securities

     367,579         689         (744     367,524   

Trading securities

          

Auction rate municipal bonds

     14,498         —           —          14,498   
                                  

Total marketable securities

   $ 382,077       $ 689       $ (744   $ 382,022   
                                  

Reported in:

          

Cash and cash equivalents

           $ 86,246   

Short-term investments

             280,085   

Long-term investments

             15,691   
                

Total marketable securities

           $ 382,022   
                

At September 30, 2010 and December 31, 2009, the Company held $474.0 million and $403.6 million in cash, cash equivalents, short-term and long-term investments, respectively. Of these amounts, the majority are held in marketable securities, as shown above. The remaining balances are generally cash held in operating accounts.

 

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Net unrealized gains of $0.7 million, net of tax, as of September 30, 2010, were related to a temporary increase in value of the remaining available-for-sale securities and were due primarily to changes in interest rates and market and credit conditions of the underlying securities. For certain investments with a temporary decline in value, because the Company has the ability to hold these investments to allow for recovery, does not anticipate having to sell these securities with unrealized losses and continues to receive interest at the maximum contractual rate, these investments are not considered to be other-than-temporarily impaired as of September 30, 2010. For the three and nine months ended September 30, 2010, the Company did not record any impairment charges. For the three and nine months ended September 30, 2009, the Company recorded impairment charges that decreased pre-tax income by $0.1 million and $1.7 million, respectively.

The gross realized losses on sales of marketable securities were $0.7 million and $1.2 million, respectively, for the three and nine months ended September 30, 2010, almost all of which were previously recorded as impairment. The gross realized gains on sales of marketable securities were not significant during the three and nine months ended September 30, 2010 and 2009.

In July 2010, the Company exercised the Rights as discussed below and received cash of $4.2 million for all of its auction rate municipal bond securities (“ARS”), which approximates the combined fair value of the ARS investment and the Rights. Consequently, at September 30, 2010, the Company had no ARS investments and had $0.3 million of asset-backed securities, including mortgage-backed securities (collectively, “ABS”) recorded at fair value. At December 31, 2009, the Company had $15.7 million of ARS and ABS investments recorded at fair value.

Prior to the first quarter of 2008, ARS and ABS investments were presented as current assets under short-term investments based on their expected maturities. Beginning with the first quarter of 2008, given the lack of active markets for these investments, the entire amount of the Company’s ARS and ABS holdings were classified as long-term investments. Due to the lack of observable market quotes on the Company’s ARS and ABS investments, the Company utilizes valuation models that rely exclusively on unobservable inputs including those that are based on a discounted cash flow model and assessments of counterparty credit quality, default risk underlying the security, discount rates and overall capital market liquidity.

In November 2008, the Company entered into an agreement with UBS which granted the Company and UBS various rights, including a right of the Company to sell the Company’s ARS investments to UBS at par value at any time during a two-year period beginning June 30, 2010 (the “Rights”) and a right of UBS to purchase such securities at par value. The Rights are an unsecured obligation of UBS and are not transferable by the Company. The Company has elected to record the Rights, a free-standing asset aside from the ARS investments, under the provisions of the guidance for the fair value option for financial assets and financial liabilities. Upon acceptance of the Rights, the Company recorded the fair value of the Rights in other assets with an offsetting entry to other income and expense, net. In conjunction with the acceptance of the Rights in November 2008, the Company reclassified the ARS investments from available-for-sale to trading to reflect its intention to exercise the Rights during the relevant two-year period. As a trading security, unrealized gains and losses are recorded in current period earnings. For the nine months ended September 30, 2010, the Company recorded $1.1 million of unrealized gains in relation to the change in the fair value of the ARS investment and an offsetting entry of $1.1 million related to the change in fair value of the Rights to other assets. For the year ended December 31, 2009, the Company recorded $2.8 million of unrealized gains in relation to the change in the fair value of the ARS investment and an offsetting entry of approximately $2.8 million related to the change in fair value of the Rights to other assets. The fair value of the Rights was based on the Company’s expected value to be received from UBS, which was the difference between par and fair value of the ARS at the end of the period. The fair value was discounted using UBS’s credit default swap rate to account for the counterparty risk.

The following table summarizes the fair value and gross unrealized losses related to individual available-for-sale securities at September 30, 2010 and available-for-sale and trading securities at December 31, 2009, which have been in a continuous unrealized loss position, aggregated by investment category and length of time (in thousands):

 

September 30, 2010

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

Commercial Paper

   $ 99,093       $ (14   $ —         $ —        $ 99,093       $ (14

Municipal bonds and notes

     28,375         (19     —           —          28,375         (19

Corporate bonds and notes

     19,134         (21     1,348         (3     20,482         (24

Treasury and agency notes and bills

     17,750         (3     —           —          17,750         (3

Asset-backed securities

     —           —          202         —          202         —     
                                                   

Total

   $ 164,352       $ (57   $ 1,550       $ (3   $ 165,902       $ (60
                                                   

 

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December 31, 2009

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

Commercial Paper

   $ 29,024       $ (6 )   $ —         $ —        $ 29,024         (6 )

Corporate bonds and notes

     27,158         (124 )     3,285         (18 )     30,443         (142 )

Treasury and agency notes and bills

     21,454         (78 )     —           —          21,454         (78 )

Municipal bonds and notes

     45,380         (69 )     —           —          45,380         (69 )

Asset-backed securities

     90         (50 )     1,103         (399 )     1,193         (449 )

Auction rate municipal bonds

     —           —          14,498         —          14,498         —     
                                                   

Total

   $ 123,106       $ (327 )   $ 18,886       $ (417 )   $ 141,992       $ (744 )
                                                   

The estimated fair value of marketable securities by contractual maturity at September 30, 2010 is shown below (in thousands). Asset-backed securities are excluded as they do not have a single maturity date. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.

 

     Estimated
Fair Value
 

Due in one year or less

   $ 282,505   

Due in one to two years

     156,825   
        

Total

   $ 439,330   
        

NOTE 14 – FAIR VALUE

The Company follows the authoritative guidance for fair value measurements and the fair value option for financial assets and financial liabilities. The guidance for fair value measurements establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. The guidance for the fair value option for financial assets and financial liabilities provides companies the irrevocable option to measure many financial assets and liabilities at fair value with changes in fair value recognized in earnings. In November 2008, the Company elected to record the Rights related to the ARS invested with UBS, as discussed above, at fair value under the provisions of the guidance for the fair value option for financial assets and financial liabilities. In July 2010, the Company exercised the Rights and received cash of $4.2 million, which approximates the combined fair value of the ARS investments and the Rights.

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

 

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

 

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The following is a list of the Company’s assets and liabilities required to be measured at fair value on a recurring basis and where they are classified within the hierarchy as of September 30, 2010 (in thousands):

 

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

(Level 2)
     Significant
Unobservable
Inputs

(Level 3 )
 

Assets

           

Money market funds (1)

   $ 2,044       $ 2,044       $ —         $ —     

Bank deposits (1)

     2,181         2,181         —           —     

Commercial paper (2)

     120,273         —           120,273         —     

Municipal bonds and notes (2)

     103,213         —           103,213         —     

Corporate bonds and notes (3)

     115,161         —           115,161         —     

Treasury and agency notes and bills (3)

     96,458         —           96,458         —     

Asset-backed securities (4)

     329         —           —           329   
                                   

Total Assets

   $ 439,659       $ 4,225       $ 435,105       $ 329   
                                   

 

The following footnotes indicate where the noted items are recorded in the Condensed Consolidated Balance Sheet at September 30, 2010:

 

(1) Money market funds and bank deposits are reported as cash and cash equivalents.
(2) Commercial paper and municipal bonds and notes are reported as either cash and cash equivalents or short-term investments.
(3) Corporate bonds and notes and treasury and agency notes and bills are reported as short-term investments.
(4) Asset-backed securities are reported as long-term investments.

The following is a list of the Company’s assets and liabilities required to be measured at fair value on a recurring basis and where they are classified within the hierarchy as of December 31, 2009 (in thousands):

 

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

Assets

           

Money market funds (1)

   $ 13,971       $ 13,971       $ —         $ —     

Bank deposits (1)

     5,808         5,808         —           —     

Commercial paper (2)

     82,348         —           82,348         —     

Corporate bonds and notes (2)

     84,555         —           84,555         —     

Municipal bonds and notes (3)

     119,985         —           119,985         —     

Treasury and agency notes and bills (3)

     59,664         —           59,664         —     

Asset-backed securities (4)

     1,193         —           —           1,193   

Auction rate municipal bonds (4)

     14,498         —           —           14,498   
                                   

Total marketable securities

     382,022         19,779         346,552         15,691   

Rights related to the UBS agreement (5)

     1,127         —           —           1,127   
                                   

Total Assets

   $ 383,149       $ 19,779       $ 346,552       $ 16,818   
                                   

 

The following footnotes indicate where the noted items are recorded in the Condensed Consolidated Balance Sheet at December 31, 2009:

 

(1) Money market funds and bank deposits are reported as cash and cash equivalents.
(2) Commercial paper and corporate bond and notes are reported as either cash and cash equivalents or short-term investments.
(3) Municipal bonds and notes and treasury and agency notes and bills are reported as short-term investments.
(4) Asset-backed securities and auction rate municipal bond securities are reported as long-term investments.
(5) Rights related to the UBS agreement are reported as other assets.

The Company’s ARS and ABS holdings have been classified as Level 3 long-term investments due to the lack of active markets for these investments. For the valuation of the Company’s ARS and ABS investments, the Company utilizes valuation models that rely exclusively on unobservable inputs including those that are based on a discounted cash flow model and assessments of counterparty credit quality, default risk underlying the security, discount rates and overall capital market liquidity. Also included in the Level 3 classification is the fair value of the Rights related to UBS agreement. See Note 13 – “Financial Instruments” above for further information.

 

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The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2010 (in thousands):

 

     Rights
(Level 3)
    Available-for-sale
and  trading
securities
(Level 3)
    Total
(Level 3)
 

Balance at December 31, 2009

   $ 1,127      $ 15,691      $ 16,818   

Purchases, sales, issuances and settlements, net

     —          (17,549     (17,549

Total gains or losses (realized and unrealized):

      

Included in earnings

     (1,127     1,595        468   

Included in other comprehensive income

     —          592        592   

Transfers in/(out) of Level 3

     —          —          —     
                        

Balance at September 30, 2010

   $ —        $ 329      $ 329   
                        

NOTE 15 – RELATED PARTY TRANSACTION

In September 2007, the Company licensed its OptiML Wafer-Level Camera technology and SHELLCASE Wafer-Level Packaging solutions to NemoTek Technologie S. A. (“NemoTek”), a supplier of camera solutions for the cell phone market. As of September 30, 2010 and December 31, 2009, the Company had invested a total of $2.0 million and $1.9 million in NemoTek, respectively, which represented less than a 10 percent holding in NemoTek. Revenues from NemoTek were $0.3 million, or less than one percent of total revenues, for the three and nine months ended September 30, 2010. There were no revenues from NemoTek for the three months ended September 30, 2009. Revenues from Nemo Tek were $1.1 million, or less than one percent of total revenues, for the nine months ended September 30, 2009. The accounts receivable balance from NemoTek was $0.1 million and $0.3 million as of September 30, 2010 and December 31, 2009, respectively.

NOTE 16 – SUBSEQUENT EVENT

On October 27, 2010, in connection with the cessation of development activity of Wafer-level Optics technology, the Company concluded that certain equipment would be disposed of by sale. As a result, the Company will recognize an impairment charge of between $3 million and $4 million to write-off the net carrying value of the equipment which will be classified as assets-held-for-sale. The Company will recognize this charge in the quarter ending December 31, 2010 and expects that this charge will result in future cash expenditures of between $0.1 million to $0.2 million.

 

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GLOSSARY OF TERMS

The following select abbreviations or acronyms are used within Part I, Item 2— Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part II, Item 1A— Risk Factors in this Quarterly Report on Form 10-Q:

 

Abbreviation or Acronym

  

Definition

3D

   3 dimensional

ASIC

   Application-specific integrated circuits

ASSP

   Application-specific standard product semiconductors

CSP

   Chip-scale packaging

DDR2

   Double-data-rate two

DDR3

   Double-data-rate three

DDR4

   Double-data-rate four

DRAM

   Dynamic random access memory

DSP

   Digital signal processors

EDOF

   Extended depth of field

IC

   Integrated circuits

IP

   Intellectual property

MEMS

   Micro electro mechanical systems

NAND

   Not And Flash memory

NOR

   Not Or Flash memory

RTL

   Register transfer level

SRAM

   Static random access memory

TCC

   Tessera Compliant Chip

VGA

   Video graphics array

 

34


 

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

The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto, and with our audited financial statements and notes thereto for the fiscal year ended December 31, 2009 found in our Annual Report on Form 10-K, filed on February 25, 2010.

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

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

 

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Corporate Information

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

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

In this Quarterly Report, the “Company,” “Tessera,” “we,” “us” and “our” refer to Tessera Technologies, Inc. and its subsidiaries on a consolidated basis.

Business Overview

Tessera is a technology innovator that invests in, licenses and delivers innovative miniaturization technologies for next-generation electronic devices. Our Micro-electronics solutions enable smaller, higher-functionality devices through chip-scale, 3 dimensional (“3D”) and wafer-level packaging technology, as well as high-density substrate and thermal management technology. Our Imaging & Optics solutions provide low-cost, high-quality camera functionality in electronic products and include image sensor packaging, wafer-level optics, and image enhancement intellectual property. We also offer customized micro-optic lenses, from diffractive and refractive optical elements to integrated micro-optical subassemblies. We license our technologies worldwide, as well as deliver products based on these technologies, some of which is done to promote the development of supply chain infrastructure.

Our patent portfolio includes more than 2,075 domestic and internationally issued patents and patent applications, covering a range of advanced semiconductor packaging, substrate, interconnect, imaging and optics, and thermal management technologies.

We have two reportable segments: Micro-electronics and Imaging and Optics. The Micro-electronics segment is primarily composed of our licensing business in our core markets, including DRAM, Flash, SRAM, DSP, ASIC, ASSP, micro-controllers, general purpose logic and analog devices, and our development and licensing efforts in emerging areas of packaging, interconnect, miniaturization such as our µPILR™ platform, and thermal management technology.

The Imaging and Optics segment is composed of two elements. The first is our licensing business in the imaging and optics market, such as our wafer-level image sensor packaging and image enhancement technologies. The second is our product and service business, which includes manufacturing small form factor micro-optics, MEMS-based products and non-recurring services such as engineering, design, assembly and infrastructure improvement.

We derive the majority of our revenues from license fees and royalties associated with our Micro-electronics technology, with a growing contribution from our Imaging & Optics technologies. Our Micro-electronics packaging technologies have been widely adopted and aspects of our technologies have been licensed to more than 70 companies, including Motorola, Inc., Intel Corporation, Hynix Semiconductor, Inc., Renesas Technology Co., Samsung Electronics Co., Ltd., Sharp Corporation, Powertech Technology, Inc., Texas Instruments, Inc. and Toshiba Corporation. We believe that more than 100 companies across the semiconductor supply chain have invested in the materials, equipment and assembly infrastructure needed to manufacture products incorporating our packaging technology.

Our Technologies

We develop, license and manufacture technologies in two key areas:

 

  Micro-electronics— including semiconductor packaging technologies encompassing interconnect and substrates, and thermal management technology; and

 

  Imaging & Optics— including wafer-level packaging, wafer-level optics, image enhancement technologies, including MEMS-based products, and micro-optics.

Micro-electronics Technologies

In the early 1990s, Tessera’s founders invented packaging technology which is now widely used throughout the semiconductor industry. Our innovations include the industry’s first chip-scale packaging technology. Our chip scale packaging technology also supports a variety of multi-chip packaging implementations, which satisfy the diverse requirements for stacked, Package-on-Package and System-in-Package designs. Our packaging technologies are widely used today in high volume packaging for a full range of integrated circuits (“ICs”). A few examples are listed below.

 

  High performance dynamic random access memory (“DRAM”) chips, such as:

 

  Double-Data-Rate two (“DDR2”); and

 

36


 

  Double-Data-Rate three (“DDR3”)

 

  Other memory chips, such as:

 

  Not Or (“NOR”) and Not And (“NAND”) Flash memory; and

 

  Static random access memory (“SRAM”)

 

  Application-specific integrated circuits (“ASICs”) and application-specific standard product semiconductors (“ASSPs”), such as:

 

  Baseband processors;

 

  Radio Frequency transceivers;

 

  Audio/video/image processors;

 

  Power management; and

 

  Connectivity (Bluetooth, Wi-Fi, Global Positioning System among others)

 

  General purpose ICs, such as:

 

  Microcontrollers;

 

  Digital Signal Processors (“DSPs”); and

 

  Analog

We are also applying our industry-leading miniaturization expertise to thermal management solutions. We are developing a unique silent air cooling technology that we believe enables more efficient heat dissipation than what is currently provided by traditional fans or other air cooling methods.

Imaging & Optics Technologies

Advancements in Imaging & Optics technologies are enabling higher quality images in considerably smaller digital still cameras and other camera-enabled devices including cell phones, security systems and personal computers. Our portfolio of imaging and optics technologies include the following:

 

  Wafer-level Packaging technologies used in image sensor packaging:

 

  SHELLCASE MVP is one of the industry’s first available through silicon via technology. It uses a glass-silicon sandwich structure, which enables image-sensing capabilities through the actual packaging structure;

 

  Wafer-level Optics technology, which enables the manufacturing and assembly of lens modules:

 

  we currently have two licensees and do not have plans to seek additional licensees or continue further development;

 

  Optical Image Enhancement technologies, which improve the quality of captured cell phone images:

 

  OptiML Focus enables a high-quality image to be simultaneously brought into focus;

 

  OptiML UFL improves low-light performance;

 

  OptiML Zoom, our first combination Optical and Embedded Image Enhancement technology, offers 3X zoom capabilities; and

 

  MEMS-based single-chip solutions enables auto focus functionality and image quality comparable with digital still cameras.

 

  Embedded Image Enhancement technologies, which provide a portfolio of in-camera image enhancement solutions for digital photos:

 

  OptiML Red-Eye automatically detects and removes red- and golden-eye defects;

 

  OptiML Face Tools provide face-oriented imaging technology such as face tracking/detection, smile/blink detection, face recognition and face beautification;

 

  OptiML Video Tools, which provide video image stabilization and video face beautification capabilities for mobile devices such as camera phones, pocket camcorders and digital still cameras;

 

  Micro-optics, which are small form factor optics developed and delivered on a variety of substrates, on one or both surfaces of a wafer and in multi-wafer forms:

 

  Digital Optics solutions include diffractive optical elements, such as the lenses used in off-axis illumination for lithography; refractive optical elements, such as lens arrays; and integrated micro-optical subassemblies, such as optical and electro-optic modules.

 

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Our Products and Solutions

Within our Imaging and Optics segment, we develop and manufacture imaging and optics solutions as well as provide services to our licensees to shorten their development effort and time to market. We manufacture small form factor micro-optics solutions using our wafer-level processes and equipment, targeted at three main markets: lithography, communications and barcode scanners.

Acquisitions

We have grown our business partly through acquisitions. On May 5, 2010, we completed the acquisition of Siimpel Corporation (“Siimpel”), a developer and manufacturer of MEMS-based camera solutions for mobile imaging applications for $15.0 million. Siimpel’s MEMS-based auto focus and auto focus shutter solutions complement our EDOF technology and enables us to offer a wider range of high-value IP-based imaging and optics solutions. We expect the acquisition will have modest impact on our operating expenses and we do not anticipate revenue from MEMS-based products in this fiscal year. The impact of the acquisition on our financial results has been included in the following discussion.

Results of Operations

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

 

     Three Months Ended     Nine Months Ended  
     September 30,
2010
    September 30,
2009
    September 30,
2010
    September 30,
2009
 

Revenues:

        

Royalty and license fees

     93     95     92     97

Product and service revenues

     7        5        8        3   
                                

Total revenues

     100        100        100        100   

Operating expenses:

        

Cost of revenues

     7        6        8        5   

Research, development and other related costs

     25        26        25        21   

Selling, general and administrative costs

     23        29        26        22   

Litigation expense

     6        9        7        8   
                                

Total operating expenses

     61        70        66        56   

Operating income

     39        30        34        44   

Other income and expense, net

     1        1        1        2   
                                

Income before taxes

     40        31        35        46   

Provision for income taxes

     17        13        15        20   
                                

Net income

     23     18     20     26
                                

Revenues

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

 

38


 

In 2005, we provided two major DRAM manufacturers with first-mover pricing advantages with respect to royalties due to us under their respective TCC licenses based on several factors, including volumes. The effect of the volume pricing adjustments may cause, at certain high shipment volumes and for these two DRAM manufacturers only, our aggregate annual DRAM royalty revenues to grow less rapidly than annual growth in overall unit shipments in the DRAM segment. An additional effect may include some quarter-to-quarter fluctuations in growth in our revenues from the DRAM segment, depending on the relative DRAM market share enjoyed by these two DRAM manufacturers in a given calendar quarter and their royalty payments within a calendar year.

Some of our license agreements have fixed terms. We will need to renew or relicense our license agreements with fixed terms prior to the expiration of such license agreements in order to extend those terms. Based on various factors including the technology and business needs of our licensees, we may not be able to renew or relicense such license agreements on terms favorable to us, or at all. We have expanded our licensable technology portfolio through internal development and acquisitions from third parties, but there is no guarantee that these measures will meet the technology and business needs of our licensees. In order to maintain existing relationships with some of our licensees, we may be forced to renew or relicense our license agreements on terms that are more favorable to such licensees

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

 

     Three Months Ended              
     September 30,
2010
    September 30,
2009
    Increase/
(Decrease)
    %
Change
 

Royalty and license fees

   $ 76,041         93   $ 62,743         95   $ 13,298        21

Product and service revenues

     6,070         7        3,380         5        2,690        80   
                                                  

Total revenues

   $ 82,111         100   $ 66,123         100   $ 15,988        24
                                                  
     Nine Months Ended              
     September 30,
2010
    September 30,
2009
    Increase/
(Decrease)
    %
Change
 

Royalty and license fees

   $ 203,250         92   $ 234,470         97   $ (31,220     (13 )% 

Product and service revenues

     17,700         8        8,500         3        9,200        108   
                                                  

Total revenues

   $ 220,950         100   $ 242,970         100   $ (22,020     (9 )% 
                                                  

Revenues for the three months ended September 30, 2010 were $82.1 million as compared to $66.1 million for the three months ended September 30, 2009, an increase of $16.0 million, or 24%. The overall increase in revenues in the three months ended September 30, 2010 as compared to the same period in 2009 was primarily due to strong royalties reported from licensees in the DRAM market and in the semiconductor market, a $6.0 million payment for past royalties under a $15.0 million litigation settlement with United Test Assembly Center Ltd. (“UTAC”), with the remaining payment due from UTAC in the fourth quarter of 2010, and increased demand for our Micro-optics products in the photolithography industry.

Revenues for the nine months ended September 30, 2010 were $221.0 million as compared to $243.0 million for the nine months ended September 30, 2009, a decrease of $22.0 million, or 9%. The overall decrease in revenues in the nine months ended September 30, 2010 as compared to the same period in 2009 was primarily due to non-recurring royalty revenues of $60.6 million from Amkor Technology, Inc. in February 2009, awarded by an arbitration panel for Amkor’s material breach of its license agreement with Tessera. Excluding this award, revenues for the nine months ended September 30, 2010 were up $38.6 million, or 21%, as compared to the nine months ended September 30, 2009. The increase was due to strong royalties reported from our TCC licensees, a $9.0 million payment for past royalties under a $15.0 million litigation settlement with UTAC, with UTAC being required to pay the remaining $6.0 million in the fourth quarter of 2010, with the remaining payment due from UTAC in the fourth quarter of 2010, and increased demand for our Micro-optics products in the photolithography industry, offset in part by non-recurring option and license fees received from Motorola, a former defendant in an ITC infringement case, in the nine months ended September 30, 2009.

Cost of Revenues

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

 

39


 

Cost of revenues for the three months ended September 30, 2010 was $5.4 million, as compared to $3.9 million for the three months ended September 30, 2009, an increase of $1.5 million, or 39%. Cost of revenues for the nine months ended September 30, 2010 was $16.5 million, as compared to $11.9 million for the nine months ended September 30, 2009, an increase of $4.6 million, or 38%. The increase was primarily attributable to the increase in production expenses related to increased Micro-optics sales, such as personnel related expenses and material costs.

Research, Development and Other Related Costs

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

Research, development and other related costs for the three months ended September 30, 2010 were $20.8 million, an increase of $4.0 million, or 24%, as compared to $16.8 million for the three months ended September 30, 2009. The increase was primarily due to $1.9 million of expenses incurred by Siimpel, acquired in May 2010, and increases in stock-based compensation expense of $0.6 million and increases in legal expenses incurred for patent related activities of $0.6 million. Research, development and other related costs for the nine months ended September 30, 2010 were $54.9 million, an increase of $4.6 million, or 9%, as compared to $50.3 million for the nine months ended September 30, 2009. The increase was primarily due to $3.5 million of expenses incurred by Siimpel, acquired in May 2010, and increases in legal expenses incurred for patent related activities of $1.5 million, offset by a reduction in stock-based compensation expense of $0.3 million.

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

Selling, General and Administrative

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

Selling, general and administrative (“SG&A”) expenses for the three months ended September 30, 2010 were $19.0 million, a decrease of $0.5 million, or 2%, as compared to $19.5 million for the three months ended September 30, 2009. The decrease was primarily attributable to decreases in legal services of $1.0 million, offset by $0.4 million of expenses incurred by Siimpel, acquired in May 2010. Selling, general and administrative expenses for the nine months ended September 30, 2010 were $58.4 million, an increase of $4.2 million, or 8%, as compared to $54.2 million for the nine months ended September 30, 2009. The increase was primarily attributable to an increase in amortization of acquired intangible assets of $1.8 million, personnel related expenses of $1.2 million, stock-based compensation expense of $1.0 million, and the inclusion of $0.7 million of expenses incurred by Siimpel, acquired in May 2010.

Litigation Expense. Litigation expense for the three months ended September 30, 2010 was $4.8 million, as compared to $6.1 million for the three months ended September 30, 2009, a decrease of $1.3 million, or 22%. Litigation expense for the nine months ended September 30, 2010 was $15.7 million, as compared to $20.2 million for the nine months ended September 30, 2009, a decrease of $4.5 million, or 22%. The decreases in both the three and nine month periods were primarily attributable to a decrease in case activities in our legal proceedings related to the International Trade Commission and to the UTAC litigation, as a settlement was reached with UTAC in early 2010, offset by legal proceedings related to our arbitration with Amkor. Refer to Part II, Item 1—Legal Proceedings for additional details.

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

 

40


 

Stock-based Compensation Expense

The effect of recording stock-based compensation expense for the three and nine months ended September 30, 2010 and 2009 is as follows (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,
2010
     September 30,
2009
     September 30,
2010
     September 30,
2009
 

Cost of revenues

   $ 136       $ 199       $ 432       $ 450   

Research, development and other related costs

     2,960         2,379         8,210         8,489   

Selling, general and administrative

     3,798         4,312         12,529         11,498   
                                   

Total stock-based compensation expense

   $ 6,894       $ 6,890       $ 21,171       $ 20,437   
                                   

Stock-based compensation expense categorized by various equity components for the three and nine months ended September 30, 2010 and 2009 is summarized in the table below (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,
2010
     September 30,
2009
     September 30,
2010
     September 30,
2009
 

Employee stock options

   $ 3,428       $ 4,152       $ 11,230       $ 12,106   

Restricted stock awards and units

     2,918         2,298         8,299         7,016   

Employee stock purchase plan

     548         440         1,642         1,315   
                                   

Total stock-based compensation expense

   $ 6,894       $ 6,890       $ 21,171       $ 20,437   
                                   

Stock-based compensation awards included employee stock options, restricted stock awards and units and employee stock purchases under our 2003 Employee Stock Purchase Plan. Stock-based compensation expense for the three months ended September 30, 2010 and 2009 was $6.9 million for both periods. Stock-based compensation expense for the nine months ended September 30, 2010 and 2009 was $21.2 million and $20.4 million, respectively. The overall increase in the nine months ended September 30, 2010 was primarily related to an increase in grants of stock awards to employees based on our compensation incentive program and additional stock-based compensation expense resulting from modification of stock awards to employees terminated from the company. Future stock-based compensation expense and unrecognized stock-based compensation expense will increase as we grant additional stock awards.

Other Income and Expense, Net

Other income and expense, net for the three months ended September 30, 2010 was $0.7 million, as compared to $0.6 million, for the three months ended September 30, 2009. Other income and expense, net for the nine months ended September 30, 2010 was $1.7 million, as compared to $4.4 million, for the nine months ended September 30, 2009. The increase from the three months ended September 30, 2009 was mainly due to an increase in interest income on our investments, as a result of a higher average balance of cash, cash equivalents and investments as compared to the same period in 2009. The decrease from the nine months ended September 30, 2009 was attributable to a non-recurring $3.5 million interest payment from Amkor, received in February 2009 as part of the $64.1 million awarded by an arbitration panel for Amkor’s breach of its license agreement, offset by a $1.7 million other-than-temporary write-down of our asset-backed securities in the same period in 2009 and a decrease in interest income on our investments as a result of lower prevailing interest rates as compared to the same period in 2009.

Provision for Income Taxes

The provision for income taxes for the three and nine months ended September 30, 2010 was $13.8 million and $33.3 million, respectively, and was comprised of domestic income tax and foreign income and withholding tax. The provision for income taxes for the three and nine months ended September 30, 2009 was $8.3 million and $47.3 million, respectively, and was comprised of domestic income tax and foreign income and withholding tax. The increase in the provision for income taxes from the three months ended September 30, 2009 was primarily attributable to the increase in domestic pre-tax income for the period offset by the effect of the reduced benefit for domestic research and foreign tax credits. The decrease in the provision for income taxes from the nine months ended September 30, 2009 was primarily attributable to the decrease in domestic pre-tax income for the period due to income taxes related to the $64.1 million settlement received from Amkor in February 2009.

Segment Operating Results

We have two reportable segments: Micro-electronics and Imaging and Optics. In addition to these reportable segments, the Corporate Overhead division includes certain operating amounts that are not allocated to the reportable segments because these operating amounts are not considered in evaluating the operating performance of our business segments.

 

41


 

The Micro-electronics segment is primarily composed of the licensing business in our core markets, including DRAM, Flash, SRAM, DSP, ASIC, ASSP, micro-controllers, general purpose logic and analog devices, and our development and licensing efforts in emerging areas of packaging, interconnect, miniaturization such as our µPILR™ platform, and thermal management technology.

The Imaging and Optics segment is composed of two elements. The first is our licensing business in the imaging and optics market, such as our wafer-level image sensor packaging and image enhancement technologies. The second is our product and service business, which includes manufacturing small form factor micro-optics and non-recurring services such as engineering, design, assembly and infrastructure improvement.

Our reportable segments were determined based upon the manner in which our management views and evaluates our operations. Segment information below and in Note 12 of the Notes to Condensed Consolidated Financial Statements is presented in accordance with the authoritative guidance on segment reporting.

The following table sets forth our segments’ revenues, operating expenses and operating income (loss) (in thousands):

 

     Three Months Ended     Nine Months Ended  
     September 30,
2010
    September 30,
2009
    September 30,
2010
    September 30,
2009
 

Revenues:

        

Micro-electronics:

        

Royalty and license fees

   $ 72,052      $ 59,060      $ 192,902      $ 221,199   

Product and service revenues

     —          3        —          48   
                                

Total Micro-electronics revenues

     72,052        59,063        192,902        221,247   

Imaging and Optics:

        

Royalty and license fees

     3,989        3,683        10,348        13,271   

Product and service revenues

     6,070        3,377        17,700        8,452   
                                

Total Imaging and Optics revenues

     10,059        7,060        28,048        21,723   
                                

Total revenues

     82,111        66,123        220,950        242,970   
                                

Operating expenses:

        

Micro-electronics Segment

     15,483        15,327        44,943        48,807   

Imaging and Optics Segment

     23,769        19,312        66,890        55,967   

Corporate overhead

     10,793        11,603        33,696        31,888   
                                

Total operating expenses

     50,045        46,242        145,529        136,662   

Operating income (loss):

        

Micro-electronics Segment

     56,569        43,736        147,959        172,440   

Imaging and Optics Segment

     (13,710     (12,252     (38,842     (34,244

Corporate overhead

     (10,793     (11,603     (33,696     (31,888
                                

Total operating income

   $ 32,066      $ 19,881      $ 75,421      $ 106,308   
                                

The revenues and operating income amounts in this section have been presented on a basis consistent with U.S. GAAP applied at the segment level. Corporate overhead expenses which have been excluded at the segment level are primarily support services, human resources, legal, finance, IT, corporate development, procurement activities, and insurance expenses. For the three months ended September 30, 2010, corporate overhead expenses were $10.8 million compared to $11.6 million for the three months ended September 30, 2009. The decrease of $0.8 million from the three months ended September 30, 2009 was mainly attributable to a decrease of $0.9 million in legal and consulting expenses. For the nine months ended September 30, 2010, corporate overhead expenses were $33.7 million compared to $31.9 million for the nine months ended September 30, 2009. The increase of $1.8 million from the nine months ended September 30, 2009 was mainly attributable to an increase of $1.4 million in stock-based compensation expense, $0.4 million in depreciation expense, and $0.3 million in personnel related expenses, offset by a decrease in marketing-related expenses of $0.8 million.

 

42


 

Micro-electronics Segment

 

     Three Months Ended      Nine Months Ended  
     September 30,
2010
     September 30,
2009
     September 30,
2010
     September 30,
2009
 

Micro-electronics:

           

Revenues:

           

Royalty and license fees

   $ 72,052       $ 59,060       $ 192,902       $ 221,199   

Product and service revenues

     —           3         —           48   
                                   

Total Micro-electronics revenues

     72,052         59,063         192,902         221,247   

Operating expenses:

           

Cost of revenues

     5         104         9         382   

Research, development and other related costs

     7,921         6,711         21,277         21,534   

Selling, general and administrative

     2,836         2,446         8,299         6,662   

Litigation expense

     4,721         6,066         15,358         20,229   
                                   

Total operating expenses

     15,483         15,327         44,943         48,807   
                                   

Total operating income

   $ 56,569       $ 43,736       $ 147,959       $ 172,440   
                                   

Micro-electronics revenues for the three months ended September 30, 2010 were $72.1 million as compared to $59.1 million for the three months ended September 30, 2009, which represented an increase of $13.0 million, or 22%. The increase was primarily attributed to strong royalties reported from licensees in the DRAM market and unit growth in the semiconductor market, a $6.0 million payment for past royalties under a $15.0 million litigation settlement with UTAC, with the remaining payment due from UTAC in the fourth quarter of 2010.

Micro-electronics revenues for the nine months ended September 30, 2010 were $192.9 million as compared to $221.2 million for the nine months ended September 30, 2009, which represented a decrease of $28.3 million, or 13%. The overall decrease in revenues in the nine months ended September 30, 2010 as compared to the same period in 2009 was primarily due to non-recurring royalty revenues of $60.6 million from Amkor Technology, Inc. in February 2009, awarded by an arbitration panel for Amkor’s material breach of its license agreement with Tessera. Excluding this award, revenues for the nine months ended September 30, 2010 were up $32.3 million, or 20%, as compared to the nine months ended September 30, 2009. The increase was due to strong royalties reported from our TCC licensees and a $9.0 million payment for past royalties under a $15.0 million litigation settlement with UTAC, with the remaining payment due from UTAC in the fourth quarter of 2010, offset in part by non-recurring option and license fees received from Motorola, a former defendant in an ITC infringement case, in the nine months ended September 30, 2009.

Micro-electronics revenues consist primarily of royalties received from our TCC licensees. Such royalty revenues are distributed between two primary market segments: DRAM and Wireless. In 2005, we provided two major DRAM manufacturers with first-mover pricing advantages in respect of royalties due to us under their respective TCC licenses, based on several factors including volumes. The effect of the volume pricing adjustments may cause, at certain high shipment volumes and for these two DRAM manufacturers only, our aggregate annual DRAM royalty revenues to grow less rapidly than annual growth in overall unit shipments in the DRAM segment. An additional effect may include, depending on the relative DRAM market share enjoyed by these two DRAM manufacturers in a given calendar quarter as well as the timing of when they reach the volume pricing incentive, some quarter-to-quarter and year-to-year fluctuations in the growth in our revenues from the DRAM segment. We have no other contracts that provide volume-based pricing adjustments.

 

43


 

Operating expenses for the three months ended September 30, 2010 were $15.5 million and consisted primarily of research, development and other related costs of $7.9 million, SG&A expenses of $2.9 million and $4.7 million in litigation expense. Operating expenses for the three months ended September 30, 2010 of $15.5 million represented an increase of $0.2 million as compared to $15.3 million for the three months ended September 30, 2009, which was primarily attributable to an increase of $0.7 in legal services, $0.6 million in amortization expense and $0.6 million in personnel related expenses of $0.6 million, offset by a decrease in litigation expense of $1.3 million.

Operating expenses for the nine months ended September 30, 2010 were $44.9 million and consisted primarily of research, development and other related costs of $21.3 million, SG&A expenses of $8.2 million and $15.4 million in litigation expense. Operating expenses for the nine months ended September 30, 2010 of $44.9 million represented a decrease of $3.9 million as compared to $48.8 million for the nine months ended September 30, 2009, which was primarily attributable to a decrease in litigation expense of $4.9 million and in stock-based compensation expense of $1.2 million, offset by an increase of $1.7 million in amortization expense and $0.4 million in personnel related expenses.

We expect that litigation expense will continue to be a material portion of the Micro-electronics segment’s operating expenses in future periods, and may fluctuate significantly in some periods, because of our ongoing legal actions, as described in Part II, Item 1— Legal Proceedings, and because we expect that we will become involved in other litigation from time to time in the future in order to enforce and protect our intellectual property rights.

Operating income for the three months ended September 30, 2010 and 2009 was $56.6 million and $43.7 million, respectively, which represented an increase of $12.9 million, or 30%, for the reasons stated above. Operating income for the nine months ended September 30, 2010 and 2009 was $148.0 million and $172.4 million, respectively, which represented a decrease of $24.4 million, or 14%, for the reasons stated above.

Imaging and Optics Segment

 

     Three Months Ended     Nine Months Ended  
     September 30,
2010
    September 30,
2009
    September 30,
2010
    September 30,
2009
 

Imaging and Optics:

        

Revenues:

        

Royalty and license fees

   $ 3,989      $ 3,683      $ 10,348      $ 13,271   

Product and service revenues

     6,070        3,377        17,700        8,452   
                                

Total Imaging and Optics revenues

     10,059        7,060        28,048        21,723   

Operating expenses:

        

Cost of revenues

     5,487        3,837        16,464        11,559   

Research, development and other related costs

     12,848        10,069        33,645        28,725   

Selling, general and administrative

     5,434        5,406        16,781        15,683   
                                

Total operating expenses

     23,769        19,312        66,890        55,967   
                                

Total operating loss

   $ (13,710   $ (12,252   $ (38,842   $ (34,244
                                

Imaging and Optics revenues for the three months ended September 30, 2010 were $10.1 million as compared to $7.1 million for the three months ended September 30, 2009, an increase of $3.0 million, or 42%. Imaging and Optics revenues for the nine months ended September 30, 2010 were $28.0 million as compared to $21.7 million for the nine months ended September 30, 2009, an increase of $6.3 million, or 29%. The increases in both periods in Imaging and Optics revenues were primarily attributable to increased demand for our Micro-optics products in the photolithography industry.

Operating expenses for the three months ended September 30, 2010 were $23.8 million and consisted of cost of revenues of $5.5 million, research, development and other related costs of $12.9 million and SG&A expenses of $5.4 million. Operating expenses for the three months ended September 30, 2009 were $19.3 million. The increase of $4.5 million in total operating expenses from the three months ended September 30, 2009 was primarily due to $2.2 million of expenses incurred by Siimpel, acquired in May 2010, and increases of $1.0 million in personnel related expenses, $0.5 million in materials and supplies and $0.3 million in stock-based compensation expense.

Operating expenses for the nine months ended September 30, 2010 were $66.9 million and consisted of cost of revenues of $16.5 million, research, development and other related costs of $33.6 million and SG&A expenses of $16.8 million. Operating expenses for the nine months ended September 30, 2009 were 56.0 million. The increase of $10.9 million in total operating expenses from the nine months ended September 30, 2009 was primarily due to $4.2 million of expenses incurred by Siimpel, acquired in May 2010, increases of $3.1 million in personnel related expenses, $1.5 million in materials and supplies, $0.7 million in depreciation and facility related expenses, $0.6 million in stock-based compensation expense, and $0.3 million in legal and outside services expense.

 

44


 

Operating loss for the three months ended September 30, 2010 and 2009 was $13.7 million and $12.3 million, respectively, which represented an increased loss of $1.4 million, or 11%, for the reasons stated above. Operating loss for the nine months ended September 30, 2010 and 2009 was $38.8 million and $34.2 million, respectively, which represented an increased loss of $4.6 million, or 13%, for the reasons stated above.

In 2009 and for the nine months ended September 30, 2010, we have incurred significant operating losses from the Imaging and Optics segment. If the anticipated future results of the Imaging and Optics segment do not materialize as expected, then the related goodwill and intangible assets could be subject to an impairment charge in the future.

On October 27, 2010, in connection with the cessation of development activity of Wafer-level Optics technology, the Company concluded that certain equipment would be disposed of by sale. As a result, the Company will recognize an impairment charge of between $3 million and $4 million to write-off the net carrying value of the equipment which will be classified as assets-held-for-sale. The Company will recognize this charge in the quarter ending December 31, 2010 and expects that this charge will result in future cash expenditures of between $0.1 million to $0.2 million.

Liquidity and Capital Resources

 

(in thousands, except for percentages)    As of
September 30,
2010
    As of
December 31,
2009
 

Cash and cash equivalents

   $ 119,675      $ 107,873   

Short-term investments

     353,980        280,085   

Long-term investments

     329        15,691   
                

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

   $ 473,984      $ 403,649   
                

Percentage of total assets

     68     65
     Nine Months Ended  
     September 30,
2010
    September 30,
2009
 

Net cash provided by operating activities

   $ 90,033      $ 101,032   

Net cash used in investing activities

   $ (83,412   $ (50,868

Net cash provided by financing activities

   $ 5,181      $ 22,358   

Cash generated from operations is our primary source of liquidity and capital resources. Our investment portfolio is also available for future cash requirements. Cash, cash equivalents and investments were $474.0 million at September 30, 2010, an increase of $70.4 million from $403.6 million at December 31, 2009. Cash and cash equivalents were $119.7 million at September 30, 2010, an increase of $11.8 million from $107.9 million at December 31, 2009. The increase in cash and cash equivalents was primarily the result of $90.0 million in cash provided by operating activities and $5.2 million in cash provided by financing activities, offset by $83.4 million net cash used in investing activities.

Cash flows provided by operating activities were $90.0 million for the nine months ended September 30, 2010, primarily due to net income of $43.8 million, adjusted for non-cash items of depreciation and amortization of $19.4 million, stock-based compensation expense of $21.2 million, net tax benefits from stock options of $1.3 million, and a net increase in the changes in operating assets and liabilities of $4.6 million.

Cash flows provided by operating activities were $101.0 million for the nine months ended September 30, 2009, primarily due to net income of $63.4 million, adjusted for non-cash items of depreciation and amortization of $15.6 million, impairment charge of long-term investments of $0.8 million, stock-based compensation expense of $20.4 million, offset by a decrease in accrued legal fees of $7.4 million.

Net cash used in investing activities was $83.4 million for the nine months ended September 30, 2010, primarily related to purchases of short-term investments of $345.1 million, net consideration paid for the acquisition of Siimpel of $15.0 million, purchases of property and equipment of $9.2 million, purchases of intangible assets of $4.3 million, offset by proceeds from maturities and sales of investments of $288.5 million and proceeds from the sale of equipment of $1.6 million.

Net cash used in investing activities was $50.9 million in the nine months ended September 30, 2009, primarily related to purchases of short-term investments of $195.4 million, purchases of property and equipment of $12.3 million, net cash paid for acquisitions and intangible assets of $15.4 million, offset by proceeds from maturities and sales of investments of $172.1 million.

 

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The primary objectives of our investment activities are to preserve principal and to maintain liquidity while at the same time capturing a market rate of return. To achieve these objectives, we maintain a diversified portfolio of securities including cash equivalents, short-term and long-term investments in a variety of securities, including municipal bonds and notes, corporate bonds and notes, commercial paper, treasury and agency notes and bills, money market funds, bank demand accounts, and asset-backed obligations. We invest excess cash predominantly in marketable debt securities that are of high-quality investment grade and the majority of which have maturities of less than one year. The majority of our marketable debt and equity securities are classified as available-for-sale and are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income (loss). Unrealized losses and declines in value determined to be other-than-temporary, if any, on available-for-sale securities are generally reported in other income and expense, net. The fair values for our securities are determined based on quoted market prices as of the valuation date, observable prices for similar assets and externally provided pricing models.

We evaluate all of our investments periodically for possible other-than-temporary impairment and review factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, our intent to hold and whether we will not be required to sell the security before its anticipated recovery, on a more likely than not basis.

In connection with the liquidity issues experienced in the global credit and capital markets, our asset-backed securities, including mortgage-backed securities (collectively “ABS”) have experienced thinly traded markets. However, we continue to earn and receive interest on these investments at the maximum contractual rate. Prior to July 2010, we also had holdings of auction rate municipal bond securities (“ARS”), which have similarly experienced thinly traded markets. In November 2008, we entered into an agreement with UBS which granted the parties various rights, including the right for us to sell our ARS investments to UBS at par value at any time during a two-year period beginning June 30, 2010 (the “Rights”). In July 2010, we exercised the Rights and received cash of $4.2 million, which approximates the combined fair value of the ARS investments and the Rights. Due to the lack of an observable market on our ABS and ARS investment portfolio, we utilize valuation models that rely on Level 3 unobservable inputs including those that are based on a discounted cash flow model and assessments of counterparty credit quality, default risk underlying the security, discount rates and overall capital market liquidity. The valuation of our investments is subject to uncertainties that are difficult to predict. Net unrealized gain of $0.7 million, net of tax, related to a temporary increase in the fair value of the remaining available-for-sale securities was recorded in accumulated other comprehensive income (loss) as an increase in stockholders’ equity at September 30, 2010.

We continue to monitor the market for ABS and consider its impact, if any, on the fair value of our investments. If uncertainties in these credit and capital markets continue, these markets deteriorate further or we experience any additional ratings downgrades on any investments in our portfolio, we may incur impairment charges to net income or additional unrealized losses in accumulated other comprehensive income (loss), which could negatively affect our financial condition, statement of operations or cash flow. For certain investments with a temporary decline in value, because we have the ability to hold these investments until the market recovers or until they reach maturity, do not anticipate having to sell these securities with unrealized losses in order to operate our business and continue to receive interest at the maximum contractual rate, these investments are not considered to be other-than-temporarily impaired. We believe that based on our cash, cash equivalents and short-term investment balances of $473.7 million at September 30, 2010 and expected operating cash flows, the current lack of an active market for ABS in the credit market will not have a material impact on our ability to fund our operations.

In August 2007, our Board of Directors authorized a plan to repurchase up to a maximum total of $100.0 million of our outstanding shares of common stock dependent on market conditions, share price and other factors. No expiration has been specified for this plan. Repurchases may take place in the open market or through private transactions. As of September 30, 2010, we have repurchased a total of 645,000 shares of common stock at a total cost of $10.5 million under this plan at an average price of $16.26. As of September 30, 2010, the total amount available for repurchase was $89.5 million. We may continue to execute authorized repurchases from time to time under the plan.

Net cash from financing activities was $5.2 million for the nine months ended September 30, 2010, due to $4.4 million from the issuance of common stock under our employee stock option programs and employee stock purchase plans and $0.8 million of excess tax benefits from stock-based compensation for the period. Net cash from financing activities was $22.4 million for the nine months ended September 30, 2009, due to $17.7 million from the issuance of common stock for exercise of stock options and purchases made under our employee stock purchase plans and $4.6 million of excess tax benefits from stock-based compensation for the period.

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

 

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Contractual Cash Obligations

 

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

Operating lease obligations

   $ 10,814       $ 7,789       $ 1,806       $ 1,219       $ —     
                                            

Total

   $ 10,814       $ 7,789       $ 1,806       $ 1,219       $ —     
                                            

The amounts reflected in the table above for obligations represent aggregate future minimum lease payments under non-cancellable facility and equipment operating leases. For our facilities leases, rent expense charged to operations differs from rent paid because of scheduled rent increases. Rent expense is calculated by amortizing total rental payments on a straight-line basis over the lease term.

We have recognized approximately $4.8 million in the liability for unrecognized tax benefits, including accrued interest and penalties. At this time, we are unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time. As a result, this amount is not included in the table above.

See Note 11— “Commitments and Contingencies” of the Notes to the Condensed Consolidated Financial Statements for additional detail.

 

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Off-Balance Sheet Arrangements and Related Party Transactions

As of September 30, 2010, we did not have any off-balance sheet arrangements as defined in item 303(a)(4)(ii) of Regulation S-K.

In September 2007, we licensed our OptiML Wafer-Level Camera technology and SHELLCASE Wafer-Level Packaging solutions to NemoTek Technologie S. A. (“NemoTek”), a supplier of camera solutions for the cell phone market. As of September 30, 2010 and December 31, 2009, we had invested a total of $2.0 million and $1.9 million in NemoTek, respectively, which represented less than a 10 percent holding in NemoTek. Revenues from NemoTek were $0.3 million, or less than one percent of total revenues, for the three and nine months ended September 30, 2010. There were no revenues from NemoTek for the three months ended September 30, 2009. Revenues from Nemo Tek were $1.1 million, or less than one percent of total revenues, for the nine months ended September 30, 2009. The accounts receivable balance from NemoTek was $0.1 million and $0.3 million as of September 30, 2010 and December 31, 2009, respectively.

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

Critical Accounting Estimates

During the three and nine months ended September 30, 2010 there were no significant changes in our critical accounting estimates. For a discussion of our critical accounting policies, see Item 7— Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2009 Annual Report on Form 10-K, filed February 25, 2010.

Recent Accounting Pronouncements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For a discussion of the Company’s market risk, see Item 7A— Quantitative and Qualitative Disclosures About Market Risk in the Company’s 2009 Annual Report on Form 10-K, filed on February 25, 2010.

Item 4. Controls and Procedures

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

Evaluation of Controls and Procedures. Tessera maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

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

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

 

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

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

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, on October 7, 2005, the Company filed a complaint for patent infringement against Advanced Micro Devices, Inc. (“AMD”) and Spansion LLC in the United States District Court for the Northern District of California, alleging infringement of Tessera’s U.S. Patent Nos. 5,679,977, 5,852,326, 6,433,419 and 6,465,893 arising from AMD’s and Spansion LLC’s respective manufacture, use, sale, offer to sell and/or importation of certain packaged semiconductor components and assemblies thereof. Tessera seeks to recover damages, up to treble the amount of actual damages, together with attorney’s fees, interest and costs. The Company also seeks other relief, including enjoining AMD and Spansion LLC from continuing to infringe these patents.

On December 16, 2005, Tessera filed a first amended complaint to add Spansion Inc. and Spansion Technology, Inc. to the lawsuit.

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

On May 24, 2007, the parties stipulated to temporarily stay this action pending completion of Investigation No. 337-TA-605, including appeals, before the International Trade Commission (“ITC”). On August 5, 2008, the court ordered that this action be further stayed pending completion, including appeals, of Investigation No. 337-TA-649 before the ITC, which Investigation was terminated in July 2009. The matter currently remains stayed, with a Case Management Conference currently set for December 14, 2010. The Company expects that potential damages continued to accrue during the stay period through the expiration of the asserted patents in September of 2010. Upon completion of Investigation No. 337-TA-605, including any appeals, the proceeding may continue, with Tessera seeking to recover its damages attributable to the alleged infringement.

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

Tessera Technologies, Inc. v. Hynix Semiconductor Inc. et. al, Case No. 106CV-076688

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, on December 18, 2006, the Company filed a complaint against Hynix Semiconductor Inc. and Hynix Semiconductor America, Inc. (collectively, “Hynix”) in the Superior Court of the State of California, for the County of Santa Clara, alleging violations of California antitrust law and California common law based on Hynix’s alleged anticompetitive actions in markets related to synchronous DRAM. The Company also seeks other relief, including enjoining Hynix from continuing their alleged anticompetitive actions. On June 1, 2007, the Superior Court overruled the demurrer to Tessera’s Cartwright Act claims against Hynix, thus allowing the claims to proceed. On September 14, 2007, the court overruled another demurrer to Tessera’s claim for interference with contract and business relations, allowing those claims to proceed as well.

On September 17, 2009, the judge to whom the case previously had been assigned filed a petition with the Judicial Council to coordinate the Tessera v. Hynix action with the Rambus v. Micron action pending before Judge Kramer in the San Francisco County Superior Court (Case No. 04-0431105). On October 15, 2009, the Judicial Council issued an order appointing Judge Kramer as the coordination motion judge. In December 2009, the action was formally coordinated with the Rambus v. Micron action.

Fact and expert discovery in the action are closed. On June 12, 2009, Hynix filed three motions for summary adjudication, addressing among other things Tessera’s standing to bring antitrust claims, its permitted damages, and the propriety of its causes of action for violation of certain California state laws. Tessera’s oppositions to the summary adjudication motions were filed on August 14, 2009. The hearing on Hynix’s motions took place on February 22, 2010 and February 24, 2010. The court denied Hynix’s motion for summary adjudication for alleged lack of standing and Hynix’s motion for summary adjudication regarding Tessera’s claims for damages. The court granted Hynix’s motion to dismiss Tessera’s intentional interference claim. At present, no trial date has been set. The parties are proceeding with trial preparation activities and are next scheduled to appear for pretrial matters on December 16, 2010.

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

 

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In re Certain Semiconductor Chips With Minimized Chip Package Size and Products Containing Same, ITC No. 337-TA-605

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, on April 17, 2007, the Company filed a complaint with the ITC, requesting that the ITC commence an investigation under Section 337 of the Tariff Act of 1930, as amended. The ITC officially instituted an investigation as requested by Tessera on May 21, 2007. The respondents are ATI Technologies, Inc., Freescale Semiconductor, Inc., Motorola, Inc., Qualcomm, Inc., Spansion, Inc., Spansion, LLC and ST Microelectronics N.V. The ITC, among other things, investigated infringement of U.S. Patent Nos. 5,852,326 and 6,433,419, and considered Tessera’s request for issuance of an order excluding from entry into the United States infringing packaged semiconductor components, assemblies thereof, and products containing the same, as well as cease and desist orders directing the respondents with domestic inventories to desist from activities with respect to infringing products.

On September 19, 2007, the ITC issued an order setting key dates for the investigation, including for the ITC hearing which was scheduled to run from February 25, 2008 to February 29, 2008. On October 17, 2007, the investigation was assigned to Administrative Law Judge Theodore Essex.

On June 11, 2007, the respondents filed a motion to stay the investigation pending the completion of reexamination proceedings relating to the asserted Tessera patents. Tessera opposed the motion on June 21, 2007; Judge Essex did not rule on the motion. On February 22, 2008, the respondents filed a renewed motion to stay the ITC action pending completion of reexamination proceedings relating to the patents at issue, in view of office actions issued by the United States Patent and Trademark Office (“PTO”) in the reexamination of these patents described below in Reexamination Proceedings. An initial hearing of the matter was held on February 25, 2008, and Tessera further opposed the motion in writing on that date. On February 26, 2008, Judge Essex ruled that the action would be stayed in view of the pending reexamination proceedings relating to the patents at issue.

On March 4, 2008, Tessera filed a Request for Emergency Review with the ITC, seeking reversal of the order staying the case, and seeking reinstatement of the hearing date. On March 27, 2008, the ITC issued an order reversing the stay, and requiring that the hearing proceedings be rescheduled for the earliest practicable date. On April 29, 2008, the ITC issued its confidential written opinion regarding reversal of the stay.

The five-day hearing began on July 14, 2008, and was completed on July 18, 2008. On October 16, 2008, Judge Essex issued an order extending the target date for completion of the investigation by the ITC from February 20, 2009 to April 3, 2009, and extended the target date for issuance of the initial determination regarding violation from October 20, 2008 to December 1, 2008.

On December 1, 2008, Judge Essex issued the Initial Determination on Violation of Section 337 and Recommended Determination on Remedy and Bond. He found, among other things, that Tessera had established a domestic industry in the United States due to Tessera’s licensing program, that the asserted patents are valid, but that Tessera had failed to prove infringement of the asserted claims of the patents-in-suit.

On December 15, 2008, Tessera, certain respondents, and the Staff filed petitions for review of the Initial Determination. The parties filed replies to each others’ petitions for review on December 23, 2008.

On January 29, 2009, the Commission announced that it had decided to review the Initial Determination in part. Specifically, the Commission determined to review, among other issues, Judge Essex’s findings that the respondents’ accused devices do not infringe the asserted claims and that a particular prior art device does not anticipate the asserted patents under 35 U.S.C. §§ 102(b) or (g). The Commission originally set a deadline of February 13, 2009 for the parties to submit responses to particular questions posed by the Commission, with February 23, 2009 set as the deadline for reply submissions. The Commission later extended those deadlines to February 23, 2009 and March 5, 2009, respectively.

On March 12, 2009, respondents Spansion, Inc. and Spansion LLC (collectively, “Spansion”) filed a Notice of Commencement of Bankruptcy Proceedings and Automatic Stay, notifying the Commission of Spansion’s recent filings for bankruptcy and asserting that certain administrative claims against Spansion must be stayed pursuant to Section 362 of the Bankruptcy Code. On March 18, 2009, Tessera filed a response to Spansion’s filing, noting that Spansion did not expressly claim that the bankruptcy filing required a stay of this action. On March 23, 2009, the ITC staff submitted a response to Spansion’s filing, asserting that Spansion’s bankruptcy filing does not require any stay of the investigation against Spansion. On May 20, 2009, the ITC denied Spansion’s request to stay the investigation against Spansion.

On March 26, 2009, the Commission issued a Notice of Commission Decision to Request Additional Briefing on Remedy and to Extend the Target Date. Pursuant to the notice, the Commission requested additional briefing from the parties, or from any interested third parties, addressing three issues specified in the notice regarding the appropriateness of Tessera’s proposed remedy. The Commission also determined that the target date for issuance of its final determination would be extended from April 14, 2009 until May 20, 2009. Initial written submissions in response to the Commission’s notice were filed by Tessera, certain respondents, the ITC staff, and by certain third parties on April 10, 2009. Reply submissions were filed by Tessera, certain respondents, the ITC staff and certain third parties on April 20, 2009. On April 20, 2009, the Commission also issued an order permitting interested third parties to have an extra nine days, until April 29, 2009, to file additional reply submissions.

On May 20, 2009, the Commission issued its Final Determination in the action. The Commission, among other things, reversed Judge Essex’s ruling that Tessera had not proven infringement by the respondents, and ruled that Tessera had established infringement. The Commission affirmed Judge Essex’s ruling that the patents are not invalid. The Commission denied Tessera’s request for a General Exclusion Order, but granted a Limited Exclusion Order against all respondents (and certain related entities) and Cease and Desist Orders against certain respondents (and certain related entities).

 

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On or about July 19, 2009, the Presidential Review period expired, and no alterations were made to the ITC’s orders in the investigation. The Investigation by the ITC is now being appealed, as discussed immediately below.

On or about June 2, 2009, Motorola, Inc. and Tessera entered into a settlement and license agreement regarding certain Tessera technology, including the patents at issue in the ITC investigation.

In September 2010, the patents asserted in this action expired together with certain portions of the ITC’s orders.

The Company cannot predict the outcome of this proceeding, which may be impacted by appellate proceedings, as discussed immediately below. An adverse decision in proceedings regarding this action could significantly harm the Company’s business and consolidated financial position, results of operations or cash flows.

Spansion, Inc. et al., v. International Trade Commission and Tessera, Inc., U.S. Court of Appeals for the Federal Circuit Case Nos. 2009-1460, 2009-1461, 2009-1462, and 2009-1465

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, on or about July 20, 2009, respondents ATI Technologies, Inc., Freescale Semiconductor, Inc., Qualcomm, Inc., Spansion, Inc., Spansion LLC and ST Microelectronics N.V. filed appeals of the ITC’s Final Determination in Investigation No. 337-TA-605 with the United States Court of Appeals for the Federal Circuit. The appellants also filed certain “emergency” motions seeking a stay of the ITC’s limited exclusion order and cease and desist orders during the pendency of the appeal proceedings, as well as an immediate stay of those ITC orders while the Federal Circuit considered briefing as to whether to grant a stay during the appeal.

On July 22, 2009, the Federal Circuit issued an order consolidating appeals from the ITC’s 337-TA-605 investigation, and ordering Tessera and the ITC to file responses to the appellants’ motion to stay no later than July 29, 2009. On July 29, 2009, Tessera and the ITC each filed their briefing in opposition to a stay of the ITC’s orders during the appeal. On August 3, 2009, the respondents filed a reply brief in support of their motion. On August 4, 2009, Tessera filed a supplemental response to the respondents’ reply brief. Also on August 4, 2009, the Federal Circuit issued an order denying Tessera’s request for leave to file a brief in excess of the usual page limits, and ordered Tessera to file a corrected version of its July 29, 2009 brief consisting of no more than 20 pages. Tessera filed its corrected brief on August 6, 2009. On September 8, 2009, the Federal Circuit denied the motions for a stay.

On September 22, 2009, respondents ATI Technologies, Inc. and Freescale Semiconductor, Inc. filed a Combined Motion for Reconsideration and Suggestion for Rehearing En Banc of the Federal Circuit’s denial of their stay motion. Tessera opposed the motion on October 5, 2009. The ITC also opposed the motion on October 5, 2009. On October 23, 2009, the Federal Circuit ruled in the Company’s favor, denying the respondents’ request to stay the limited exclusion order and cease and desist orders during the appeal. The Federal Circuit also notified the parties that it had circulated the petition for rehearing en banc to the court. On November 5, 2009, the petition for rehearing en banc was denied.

On October 30, 2009, the respondents filed their appellate briefing regarding the merits of the ITC’s ruling. Tessera filed its response brief in the appeal on January 15, 2010, and the respondents’ reply briefs were filed on February 19, 2010. Oral argument occurred on June 9, 2010, and the parties now await a decision from the Federal Circuit.

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

Tessera, Inc. v. Motorola, Inc., et. al, Case No. 2:07cv143 (E.D. Tex.)

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, on April 17, 2007, the Company filed a complaint against Motorola, Inc., Qualcomm, Inc., Freescale Semiconductor, Inc., and ATI Technologies, Inc. in the United States District Court for the Eastern District of Texas, alleging infringement of Tessera’s U.S. Patent Nos. 5,852,326 and 6,433,419, arising from, among other things, the defendants’ respective manufacture, use, sale, offer to sell and/or importation of certain packaged semiconductor components and assemblies thereof. The Company seeks to recover damages, up to treble the amount of actual damages, together with attorney’s fees, interest and costs. The Company also seeks other relief, including enjoining the defendants from continuing to infringe these patents. The defendants have not yet answered Tessera’s complaint. The parties have agreed that the case will be temporarily stayed pending completion, including appeals, of ITC Investigation No. 337-TA-605 titled In re Certain Semiconductor Chips With Minimized Chip Package Size and Products Containing Same.

On or about June 2, 2009, Motorola, Inc. and Tessera entered into a settlement and license agreement regarding certain Tessera technology, including the patents at issue in this action. Tessera’s request to dismiss Motorola, Inc. from the action was granted by the Court on June 8, 2009.

 

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

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

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, on December 7, 2007, the Company filed a complaint with the ITC, requesting that the ITC commence an investigation under Section 337 of the Tariff Act of 1930, as amended. The ITC officially instituted an investigation as requested by Tessera on January 3, 2008. The respondents named in the complaint were A-Data Technology Co., Ltd., A-Data Technology (U.S.A.) Co., Ltd., Acer, Inc., Acer America Corp., Centon Electronics, Inc., Elpida Memory, Inc., Elpida Memory (USA) Inc., International Products Sourcing Group, Inc., Kingston Technology Co., Inc., Nanya Technology Corporation, Nanya Technology Corp., U.S.A., Peripheral Devices & Products Systems, Inc. d/b/a Patriot Memory, Powerchip Semiconductor Corp., ProMOS Technologies Inc., Ramaxel Technology Ltd., Smart Modular Technologies, Inc., TwinMOS Technologies, Inc., and TwinMOS Technologies USA Inc. In the Notice of Institution, the ITC stated that it would, among other things, investigate infringement of U.S. Patent Nos. 5,679,977, 6,133,627, 5,663,106, and 6,458,681, and consider Tessera’s request for issuance of an order excluding from entry into the United States infringing packaged semiconductor components, assemblies thereof, and products containing the same, as well as cease and desist orders directing parties with domestic inventories to desist from activities with respect to infringing products.

The action was assigned to Administrative Law Judge Bullock. On January 14, 2008, Judge Bullock issued a protective order in the action, and ground rules setting case procedures. On January 23, 2008, Judge Bullock issued an order setting the target date for completion of the investigation at April 14, 2009. On February 27, 2008, Judge Bullock ordered the hearing date to be set for September 22, 2008.

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

On May 15, 2008, the Company filed a motion to withdraw U.S. Patent No. 6,458,681 from the ITC action. The respondents did not oppose the motion, and the motion was granted. In July 2008, the action was assigned to Judge Essex.

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

A nine-day hearing in this action began on September 22, 2008 and was completed on October 3, 2008. The parties completed their initial post-hearing briefing on October 31, 2008. On January 2, 2009, Judge Essex issued an order extending the date for issuance of his initial determination regarding violation from January 14, 2009 until March 6, 2009. On February 10, 2009, Judge Essex again extended the date for issuance of his initial determination regarding violation until May 22, 2009, and extended the target date for completion of the Commission’s investigation until September 22, 2009. On April 2, 2009, Judge Essex again extended the date for issuance of his initial determination regarding violation until July 17, 2009, and extended the target date for completion of the Commission’s investigation until November 17, 2009. On June 12, 2009, Judge Essex again extended the date for issuance of his initial determination until August 28, 2009. The June 12, 2009 order also extended the target date for completion of the Commission’s investigation until December 29, 2009.

In a separate June 12, 2009 order, Judge Essex requested briefing from the parties as to the effect, if any, of the Commission’s opinion in the 337-TA-605 investigation on the infringement analysis that Judge Essex should undertake in the 377-TA-630 investigation. The parties submitted their initial briefing on this issue on June 26, 2009, and their reply briefing on July 6, 2009.

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

 

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On September 17, 2009, Tessera and the ITC Staff filed petitions for review of portions of the Initial Determination. Certain respondents also conditionally sought review of portions of the Initial Determination. The parties filed replies to each others’ petitions for review on October 1, 2009. On October 30, 2009, the ITC announced that it will review portions of the Initial Determination. The Commission stated that it would review, among other things, whether the respondents infringed the Tessera patents asserted in the action.

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

The Company cannot predict the outcome of this proceeding, which may be impacted by appellate proceedings, as discussed immediately below. An adverse decision in proceedings regarding this action could significantly harm the Company’s business and consolidated financial position, results of operations or cash flows.

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

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, on January 28, 2010, the Company filed a Notice of Appeal of the ITC’s Final Determination in Investigation No. 337-TA-630 with the United States Court of Appeals for the Federal Circuit. Principal briefing has been completed. Oral argument in the case has not yet been scheduled.

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

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

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, on December 7, 2007, the Company filed a complaint against A-Data Technology Co., Ltd., A-Data Technology (U.S.A.) Co., Ltd., Acer, Inc., Acer America Corp., Centon Electronics, Inc., Elpida Memory, Inc., Elpida Memory (USA) Inc., International Products Sourcing Group, Inc., Kingston Technology Co., Inc., Nanya Technology Corporation, Nanya Technology Corp., U.S.A., Peripheral Devices & Products Systems, Inc. d/b/a Patriot Memory, Powerchip Semiconductor Corp., ProMOS Technologies Inc., Ramaxel Technology Ltd., Smart Modular Technologies, Inc., TwinMOS Technologies, Inc., and TwinMOS Technologies USA Inc. in the United States District Court for the Eastern District of Texas, alleging infringement of Tessera’s U.S. Patent Nos. 5,679,977, 6,133,627, 5,663,106 and 6,458,681, arising from, among other things, the defendants’ respective manufacture, use, sale, offer to sell and/or importation of certain packaged semiconductor components and assemblies thereof. The Company seeks to recover damages, up to treble the amount of actual damages, together with attorney’s fees, interest and costs. The Company also seeks other relief, including enjoining the defendants from continuing to infringe these patents.

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

As noted above, on May 21, 2008, the Company settled its dispute with one of the defendants, International Products Sourcing Group (“IPSG”), and entered into a settlement and license agreement with IPSG and its parent, Micro Electronics, Inc. As part of the settlement, IPSG and Micro Electronics acknowledged the validity and enforceability of the asserted patents, and further acknowledged that their accused products infringe those patents. IPSG was dismissed from the Texas district court action on June 30, 2008. On August 14, 2008, Company settled its dispute with another defendant, Peripheral Devices & Products Systems, Inc. (“PDP”), and entered into a settlement and license agreement with PDP. As part of the settlement, PDP, on behalf of itself and its parents, affiliates and subsidiaries, acknowledged the validity and enforceability of the asserted patents, and further acknowledged that its accused products infringe those patents. On September 9, 2008, PDP was dismissed from the Texas district court action.

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

 

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

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, on July 31, 2008, Siliconware Precision Industries Co., Ltd. and Siliconware U.S.A., Inc. (collectively, “Siliconware”) filed a complaint against the Company in the United States District Court for the Northern District of California seeking a declaratory judgment of noninfringement, invalidity, and unenforceability of Tessera’s U.S. Patent No. 5,663,106. The Company filed its Answer and Counterclaims on September 5, 2008, asserting infringement of the patent at issue by Siliconware. On September 11, 2008, the case was related to Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal) and assigned to the same judge. On December 19, 2008, the court ordered this action be stayed pending completion of Investigation No. 337-TA-649 before the ITC, which Investigation was terminated in July 2009. The matter currently remains stayed, with a Case Management Conference currently set for December 14, 2010.

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

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

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, on August 4, 2008, Advanced Semiconductor Engineering Inc., ASE Test Limited, and ASE (U.S.) Inc. (collectively, “ASE”) filed a complaint against the Company in the United States District Court for the Northern District of California seeking a declaratory judgment of noninfringement and invalidity of Tessera’s U.S. Patent No. 5,663,106. On September 11, 2008, the case was related to Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal) and assigned to the same judge. The Company filed its Answer and Counterclaims on December 1, 2008, asserting infringement of the patent at issue by ASE. On December 19, 2008, the court ordered this action be stayed pending completion of Investigation No. 337-TA-649 before the ITC, which Investigation was terminated in July 2009. The matter currently remains stayed, with a Case Management Conference currently set for December 14, 2010.

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

ChipMOS Technologies Inc., ChipMOS U.S.A. Inc. and ChipMOS Technologies (Bermuda) Ltd. v. Tessera, Inc., Civil Action No. 08-04063 (N.D. Cal.)

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, on August 11, 2008, ChipMOS Technologies Inc., ChipMOS U.S.A. Inc. and ChipMOS Technologies (Bermuda) Ltd. (collectively, “ChipMOS”) filed a complaint against the Company in the United States District Court for the Northern District of California seeking a declaratory judgment of noninfringement and invalidity of Tessera’s U.S. Patent No. 5,663,106. On September 11, 2008, the case was related to Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal) and assigned to the same judge. The Company filed its Answer and Counterclaims on September 12, 2008, asserting infringement of the patent at issue by ChipMOS. On December 19, 2008, the court ordered this action be stayed pending completion of Investigation No. 337-TA-649 before the ITC, which Investigation was terminated in July 2009. The matter currently remains stayed, with a Case Management Conference currently set for December 14, 2010.

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

Powertech Technology Inc. v. Tessera, Inc., Civil Action No. 10-00945 (N.D. Cal.)

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, on March 5, 2010, Powertech Technology Inc. (“PTI”) filed a complaint against the Company in the United States District Court for the Northern District of California seeking a declaratory judgment of noninfringement and invalidity of Tessera’s U.S. Patent No. 5,663,106. On March 22, 2010, the case was related to Siliconware Precision Industries Co., Ltd. v. Tessera, Inc., Civil Action No. 08-03667 (N.D. Cal.), and assigned to the judge presiding over the action.

On April 1, 2010, the Company filed a motion to dismiss the complaint for lack of subject matter jurisdiction. The hearing on Tessera’s motion occurred on May 13, 2010. On June 1, 2010, the judge granted Tessera’s motion, and dismissed the action.

On June 29, 2010, PTI filed a motion seeking reconsideration of the June 1, 2010 order dismissing the action. Tessera’s opposition to PTI’s motion for reconsideration was filed on July 15, 2010. On August 3, 2010, PTI’s motion was denied. On August 6, 2010, PTI filed a notice of appeal with the U.S. Court of Appeals for the Federal Circuit.

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

 

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Tessera, Inc. v. United Test and Assembly Center Limited, et al., Case No. RG08410327

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, on September 18, 2008, the Company filed a complaint in the Superior Court for the State of California against United Test and Assembly Center, Ltd. and UTAC America, Inc. (collectively, “UTAC”) alleging breach of contract for failure to pay Tessera the full royalty due under its license agreement. The Company also alleged violations of California unfair competition laws and seeking compensatory and punitive damages.

On October 20, 2008, UTAC removed the action to the U.S. District Court for the Northern District of California. On October 31, 2008, Judge Claudia Wilken issued an order that Tessera’s case against UTAC was related to Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal.) and that the UTAC case should be reassigned to her.

On November 19, 2008, Tessera filed a motion to remand the case to state court. On January 6, 2009, Judge Wilken granted Tessera’s motion, and remanded the case to state court.

On January 16, 2009, UTAC filed a cross-complaint against Tessera, asserting claims for declaratory judgment, breach of contract, breach of the implied covenant of good faith and fair dealing and violation of California unfair competition law. Tessera’s response to UTAC’s cross-complaint was filed on February 18, 2009. Tessera’s answer denied generally the allegations in UTAC’s cross-complaint, and asserted various affirmative defenses.

On March 25, 2009, UTAC filed a motion to designate the action as complex, and have the case reassigned to a judge on the State Court’s complex panel. Tessera opposed the motion. On April 17, 2009, the Court granted UTAC’s motion, and the case was reassigned to Judge Robert Freedman.

On March 19, 2009, Tessera filed a Special Motion to Strike Cross-Complaint under California Code of Civil Procedure Section 425.16, asserting that UTAC’s claims for breach of contract, breach of implied covenant of good faith and fair dealing, and violation of the unfair competition law were barred by California’s “anti- SLAPP” statute. On April 16, 2009, UTAC voluntarily moved to dismiss with prejudice its causes of action for breach of contract and breach of implied covenant of good faith and fair dealing. Tessera did not oppose UTAC’s motion to voluntarily dismiss with prejudice, and the dismissal was entered by the Court. On April 22, 2009, a hearing was held before Judge Freedman and Tessera’s motion was taken under submission. On May 4, 2009, Judge Freedman issued an order granting Tessera’s motion, and striking UTAC’s causes of action for breach of contract, breach of implied covenant of good faith and fair dealing, and violation of the unfair competition law. On June 25, 2009, Tessera filed a motion seeking recovery from UTAC of its costs and attorneys’ fees incurred in connection with the successful motion. Tessera’s motion for costs and attorneys’ fees was heard by the Court on October 23, 2009, and the Court took the matter under submission. On January 21, 2010, the Court granted Tessera’s motion in part and ordered UTAC to pay Tessera’s attorneys’ fees in the amount of $110,812.50, and costs in the amount of $1,957.00.

Tessera sought summary adjudication regarding certain contract issues, and hearings on those motions took place on November 20, 2009 and December 11, 2009, respectively. On December 10, 2009, the Court denied summary adjudication regarding interpretation of UTAC’s royalty obligations under the contract. On December 14, 2009, the Court granted summary adjudication to Tessera regarding UTAC’s cause of action and asserted affirmative defenses of patent misuse, finding that UTAC had presented no evidence of patent misuse by Tessera. In addition, the Court denied summary adjudication regarding whether certain UTAC products meet certain parameters set forth in the parties’ agreement.

On December 11, 2009, the Court reset the trial date from January 11, 2010 to February 1, 2010. On January 15, 2010, the Court again reset the trial date for March 1, 2010. On February 18, 2010 and February 23, 2010, the Court held the Pretrial Management Conference, including hearing the parties’ motions in limine.

On March 1, 2010, the parties entered into a settlement agreement, agreed to a mutual dismissal of the action, and entered into an updated license agreement. The initial term of the updated license agreement runs through the end of 2016. UTAC has the option to renew the license for an additional five year term. Among other consideration to Tessera, under the terms of the agreement UTAC is required to pay $15.0 million in cash to address past royalties owed under the initial license, of which $9.0 million has been received from UTAC.

Reexamination Proceedings

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, on February 9, 2007 and February 15, 2007, Silicon Precision Industries Co., Ltd. and Siliconware USA, Inc. (collectively, “Siliconware”) filed with the PTO requests for inter partes reexamination relating to U.S. Patent Nos. 6,433,419 and 6,465,893, and ex parte reexamination relating to U.S. Patent Nos. 5,679,977, 6,133,627 and 5,852,326. On April 19, 2007, the PTO granted the requests for ex parte reexamination. On May 4, 2007, the PTO granted the requests for inter partes reexamination. The PTO denied the Company’s petition to vacate the inter partes reexamination proceeding on the ground that the request did not name the real party in interest, and a related request for reconsideration of that decision.

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

 

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

A first official action rejecting some claims and confirming other claims as patentable was mailed February 21, 2008 in the reexamination of U.S. Patent No. 5,852,326. A response to the official action in the reexamination of U.S. Patent No. 5,852,326 was filed on April 21, 2008. A second office action rejecting some claims and confirming other claims as patentable was mailed on August 1, 2008. Tessera filed a response to the official action on October 1, 2008. A third, final official action rejecting all claims under reexamination was mailed on March 6, 2009. Tessera filed a response to the official action on April 6, 2009. An advisory action was mailed by the PTO on June 22, 2009, maintaining all of the rejections presented in the Action of March 6, 2009. On July 1, 2009, Tessera filed a petition to withdraw the finality of the official action mailed on March 6, 2009. The PTO issued a decision on July 10, 2009 dismissing Tessera’s petition of July 1, 2009. Tessera filed a Notice of Appeal on August 6, 2009, and timely filed an appeal brief on October 13, 2009. The PTO’s Answer to Tessera’s appeal brief was mailed on May 28, 2010. On July 28, 2010, Tessera filed a reply brief and a request for oral hearing.

A first official action was mailed February 22, 2008 in the reexamination of U.S. Patent No. 5,861,666 rejecting those claims which were subject to reexamination. Such official action was superseded by a substantively identical action mailed March 11, 2008 restarting the period for response. A response to such official action was filed on May 12, 2008. A second official action was mailed on September 30, 2008 and Tessera filed an amendment to the claims and response to the second official action on October 30, 2008. On March 13, 2009, the PTO issued a Notice of Intent to Issue Ex Parte Reexamination Certificate, after which a Supplemental Notice of Intent to Issue Ex Parte Reexamination Certificate (Corrected Status) was issued on April 2, 2009, finding certain amended and newly presented claims to be patentable. The Reexamination Certificate issued on June 30, 2009.

On February 12, 2008, the PTO issued decisions merging the three reexaminations of U.S. Patent No. 5,679,977 with one another and also merging the two reexaminations of U.S. Patent No. 6,133,627 with one another. A first official action was issued on February 29, 2008 in the merged reexaminations of U.S. Patent No. 6,133,627, rejecting those claims subject to reexamination. A response to the official action in the merged reexaminations of U.S. Patent No. 6,133,627 was filed on April 29, 2008. On August 10, 2008, the PTO issued a second official action, to which Tessera filed a Request to Vacate the Second Official Action on August 26, 2008 on procedural grounds. As a result, on September 11, 2008, the PTO issued a third non-final official action. Tessera filed a response to the non-final office action on October 17, 2008.

A first official action was issued on March 28, 2008 in the merged reexaminations of U.S. Patent No. 5,679,977, rejecting those claims subject to reexamination. On May 28, 2008, a response to the official action in the merged reexaminations of U.S. Patent No. 5,679,977 was filed. On October 10, 2008, the PTO issued a second non-final official action, to which Tessera filed a response on November 10, 2008. On October 1, 2009, the PTO issued a final official action. Tessera filed a response to the final official action on December 1, 2009. On January 14, 2010, the PTO issued an Advisory Action indicating that Tessera’s response of December 1, 2009 failed to overcome all of the rejections set forth in the final official action mailed October 1, 2009. Tessera filed a Notice of Appeal on February 1, 2010, and timely filed an appeal brief on April 5, 2010. The PTO’s Answer to Tessera’s appeal brief withdrew certain rejections previously applied to the claims, but continued to apply other rejections as to all claims under reexamination.

On February 19, 2008, the PTO issued a second official action maintaining the rejections in U.S. Patent No. 6,433,419. On March 10, 2008, Tessera filed a petition to vacate the second official action in the reexamination of U.S. Patent No. 6,433,419 on the ground that the second official action did not properly take account of an amendment to the specification of U.S. Patent No. 6,433,419. On March 19, 2008, Tessera filed a substantive response to such second official action. On June 3, 2008, Tessera filed a renewed petition to vacate the inter partes reexamination on the ground that the request for such reexamination did not name the real party in interest. On June 11, 2008, Siliconware filed an opposition to such petition. The petition was denied on September 10, 2008. On June 13, 2008, the PTO issued a third official action in the inter partes reexamination of U.S. Patent No. 6,433,419 which was denominated as an action closing prosecution. On July 14, 2008, Tessera filed a substantive response to the action closing prosecution, to which a response was filed by Siliconware on August 8, 2008. A Right of Appeal Notice was issued on September 17, 2008, and Tessera filed a Notice of Appeal on October 17, 2008. On November 3, 2008, the PTO issued a decision withdrawing the Right of Appeal Notice and returning the case to the examiner for issuance of a further action. On December 23, 2008, the PTO issued a non-final official action, also denominated as an action closing prosecution, to which Tessera filed a response on January 23, 2009. On February 23, 2009, Siliconware filed a response to Tessera’s January 23, 2009 response. A Right of Appeal Notice was issued on June 19, 2009. On July 1, 2009, Tessera filed a petition to withdraw the Right of Appeal Notice. Having not yet received a decision on the petition of July 1, 2009, Tessera filed a Notice of Appeal on July 20, 2009. On July 30, 2009, the PTO issued a decision dismissing Tessera’s petition of July 1, 2009. Tessera timely filed an appeal brief on October 5, 2009, to which Siliconware filed a Response Brief on November 5, 2009. Siliconware refiled their Response Brief on March 17, 2010. The PTO’s Answer to Tessera’s appeal brief was mailed on July 13, 2010. On August 13, 2010, Tessera filed a rebuttal brief and a request for oral hearing.

On February 15, 2008, the PTO issued a second official action, also denominated as an action closing prosecution, maintaining the rejections of U.S. Patent No. 6,465,893. On March 28, 2008, Tessera filed a petition to vacate the second official action in the reexamination of U.S. Patent No. 6,465,893 on the ground that the second official action did not properly take account of an amendment to the specification of U.S. Patent

 

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No. 6,465,893. On April 15, 2008, Tessera filed a response to the second official action in the reexamination of U.S. Patent No. 6,465,893, to which Siliconware filed comments on May 15, 2008. On June 9, 2008, Tessera filed a renewed petition to vacate the inter partes reexamination on the ground that the request for such reexamination did not name the real party in interest, which petition was denied on September 10, 2008. On August 21, 2008, a non-final office action was issued. Tessera filed a response on October 21, 2008. On February 5, 2009, the PTO issued a non-final official action, also denominated as the second action closing prosecution. Tessera filed a response on March 5, 2009, to which Siliconware filed a response on April 6, 2009. A Right of Appeal Notice was issued on June 22, 2009. Tessera filed a Notice of Appeal on July 22, 2009. Tessera timely filed an appeal brief on October 5, 2009, to which Siliconware filed a Response Brief on November 5, 2009, and a Corrected Response Brief on June 14, 2010.

On March 26, 2008, a request for a third ex parte reexamination of U.S. Patent No. 6,133,627 patent was filed, ostensibly by PowerChip Semiconductor Corporation (“Powerchip”). On May 2, 2008, the PTO granted this request. On November 18, 2008, the PTO issued a first non-final official action, to which Tessera filed a response on December 18, 2008. On February 13, 2009, the PTO issued an order merging all of the reexaminations of U.S. Patent No. 6,133,627. On March 17, 2009, the PTO issued a non-final official action rejecting all claims under reexamination, to which Tessera filed a response on April 17, 2009. On July 14, 2009, the PTO issued a final official action which held certain claims patentable but rejected other claims to which Tessera filed a response on August 14, 2009. On December 1, 2009, the PTO issued an Advisory Action indicating that Tessera’s response of August 14, 2009 failed to overcome all of the rejections set forth in the final official action mailed July 14, 2009. Tessera filed a Notice of Appeal on December 14, 2009. Tessera timely filed an appeal brief on February 17, 2010. The PTO’s Answer to Tessera’s appeal brief was mailed on May 28, 2010. On July 28, 2010, Tessera filed a reply brief and a request for oral hearing.

On April 2, 2008, a request for inter partes reexamination of Tessera’s U.S. Patent No. 6,458,681 was filed, ostensibly by Powerchip. On June 6, 2008, the PTO granted this request and issued an official action rejecting certain claims of the ‘681 patent, to which Tessera filed a response on August 6, 2008, and to which Powerchip filed responsive comments on October 10, 2008. On September 21, 2009, the PTO issued an Action Closing Prosecution rejecting certain claims and holding one claim patentable, to which Tessera timely filed a response on October 21, 2009. On November 20, 2009, Powerchip filed comments to Tessera’s response of October 21, 2009. A Right of Appeal Notice was issued on February 22, 2010. On July 20, 2010, the PTO issued a Notice of Intent to Issue Inter Partes Reexamination Certificate, canceling the claims subject to reexamination. The reexamination certificate issued on October 6, 2010. On March 22, 2010, Tessera filed an application for reissue of the ‘681 patent to further address the matters raised during the reexamination proceedings and to pursue additional claims.

On July 18, 2008, a request for ex parte reexamination of Tessera’s U.S. Patent No. 5,663,106 was filed, ostensibly by Powerchip. On September 4, 2008, the PTO granted the request for reexamination. On April 10, 2009, the PTO issued a non-final official action rejecting all claims under reexamination. Tessera filed a response on June 10, 2009. On November 19, 2009, the PTO issued a final official action finding certain claims patentable and rejecting other claims. Tessera filed a response on January 19, 2010. On April 7, 2010, the PTO issued a non-final official action withdrawing the rejections previously made but rejecting all claims under reexamination on new grounds. Tessera filed a response on June 7, 2010. On October 18, 2010, the PTO issued a new final official action to which Tessera will have an opportunity to respond.

On or about January 3, 2006, Koninklijke Phillips Electronics N.V. and Philips Semiconductors B.V. (“Philips”), MICRON Semiconductor Deutschland GmbH (“Micron GmbH”), Infineon and STMicroelectronics, Inc. (“STM”) filed oppositions to Tessera’s European Patent No. EP1111672 (the “EP672 Patent”) before the European Patent Office (the “EPO”). Micron GmbH and Infineon withdrew their oppositions on July 24, 2006 and November 4, 2006, respectively. On October 10, 2006, Tessera filed its response to the remaining oppositions with the EPO. On December 4, 2006, Phillips withdrew its opposition. On September 16, 2008, the EPO Opposition Division issued a “Summons to attend oral proceedings” which states “preliminary” opinions unfavorable to the claims of the EP672 Patent. The Company filed a written response to the summons on January 5, 2009. STM also filed comments responsive to the summons on December 31, 2008, to which the Company filed a response to STM’s comments on January 12, 2009. An oral hearing before the EPO Opposition Division, was held on June 4, 2009, resulting in a decision to revoke the EP672 Patent. Tessera filed a Notice of Appeal on August 24, 2009. On October 26, 2009, Tessera filed a Statement of Grounds for Appeal with the EPO. STM filed comments to the Grounds for Appeal on March 8, 2010. The Company cannot predict the outcome of this proceeding. If the opposition results in a limitation or a revocation of the EP672 Patent, this could significantly harm the Company’s business and consolidated financial position, results of operations or cash flows.

The following Tessera patents expired on September 24, 2010: U.S. Patent Nos. 6,433,419, 6,465,893, 5,679,977, 6,133,627 and 5,852,326. The reexamination proceedings will continue after expiration.

The patents that are subject to the above-described reexamination proceedings include some of the key patents in Tessera’s portfolio, and claims that have been preliminarily rejected in the current official actions are being asserted in certain of Tessera’s various litigations. The Company cannot predict the outcome of these proceedings. An adverse decision in any of these proceedings could significantly harm the Company’s business and financial condition. The following Tessera patents expired on September 24, 2010: U.S. Patent Nos. 6,433,419, 6,465,893, 5,679,977, 6,133,627 and 5,852,326. The reexamination proceedings will continue after expiration. An adverse decision could also significantly affect Tessera’s ongoing litigations, as described in this Part II, Item 1— Legal Proceedings, in which patents are being asserted, which in turn could significantly harm the Company’s business and consolidated financial position, results of operations or cash flows.

 

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

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, on January 23, 2009, Qimonda AG filed a bankruptcy petition with the Local Court of Munich, Insolvency Court. On April 1, 2009, the Court opened insolvency proceedings over the estate of Qimonda AG and appointed Rechtsanwalt Dr. Michael Jaffé as the insolvency administrator. On or about May 27, 2009, Dr. Jaffé chose non-performance of Tessera’s license agreement with Qimonda AG under Section 103 of the German Insolvency Code and purported to terminate the license agreement. On June 12, 2009, Tessera filed a Proof of Claim in the Qimonda AG bankruptcy alleging amounts due of approximately 15.7 million Euros. On December 2, 2009, Dr. Jaffé preliminarily contested Tessera’s claim in full. Tessera is in ongoing discussions with the insolvency administrator.

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

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, on or about March 1, 2009, Spansion LLC, Spansion, Inc. and Spansion Technology LLC (collectively, “Spansion”) initiated bankruptcy proceedings in the United States Bankruptcy Court for the District of Delaware. On or about July 17, 2009, Tessera filed a Proof of Claim in each of the above Spansion bankruptcy proceedings alleging amounts due of not less than $25 million. On July 28, 2009, the Company sought permission under the Bankruptcy rules to serve certain discovery requests in the actions, seeking various documents and testimony regarding potential administrative claims that Tessera may assert in the action. Tessera’s request for such discovery was denied without prejudice on August 11, 2009. The parties thereafter completed certain fact and expert discovery relating to Tessera’s administrative expense claim in December and January of 2010.

On January 12, 2010, Spansion filed a motion to determine and estimate the amount of Tessera’s administrative expense claim, for the purpose of demonstrating the feasibility of Spansion’s Second Amended Joint Plan of Reorganization. Tessera’s administrative expense claim at issue relates to the damages that would be owed to Tessera for Spansion’s post-petition (post-March 1, 2009) infringement of certain Tessera patents. Tessera filed its objection to Spansion’s motion on January 22, 2010. On January 29, 2010, the court held a hearing on Spansion’s motion. The parties submitted post-hearing letter briefs on February 3, 2010. The Court announced its ruling that a reasonable royalty rate for Spansion products sold in the United States during the administrative period was 56.7 cents per unit. On April 6, 2010, the Court entered an order estimating the amount of any alleged administrative expensive claim of Tessera for purposes of plan confirmation in the amount of $4,232,986.13 for the period from March 1, 2009 to July 20, 2009.

On February 5, 2010, Spansion filed a motion for an order estimating the amount of “certain contingent, unliquidated, duplicative and/or overstated claims” for purposes of establishing class 5 plan distribution reserves. Tessera filed its objection to the estimation motion on February 17, 2010 and on that same date submitted three Amended Proofs of Claim based in part on the Court’s 56.7 cents per unit royalty rate. On February 18, 2010, Tessera filed a motion for authority to file its Amended Proofs of Claim. On March 23, 2010, the Court entered an order allowing Tessera to file its Amended Proofs of Claim. Tessera voluntarily withdrew its three prior proofs of claim.

On January 26, 2010, Tessera filed its objection to Spansion’s Second Amended Joint Plan of Reorganization, asserting that the plan is not feasible and that it fails to provide for the payout of administrative expense claims on the plan effective date. On February 2, 2010, Tessera submitted three ballots, one for each previously submitted Proof of Claim. The ballots, among other things, rejected Spansion’s Second Amended Joint Plan of Reorganization.

On April 1, 2010, the Court issued its Order and Opinion on Confirmation in which, among other things, it denied Spansion’s request for plan confirmation due to, among other reasons, the failure to set aside a reserve for Tessera’s administrative expense claim in the amount of $4,232,986. 13. The Court overruled certain Tessera objections regarding irregularities in the plan voting solicitation and tabulation and Spansion’s failure to properly count Tessera’s three plan ballots. On April 7, 2010, Spansion filed an amended plan that included a reserve for the alleged administrative expense claim of Tessera in the amount of $4,232,986.13. On April 16, 2010, the Court issued its finding of facts, conclusions of law, and Order confirming the plan as amended. On May 10, 2010, the plan became effective.

On February 23, 2010, Tessera filed a motion for allowance and payment of its administrative expense claim in the amount of $96,765,070, as of January 29, 2010, plus all damages that arise from and after that date, with interest thereon. Spansion filed an objection to the Request for Administrative Expense Claim on March 16, 2010 and the Official Committee of Unsecured Creditors joined in Spansion’s objection on March 16, 2010.

On March 25, 2010, the parties reached a stipulation regarding the estimated amount of Tessera’s pre-petition claim. On May 26, 2010, the Court issued its Order approving the stipulation and estimating Tessera’s pre-petition claims in the amount of $130 million. In its June 15, 2010 Order, the Court disallowed two of Tessera’s Amended Proofs of Claim, leaving one proof of claim of not less than $219 million. On July 6, 2010, Spansion filed an objection to the remaining proof of claim.

On July 13, 2010, Spansion and Tessera filed joint motions seeking to withdraw the reference from the bankruptcy court insofar as it relates Tessera’s administrative expense claim and remaining proof of claim to the United States District Court for the District of Delaware and to transfer venue of that matter to the United States District Court for the Northern District of California where a prior matter between Tessera and Spansion is pending. At a hearing held on July 28, 2010, the Court indicated that it would approve an order permitting the parties to submit their joint motion to the United States District Court for the District of Delaware for determination. The parties filed the joint motion with the District Court that same date where it remains pending.

 

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Amkor Technology, Inc. v. Tessera, Inc.

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, on or about August 7, 2009, Amkor filed a request for arbitration against the Company before the International Chamber of Commerce (“ICC”). The request, among other things, accuses the Company of interference with Amkor’s existing and prospective business relationships, of improperly claiming that Amkor had breached the parties’ license agreement, and of improperly threatening to terminate that agreement. Amkor seeks relief including judgment that it is in compliance with the license agreement and is a licensee in good standing under the license agreement; judgment that the license agreement remains in effect and no breach alleged by the Company against Amkor has terminated the License Agreement; judgment that Amkor’s method of calculating royalties on a going-forward basis complies with Amkor’s obligations under the license agreement; an injunction against the Company forbidding it from making statements to Amkor’s customers and potential customers inconsistent with the above; an injunction against the Company forbidding it from attempting to terminate the license agreement or threatening to terminate the license agreement during the arbitration or based on events occurring prior to the conclusion of the arbitration; a damage award against the Company for attorneys fees and costs to Amkor associated with this arbitration, together with all other damages resulting from the Company’s alleged acts of tortious interference and punitive damages; all other relief recoverable under the Rules of Arbitration of the ICC; such other and further relief as the arbitrators deem just and proper.

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

On January 15, 2010, Amkor filed its response to Tessera’s counterclaims, along with certain new counterclaims by Amkor and a motion for priority consideration of certain issues. In its responsive pleading, Amkor denied Tessera’s counterclaims, arguing in part that Tessera’s counterclaims for royalties are barred by the doctrines of collateral estoppel and res judicata, and sought a declaratory judgment that it has not infringed and that its packages are not made under any of the patents asserted in Tessera’s answer and that the patents are invalid and unenforceable. Tessera filed an answer denying Amkor’s counterclaims and a response to Amkor’s motion on February 12, 2010. Amkor also claims a credit for royalties it alleges it overpaid Tessera. On March 28, 2010, the arbitrators ruled on Amkor’s motion for priority consideration, holding that certain issues—including royalties payable on a going-forward basis for the patents addressed in the previous arbitration, including but not limited to royalties applicable to packages assembled for Qualcomm, Inc., and Tessera’s counterclaim for breach of the audit provision—would be considered in an early hearing which is currently scheduled to last two days starting on December 9, 2010. The arbitrators scheduled a two-week hearing on the remaining issues for August 15, 2011.

On May 14, 2010, Amkor filed a motion to bar Tessera’s counterclaims for royalties owed based on Amkor’s activities prior to December 1, 2008 as barred by the doctrine of res judicata. A hearing on Amkor’s motion occurred on August 25, 2010. A ruling on that motion has not yet been issued.

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

Tessera, Inc. v. UTAC (Taiwan) Corporation, Case No. CV10 4435 HRL (N.D. Cal.)

On September 30, 2010, Tessera filed a complaint against UTAC (Taiwan) Corporation (“UTAC Taiwan”) in the United States District Court for the Northern District of California. The case was initially assigned to Magistrate Judge Howard R. Lloyd and was reassigned to Judge Jeremy Fogel on October 8, 2010. Tessera’s complaint names as defendant UTAC Taiwan and alleges causes of action for breach of contract, declaratory relief, and breach of the implied covenant of good faith and fair dealing. The complaint requests of the Court, among other things, a judicial determination and declaration that UTAC Taiwan remains contractually obligated to pay royalties to Tessera, an accounting and restitution in an amount to be determined at trial, and an award of damages in an amount to be determined at trial, plus interest on damages, costs, disbursements, attorneys’ fees, and such other and further relief as the Court may deem just and proper. The case is in the pleading stage.

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

 

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Tessera, Inc. v. Sony Electronics, Inc. et al., Case No. 1:99-mc-0999 (D. Del.)

On October 1, 2010, Tessera filed a complaint against Sony Electronics, Inc., Sony Corporation, and Renesas Electronics Corporation in the United States District Court for the District of Delaware. The case was assigned to Renee Marie Bumb of the District of New Jersey and then referred to Magistrate Judge Karen M. Williams in the same District. Tessera’s complaint alleges that defendants Sony Electronics, Inc., Sony Corporation, and Renesas Electronics Corporation infringed and are currently infringing, including by directly infringing, contributorily infringing and/or inducing infringement, U.S. Patent No. 6,885,106. The complaint requests of the Court, among other things, a judgment that the defendants willfully infringed, induced others to infringe, and/or committed acts of contributory infringement of one or more claims of the '106 patent; an order that defendants, their affiliates, subsidiaries, directors, officers, employees, attorneys, agents, and all persons in active concert or participation with any of them be preliminarily and permanently enjoined from further acts of infringement, inducing infringement, and contributory infringement of the '106 patent; an order for an accounting; and an award of damages that result from the defendants’ infringing acts, interest on damages, costs, expenses, attorneys’ fees and such other and further relief as the Court deems just and proper. The case is in the pleading stage.

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

Item 1A. Risk Factors

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

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

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

We cannot predict the outcome of any of these proceedings or the myriad procedural and substantive motions in these proceedings. In the event that there is an adverse ruling in any legal or administrative proceeding relating to the infringement, validity, enforceability or ownership of any of our key patents, or if a court or an administrative body such as the PTO limits the scope of the claims of any of our key patents, we could be prevented from enforcing or earning future revenues from such key patents, and the likelihood that companies will take new licenses and that current licensees will continue to agree to pay under their existing licenses could be significantly reduced. The resulting reduction in license fees and royalties could significantly harm our business, consolidated financial position, results of operations or cash flows, or the trading price of our common stock. Furthermore, regardless of the merits of any claim, the continued maintenance of these legal and administrative proceedings may result in substantial legal expenses and could divert our management’s time and attention away from our other business operations, which could significantly harm our business. Our enforcement proceedings historically have been protracted and complex, and we have experienced significant delays in certain of these proceedings. The complexity of our litigations, their disproportionate importance to our business compared to other companies, the propensity for delay in patent litigations, and the potential that we may lose particular motions as well as the overall litigations all could cause significant volatility in our stock price and could materially adversely affect our business and consolidated financial position, results of operations or cash flows.

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

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

 

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any future legal actions could cause an existing licensee or strategic partner to cease making royalty or other payments to us, or to challenge the validity and enforceability of our patents or the scope of our license agreements, and could significantly damage our relationship with such licensee or strategic partner and, as a result, prevent the adoption of our other Micro-electronics or Imaging & Optics technologies by such licensee or strategic partner. Litigation could also severely disrupt or shut down the business operations of our licensees or strategic partners, which in turn would significantly harm our ongoing relations with them and cause us to lose royalty revenues. In addition, many semiconductor and package assembly companies maintain their own internal design groups and have their own package design and manufacturing capabilities. If we believe these groups have designed technologies that infringe upon our intellectual property, and if they subsequently fail to enter into a license agreement with us or pay for licensed technology, then it may become necessary for us to commence legal proceedings against them. Litigation stemming from these or other disputes could also harm our relationships with other licensees or our ability to gain new customers, who may postpone licensing decisions pending the outcome of the litigation or dispute, or who may, as a result of such litigation, choose not to adopt our Micro-electronics or Imaging & Optics technologies. In addition, these legal proceedings could be very expensive and may reduce or eliminate our profits. The costs associated with legal proceedings are typically high, relatively unpredictable and not completely within our control. While we do our best to forecast and control such costs, the costs may be materially higher than expected, which could adversely affect our operating results. Whether or not determined in our favor or ultimately settled, litigation diverts our managerial, technical, legal and financial resources from our business operations. Furthermore, an adverse decision in any of these legal actions could result in a loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses from others, limit the value of our licensed technology or otherwise negatively impact our stock price or our business and consolidated financial position, results of operations or cash flows. Even if we prevail in our legal actions, significant contingencies will exist to their settlement and final resolution, including the scope of the liability of each party, our ability to enforce judgments against the parties, the ability and willingness of the parties to make any payments owed or agreed upon and the dismissal of the legal action by the relevant court, none of which are completely within our control. Parties that may be obligated to pay us royalties could also decide to alter their business activities or corporate structure, which could affect our ability to collect royalties from such parties.

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

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

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

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

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

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

Third parties may claim that we or our customers are infringing upon their intellectual property rights. Even if we believe that such claims are without merit, they can be time-consuming and costly to defend against and will divert management’s attention and resources away from our business. Claims of intellectual property infringement also might require us to enter into costly settlement or license agreements or pay costly damage awards. Even if we have an agreement that provides for a third party to indemnify us against such costs, the indemnifying party may be unable to perform its contractual obligations under the agreement. If we cannot or do not license the infringed intellectual property at all or on reasonable terms, or substitute similar technology from another source, our business, financial position, results of operations or cash flows could suffer.

 

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If the U.S. patent laws and regulations are changed, we could be adversely impacted.

Our business relies in part on the uniform and historically consistent application of U.S. patent laws and regulations. Changes to these laws and regulations may occur as a result of decisions and actions of Congress, the PTO, and the courts, including the U.S. Supreme Court. In recent years, certain proposals have been made to change some aspects of the patent laws and PTO rules, the courts have interpreted U.S. patent laws and regulations differently, and in particular the U.S. Supreme Court has decided a number of patent cases and continues to actively review more patent cases than it has in the past. Some of these changes or potential changes may not be advantageous for us, and may make it more difficult to obtain adequate patent protection or to enforce our patents against parties using them without a license or payment of royalties. These changes or potential changes, if passed by Congress or implemented by the Administration, or required by the courts, could have a deleterious effect on our licensing program and, therefore, the royalties we can collect.

Some of our license agreements have fixed terms and will need to be renewed or relicensed in the future in order to extend those terms. If we are unable to renew or relicense these license agreements on terms favorable to us, our results of operations could be harmed.

Some of our license agreements have fixed terms. We will need to renew or relicense our license agreements with fixed terms prior to the expiration of such license agreements in order to extend those terms. Based on various factors including the technology and business needs of our licensees, we may not be able to renew or relicense such license agreements on terms favorable to us, or at all. We have expanded our licensable technology portfolio through internal development and acquisitions from third parties, but there is no guarantee that these measures will meet the technology and business needs of our licensees. In order to maintain existing relationships with some of our licensees, we may be forced to renew or relicense our license agreements on terms that are more favorable to such licensees, which could harm our results of operations. If we fail to renew or relicense our license agreements, we would lose existing licensees and our business would be materially adversely affected.

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

In 2005, we provided two major DRAM manufacturers with first-mover pricing advantages with respect to royalties due to us under their respective TCC licenses based on several factors, including volumes. The effect of the volume pricing adjustments may cause, at certain high shipment volumes and for these two DRAM manufacturers only, our aggregate annual DRAM royalty revenues to grow less rapidly than annual growth in overall unit shipments in the DRAM segment. An additional effect may include some quarter-to-quarter fluctuations in growth in our revenues from the DRAM segment, depending on the relative DRAM market share enjoyed by these two DRAM manufacturers as well as the timing of when they reach the volume pricing incentive in a given calendar quarter and their royalty payments within a calendar year.

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

We currently have one license agreement that automatically converts to a fully paid-up license after the expiration of its current term on December 31, 2013, provided that the licensee (Texas Instruments, Inc.) complies with all terms and conditions of the license agreement up through its expiration. We also have certain other license agreements that each provide the licensee with the option to extend the current term of their agreement for an additional five years with royalty payments throughout the expiration of the extended term, whereupon such a license automatically converts to a fully paid-up license after the expiration of its extended term. We may not receive further royalties from licensees for any licensed technology under those agreements if they convert to fully paid-up licenses because such licensees will be entitled to continue using some, if not all, of our relevant intellectual property under the terms of the license agreements, even if relevant patents are still in effect. If we cannot find another source of revenue to replace the revenues from these license agreements converting to fully paid-up licenses, our results of operations following such conversion could be materially adversely affected.

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

A significant portion of our royalty revenues comes from the manufacture and sale of packaged semiconductor chips for DSP, ASSP, ASIC and memory. In addition, we derive substantial revenues from the incorporation of our technology into mobile devices. If demand for semiconductors in any one or a combination of these market segments or products declines, our royalty revenues may be reduced significantly and our business could be harmed.

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

We earn a significant amount of our revenues from a limited number of customers. For the three and nine months ended September 30, 2010, there were four and three customers, respectively, that each accounted for 10% or more of total revenue. We expect that a significant portion of our revenues will continue to come from a limited number of customers for the foreseeable future. If we lose any of these customers, our revenues may decrease substantially.

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

Our long-term success depends on future royalties paid to us by licensees. Royalty payments under our TCC licenses are primarily based upon the number of electrical connections to the semiconductor chip in a package covered by our licensed technology. We also have royalty

 

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arrangements for TCC and other technologies in which royalties are paid based upon a percent of the net sales price or based upon a per package, or a per unit sold basis. We are dependent upon our ability to structure, negotiate and enforce agreements for the determination and payment of royalties, as well as upon our licensees’ compliance with their agreements. We face risks inherent in a royalty-based business model, many of which are outside of our control, such as the following:

 

   

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

 

   

the extent to which large equipment vendors and materials providers develop and supply tools and materials to enable manufacturing using our packaging technology;

 

   

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

 

   

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

 

   

the impact of economic downturns; and

 

   

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

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

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

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

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

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

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

Competing technologies may harm our business.

We expect that our technologies will continue to compete with technologies of internal design groups at semiconductor manufacturers, assemblers, electronic component and system manufacturers, image sensor and lens manufacturers and camera module companies. These internal design groups create their own packaging, imaging and optics solutions. If these internal design groups design around our patents or introduce unique solutions superior to our technology, they may not need to license our technology. These groups may design technology that is less expensive to implement than ours or that enables products with higher performance or additional features. Many of these groups have

 

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substantially greater resources, greater financial strength and lower cost structures which may allow them to undercut our price. They also have the inherent advantage of internal access to corporate strategies, technology roadmaps and technical information. As a result, they may be able to bring alternative solutions to market more easily and quickly. For instance, for our Micro-electronics technologies, certain flip chip technologies are being used by large semiconductor manufacturers and assemblers for a variety of semiconductors, including processors and memory. Another example of a competitive technology is the small format lead frame package that is also getting market traction. The companies using these technologies are utilizing their current lead frame infrastructure to achieve cost-effective results. Wafer-level packaging is an emerging competitive technology that could also erode chip-scale packaging market share as the technology and infrastructure matures. Other examples of competitive technologies that could erode chip-scale packaging market share include the chip-on-board technique to package image sensors and certain system-in-package technologies that can integrate multiple die.

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

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

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