10-Q 1 d406103d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2012

OR

 

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

Commission File Number: 000-50460

 

 

TESSERA TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   16-1620029

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

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

(408) 321-6000

(Registrant’s Telephone Number, Including Area Code)

 

 

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

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

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

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

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

As of October 18, 2012, 52,238,052 shares of the registrant’s common stock were outstanding.

 

 

 


Table of Contents

TESSERA TECHNOLOGIES, INC.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTER ENDED SEPTEMBER 30, 2012

TABLE OF CONTENTS

 

           Page  
   PART I   

Item 1.

   Financial Statements (unaudited)   
   Condensed Consolidated Balance Sheets – September 30, 2012 and December 31, 2011      3   
  

Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2012 and 2011

     4   
  

Condensed Consolidated Statements of Comprehensive Loss – Three and Nine Months Ended September 30, 2012 and 2011

     5   
   Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2012 and 2011      6   
   Notes to Condensed Consolidated Financial Statements      7   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      23   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      34   

Item 4.

   Controls and Procedures      34   
   PART II   

Item 1.

   Legal Proceedings      34   

Item 1A.

   Risk Factors      45   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      58   

Item 3.

   Defaults Upon Senior Securities      58   

Item 4.

   Mine Safety Disclosures      58   

Item 5.

   Other Information      58   

Item 6.

   Exhibits      58   
Signatures      60   
Exhibit Index   

 

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PART I—FINANCIAL INFORMATION

TESSERA TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for par value)

(unaudited)

 

     September 30,
2012
    December 31,
2011
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 124,954      $ 55,758   

Short-term investments

     340,952        436,687   

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

     14,083        8,599   

Inventories

     3,261        1,574   

Short-term deferred tax assets

     2,032        1,892   

Other current assets

     23,695        13,664   
  

 

 

   

 

 

 

Total current assets

     508,977        518,174   

Property and equipment, net

     50,987        36,319   

Intangible assets, net

     126,128        141,326   

Goodwill

     6,844        —     

Long-term deferred tax assets

     15,456        18,223   

Other assets

     10,597        2,484   
  

 

 

   

 

 

 

Total assets

   $ 718,989      $ 716,526   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

    

Current liabilities:

    

Accounts payable

   $ 13,086      $ 7,203   

Accrued legal fees

     7,003        6,110   

Accrued liabilities

     18,190        20,824   

Deferred revenue

     4,223        2,610   
  

 

 

   

 

 

 

Total current liabilities

     42,502        36,747   

Long-term deferred tax liabilities

     4,083        4,083   

Other long-term liabilities

     5,407        5,017   

Commitments and contingencies (Note 13)

    

Stockholders’ equity:

    

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

     —          —     

Common stock: $0.001 par value; 150,000 shares authorized; 52,879 and 52,221 shares issued, respectively, and 52,228 and 51,576 shares outstanding, respectively

     53        52   

Additional paid-in capital

     478,770        462,697   

Treasury stock at cost; 651 and 645 shares on common stock at each period end, respectively

     (10,588     (10,505

Accumulated other comprehensive income

     374        24   

Retained earnings

     198,388        218,411   
  

 

 

   

 

 

 

Total stockholders’ equity

     666,997        670,679   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 718,989      $ 716,526   
  

 

 

   

 

 

 

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

 

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TESSERA TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,     September 30,     September 30,  
     2012     2011     2012     2011  

Revenues:

        

Royalty and license fees

   $ 60,114      $ 55,271      $ 161,563      $ 182,931   

Past production payments

     79        —          79        —     

Product and service revenues

     12,497        4,071        19,145        14,914   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     72,690        59,342        180,787        197,845   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Cost of revenues

     16,748        5,594        28,105        16,467   

Research, development and other related costs

     24,615        18,690        72,930        56,088   

Selling, general and administrative

     24,010        20,432        73,058        62,671   

Litigation expense

     9,689        9,059        19,905        22,263   

Restructuring and other charges

     —          2,938        —          4,997   

Goodwill impairment

     —          49,653        —          49,653   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     75,062        106,366        193,998        212,139   

Operating loss

     (2,372     (47,024     (13,211     (14,294

Other income and expense, net

     3,725        690        5,380        2,024   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

     1,353        (46,334     (7,831     (12,270

Provision for (benefit from) income taxes

     2,465        (1,598     1,778        9,668   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (1,112   $ (44,736   $ (9,609   $ (21,938
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share:

        

Net loss per share-basic

   $ (0.02   $ (0.87   $ (0.19   $ (0.43
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share-diluted

   $ (0.02   $ (0.87   $ (0.19   $ (0.43
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per share

   $ 0.10      $ —        $ 0.20      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     52,093        51,364        51,908        50,980   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     52,093        51,364        51,908        50,980   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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TESSERA TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

     Three Months Ended     Nine Months Ended  
     September 30,
2012
    September 30,
2011
    September 30,
2012
    September 30,
2011
 

Net loss

   $ (1,112   $ (44,736   $ (9,609   $ (21,938

Other comprehensive income (loss):

        

Net unrealized gains (losses) on available-for-securites, net of tax

     204        (601     350        (349
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     204        (601     350        (349
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (908   $ (45,337   $ (9,259   $ (22,287
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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TESSERA TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Nine Months Ended  
     September 30,
2012
    September 30,
2011
 

Cash flows from operating activities:

    

Net loss

   $ (9,609   $ (21,938

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

    

Depreciation and amortization of property and equipment

     10,164        7,487   

Amortization of intangible assets

     18,910        12,548   

Loss (gain) on disposal of property and equipment, net

     (21     76   

Stock-based compensation expense

     13,249        20,250   

Impairment of goodwill

     —          49,653   

Deferred income tax, net

     (140     (1,655

Amortization of premuim/discount on investments

     1,132        —     

Changes in operating assets and liabilities, net of acquisitions:

    

Accounts receivable, net

     (5,484     3,560   

Inventories

     (1,295     196   

Other assets

     (9,240     (360

Accounts payable

     5,883        (370

Accrued legal fees

     893        4,097   

Accrued liabilities

     (2,603     (5,831

Deferred revenue

     1,613        (4,329
  

 

 

   

 

 

 

Net cash provided by operating activities

     23,452        63,384   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (12,782     (3,518

Proceeds from sale of property and equipment

     63        2,207   

Purchases of short-term available-for-sale investments

     (202,387     (269,167

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

     297,340        230,364   

Purchases of intangible assets

     (4,412     (8,494

Acquisitions, net of cash acquired

     (27,173     —     
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     50,649        (48,608
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Dividend paid

     (10,414     —     

Proceeds from exercise of stock options

     1,860        3,180   

Proceeds from employee stock purchase program

     3,732        4,174   

Repurchase of common stock

     (83     —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (4,905     7,354   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     69,196        22,130   

Cash and cash equivalents at beginning of period

     55,758        69,268   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 124,954      $ 91,398   
  

 

 

   

 

 

 

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

 

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TESSERA TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION

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

The accompanying interim unaudited condensed consolidated financial statements as of September 30, 2012 and 2011, 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 (“U.S.”) for interim financial information. The amounts as of December 31, 2011 have been derived from the Company’s annual audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary (consisting of normal recurring adjustments) to state fairly the financial position of the Company and its results of operations and cash flows as of and for the periods presented. These financial statements should be read in conjunction with the annual audited financial statements and notes thereto as of and for the year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed on February 17, 2012 (the “Form 10-K”).

The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2012 or any future period and the Company makes no representations related thereto.

Reclassification

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

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no significant changes in the Company’s significant accounting policies with the exception of those described below during the nine months ended September 30, 2012, as compared to the significant accounting policies described in the Form 10-K.

Property and equipment

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

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

 

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

Variable Interest Entity

In October 2011, a subsidiary of the Company entered into a limited liability company agreement (“Agreement”) to form a new entity (“Entity”), with the Entity’s primary objective to define strategies and related business plans to accelerate the development and commercialization of the Company’s current and future advanced packaging and interconnect technology. The subsidiary of the Company is the sole contributor of capital to the Entity and has contributed $5.0 million of the total possible capital contribution of up to $5.0 million, as of September 30, 2012. Per the Agreement, all net profits and losses are allocated to such subsidiary of the Company since it is the sole contributor of capital. The Entity has net assets of approximately $2.7 million as of September 30, 2012 which are consolidated with the Company’s operating results.

Contingencies

From time to time, the Company may be involved in legal and administrative proceedings and claims of various types. The Company records a liability in its consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. Management reviews these estimates in each accounting period as additional information becomes known and adjusts the loss provision when appropriate. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in the consolidated financial statements. If a loss is probable but the amount of loss cannot be reasonably estimated, the Company discloses the loss contingency

 

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and an estimate of possible loss or range of loss (unless such an estimate cannot be made). The Company does not recognize gain contingencies until they are realized. Legal costs incurred in connection with loss contingencies are expensed as incurred. See Note 13, “Commitments and Contingencies,” for further information regarding the Company’s pending litigation.

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

Adopted

In June 2011, the Financial Accounting Standards Board (the “FASB”) and International Accounting Standards Board issued an update to the authoritative guidance for fair value measurement. This update does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within U.S. GAAP or International Financial Reporting Standards. This update changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, this update clarifies the FASB’s intent about the application of existing fair value measurements. This update is effective for interim and annual periods beginning after December 15, 2011 and shall be applied prospectively. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial position, results of operations or cash flows.

Issued

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

In July 2012, the FASB issued ASU 2012-02, Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, which is intended to reduce the complexity and cost of performing a quantitative test for impairment of indefinite-lived intangible assets by permitting an entity the option to perform a qualitative evaluation about the likelihood that an indefinite-lived intangible asset is impaired in order to determine whether it should calculate the fair value of the asset. The update also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

NOTE 4 – COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

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

 

     September 30,
2012
    December 31,
2011
 

Trade and other receivables

   $ 14,126      $ 8,642   

Allowance for doubtful accounts

     (43     (43
  

 

 

   

 

 

 
   $ 14,083      $ 8,599   
  

 

 

   

 

 

 

Inventories consisted of the following (in thousands):

 

     September 30,
2012
     December 31,
2011
 

Raw materials

   $ 2,037       $ 516   

Work in process

     515         435   

Finished goods

     709         623   
  

 

 

    

 

 

 
   $ 3,261       $ 1,574   
  

 

 

    

 

 

 

 

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

 

     September 30,
2012
    December 31,
2011
 

Furniture and office equipment

   $  39,842      $  37,371   

Production equipment

     32,813        11,589   

Land and buildings

     21,314        21,314   

Leasehold improvements

     6,226        5,460   
  

 

 

   

 

 

 
     100,195        75,734   

Less: Accumulated depreciation and amortization

     (49,208     (39,415
  

 

 

   

 

 

 
   $ 50,987      $ 36,319   
  

 

 

   

 

 

 

Accrued liabilities consisted of the following (in thousands):

 

     September 30,
2012
     December 31,
2011
 

Employee compensation and benefits

   $  11,182       $  11,852   

Other

     7,008         8,972   
  

 

 

    

 

 

 
   $ 18,190       $ 20,824   
  

 

 

    

 

 

 

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

 

     September 30,
2012
     December 31,
2011
 

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

   $  374       $  24   
  

 

 

    

 

 

 
   $ 374       $ 24   
  

 

 

    

 

 

 

NOTE 5 – FINANCIAL INSTRUMENTS

The following is a summary of marketable securities at September 30, 2012 and December 31, 2011 (in thousands):

 

     September 30, 2012  
            Gross      Gross     Estimated  
            Unrealized      Unrealized     Fair  
     Cost      Gains      Losses     Values  

Available-for-sale securities

          

Corporate bonds and notes

   $ 184,690       $ 300       $ (24   $ 184,966   

Municipal bonds and notes

     94,130         82         (6     94,206   

Commercial paper

     50,187         11         (8     50,190   

Treasury and agency notes and bills

     30,559         18           30,577   

Money market funds

     17,329         —           —          17,329   

Certificate of deposit

     4,507         2         —          4,509   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

     381,402         413         (38     381,777   
  

 

 

    

 

 

    

 

 

   

 

 

 

Reported in:

          

Cash and cash equivalents

           $ 40,825   

Short-term investments

             340,952   
          

 

 

 

Total marketable securities

           $ 381,777   
          

 

 

 

 

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

Available-for-sale securities

          

Corporate bonds and notes

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

Municipal bonds and notes

     151,887         203         (15     152,075   

Treasury and agency notes and bills

     87,684         84         (14     87,754   

Commercial paper

     30,899         7         (15     30,891   

Money market funds

     13,269         —           —          13,269   

Certificate of deposit

     9,820         3         (6     9,817   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

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

 

 

    

 

 

    

 

 

   

 

 

 

Reported in:

          

Cash and cash equivalents

           $ 25,190   

Short-term investments

             436,687   
          

 

 

 

Total marketable securities

           $ 461,877   
          

 

 

 

At September 30, 2012 and December 31, 2011, the Company had $465.9 million and $492.4 million, respectively, in cash, cash equivalents and short-term investments. The majority of these amounts were held in marketable securities, as shown above. The remaining balance of $84.1 million and $30.5 million at September 30, 2012 and December 31, 2011, respectively, was cash held in operating accounts not included in the tables above.

The gross realized gains and losses on sales of marketable securities were not significant during each of the three and nine months ended September 30, 2012 and 2011.

Unrealized gains of $0.4 million, net of tax, as of September 30, 2012, were related to a temporary increase in value of the remaining available-for-sale securities and were due primarily to changes in interest rates and market and credit conditions of the underlying securities. Certain investments with a temporary decline in value are not considered to be other-than-temporarily impaired as of September 30, 2012 because the Company has the ability to hold these investments to allow for recovery, does not anticipate having to sell these securities with unrealized losses and continues to receive interest at the maximum contractual rate. For the three and nine months ended September 30, 2012 and 2011, respectively, the Company did not record any impairment charges.

The following table summarizes the fair value and gross unrealized losses related to individual available-for-sale securities at September 30, 2012 and December 31, 2011, which have been in a continuous unrealized loss position, aggregated by investment category and length of time (in thousands):

 

September 30, 2012

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

Corporate bonds and notes

   $  36,845       $ (24   $ —         $ —         $  36,845       $ (24

Municipal bonds and notes

     17,709         (6     —           —           17,709         (6

Commercial paper

     25,977         (8     —              25,977         (8
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 80,531       $ (38   $ —         $ —         $ 80,531       $ (38
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2011

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

Corporate bonds and notes

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

Municipal bonds and notes

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

Commercial Paper

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

Treasury and agency notes and bills

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

Certificate of deposit

     3,514         (6 )           3,514         (6 )
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

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The estimated fair value of marketable securities by contractual maturity at September 30, 2012 is shown below (in thousands). 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

   $ 284,495   

Due in one to two years

     97,282   
  

 

 

 

Total

   $ 381,777   
  

 

 

 

NOTE 6 – BUSINESS COMBINATION

Vista Point Technologies

On June 28, 2012, DigitalOptics Corporation, a subsidiary of Tessera Technologies, Inc., completed its acquisition of certain assets of Vista Point Technologies, a Tier One qualified camera module manufacturing business, from Flextronics International Ltd. for consideration of $29.0 million, net of $11.9 million cash acquired. Approximately $7.6 million of the consideration has been placed in escrow, of which, approximately $7.0 million is subject to delivery of certain additional assets by Flextronics International Ltd. no later than March 31, 2013. The Company intends to use the acquired assets to help build the DigitalOptics segment into a supplier of camera modules in the mobile phone market.

As part of the acquisition, DigitalOptics Corporation Technology Zhuhai Limited (formally known as Vista Point Electronic Technologies (Zhuhai) Co. Ltd.), a company organized under the laws of the People’s Republic of China, was acquired from Flextronics International Ltd. and became an indirect wholly owned subsidiary of the Company. The business combination transaction was accounted for using the purchase method of accounting, with the results of the acquisition included in the DigitalOptics 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 Flextronics International Ltd. 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

   $ 11,196         1-7   

Inventory

     392         N/A   

Other current assets

     870         N/A   

Other assets

     7,853         N/A   
  

 

 

    
     20,311      

Identified intangible assets:

     

Patents/core technology

     900         14   

Customer relationships

     900         3   

Goodwill

     6,844         N/A   
  

 

 

    
     8,644      
  

 

 

    

Total purchase price

   $ 28,955      
  

 

 

    

Approximately $20.3 million has been allocated to acquired net tangible assets consisting of property and equipment delivered, and $7.0 million of property and equipment (included in other assets) to be delivered. Approximately $1.8 million has been allocated to amortizable intangible assets acquired.

NOTE 7 – 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.

 

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

 

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

The following is a list of the Company’s assets required to be measured at fair value on a recurring basis and where they were classified within the hierarchy as of September 30, 2012 (in thousands):

 

     Fair Value      Quoted
Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets

           

Marketable Securities

           

Money market funds (1)

   $ 17,329       $ 17,329       $ —         $ —     

Corporate bonds and notes (2)

     184,966         —           184,966         —     

Municipal bonds and notes (2)

     94,206         —           94,206         —     

Treasury and agency notes and bills (2)

     30,577         —           30,577         —     

Certificate of deposit (2)

     4,509         —           4,509         —     

Commercial paper (3)

     50,190         —           50,190         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 381,777       $ 17,329       $ 364,448       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The following footnotes indicate where the noted items were recorded in the Condensed Consolidated Balance Sheet at September 30, 2012:

 

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

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

 

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

Assets

           

Marketable Securities

           

Money market funds (1)

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

Corporate bonds and notes (2)

     168,071         —           168,071         —     

Municipal bonds and notes (2)

     152,075         —           152,075         —     

Treasury and agency notes and bills (2)

     87,754         —           87,754         —     

Certificate of deposit (2)

     9,817         —           9,817         —     

Commercial paper (3)

     30,890         —           30,890         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

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

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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

Nonrecurring Fair Value Measurements

The Company measures certain assets at fair value on a nonrecurring basis. These assets include approximately $18.2 million of property and equipment and $1.8 million in intangible assets that were valued at fair value as part of the Vista Point Technologies acquisition described in Note 6 above. For certain of the property and equipment, the fair value was determined using a cost approach based on the condition, market and functionality of these assets, including physical depreciation and certain obsolescence adjustments. The fair value for these acquired intangible assets was determined using the cost approach and discounted cash flow method. As a result, $0.3 million of property and equipment and the $1.8 million of intangible assets are classified as Level 3.

NOTE 8 – GOODWILL AND IDENTIFIED INTANGIBLE ASSETS

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and identified intangible assets acquired under a business combination. Identified intangible assets consist of acquired patents/core technology, existing technology, trade names, assembled workforce and non-compete agreements resulting from business combinations, and acquired patents under asset purchase agreements. Except for intangible assets used in in-process research and development which have indefinite useful lives until the completion or abandonment of the associated research and development efforts, identified intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from two to 15 years.

As a result of the Company’s impairment analysis, completed in the fourth quarter of 2011, the Company recorded an impairment charge of goodwill of $49.7 million for the nine months ended September 31, 2011, all of which was included in the DigitalOptics segment. The Company recorded the impairment charge due primarily to the low market price of the Company’s common stock, which resulted in the Company’s market capitalization being significantly lower than the book value of equity for an extended period of time. Accordingly, the carrying value of goodwill was zero at December 31, 2011.

The changes to our goodwill, which are all allocated to the DigitalOptics segment, from December 31, 2011 through September 30, 2012 is reflected below (in thousands):

 

      DigitalOptics  

Balance at December 31, 2011

   $ —     

Goodwill acquired through the asset acquisition from Vista Point Technologies

     6,844   
  

 

 

 
Balance at September 30, 2012    $  6,844   
  

 

 

 

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

 

          September 30, 2012      December 31, 2011  
     Average
Life
(Years)
   Gross
Assets
     Accumulated
Amortization
    Net      Gross
Assets
     Accumulated
Amortization
    Net  

Acquired patents / core technology

   3-15    $ 135,366       $ (34,534   $ 100,832       $ 132,553       $ (21,901   $ 110,652   

Existing technology

   5-10      54,196         (37,066     17,130         54,196         (32,032     22,164   

Customer contracts

   3-9      12,800         (7,794     5,006         11,900         (6,808     5,092   

Trade name

   4-10      3,620         (2,360     1,260         3,620         (2,102     1,518   

In-process research and development

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

Non-competition agreements

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

Assembled workforce

   4      300         (300     —           300         (300     —     
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
      $ 209,582       $ (83,454   $ 126,128       $ 205,869       $ (64,543   $ 141,326   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense for the three months ended September 30, 2012 and 2011 amounted to $6.2 million and $4.3 million, respectively. Amortization expense for the nine months ended September 30, 2012 and 2011 amounted to $18.9 million and $12.5 million, respectively.

As of September 30, 2012, the estimated future amortization expense of intangible assets, excluding the in-process research and development, is as follows (in thousands):

 

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2012 (remaining 3 months)

   $ 6,153   

2013

     24,510   

2014

     22,699   

2015

     21,366   

2016

     17,522   

Thereafter

     31,978   
  

 

 

 
   $ 124,228   
  

 

 

 

There was no impairment of long-lived assets for the three and nine months ended September 30, 2012 and 2011. The Company has incurred significant operating losses from the DigitalOptics segment. If the anticipated future results of the DigitalOptics segment do not materialize as expected, then the related goodwill and intangible assets could be subject to an impairment charge in the future. See Note 14 — “Segment and Geographic Information” for additional detail.

NOTE 9 – NET LOSS PER SHARE

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

 

     Three Months Ended     Nine Months Ended  
     September 30,
2012
    September 30,
2011
    September 30,
2012
    September 30,
2011
 

Numerator:

        

Net loss

   $ (1,112   $ (44,736   $ (9,609   $ (21,938

Denominator:

        

Weighted average common shares outstanding

     52,111        51,407        51,927        51,041   

Less: Unvested common shares subject to repurchase

     (18     (43     (19     (61
  

 

 

   

 

 

   

 

 

   

 

 

 

Total shares-basic

     52,093        51,364        51,908        50,980   

Effect of dilutive securities:

        

Stock awards

     —          —          —          —     

Restricted stock awards and units

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total shares-diluted

     52,093        51,364        51,908        50,980   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share-basic

   $ (0.02   $ (0.87   $ (0.19   $ (0.43
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share-diluted

   $ (0.02   $ (0.87   $ (0.19   $ (0.43
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) 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 (loss) 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 incremental common shares issuable upon the exercise of stock options, less shares from assumed proceeds. The assumed proceeds calculation includes actual proceeds to be received from the employee upon exercise, the average unrecognized stock compensation cost during the period and any tax benefits that will be credited upon exercise to additional paid in capital.

For both the three and nine months ended September 30, 2012, all 6.5 million shares of common stock, subject to stock options and restricted stock awards and units were excluded from the computation of diluted net income per share as they were anti-dilutive.

For the three and nine months ended September 30, 2011, all 6.8 million and 6.2 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 10 – STOCKHOLDERS’ EQUITY

Stock Repurchase Programs

In August 2007, the Company’s Board of Directors (“the Board”) authorized a plan to repurchase up to a maximum total of $100.0 million of the Company’s outstanding shares of common stock dependent on market conditions, share price and other factors. As of September 30, 2012 and December 31, 2011, the Company had repurchased a total of approximately 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, 2012, the total amount available for repurchase was $89.5 million. The Company may continue to execute authorized repurchases from time to time under the plan.

 

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Stock Option Plans

The 1996 Plan and the 1999 Plan

In December 1996, the Board adopted the 1996 Stock Option Plan (“1996 Plan”). In February 1999, the Board adopted the 1999 Stock Option Plan (“1999 Plan”) which was approved by the stockholders in May 1999. Under the 1996 Plan and the 1999 Plan, incentive stock options may be granted to the employees of the Company or its subsidiaries at an exercise price of no less than 100% of the fair value on the date of grant, and nonstatutory stock options may be granted to the employees of the Company or its subsidiaries, non-employee directors and consultants at an exercise price of no less than 85% of the fair value. In both cases, when the optionees own stock representing more than 10% of the voting power of all classes of stock of the Company, the exercise price shall be no less than 110% of the fair value on the date of grant. For options granted with an exercise price below fair market value, a stock-based compensation charge has been determined. Options granted under these plans generally have a term of ten years from the date of grant and vest over a four-year period. Shares issued in connection with the exercise of unvested options are subject to repurchase by the Company until such options vest. After February 1999, no further options were granted from the 1996 Plan. After December 2000, no further options were granted from the 1999 Plan. The Company has no intention of issuing additional grants under these plans. As of September 30, 2012, there were no shares reserved for grant under these plans and only cancellations under the 1999 Plan are recorded as available for grant. Based on a Board decision, cancellations under the 1996 Plan are not considered available for grant.

The 2003 Plan

In February 2003, the Board adopted and the Company’s stockholders approved the 2003 Equity Incentive Plan (“2003 Plan”). Under the 2003 Plan, incentive stock options may be granted to the employees of the Company or its subsidiaries at an exercise price of no less than 100% of the fair value on the date of grant, and nonstatutory stock options may be granted to the employees of the Company or its subsidiaries, non-employee directors and consultants at an exercise price of no less than 85% of the fair value. In both cases, when the optionees own stock representing more than 10% of the voting power of all classes of stock of the Company, the exercise price shall be no less than 110% of the fair value on the date of grant. Options, restricted stock awards, and restricted stock units granted under this plan generally have a term of ten years from the date of grant and vest over a four-year period. Restricted stock, performance awards, dividend equivalents, deferred stock, stock payments and stock appreciation rights may also be granted under the 2003 Plan either alone, in addition to, or in tandem with any options granted thereunder. Restricted stock awards and units are full-value awards that reduce the number of shares reserved for grant under this plan by one and one-half shares for each share granted. The vesting criteria for restricted stock awards and units is generally the passage of time or meeting certain performance-based objectives, and continued employment through the vesting period generally over four years. As of September 30, 2012, there were 4,955,000 shares reserved for future grant under this plan.

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

 

     Shares Outstanding  
     Number of
Shares
    Weighted
Average
Exercise
Price Per
Share
 

Balance at December 31, 2011

     6,819      $  20.16   

Options granted

     1,603      $ 15.56   

Options exercised

     (127   $ 14.70   

Options cancelled / forfeited / expired

     (1,654   $ 23.85   
  

 

 

   

Balance at September 30, 2012

     6,641      $ 18.24   
  

 

 

   

Information with respect to outstanding restricted stock awards and units as of September 30, 2012 is as follows (in thousands, except per share amounts):

 

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

Balance at December 31, 2011

     730        261        991      $ 17.60   

Awards and units granted

     311        133        444      $ 16.57   

Awards and units vested / earned

     (208     (30     (238   $ 17.22   

Awards and units cancelled / forfeited

     (112     (248     (360   $ 19.48   
  

 

 

   

 

 

   

 

 

   

Balance at September 30, 2012

     721        116        837      $ 16.35   
  

 

 

   

 

 

   

 

 

   

 

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Table of Contents

Performance Awards and Units

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

Employee Stock Purchase Plan

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

The ESPP has a series of consecutive, overlapping 24-month offering periods. The first offering period commenced February 1, 2004, the effective date of the ESPP, as determined by the Board. Individuals who own less than 5% of the Company’s voting stock, are scheduled to work more than 20 hours per week and whose customary employment is for more than five months in any calendar year may join an offering period on the first day of the offering period or the beginning of any semi-annual purchase period within that period. Individuals who become eligible employees after the start date of an offering period may join the ESPP at the beginning of any subsequent semi-annual purchase period.

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

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

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

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

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

As of September 30, 2012, there were approximately 299,000 shares reserved for grant under the ESPP.

NOTE 11 – STOCK-BASED COMPENSATION EXPENSE

The effect of recording stock-based compensation expense for the three and nine months ended September 30, 2012 and 2011 is as follows (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,
2012
     September 30,
2011
     September 30,
2012
     September 30,
2011
 

Cost of revenues

   $ 106       $ 67       $ 504       $ 339   

Research, development and other related costs

     1,326         1,694         4,990         6,548   

Selling, general and administrative

     2,548         3,598         7,755         13,363   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 3,980       $ 5,359       $ 13,249       $ 20,250   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock-based compensation expense categorized by various equity components for the three and nine months ended September 30, 2012 and 2011 is summarized in the table below (in thousands):

 

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Table of Contents
     Three Months Ended      Nine Months Ended  
     September 30,
2012
     September 30,
2011
     September 30,
2012
     September 30,
2011
 

Employee stock options

   $ 2,341       $ 3,375       $ 8,251       $ 12,547   

Restricted stock awards and units

     1,154         1,494         3,557         6,124   

Employee stock purchase plan

     485         490         1,441         1,579   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 3,980       $ 5,359       $ 13,249       $ 20,250   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

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

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

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

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

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

The following assumptions were used to value the options granted:

 

     Three Months Ended     Nine Months Ended  
     September 30,
2012
    September 30,
2011
    September 30,
2012
    September 30,
2011
 

Expected life (in years)

     3.7        3.7        3.7        3.7   

Risk-free interest rate

     0.5     0.7     0.5 - 0.8     0.7 - 1.8

Dividend yield

     2.7     0.0     2.2 - 2.7     0.0

Expected volatility

     48.5     76.5     48.5 - 66.4     76.3 - 76.7

NOTE 12 – INCOME TAXES

The provision for income taxes for the three and nine months ended September 30, 2012 was $2.5 million and $1.8 million, respectively, which were comprised of domestic income tax and foreign income and withholding taxes. The benefit from income taxes for the three months ended September 30, 2011 was $1.6 million and the provision for income taxes for the nine months ended September 30, 2011 was $9.7 million, which were comprised of domestic income tax and foreign income and withholding taxes as offset by a tax benefit for the impairment of tax-deductible goodwill. The Company’s provision for income taxes is based on its worldwide estimated annualized effective tax rate, except for jurisdictions for which a loss is expected for the year and no benefit can be realized for those losses, and the tax effect of discrete items occurring during the period. The tax for jurisdictions for which a loss is expected for the year is based on actual taxes and tax reserves for the quarter. The increase in the income tax provision for the three months ended September 30, 2012 as compared to the same period in the prior year is largely attributable to income generated during the three months ended September 30, 2012 as compared to the loss generated in the three months ended September 30, 2011. The decrease in the income tax provision for the nine months ended September 30, 2012 as compared to the same period in the prior year is attributable to the greater loss incurred in the current year as compared to the prior year’s income before considering the non-tax-deductible goodwill impairment for which the Company does not receive a tax benefit.

As of September 30, 2012, unrecognized tax benefits approximated $3.9 million, of which $2.6 million would affect the effective tax rate if recognized. At December 31, 2011, unrecognized tax benefits were $3.8 million of which $2.5 million would affect the effective tax rate if recognized. It is reasonably possible that unrecognized tax benefits may decrease by a range of $0.1 million to $0.2 million in the next 12 months due to the expected lapse of a foreign statute of limitation relating to tax incentives and the conclusion of a foreign tax examination.

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, 2012 and 2011, the Company recognized an insignificant amount of interest and penalties related to unrecognized tax benefits. At September 30, 2012 and December 31, 2011, the Company has accrued $0.4 million and $0.3 million, respectively, of interest and penalties related to unrecognized tax benefits.

 

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At September 30, 2012, the Company’s 2007 through 2011 tax years were open and subject to potential examination in one or more jurisdictions. In addition, in the U.S., any net operating losses or credits that were generated in prior years but utilized in an open year may also be subject to examination. The Company is currently under Internal Revenue Service examination related to its 2008 and 2009 tax returns, under review in Israel on a 2007 subsidiary liquidation and in Ireland on the 2010 R&D tax credit claim. The Company is not currently under state income tax examination.

NOTE 13 – COMMITMENTS AND CONTINGENCIES

Lease and Purchase Commitments

The Company and its subsidiaries lease office and research facilities and office equipment under operating leases which expire at various dates through 2018. Under lease agreements that contain escalating rent provisions, lease expense is recorded on a straight-line basis over the lease term. In addition, the Company and its subsidiaries have agreements containing non-cancelable, non-refundable payment terms with third parties to purchase equipment and services. Rent expense for the three months ended September 30, 2012 and 2011, was $1.1 million and $0.8 million, respectively. Rent expense for the nine months ended September 30, 2012 and 2011, was $2.8 million and $2.4 million, respectively.

As of September 30, 2012, future minimum lease payments and purchase obligations are as follows (in thousands):

 

     Lease
Obligations
     Purchase
Obligations
     Total  

2012 (remaining 3 months)

   $ 958       $ 6,665       $ 7,623   

2013

     4,782         1,027         5,809   

2014

     4,014         —           4,014   

2015

     2,732         —           2,732   

2016

     1,668         —           1,668   

Thereafter

     1,454         —           1,454   
  

 

 

    

 

 

    

 

 

 
   $ 15,608       $ 7,692       $ 23,300   
  

 

 

    

 

 

    

 

 

 

Contingencies

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

Powertech Technology Inc. v. Tessera, Inc., Civil Action No. 4:10-00945-CW (N.D. Cal.) and U.S. Court of Appeals for the Federal Circuit Case No. 2010-1489

On March 5, 2010, Powertech Technology Inc. (“PTI”) filed a complaint against Tessera, Inc. in the United States District Court for the Northern District of California seeking a declaratory judgment of noninfringement and invalidity of Tessera, Inc.’s U.S. Patent No. 5,663,106. On March 22, 2010, the case was related to Siliconware Precision Industries, Co., Ltd v. Tessera, Inc., Civil Action No. 4:08-cv-03667-CW (N.D. Cal.), and assigned to the judge presiding over that action.

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

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

On August 6, 2010, PTI filed a notice of appeal with the U.S. Court of Appeals for the Federal Circuit. On September 30, 2011, the Federal Circuit issued an opinion reversing and remanding the case to the district court, determining that there was declaratory judgment jurisdiction. Tessera, Inc. filed a petition for rehearing on November 14, 2011. The Federal Circuit denied Tessera, Inc.’s petition for rehearing on January 5, 2012. On January 19, 2012, the Federal Circuit issued its judgment and the case was remanded to the district court. On December 15, 2011, the district court case was related to Powertech Technology Inc. v. Tessera, Inc., Civil Action No. 4:11-06121-CW (N.D. Cal.), discussed below.

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

On May 16, 2012, the Court entered an order that denied PTI’s motion to strike as to one of Tessera, Inc.’s affirmative defenses, granted PTI’s motion to strike with leave to amend as to several other affirmative defenses asserted by Tessera, Inc., and granted PTI’s motion to strike as to one of Tessera, Inc.’s affirmative defenses, stating that Tessera, Inc. may move to amend to add that defense if circumstances change. Tessera, Inc. filed an amended answer on May 29, 2012.

On June 29, 2012, PTI sent a letter to Tessera, Inc. purporting to terminate the TCC License Agreement as of June 30, 2012.

 

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On July 30, 2012, Tessera, Inc. provided PTI with a covenant not to sue, or otherwise hold liable, PTI or its customers under certain claims of U.S. Patent No. 5,663,106 in connection with certain PTI-manufactured products.

On August 9, 2012, Tessera, Inc. moved for summary judgment on the ground that as a matter of law no case or controversy exists sufficient to support PTI’s claims because of the covenant and because the parties’ rights and obligations do not turn on infringement or validity of the Tessera, Inc. patent that forms the basis of PTI’s claims.

On September 18, 2012, the Patent Office issued an ex parte reexamination certificate in which certain original claims were cancelled from U.S. Patent No. 5,663,106, and certain new claims were added.

On October 1, 2012, Tessera, Inc. provided PTI with a supplemental covenant not to sue, which among other things, extended the covenant to PTI’s subsidiaries and made clear that Tessera, Inc. will not contend that PTI is obligated to pay royalties based on infringement of U.S. Patent No. 5,663,106.

On October 2, 2012, PTI filed a motion for entry of judgment under Federal Rule of Civil Procedure 54(b) asking the court to enter judgment that certain claims of U.S. Patent No. 5,663,106 that were subject to reexamination are invalid.

Powertech Technology Inc. v. Tessera, Inc., Civil Action No. 4:11-0612-CW (N.D. Cal.)

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

On December 15, 2011, the case was related to Powertech Technology Inc. v. Tessera, Inc., Civil Action No. 4:10-00945-CW (N.D. Cal.), discussed above.

On December 30, 2011, Tessera, Inc. filed a motion to dismiss the complaint for failure to state a claim upon which relief can be granted and a special motion to strike pursuant to California’s anti-SLAPP statute. The Court denied Tessera, Inc.’s motions on May 21, 2012.

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

On June 3, 2012, PTI filed an amended complaint against Tessera, Inc., adding claims for fraud and deceit, patent misuse, and a declaratory judgment interpreting PTI’s license agreement with Tessera, Inc. In addition to the damages sought by PTI’s original complaint, the amended complaint seeks punitive damages for fraud, termination of the Tessera, Inc. license as of September 24, 2010, recovery of all royalties paid on wBGA products since September 24, 2010, and an order “enjoining Tessera, Inc. and directing that Tessera, Inc. may not proceed against any party,… under any Tessera Patent as defined by Exhibit A to the TCC License with all amendments, supplements, and additions through September 28, 2010 until Tessera has first paid PTI all of the royalties paid on wBGA products by PTI since September 24, 2010, presently estimated to be $40 million.” Tessera, Inc. filed a motion to dismiss PTI’s claim for patent misuse and to strike portions of PTI’s claim for fraud on June 19, 2012. On August 10, 2012, the Court granted in part and denied in part Tessera, Inc.’s motion, specifically dismissing the patent misuse claim and striking the fraud claim, and granted PTI leave to file an amended and supplemental complaint.

On June 29, 2012, PTI sent a letter to Tessera, Inc. purporting to terminate the TCC License Agreement as of June 30, 2012.

On August 24, 2012, PTI filed a third amended complaint. In addition to the claims and recovery alleged in its earlier complaints, the third amended complaint contained an amended fraud claim and an amended patent misuse claim. The new fraud claim sought damages at least in the amount of the royalty payments made to Tessera, Inc. after December 7, 2007, and punitive damages. The new patent misuse claim asked for declarations that Tessera has engaged in patent misuse, that the agreement is unenforceable against PTI until Tessera, Inc. has purged the patent misuse, and that the Tessera, Inc. patents are unenforceable against PTI until Tessera, Inc. has purged the patent misuse. Tessera, Inc. answered that complaint on September 10, 2012. Also on September 10, 2012, Tessera, Inc. filed counterclaims against PTI for breach of contract, breach of the implied covenant, fraud, negligent misrepresentation, declaratory judgment of indemnification, and declaratory judgment regarding PTI’s asserted termination of the agreement.

On July 20, 2012, PTI filed a motion for summary judgment on PTI’s first claim for relief in this case. On August 9, 2012, Tessera, Inc. filed an opposition to PTI’s motion and filed its own motion for summary judgment on PTI’s first, second and third claims on the ground, among others, that under the unambiguous language of the agreement Tessera, Inc. did not breach the agreement by filing and pursing its claims 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 September 20, 2012, the court heard arguments on PTI’s July 20, 2012 summary judgment motion and Tessera, Inc.’s August 9, 2012 summary judgment motions and took the motions under submission. On October 2, 2012, the parties stipulated to the court’s taking the motions off calendar, and that same day, the court entered an order taking the motions off calendar until such date as the court determines the motions should be decided or the presently-set date for hearing summary judgment motions of December 5, 2013.

 

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On Oct. 23, 2012, the Court granted PTI leave to file its fourth amended and supplemental complaint.

Other Litigation Matters

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

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

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

NOTE 14 – SEGMENT AND GEOGRAPHIC INFORMATION

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

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

The Intellectual Property segment is managed by Tessera Intellectual Property Corp., including managing the patent, licensing and litigation portfolios of Tessera, Inc. and Invensas Corporation. The Company’s Intellectual Property segment, comprised of reverse engineering, licensing, account administration and legal teams, generates revenue from manufacturers for the use of its patented ideas. Included in the Intellectual Property segment are a number of advanced technology research and development programs.

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

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

The following table sets forth the Company’s segment revenues, operating expenses and operating loss for the three and nine months ended September 30, 2012 and 2011 (in thousands):

 

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     Three Months Ended     Nine Months Ended  
     September 30,     September 30,     September 30,     September 30,  
     2012     2011     2012     2011  

Revenues:

        

Intellectual Property Segment:

        

Royalty and license fees

   $ 57,721      $ 50,312      $ 149,723      $ 164,414   

Past production payments

     79        —          79        —     

Product and service revenues

     66        —          66        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Intellectual Property revenues

     57,866        50,312        149,868        164,414   

DigitalOptics Segment:

        

Royalty and license fees

     2,393        4,959        11,840        18,517   

Product and service revenues

     12,431        4,071        19,079        14,914   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total DigitalOptics revenues

     14,824        9,030        30,919        33,431   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     72,690        59,342        180,787        197,845   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Intellectual Property Segment

     25,533        23,736        68,858        59,269   

DigitalOptics Segment

     38,154        71,803        89,428        116,910   

Corporate Overhead

     11,375        10,827        35,712        35,960   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     75,062        106,366        193,998        212,139   

Operating income (loss):

        

Intellectual Property Segment

     32,333        26,576        81,010        105,145   

DigitalOptics Segment

     (23,330     (62,773     (58,509     (83,479

Corporate Overhead

     (11,375     (10,827     (35,712     (35,960
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating loss

   $ (2,372   $ (47,024   $ (13,211   $ (14,294
  

 

 

   

 

 

   

 

 

   

 

 

 

A significant portion of the Company’s revenues is derived from licensees domiciled 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 is prepared by reference to the domicile of the customer. Geographic revenue information for the periods indicated (in thousands, except for percentages) is presented below:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2012     2011     2012     2011  

U.S.

   $ 29,155         40   $ 17,319         29   $ 74,127         41   $ 54,226         27

Korea

     14,181         20     12,058         20     33,660         19     37,582         19

China

     11,057         15     1,386         2     14,446         8     4,718         2

Taiwan

     8,291         11     17,358         29     26,417         15     57,120         29

Japan

     5,608         8     5,893         10     19,566         11     24,355         12

Other Asia

     3,219         4     2,375         4     7,535         4     7,940         4

Europe and other

     1,179         2     2,953         5     5,036         3     11,904         6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 72,690         100   $ 59,342         100   $ 180,787         100   $ 197,845         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

For the three months ended September 30, 2012, four customers each accounted for 10% or more of total revenues. For the nine months ended September 30, 2012, two customers each accounted for 10% or more of total revenues. For the three months ended September 30, 2011, three customers each accounted for 10% or more of total revenues. For the nine months ended September 30, 2011, two customers each accounted for 10% or more of total revenues.

 

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As of September 30, 2012 and December 31, 2011, property and equipment, net, by geographical area are presented below (in thousands):

 

     September 30,
2012
     December 31,
2011
 

U.S.

   $ 37,067       $ 35,082   

China

     9,624         —     

Other

     4,296         1,237   
  

 

 

    

 

 

 

Total

   $ 50,987       $ 36,319   
  

 

 

    

 

 

 

NOTE 15 – RELATED PARTY TRANSACTION

Since 2008, Tessera, Inc. has engaged 3LP Advisors LLC (“3LP”) to assist with the identification and acquisition of patents. In 2011 and 2012, 3LP expanded its advisory services by providing strategic advice to Invensas Corporation and Tessera Intellectual Property Corp. as well. A managing partner of 3LP, Mr. Kevin G. Rivette, is a member of the Board and has a non-majority ownership interest in 3LP. For the three months ended September 30, 2012 and 2011, the Company recognized operating expense of $0.4 million and $0.5 million, respectively, related to these engagements. For both the nine months ended September 30, 2012 and 2011, the Company recognized operating expense of $2.1 million, related to these engagements. At September 30, 2012 and December 31, 2011, the accounts payable balance due to 3LP was $0.2 million and $2.0 million, respectively.

NOTE 16 – RESTRUCTURING AND OTHER CHARGES

In January 2011, the Company announced a reorganization of its DigitalOptics segment to focus on key growth opportunities including extended depth of field (“EDoF”), Zoom and MEMS-based auto-focus and a reduction of DigitalOptics employees by up to 15% of the Company’s worldwide employee base along with certain headquarters support functions. In August 2011, the Company announced a commitment to undertake a workforce reduction at its Yokohama, Japan development facility and to close that facility in order to optimize the Company’s operations. Expenses incurred as a result of these activities consisted of severance, costs related to the continuation of certain employee benefits and expenses related to the closure of the facility and termination of the operating lease, and are recorded in restructuring and other charges on the statement of operations. Total restructuring and other charges related to these activities was $2.9 million as of September 30, 2011 and $5.2 million as of December 31, 2011, all of which were expensed in the year ended December 31, 2011. The activities were completed in the first quarter of 2012.

NOTE 17 – SUBSEQUENT EVENT

On October 31, 2012, the Board declared a cash dividend of $0.10 per share of common stock for the fourth quarter, payable on December 13, 2012, for the stockholders of record at the close of business on November 22, 2012.

 

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

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

This Quarterly Report contains forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “anticipates,” “plans,” “believes,” “seeks,” “estimates,” “could,” “would,” “may,” “intends,” “targets” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Quarterly Report. The identification of certain statements as “forward-looking” is not intended to mean that other statements not specifically identified are not forward-looking. All statements other than statements about historical facts are statements that could be deemed forward-looking statements, including, but not limited to, statements that relate to our future revenues, product development, demand, acceptance and market share, growth rate, competitiveness, gross margins, levels of research, development and other related costs, expenditures, the outcome or effects of and expenses related to litigation and administrative proceedings related to our patents, our intent to enforce our intellectual property, our ability to license our intellectual property, our ability to become a leading supplier of camera modules in the mobile phone market, 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, and the sufficiency of financial resources to support future operations and capital expenditures.

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

Corporate Information

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

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

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

Business Overview

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

Our Intellectual Property segment is managed by Tessera Intellectual Property Corp., including managing the patent and licensing portfolios of our subsidiaries, Tessera, Inc. and Invensas Corporation (“Invensas”). Our Intellectual Property business, comprised of reverse engineering, licensing, account administration and litigation teams, generates revenue from manufacturers that use its patented ideas. Included in the Intellectual Property segment are a number of advanced technology research and development programs.

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

 

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Our segments were determined based upon the manner in which our management viewed and evaluated our operations for the period reported. As our business grows and evolves, our management may change their views of our business operations. Segment information in Note 14 — “Segment and Geographic Information” in the Notes to Condensed Consolidated Financial Statements is incorporated herein by reference and is presented per the authoritative guidance for segment reporting. At the end of 2011, we renamed our segments in and have recast our segment results to reflect the inclusion of our silent air cooling program in our DigitalOptics segment. Prior to that time, that program was included in our Intellectual Property segment.

Intellectual Property Segment

Our intellectual property segment owns patents principally in the fields of semiconductor packaging and semiconductor circuitry. Many of these patents were purchased from third parties and a significant number of these patents are the result of internal research and development investments. The intellectual property business has licensed these patented ideas to manufacturers that use these ideas, typically on a running per unit royalty basis. Our intellectual property business is also pursuing legal damages for infringement of its patents by manufacturers that we believe use our patented ideas but did not license the right to use our patented ideas.

DigitalOptics Segment

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

Actuator technologies:

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

Image Enhancement Solutions:

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

 

   

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

 

   

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

 

   

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

 

   

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

Wafer Level Optics:

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

Camera Modules:

DOC produces camera modules at its camera module assembly facility located in Zhuhai, China.

 

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Results of Operations

Acquisitions

We have grown our business partly through acquisitions. On June 28, 2012, DOC acquired from Flextronics International Ltd. (“Flextronics”) all the outstanding equity interests in DigitalOptics Corporation Technology Zhuhai Co., Ltd. (formerly known as Vista Point Electronic Technologies (Zhuhai) Co. Ltd.), a company organized under the laws of the People’s Republic of China (the “Zhuhai Entity”), and acquired certain other assets from Flextronics related to its camera module business (collectively, the “Zhuhai Transaction”). The costs incurred related to the Zhuhai Transaction during the three and nine months ended September 30, 2012 have been included in the following discussion. As a result of the Zhuhai Transaction, we anticipate that we will need to make substantial additional capital expenditures and employ additional working capital in order to succeed in our business plans for the DigitalOptics segment. We also anticipate that we will incur greater operating expenses in future periods, due to the manufacturing operations and additional personnel acquired with the Zhuhai Entity.

Revenues

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

From time to time we enter into license agreements that have fixed expiration dates. Upon expiration of such agreements, we need to renew or replace these agreements in order to maintain our revenue base. We may not be able to continue licensing customers on terms favorable to us, under the existing terms or at all, which would harm our results of operations. For example, our license agreement with Micron Technology, Inc. expired in May 2012. Micron Technology, Inc. accounted for 10% or more of total revenues for the year ended December 31, 2011 and has since entered into a definitive sponsor agreement to acquire and support Elpida Memory, Inc., a leading dynamic random access memory (“DRAM”) manufacturer, which is expected to close in the first half of 2013 subject to numerous closing conditions and approvals. While our revenues for the third quarter of 2012 include a payment from Micron Technology, Inc. for the stub period prior to the expiration of the license agreement, if we fail to replace the expired Micron Technology, Inc. license agreement, it will have a negative impact on our revenue and our results of operations.

Tessera, Inc. is in litigation with Powertech Technology Inc. (“PTI”), a customer representing 10% or more of our revenue in 2011, as described in Part II, Item 1 — Legal Proceedings . In June 2012, PTI notified Tessera, Inc. of its purported termination of its license agreement with Tessera, Inc. and that PTI will make a final payment under the license agreement in July 2012. If we are not able to replace the revenue from PTI or if we receive an adverse determination in the litigation with PTI, it could have a substantial adverse impact on our royalty revenue in the near term.

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

 

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

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,     September 30,     September 30,  
     2012     2011     2012     2011  

Revenues:

        

Royalty and license fees

     83     93     89     93

Past production payments (1)

     —          —          —          —     

Product and service revenues

     17        7        11        7   

Total revenues

     100        100        100        100   

Operating expenses:

        

Cost of revenues

     23        9        16        8   

Research, development and other related costs

     34        32        40        28   

Selling, general and administrative

     33        34        40        32   

Litigation expense

     13        15        11        11   

Restructuring charges

     —          5        —          3   

Impairment of goodwill

     —          84        —          25   

Total operating expenses

     103        179        107        107   

Operating loss

     (3)        (79)        (7)        (7)   

Other income and expense, net

     5        1        3        1   

Income (loss) before taxes

     2        (78     (4     (6

Provision for (benefit from) income taxes

     3        (3     1        5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (2 )%      (75 )%      (5 )%      (11 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Past production payments consist of royalty payments for the use of our technology or intellectual property in the past by new licensees that make such payments as part of a settlement of a patent infringement dispute.

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

 

     Three Months Ended  
     September 30,     September 30,     Increase     %  
     2012     2011     (Decrease)     Change  

Royalty and license fees

   $  60,114         83   $  55,271         93    $  4,843        9

Past production payments

     79         —          —           —          79        n/a   

Product and service revenues

     12,497         17        4,071         7        8,426        207   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

   $ 72,690         100   $ 59,342         100   $  13,348        22
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     Nine Months Ended  
     September 30,     September 30,     Increase     %  
     2012     2011     (Decrease)     Change  

Royalty and license fees

   $ 161,563        89   $  182,931         93    $ (21,368     (12 )% 

Past production payments

     79         —          —           —          79        n/a   

Product and service revenues

     19,145         11        14,914         7        4,231        28   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

   $ 180,787         100   $ 197,845         100   $ (17,058     (9 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue for the three and nine months ended September 30, 2012 was $72.7 million and $180.8 million, respectively, compared to $59.3 million and $197.8 million for the same periods in the prior year. See “Segment Operating Results” below for an explanation of the changes in revenue as compared between the reporting periods.

Cost of Revenues

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

 

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communications industries and the timing of property and equipment being placed in service. We anticipate our cost of revenues will increase as our product mix includes more products and services while we grow our DigitalOptics business through the manufacturing operations we acquired in June 2012 through the Zhuhai Transaction.

Cost of revenues for the three months ended September 30, 2012 was $16.7 million, as compared to $5.6 million for the three months ended September 30, 2011, an increase of $11.1 million, or 199%. Cost of revenues for the nine months ended September 30, 2012 was $28.1 million, as compared to $16.5 million for the nine months ended September 30, 2011, an increase of $11.6 million, or 71%. The increases as compared to the same periods in 2011 resulted from increases in equipment, materials and supplies, depreciation and amortization of acquired intangible assets, and personnel related expenses, of which relate primarily to the increased product revenues driven by the operations acquired in the Zhuhai Transaction.

Research, Development and Other Related Costs

Research, development and other related costs consist primarily of compensation and related costs for personnel, as well as costs related to patent applications and examinations, amortization of intangible assets, materials, supplies and equipment depreciation. Research and development is conducted primarily in-house and targets development of chip-scale, circuitry design, 3D architecture, 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 such as 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, 2012 were $24.6 million, as compared to $18.7 million for the three months ended September 30, 2011, an increase of $5.9 million, or 32%. The increase was primarily due to increases in personnel related expenses of $2.2 million, in material costs of $2.0 million, in consulting fees of $0.4 million and in amortization of intangible assets of $0.5 million, offset by a decrease in stock-based compensation expense of $0.4 million. Research, development and other related costs for the nine months ended September 30, 2012 were $72.9 million, as compared to $56.1 million for the nine months ended September 30, 2011, an increase of $16.8 million, or 30%. The increase was primarily due to increases in personnel related expenses of $5.0 million, in material costs of $4.8 million, in consulting fees of $2.5 million and in amortization of intangible assets of $1.7 million, offset by a decrease in stock-based compensation expense of $1.6 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, reverse engineering personnel and services, 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 fees and 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, 2012 were $24.0 million, as compared to $20.4 million for the three months ended September 30, 2011, an increase of $3.6 million, or 18%. The increase was primarily attributable to increases in outside services and legal fees of $1.6 million, in amortization of intangible assets of $1.3 million, in personnel related expenses of $0.7 million and in facility and insurance expense of $0.3 million, offset by a decrease in stock-based compensation expense of $1.1 million. SG&A expenses for the nine months ended September 30, 2012 were $73.1 million, as compared to $62.7 million for the nine months ended September 30, 2011, an increase of $10.4 million, or 17%. The increase was primarily attributable to increases in outside service and legal fees of $7.8 million which were related to our acquisition activities, in amortization of intangible assets of $3.9 million and in personnel related expenses of $2.1 million, offset by a decrease in stock-based compensation expense of $5.6 million.

Litigation Expense

Litigation expense for the three months ended September 30, 2012 was $9.7 million, as compared to $9.1 million for the three months ended September 30, 2011, an increase of $0.6 million, or 7%. Litigation expense for the nine months ended September 30, 2012 was $19.9 million, as compared to $22.3 million for the nine months ended September 30, 2011, a decrease of $2.4 million, or 11%. The decrease in the year to date costs was primarily attributable to the decrease in case activities in our docket of legal proceedings. The case management orders in a number of proceedings have delayed the timing of costs that will be incurred in those proceedings until the end of 2012, 2013 and 2014.

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

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

 

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Impairment of Goodwill

In 2011, we recorded an impairment charge of goodwill of $49.7 million due primarily to the low market price of our common stock, which resulted in our market capitalization being significantly lower than the book value of equity for an extended period of time. Refer to Note 8 — “Goodwill and Identified Intangible Assets” of the Notes to Condensed Consolidated Financial Statements for additional details.

Stock-based Compensation Expense

The following table sets forth our stock-based compensation expense for the three and nine months ended September 30, 2012 and 2011 (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,
2012
     September 30,
2011
     September 30,
2012
     September 30,
2011
 

Cost of revenues

   $ 106       $ 67       $ 504       $ 339   

Research, development and other related costs

     1,326         1,694         4,990         6,548   

Selling, general and administrative

     2,548         3,598         7,755         13,363   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 3,980       $ 5,359       $ 13,249       $ 20,250   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock-based compensation expense categorized by various equity components for the three and nine months ended September 30, 2012 and 2011 is summarized in the table below (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,      September 30,      September 30,  
     2012      2011      2012      2011  

Employee stock options

   $ 2,341       $ 3,375       $ 8,251       $ 12,547   

Restricted stock awards and units

     1,154         1,494         3,557         6,124   

Employee stock purchase plan

     485         490         1,441         1,579   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 3,980       $ 5,359       $ 13,249       $ 20,250   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock-based compensation awards included employee stock options, restricted stock awards and units and employee stock purchases. Stock-based compensation expense for the three months ended September 30, 2012 and 2011 was $4.0 million and $5.4 million, respectively. Stock-based compensation expense for the nine months ended September 30, 2012 and 2011 was $13.2 million and $20.3 million, respectively. The overall decrease from the three and nine months ended September 30, 2011 was primarily related to decreases resulting from fully amortized expense as shares become vested, forfeitures of restricted stock awards and units, and lower expenses related to modification of stock awards. Future stock-based compensation expense will vary due to volatility in our stock price, number and type of stock awards granted and timing of modifications to stock awards, if any.

Other Income and Expense, Net

Other income and expense, net for the three months ended September 30, 2012 was $3.7 million, as compared to $0.7 million, for the three months ended September 30, 2011. Other income and expense, net for the nine months ended September 30, 2012 was $5.4 million, as compared to $2.0 million, for the nine months ended September 30, 2011. The increases were mainly due to the portion of the payment from Amkor related to the International Court of Arbitration of the International Chamber of Commerce interim award in favor of Tessera, Inc. that was recorded as interest income.

Provision for (benefit from) Income Taxes

The provision for income taxes in the three and nine months ended September 30, 2012 of $2.5 million and $1.8 million, respectively, was largely comprised of domestic income tax and foreign income tax and withholding taxes. The benefit from income taxes for the three months ended September 30, 2011 was $1.6 million and the provision for income taxes for the nine months ended September 30, 2011 was $9.7 million, which were comprised of domestic income tax and foreign income and withholding taxes as offset by a tax benefit for the impairment of tax-deductible goodwill. The increase in the income tax provision for the three months ended September 30, 2012 as compared to the same period in the prior year is largely attributable income generated during the current period as compared to the loss generated in the third quarter last year. The decrease in the income tax provision for the nine months ended September 30, 2012 as compared to the same period in the prior year is attributable to the greater loss incurred in the current year as compared to the prior year’s income before considering the nontax-deductible goodwill impairment for which we do not receive a tax benefit.

Segment Operating Results

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

 

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The costs incurred related to the Zhuhai Transaction and the related ongoing operations during the three and nine months ended September 30, 2012 have been included in the results for the DigitalOptics segment, as the acquired business and assets have been included in that segment.

Our reportable segments were determined based upon the manner in which our management views and evaluates our operations. Segment information below and in Note 14 — “Segment and Geographic Information ” 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 loss for the three and nine months ended September 30, 2012 and 2011 (in thousands):

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,     September 30,     September 30,  
     2012     2011     2012     2011  

Revenues:

        

Intellectual Property Segment:

        

Royalty and license fees

   $ 57,721      $ 50,312      $ 149,723      $ 164,414   

Past production payments

     79        —          79        —     

Product and service revenues

     66        —          66        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Intellectual Property revenues

     57,866        50,312        149,868        164,414   

DigitalOptics Segment:

        

Royalty and license fees

     2,393        4,959        11,840        18,517   

Product and service revenues

     12,431        4,071        19,079        14,914   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total DigitalOptics revenues

     14,824        9,030        30,919        33,431   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     72,690        59,342        180,787        197,845   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Intellectual Property Segment

     25,533        23,736        68,858        59,269   

DigitalOptics Segment

     38,154        71,803        89,428        116,910   

Corporate Overhead

     11,375        10,827        35,712        35,960   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     75,062        106,366        193,998        212,139   

Operating income (loss):

        

Intellectual Property Segment

     32,333        26,576        81,010        105,145   

DigitalOptics Segment

     (23,330     (62,773     (58,509     (83,479

Corporate Overhead

     (11,375     (10,827     (35,712     (35,960
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating loss

   $ (2,372   $ (47,024   $ (13,211   $ (14,294
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenues and operating income amounts in this section have been presented on a basis consistent with U.S. GAAP applied at the segment level. Corporate Overhead expenses which have been excluded are primarily support services, human resources, legal, finance, IT, corporate development, procurement activities, and insurance expenses. For the three months ended September 30, 2012, Corporate Overhead expenses were $11.4 million as compared to $10.8 million for the three months ended September 30, 2011. The increase of $0.6 million was mainly attributable to increases in consulting expense of $0.6 million, in depreciation expense of $0.2 million, in facilities and insurance expense of $0.2 million, and in personnel costs of $0.2 million. These increases were partially offset by a decrease of $0.7 million in stock-based compensation expense.

For the nine months ended September 30, 2012, Corporate Overhead expenses were $35.7 million as compared to $36.0 million for the nine months ended September 30, 2011. The decrease of $0.3 million was mainly attributable to a decrease of $4.9 million in stock based compensation partially offset by increases in consulting expense of $3.7 million, in depreciation of $0.2 million, and in facilities and insurance of $0.5 million.

 

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Intellectual Property Segment

 

     Three Months Ended     Nine Months Ended  
     September 30,      September 30,      Increase     %     September 30,      September 30,      Increase     %  
     2012      2011      (Decrease)     Change     2012      2011      (Decrease)     Change  

Revenues:

                    

Intellectual Property:

                    

Royalty and license fees

   $ 57,721       $ 50,312       $ 7,409        15   $ 149,723       $ 164,414       $ (14,691     (9 )% 

Past production payments

     79         —           79        n/a        79         —           79        n/a   

Product and service revenues

     66         —           66        n/a        66         —           66        n/a   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total Intellectual Property revenues

     57,866         50,312         7,554        15        149,868         164,414         (14,546     (9

Operating expenses:

                    

Cost of revenues

     193         195         (2     (1     696         602         94        16   

Research, development and other related costs

     7,283         7,018         265        4        24,977         21,166         3,811        18   

Selling, general and administrative

     8,377         4,542         3,835        84        23,044         12,146         10,898        90   

Litigation expense

     9,680         9,043         637        7        20,141         22,242         (2,101     (9

Restructuring charges

     —           2,938         (2,938     n/a        —           3,113         (3,113     n/a   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total operating expenses

     25,533         23,736         1,797        8        68,858         59,269         9,589        16   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total operating income

   $ 32,333       $ 26,576       $ 5,757        22   $ 81,010       $ 105,145       $ (24,135     (23 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Intellectual Property revenues consist primarily of royalties received from our licensees. For the three months ended September 30, 2012, Intellectual Property revenues were $57.9 million as compared to $50.3 million for the three months ended September 30, 2011, an increase of $7.6 million, or 15%. The overall increase in revenues in the three months ended September 30, 2012 as compared to the same period in 2011 was primarily due to $19.9 million payment from Amkor ($16.7 million of the payment was recorded as royalties and the balance as interest income) related to the interim award by the International Court of Arbitration of the International Chamber of Commerce , partially offset by PTI’s declining payments, the expiration of Micron’s license and lower unit volumes reported by other customers.

For the nine months ended September 30, 2012, Intellectual Property revenue was $149.9 million, compared to $164.4 million in the first nine months of the prior year, which included a nonrecurring $1.0 million license fee. The overall decrease of $14.5 million or 9%, in revenues in the nine months ended September 30, 2012 as compared to the same period in 2011 was primarily due to PTI’s declining payments, the expiration of Micron’s license and lower unit volumes reported by other customers, partially offset by the $19.9 million payment from Amkor ($16.7 million of the payment was recorded as royalties and the balance as interest income) related to the interim award by the International Court of Arbitration of the International Chamber of Commerce and by license and royalty payments of approximately $9.4 million related to audits.

Operating expenses for the three months ended September 30, 2012 were $25.5 million and consisted primarily of research, development and other related costs of $7.3 million, SG&A expenses of $8.4 million and litigation expense of $9.7 million. The increase of $1.8 million, or 8%, in total operating expense as compared to $23.7 million for the three months ended September 30, 2011, was primarily attributable to increases in amortization of intangible assets of $2.1 million, in consulting fees of $1.0 million, and in litigation expense of $0.6 million. These increases were partially offset by the restructuring charges that occurred in the third quarter of 2011.

Operating expenses for the nine months ended September 30, 2012 were $68.9 million and consisted primarily of research, development and other related costs of $25.0 million, SG&A expenses of $23.0 million and litigation expense of $20.1 million. The increase of $9.6 million, or 16%, in total operating expense as compared to $59.3 million for the nine months ended September 30, 2011, was primarily attributable to increases in amortization of intangible assets of $6.7 million, in consulting fees of $4.7 million, and in patent prosecution, application and examination expenses of $2.2 million, offset by a decrease in litigation expense of $2.1 million and by the restructuring charges that occurred in the nine months ended September 30, 2011.

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

Operating income for the three months ended September 30, 2012 and 2011 was $32.3 million and $26.6 million, respectively, which represented an increase of $5.8 million, or 22%, for the reasons stated above. Operating income for the nine months ended September 30, 2012 and 2011 was $81.0 million and $105.1 million, respectively, which represented a decrease of $24.1 million, or 23%, for the reasons stated above.

 

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DigitalOptics Segment

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,     Increase     %     September 30,     September 30,     Increase     %  
     2012     2011     (Decrease)     Change     2012     2011     (Decrease)     Change  

Revenues:

                

DigitalOptics

                

Royalty and license fees

   $ 2,393      $ 4,959      $ (2,566     (52 )%    $ 11,840      $ 18,517      $ (6,677     (36 )% 

Product and service revenues

     12,431        4,071        8,360        205        19,079        14,914        4,165        28   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total DigitalOptics revenues

     14,824        9,030        5,794        64        30,919        33,431        (2,512     (8

Operating expenses:

                

Cost of revenues

     16,555        5,399        11,156        207        27,409        15,865        11,544        73   

Research, development and other related costs

     17,332        11,672        5,660        48        47,953        34,922        13,031        37   

Selling, general and administrative

     4,267        5,079        (812     (16     14,066        14,586        (520     (4

Restructuring charges

     —          —          —          —          —          1,884        (1,884     n/a   

Impairment of goodwill

     —          49,653        (49,653     n/a        —          49,653        (49,653     n/a   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     38,154        71,803        (33,649     (47     89,428        116,910        (27,482     (24
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating loss

   $ (23,330   $ (62,773   $ 39,443        (63 )%    $ (58,509   $ (83,479   $ 24,970        (30 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

DigitalOptics revenues for the three months ended September 30, 2012 were $14.8 million as compared to $9.0 million for the three months ended September 30, 2011, an increase of $5.8 million or 64%. The increase in DigitalOptics revenues in the three months ended September 30, 2012 as compared to the same period in 2011 was due primarily to $9.6 million in revenues related to operations acquired in the Zhuhai Transaction. This increase was partially offset from $3.6 million in lower revenues primarily related to royalties and licenses of our image enhancement technologies and weaker demand for our Micro-Optics products.

DigitalOptics revenue for the for the nine months ended September 30, 2012 was $30.9 million, compared to $33.4 million in the first nine months of the prior year, a decrease of $2.5 million or 8%. The decrease was due to weaker demand for our Micro-Optics products of $5.5 million and lower royalty and license fees revenues from our image enhancement technologies of $6.7 million, partially offset by the $9.6 million in revenues related to operations acquired in the Zhuhai Transaction.

On June 28, 2012, DOC completed the Zhuhai Transaction for consideration of $28.9 million net of cash acquired. We intend to use the acquired assets to help build the DigitalOptics segment into a supplier of camera modules in the mobile phone market. In addition, we are in the process of investing in lens design and manufacturing capability. As a result, we anticipate that we will incur greater operating expenses in future periods.

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

Operating expenses for the three months ended September 30, 2012 were $38.2 million, and consisted of cost of revenues of $16.6 million, research, development and other related costs of $17.3 million and SG&A expenses of $4.3 million. The decrease of $33.6 million, or 47%, in total operating expenses as compared to $71.8 million for the three months ended September 30, 2011, was primarily due to the one-time charge of $49.7 million related to the impairment of goodwill in the third quarter of 2011, partially offset by an increase of $9.4 million in operating equipment and materials primarily related to $9.6 million of additional product revenues generated by the manufacturing operation acquired in the Zhuhai Transaction, and increases in personnel related expenses of $4.0 million and in depreciation expense of $1.9 million.

Operating expenses for the nine months ended September 30, 2012 were $89.4 million, and consisted of cost of revenues of $27.4 million, research, development and other related costs of $48.0 million and SG&A expenses of $14.1 million. The decrease of $27.5 million, or 24%, in total operating expenses as compared to $116.9 million for the nine months ended September 30, 2011, was primarily due to the one-time charge of $49.7 million related to the impairment of goodwill and restructuring charges of $1.9 million which both occurred in the third quarter of 2011, partially offset by an increase of $11.8 million in operating equipment and materials primarily related to $9.6 million of additional product revenues generated by the manufacturing operation acquired in the Zhuhai Transaction, and increases in personnel related expenses of $6.1 million and in depreciation expense of $2.6 million.

Operating loss for the three months ended September 30, 2012 and 2011 was $23.3 million and $62.8 million, respectively, which represented a decreased loss of $39.5 million, or 63%, for the reasons stated above.

Operating loss for the nine months ended September 30, 2012 and 2011 was $58.5 million and $83.5 million, respectively, which represented a decreased loss of $25.0 million, or 30%, for the reasons stated above.

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

 

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Liquidity and Capital Resources

 

     As of     As of  
     September 30,     December 31,  
(in thousands, except for percentages)    2012     2011  

Cash and cash equivalents

   $ 124,954      $ 55,758   

Short-term investments

     340,952        436,687   
  

 

 

   

 

 

 

Total cash, cash equivalents and short-term investments

   $ 465,906      $ 492,445   
  

 

 

   

 

 

 

Percentage of total assets

     65     69
     Nine Months Ended  
     September
30, 2012
    September 30,
2011
 
    

Net cash provided by operating activities

   $ 23,452      $ 63,384   

Net cash provided by (used in) investing activities

   $ 50,649      $ (48,608

Net cash provided by (used in) financing activities

   $ (4,905   $ 7,354   

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 $465.9 million at September 30, 2012, a decrease of $26.5 million from $492.4 million at December 31, 2011. Cash and cash equivalents were $125.0 million at September 30, 2012, an increase of $69.2 million from $55.8 million at December 31, 2011. The increase in cash and cash equivalents was primarily the result of $23.5 million in cash provided by operating activities and $50.6 million in cash provided by investing activities, offset by $4.9 million net cash used in financing activities.

Cash flows provided by operations were $23.5 million for the nine months ended September 30, 2012, primarily due to our net loss of $9.6 million being adjusted for non-cash items of depreciation and amortization of $29.1 million and of stock-based compensation expense of $13.2 million offset by a net decrease in cash from the changes in operating assets and liabilities of $10.2 million.

Cash flows provided by operations were $63.4 million for the nine months ended September 30, 2011, primarily due to net loss of $21.9 million, adjusted for non-cash items of goodwill impairment of $49.7 million, of depreciation and amortization of $20.0 million and, of stock-based compensation expense of $20.3 million, offset by a net decrease in cash from the changes in operating assets and liabilities of $3.0 million.

Net cash provided by investing activities was $50.6 million for the nine months ended September 30, 2012, primarily related to the maturities and sales of short-term investments of $297.3 million, offset by purchases of available-for-sale securities of $202.4 million, cash used of $27.2 million in our acquisition of the Zhuhai Entity and related assets from Flextronics, purchases of intangible assets of $4.4 million, and purchases of property and equipment of $12.8 million. We anticipate significant additional investment in property and equipment as we continue to build our new manufacturing facility in Taiwan.

Net cash used in investing activities was $48.6 million for the nine months ended September 30, 2011, primarily related to purchases of short-term investments of $269.2 million, purchases of intangible assets of $8.5 million, and purchases of property and equipment of $3.5 million, offset by proceeds from maturities and sales of investments of $230.4 million and proceeds from the sale of assets of $2.2 million.

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

We evaluate our investments periodically for possible other-than-temporary impairment and review factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, our intent to hold and whether we will not be required to sell the security before its anticipated recovery, on a more likely than not basis. If declines in the fair value of the investments are determined to be other-than-temporary, we report the credit loss portion of such decline in other income and expense, net, and the remaining noncredit loss portion in accumulated other comprehensive income. For the three and nine months ended September 30, 2012 and 2011, no impairment charges were recorded.

In August 2007, our Board of Directors authorized a plan to repurchase up to a maximum total of $100.0 million of our outstanding shares of common stock dependent on market conditions, share price and other factors. No expiration has been specified for this plan. Repurchases may take place in the open market or through private transactions. As of September 30, 2012, we have repurchased approximately 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, 2012, the total amount available for repurchase was $89.5 million. We may continue to execute authorized repurchases from time to time under the plan.

 

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Net cash used in financing activities was $4.9 million for the nine months ended September 30, 2012 due to a dividend payment of $10.4 million, offset by the issuance of common stock under our employee stock option programs and employee stock purchase plans.

Net cash from financing activities was $7.4 million for the nine months ended September 30, 2011 due to the issuance of common stock under our employee stock option programs and employee stock purchase plans.

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 DOC growth and acquisition funding needs for at least the next twelve months. Poor financial results, unanticipated expenses, unanticipated acquisitions of technologies or businesses or unanticipated strategic investments could give rise to additional financing requirements sooner than we expect. There can be no assurance that equity or debt financing will be available when needed or, if available, that such financing will be on terms satisfactory to us and not dilutive to our then-current stockholders.

Contractual Cash Obligations

 

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

Operating lease obligations

   $ 15,608       $ 958       $ 11,528       $ 2,882       $ 240   

Purchase obligations

     7,692         6,665         1,027         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,300       $ 7,623       $ 12,555       $ 2,882       $ 240   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

We have recognized approximately $4.3 million in the liability for unrecognized tax benefits, including accrued interest and penalties. It is reasonably possible that unrecognized tax benefits will decrease by a range of $0.1 million to $0.2 million during 2012 due to a lapse in a foreign statute of limitations relating to various tax incentives. At this time, we are unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time. As a result, this amount is not included in the table above.

Refer to Note 13 — Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements for additional detail.

Off-Balance Sheet Arrangements and Related Party Transactions

As of September 30, 2012, we did not have any off-balance sheet arrangements as defined in item 303(a)(4)(ii) of Regulation S-K.

Since 2008, Tessera, Inc. has engaged 3LP Advisors LLC (“3LP”) to assist with the identification and acquisition of patents. In 2011 and 2012, 3LP expanded its advisory services by providing strategic advice to Invensas Corporation and Tessera Intellectual Property Corp. as well. A managing partner of 3LP, Mr. Kevin G. Rivette, is a member of our Board of Directors and has a non-majority ownership interest in 3LP. For the three months ended September 30, 2012 and 2011, we recognized operating expense of $0.4 million and $0.5 million, respectively, related to these engagements. For both of the nine months ended September 30, 2012 and 2011, we recognized operating expense of $2.1 million related to these engagements. At September 30, 2012 and December 31, 2011, the accounts payable balance due to 3LP was $0.2 million and $2.0 million, respectively.

Critical Accounting Policies and Estimates

During the nine months ended September 30, 2012 there were no significant changes in our critical accounting policies. See Note 2 — “Summary of Significant Accounting Policies” of the Notes to the Condensed Consolidated Financial Statements for additional detail. For a discussion of our critical accounting policies and estimates, see Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2011 Annual Report on Form 10-K, filed on February 17, 2012.

Recent Accounting Pronouncements

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

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

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

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

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

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

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

Other than to the extent the proceedings described below have concluded, we cannot predict the outcome of any of the proceedings described below. An adverse decision in any of these proceedings could significantly harm our business and our consolidated financial position, results of operations or cash flows. The disclosure in this Item 1 updates the disclosure contained in Part II, Item 1 of our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2012, filed on August 3, 2012.

Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 4:05-cv-04063-CW (N.D. Cal.)

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

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

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

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

On January 4, 2012 the court set a fact discovery cut-off date of January 18, 2013, a hearing on claim construction and certain dispositive motions on December 5, 2013, and a trial date of April 7, 2014. In July 2012, in connection with the filing of back-royalty reports and the payment of back royalties, Tessera, Inc. by stipulation dismissed its cause of action for breach of contract by ChipMOS Technologies, Inc. and

 

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ChipMOS U.S.A. and its cause of action for breach of contract by the SPIL entities. On October 2, 2012, the Court granted the stipulated dismissal with prejudice of Tessera, Inc.’s breach of contract claim against STATS ChipPAC Ltd., STATS ChipPAC (BVI) Ltd., and STATS ChipPAC, Inc.

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

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

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

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

Tessera, Inc. v. Motorola, Inc., et. al, Civil Action No. 4:12-cv-00692-CW (N.D. Cal.)

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

On January 18, 2012, the stay was lifted and the case transferred to the United States District Court for the Northern District of California. On March 1, 2012, the Court ordered the parties to comply with the scheduling order in Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 4: 05-04063-CW (N.D. Cal.).

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

Tessera, Inc. v. A-DATA Technology Co., Ltd., et al., Civil Action No. 2:-07-CV-00534-TJW (E.D. Tex.)

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

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

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

 

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Siliconware Precision Industries Co., Ltd. and Siliconware U.S.A., Inc. v. Tessera, Inc., Civil Action No. 4:08-cv-03667-CW (N.D. Cal.)

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

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

ChipMOS Technologies Inc., ChipMOS U.S.A. Inc. and ChipMOS Technologies (Bermuda) Ltd. v. Tessera, Inc., Civil Action No. 4:08-03827-CW (N.D. Cal.)

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

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

Powertech Technology Inc. v. Tessera, Inc., Civil Action No. 4: 10-00945-CW (N.D. Cal.) and U.S. Court of Appeals for the Federal Circuit Case No. 2010-1489

On March 5, 2010, Powertech Technology Inc. (“PTI”) filed a complaint against Tessera, Inc. in the United States District Court for the Northern District of California seeking a declaratory judgment of noninfringement and invalidity of Tessera, Inc.’s U.S. Patent No. 5,663,106. On March 22, 2010, the case was related to Siliconware Precision Industries, Co., Ltd v. Tessera, Inc., Civil Action No. 4:08-cv-03667-CW (N.D. Cal.), and assigned to the judge presiding over that action.

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

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

On August 6, 2010, PTI filed a notice of appeal with the U.S. Court of Appeals for the Federal Circuit. On September 30, 2011, the Federal Circuit issued an opinion reversing and remanding the case to the district court, determining that there was declaratory judgment jurisdiction. Tessera, Inc. filed a petition for rehearing on November 14, 2011. The Federal Circuit denied Tessera, Inc.’s petition for rehearing on January 5, 2012. On January 19, 2012, the Federal Circuit issued its judgment and the case was remanded to the district court. On December 15, 2011, the district court case was related to Powertech Technology Inc. v. Tessera, Inc., Civil Action No. 4:11-06121-CW (N.D. Cal.), discussed below.

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

On May 16, 2012, the Court entered an order that denied PTI’s motion to strike as to one of Tessera, Inc.’s affirmative defenses, granted PTI’s motion to strike with leave to amend as to several other affirmative defenses asserted by Tessera, Inc., and granted PTI’s motion to strike as to one of Tessera, Inc.’s affirmative defenses, stating that Tessera, Inc. may move to amend to add that defense if circumstances change. Tessera, Inc. filed an amended answer on May 29, 2012.

On June 29, 2012, PTI sent a letter to Tessera, Inc. purporting to terminate the TCC License Agreement as of June 30, 2012.

On July 30, 2012, Tessera, Inc. provided PTI with a covenant not to sue, or otherwise hold liable, PTI or its customers under certain claims of U.S. Patent No. 5,663,106 in connection with certain PTI-manufactured products.

On August 9, 2012, Tessera, Inc. moved for summary judgment on the ground that as a matter of law no case or controversy exists sufficient to support PTI’s claims because of the covenant and because the parties’ rights and obligations do not turn on infringement or validity of the Tessera, Inc. patent that forms the basis of PTI’s claims.

On September 18, 2012, the Patent Office issued an ex parte reexamination certificate in which certain original claims were cancelled from U.S. Patent No. 5,663,106, and certain new claims were added.

 

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On October 1, 2012, Tessera, Inc. provided PTI with a supplemental covenant not to sue, which among other things, extended the covenant to PTI’s subsidiaries and made clear that Tessera, Inc. will not contend that PTI is obligated to pay royalties based on infringement of U.S. Patent No. 5,663,106.

On October 2, 2012, PTI filed a motion for entry of judgment under Federal Rule of Civil Procedure 54(b) asking the court to enter judgment that certain claims of U.S. Patent No. 5,663,106 that were subject to reexamination are invalid.

Powertech Technology Inc. v. Tessera, Inc., Civil Action No. 4:11-06121-CW (N.D. Cal.)

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

On December 15, 2011, the case was related to Powertech Technology Inc. v. Tessera, Inc., Civil Action No. 4:10-00945-CW (N.D. Cal.), discussed above.

On December 30, 2011, Tessera, Inc. filed a motion to dismiss the complaint for failure to state a claim upon which relief can be granted and a special motion to strike pursuant to California’s anti-SLAPP statute. The Court denied Tessera, Inc.’s motions on May 21, 2012.

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

On June 3, 2012, PTI filed an amended complaint against Tessera, Inc., adding claims for fraud and deceit, patent misuse, and a declaratory judgment interpreting PTI’s license agreement with Tessera, Inc. In addition to the damages sought by PTI’s original complaint, the amended complaint seeks punitive damages for fraud, termination of the Tessera, Inc. license as of September 24, 2010, recovery of all royalties paid on wBGA products since September 24, 2010, and an order “enjoining Tessera, Inc. and directing that Tessera, Inc. may not proceed against any party,… under any Tessera Patent as defined by Exhibit A to the TCC License with all amendments, supplements, and additions through September 28, 2010 until Tessera has first paid PTI all of the royalties paid on wBGA products by PTI since September 24, 2010, presently estimated to be $40 million.” Tessera, Inc. filed a motion to dismiss PTI’s claim for patent misuse and to strike portions of PTI’s claim for fraud on June 19, 2012. On August 10, 2012, the Court granted in part and denied in part Tessera, Inc.’s motion, specifically dismissing the patent misuse claim and striking the fraud claim, and granted PTI leave to file an amended and supplemental complaint.

On June 29, 2012, PTI sent a letter to Tessera, Inc. purporting to terminate the TCC License Agreement as of June 30, 2012.

On August 24, 2012, PTI filed a third amended complaint. In addition to the claims and recovery alleged in its earlier complaints, the third amended complaint contained an amended fraud claim and an amended patent misuse claim. The new fraud claim sought damages at least in the amount of the royalty payments made to Tessera, Inc. after December 7, 2007, and punitive damages. The new patent misuse claim asked for declarations that Tessera has engaged in patent misuse, that the agreement is unenforceable against PTI until Tessera, Inc. has purged the patent misuse, and that the Tessera, Inc. patents are unenforceable against PTI until Tessera, Inc. has purged the patent misuse. Tessera, Inc. answered that complaint on September 10, 2012. Also on September 10, 2012, Tessera, Inc. filed counterclaims against PTI for breach of contract, breach of the implied covenant, fraud, negligent misrepresentation, declaratory judgment of indemnification, and declaratory judgment regarding PTI’s asserted termination of the agreement.

On July 20, 2012, PTI filed a motion for summary judgment on PTI's first claim for relief in this case. On August 9, 2012, Tessera, Inc. filed an opposition to PTI’s motion and filed its own motion for summary judgment on PTI’s first, second and third claims on the ground, among others that under the unambiguous language of the agreement Tessera, Inc. did not breach the agreement by filing and pursing its claims in the ‘630 ITC Action.

On September 20, 2012, the court heard arguments on PTI’s July 20, 2012 summary judgment motion and Tessera, Inc.’s August 9, 2012 summary judgment motions and took the motions under submission. On October 2, 2012, the parties stipulated to the court’s taking the motions off calendar, and that same day, the court entered an order taking the motions off calendar until such date as the court determines the motions should be decided or the presently-set date for hearing summary judgment motions of December 5, 2013.

On Oct. 23, 2012, the Court granted PTI leave to file its fourth amended and supplemental complaint.

Tessera, Inc. v. UTAC (Taiwan) Corporation, Civil Action No. 5:10-04435-EJD (N.D. Cal.)

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

 

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On March 16, 2011, UTAC Taiwan filed a motion to dismiss the complaint. On March 28, 2012, the Court granted UTAC Taiwan’s motion with leave to amend. On April 19, 2012, Tessera, Inc. filed an amended complaint against UTAC Taiwan alleging in further detail causes of action for breach of contract, declaratory relief and breach of the implied covenant of good faith and fair dealing. The amended complaint seeks the same relief as the original complaint. On May 22, 2012 UTAC Taiwan filed its answer and counterclaim to Tessera, Inc.’s amended complaint. Tessera, Inc. filed its reply to UTAC’s counterclaim, asserting affirmative defenses, on June 21, 2012.

The Court issued its case management order on June 26, 2012, setting the schedule for the case. The Court set January 31, 2013 for initial fact discovery cutoff, and a last date to file dispositive motions of April 5, 2013.

Tessera, Inc. v. Sony Electronics, Inc. et al., Civil Action No. 1:10-CV-838-RMD-KW(D. Del.)

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

Tessera, Inc.’s Third Amended Complaint alleges that Sony Electronics, Inc., Sony Corporation, Sony Mobile Communications AB and Sony Mobile Communications (USA) Inc. (collectively, “Sony”) and Renesas infringed and are currently infringing, including by directly infringing, contributorily infringing and/or inducing infringement, U.S. Patent Nos. 6,885,106 (the “106 patent”) and 6,054,337 (the “337 patent”). 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 U.S. Patent Nos. 6,885,106 and 6,054,337; an order that defendants, their affiliates, subsidiaries, directors, officers, employees, attorneys, agents, and all persons in active concert or participation with any of them be preliminarily and permanently enjoined from further acts of infringement, inducing infringement, and contributory infringement of U.S. Patent Nos. 6,885,106 and 6,054,337; an order for an accounting; and an award of damages that result from the defendants’ infringing acts, interest on damages, costs, expenses, attorneys’ fees and such other and further relief as the Court deems just and proper.

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

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

On March 19, 2012, Sony filed an Answer to Tessera, Inc.’s Third Amended Complaint and certain Sony parties filed Counterclaims; in its filing, Sony, among other things, denies infringement of U.S. Patent Nos. 6,885,106 and 6,054,337 and alleges invalidity of U.S. Patent Nos. 6,885,106 and 6,054,337. Sony also alleges that Tessera, Inc.’s claims are precluded to the extent any allegedly infringing products are supplied directly or indirectly to Sony by an entity or entities having an express or implied license to the patents-in-suit, to the extent any allegedly infringing products are supplied, directly or indirectly, by Sony to an entity or entities having an express or implied license to the patents-in-suit, and/or to the extent Tessera, Inc.’s claims are otherwise precluded by the doctrine of patent exhaustion. Sony also requests an award of its attorneys’ fees and costs. On April 12, 2012, Tessera, Inc. filed an Answer to the Sony parties’ Counterclaims, denying that they are entitled to any relief on their Counterclaims.

On April 20, 2012, Renesas filed an Answer and Counterclaims to Tessera, Inc.’s Third Amended Complaint. In its filing, Renesas, among other things, denies infringement of U.S. Patent Nos. 6,885,106 and 6,054,337, alleges invalidity of U.S. Patent Nos. 6,885,106 and 6,054,337 under 35 U.S.C. §§ 102, 103, and 112, alleges invalidity of U.S. Patent No. 6,885,106 for improper double patenting, alleges unenforceability of U.S. Patent No. 6,885,106 due to inequitable conduct, alleges that Tessera, Inc. is not entitled to any injunctive relief, and requests an award to Renesas of its attorneys’ fees and costs. On May 14, 2012, Tessera, Inc. filed an Answer to Renesas’s Counterclaims, denying that Renesas is entitled to any relief on its Counterclaims.

Tessera, Inc. v. Sony Corporation, Civil Action No. 5:11-04399-EJD (N.D. Cal.)

On May 26, 2011, Tessera, Inc. filed a complaint against Sony Corporation (“Sony”) in the California Superior Court for Santa Clara County. Tessera, Inc.’s complaint alleges breach of contract and breach of the covenant of good faith and fair dealing claims against Sony. Tessera, Inc. contends that Sony failed to abide by the terms of a royalty-bearing technology license agreement between the parties. Tessera, Inc. contends that it commissioned an audit of payments due by Sony under the agreement, delivered an audit report to Sony on February 14, 2011, and that Sony has failed to pay the amounts the auditors found due. Tessera, Inc. requests its damages, plus interest, costs and attorney’s fees. Sony removed the case to federal district court (Northern District of California) on September 2, 2011. On September 8, 2011, Sony filed an answer and defenses to Tessera, Inc.’s complaint, and a counterclaim alleging breach of the implied covenant of good faith and fair dealing. On January 31, 2012, the Court issued a Case Management Order, setting various case deadlines, including scheduling a Preliminary Pretrial Conference for February 22, 2013. On October 10, 2012 Sony filed a motion requesting leave to file an Amended Answer, which proposes adding counterclaims against Tessera, Inc. for fraud, violation of Cal. Bus. & Prof. Code 17200, and civil conspiracy.

 

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Invensas Corporation v. Renesas Electronics Corporation, Civil Action No. 1:11-CV-00448-GMS-CJB (D. Del.)

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

On October 28, 2011, Renesas filed an Answer and Counterclaims to Invensas’s Complaint. In its filing, Renesas, among other things, denies infringement of U.S. Patent Nos. 6,777,802, 6,825,554, 6,566,167, and 6,396,140, alleges invalidity of these same patents, alleges that Invensas is not entitled to any injunctive relief, alleges that Invensas’s claims for damages are limited or barred, alleges that the court lacks personal jurisdiction over Renesas, and seeks an award to Renesas of attorneys’ fees and costs. On November 21, 2011, Invensas filed an Answer to Renesas’s Counterclaims.

On June 4, 2012, the Court issued a Case Management Order, setting various case deadlines. Pretrial conference and trial dates have not yet been set.

Reexamination Proceedings

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

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

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

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

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

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

A first official action was issued on February 29, 2008 in the merged reexaminations of U.S. Patent No. 6,133,627, rejecting those claims subject to reexamination. On August 10, 2008, the PTO issued a second official action, to which Tessera, Inc. filed a Request to Vacate the

 

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

On February 19, 2008, the PTO issued a second official action maintaining the rejections in U.S. Patent No. 6,433,419. On March 10, 2008, Tessera, Inc. filed a petition to vacate the second official action in the reexamination of U.S. Patent No. 6,433,419 on the ground that the second official action did not properly take account of an amendment to the specification of U.S. Patent No. 6,433,419. On June 3, 2008, Tessera, Inc. filed a renewed petition to vacate the inter partes reexamination on the ground that the request for such reexamination did not name the real party in interest. The petition was denied on September 10, 2008. On June 13, 2008, the PTO issued a third official action in the inter partes reexamination of U.S. Patent No. 6,433,419 which was denominated as an action closing prosecution. A Right of Appeal Notice was issued on September 17, 2008, and Tessera, Inc. filed a Notice of Appeal on October 17, 2008. On November 3, 2008, the PTO issued a decision withdrawing the Right of Appeal Notice and returning the case to the examiner for issuance of a further action. On December 23, 2008, the PTO issued a non-final official action, also denominated as an action closing prosecution. A Right of Appeal Notice was issued on June 19, 2009. On July 1, 2009, Tessera, Inc. filed a petition to withdraw the Right of Appeal Notice. Having not yet received a decision on the petition of July 1, 2009, Tessera, Inc. filed a Notice of Appeal on July 20, 2009. On July 30, 2009, the PTO issued a decision dismissing Tessera, Inc.’s petition of July 1, 2009. Tessera, Inc. timely filed an appeal brief on October 5, 2009. The PTO’s Answer to Tessera, Inc.’s appeal brief was mailed on July 13, 2010. On January 17, 2011, Tessera, Inc. filed a petition to reopen prosecution due to new developments after the close of briefing in the appeal which include actions by the PTO in other reexaminations and a new holding by the Court of Appeals for the Federal Circuit in an appeal from a decision of the International Trade Commission concerning U.S. Patent No. 6,433,419. On February 25, 2011, the PTO issued a decision granting in part Tessera, Inc.’s petition to the extent that prosecution of the reexamination proceedings in connection with U.S. Patent No. 6,433,419 was reopened. On March 11, 2011, the PTO issued a fourth official action in the inter partes reexamination of U.S. Patent No. 6,433,419 which was denominated an action closing prosecution. The official action of March 11, 2011 confirmed that all of the claims subject to reexamination are patentable. A Right of Appeal Notice was issued on May 3, 2011, and SPIL filed a Notice of Appeal on June 2, 2011. On November 15, 2011, the Examiner mailed an Examiner’s Answer maintaining all positions set forth in the Right of Appeal Notice issued on May 3, 2011. An oral hearing in the appeal was held on September 19, 2012 at the PTO in Alexandria, VA.

On February 15, 2008, the PTO issued a second official action, also denominated as an action closing prosecution, maintaining the rejections of U.S. Patent No. 6,465,893. On March 28, 2008, Tessera, Inc. filed a petition to vacate the second official action in the reexamination of U.S. Patent No. 6,465,893 on the ground that the second official action did not properly take account of an amendment to the specification of U.S. Patent No. 6,465,893. On June 9, 2008, Tessera, Inc. filed a renewed petition to vacate the inter partes reexamination on the ground that the request for such reexamination did not name the real party in interest, which petition was denied on September 10, 2008. On August 21, 2008, a non-final office action was issued. On February 5, 2009, the PTO issued a non-final official action, also denominated as the second action closing prosecution. A Right of Appeal Notice was issued on June 22, 2009. Tessera, Inc. filed a Notice of Appeal on July 22, 2009. On November 10, 2010, the PTO issued an action closing prosecution confirming certain of the original claims subject to reexamination as patentable and rejecting other claims subject to reexamination. A second Right of Appeal Notice was issued on February 18, 2011. Tessera, Inc. filed a Notice of Appeal on March 3, 2011, and SPIL filed a Notice of Cross Appeal on March 7, 2011. On August 22, 2011, the examiner mailed an examiner’s answer maintaining all positions set forth in the Right of Appeal Notice issued on February 18, 2011. An oral hearing in the appeal was held on September 19, 2012 at the PTO in Alexandria, VA.

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

On April 2, 2008, a request for inter partes reexamination of Tessera, Inc.’s U.S. Patent No. 6,458,681 was filed, ostensibly by Powerchip. On June 6, 2008, the PTO granted this request and issued an official action rejecting certain claims of the ‘681 patent. On September 21, 2009, the PTO issued an Action Closing Prosecution rejecting certain claims and holding one claim patentable. A Right of Appeal Notice was issued on February 22, 2010. On July 20, 2010, the PTO issued a Notice of Intent to Issue Inter Partes Reexamination Certificate, canceling the claims subject to reexamination. The reexamination certificate issued on October 26, 2010. On March 22, 2010, Tessera, Inc. filed an application for reissue of the ‘681 patent to further address the matters raised during the reexamination proceedings and to pursue additional claims. On May 22, 2012, the reissue application issued as U.S. Patent No. RE43,404, which included certain amended claims from the ‘681 patent and new claims, and which canceled other claims from the ‘681 patent.

 

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On July 18, 2008, a request for ex parte reexamination of Tessera, Inc.’s U.S. Patent No. 5,663,106 was filed, ostensibly by Powerchip. On September 4, 2008, the PTO granted the request for reexamination. On April 10, 2009, the PTO issued a non-final official action rejecting all claims under reexamination. On November 19, 2009, the PTO issued a final official action finding certain claims patentable and rejecting other claims. On April 7, 2010, the PTO issued a non-final official action withdrawing the rejections previously made but rejecting all claims under reexamination on new grounds. On October 18, 2010, the PTO issued a new final official action. An advisory action was mailed by the PTO on March 17, 2011, finding certain claims patentable and maintaining the remainder of the rejections presented in the October 18, 2010 action. Tessera, Inc. filed a Notice of Appeal on April 18, 2011. On July 6, 2011, Tessera, Inc. filed a petition with the PTO to allow a first reissue application filed with the claims held to be patentable in the present reexamination proceeding, and to merge a second reissue application filed with the claims involved the present reexamination proceeding with the present proceeding. On January 18, 2012, the PTO issued a decision dismissing Tessera, Inc.’s July 6, 2011 petition and suspending the first and second reissue applications pending conclusion of the ex parte reexamination proceeding of U.S. Patent No. 5,663,106. The PTO’s Answer to Tessera, Inc.’s appeal brief was mailed on February 17, 2012. On July 9, 2012, Tessera, Inc. filed a request for the Board to dismiss the appeal of U.S. Patent No. 5,663,106 and to return the case to the Examiner for issuance of a Notice of Intent to Issue Reexamination Certificate with the presently allowed claims as set forth in the advisory action mailed March 17, 2011. On July 17, 2012, the Board dismissed the appeal and returned the case to the Examiner for further action. On July 30, 2012, the PTO issued a Notice of Intent to Issue Ex Parte Reexamination Certificate, holding certain claims patentable and canceling certain other claims. On August 3, 2012, Tessera, Inc. expressly abandoned the first and second reissue applications. The Reexamination Certificate issued on September 18, 2012.

On June 17, 2011, a request for inter partes reexamination of U.S. Patent No. 6,885,106 was filed by Sony Corporation and Sony Electronics, Inc. On September 8, 2011, the PTO granted the request for reexamination. On September 20, 2011, the PTO issued a non-final official action rejecting certain claims and confirming certain claims. Tessera, Inc. filed a Petition under 37 C.F.R. § 1.181 to Withdraw the Pending Office Action and Ultra Vires Requirement for Information (Rule 105 Requirement) on November 11, 2011. Tessera, Inc. then filed a response to the September 20, 2011, non-final official action on December 20, 2011. Sony filed responsive comments on January 19, 2012 with a Petition to waive page limits. The PTO dismissed Tessera, Inc.’s Rule 181 Petition as moot because the PTO accepted Tessera, Inc.’s arguments in the Response regarding the Rule 105 requirement. The PTO found Tessera, Inc.’s response non-compliant for exceeding the page limits in a Notice mailed February 22, 2012. Tessera Inc. filed a Response to the Notice and a Petition to waive page limits March 7, 2012. The PTO granted Tessera Inc.’s and Sony’s separate petitions to waive page limits on April 10, 2012. The PTO issued an Action Closing Prosecution (non-final) on April 17, 2012, which rejected certain claims and confirmed certain claims. Tessera, Inc. filed a Petition to Strike Sony’s Comments on April 23, 2012. Sony opposed on May 1, 2012 by withdrawing from the record the challenged proposed rejections. The PTO denied Tessera, Inc.’s Petition on May 25, 2012 based on Sony’s withdrawal. Tessera, Inc. filed a Response to the Action Closing Prosecution on June 18, 2012. Sony’s Comments were filed on July 18, 2012. The PTO found Tessera, Inc.'s June 18, 2012 Response page-limit compliant in a petition decision mailed September 28, 2012.

On September 24, 2012, Sony filed a petition for inter partes review of Tessera, Inc.’s U.S. Patent No. 6,054,337. On September 27, 2012, the PTO mailed a Notice accepting the petition filing, which set a December 27, 2012 deadline for Tessera, Inc. to file a preliminary response.

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

 

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Insolvency Proceedings over the Estate of Elpida, Japan, Tokyo District Court, Eighth Civil Division

On March 23, 2012, Elpida Memory, Inc. filed a corporate reorganization proceeding with the Tokyo District Court, Eighth Civil Division. A Delaware Bankruptcy Court entered an order recognizing this foreign bankruptcy proceeding on April 24, 2012 and this order, which effected a limited stay of proceedings against Elpida Memory, Inc., its United States subsidiary and down-stream customers, was filed with the Texas A-DATA court on May 3, 2012. On May 20, 2012, Tessera, Inc. timely filed a Proof of Claim in the Japanese proceeding. On July 9, 2012 the insolvency administrator served a Statement of Disapproval of the Proof of Claim. Tessera, Inc. did not file a complaint with the Tokyo District Court, thus as it relates to Tessera, Inc. this proceeding is now concluded.

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

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

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

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

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

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

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

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

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

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

On July 11, 2011, the Tribunal issued a Partial Award on certain issues tried to the Tribunal on December 9-10, 2010. The Tribunal (1) granted Tessera, Inc.’s request for additional royalties due for the patents addressed in the previous arbitration, in an amount to be determined later, but

 

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denied Tessera, Inc.’s claim for additional royalties owing from certain packages assembled for customers including Qualcomm, Inc., (2) found that Amkor was in breach of the License Agreement as to its royalty obligations and the audit provision of the license agreement, and (3) deferred a final decision on certain grounds for termination of the license agreement until the second phase of this arbitration has concluded.

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

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

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

On July 6, 2012, the Tribunal issued a partial award. Among other things, the partial award further interpreted the parties’ agreement, found that certain packages were neither licensed nor royalty bearing under the agreement, found that one of the patents at issue in the arbitration was not valid, that seven of the asserted patents were not infringed by the accused Amkor products, that a subset of accused Amkor products did not infringe two additional asserted patents, and that royalties are due under seven of the patents at issue in the arbitration for certain TCC and related integrated circuit packages. In addition, the Tribunal awarded interest to Tessera, Inc., rejected Amkor’s contention that it is in compliance with the license agreement and that it is a licensee in good standing, rejected Amkor’s claim that Tessera, Inc.’s counterclaims were barred by doctrines of laches, waiver, estoppel, unclean hands or the statute of limitations, rejected Amkor’s request to enjoin Tessera, Inc. from behavior outside the arbitral forum, and agreed that Tessera, Inc. was entitled to and did terminate the license agreement as of February 17, 2011. The Tribunal also found that the parties should bear their own attorney’s fees and costs. The partial award contains additional rulings not summarized here. Further proceedings are expected to be undertaken to ascertain, among other things, the amount due to Tessera, Inc. consistent with the partial award. Tessera, Inc. cannot predict the timing of the damage award(s) that may result.

On July 9, 2012, the Tribunal issued a procedural order noting that Tessera, Inc. previously reserved its claims as to certain patents which have not yet been addressed by the Tribunal, and asking that Tessera, Inc. inform Amkor and the Tribunal within 10 days as to whether it intends to pursue any or all of those reserved claims in this proceeding or whether it intends to dismiss those claims. Tessera, Inc. has notified the Tribunal that it intends to proceed with claims it reserved under three of the previously identified patents. On August 20, 2012, Tessera, Inc. received an initial payment of $19.9 million from Amkor related to the partial award the Tribunal issued on July 6, 2012.

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

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

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

Tessera, Inc. v. Amkor Technology, Inc., Civil Action No. 1:12-cv-00852-SLR (D. Del.)

On July 6, 2012, Tessera, Inc. filed a complaint against Amkor Technology, Inc. in the United States District Court for the District of Delaware. Tessera, Inc.’s complaint alleges that Amkor has infringed and is currently infringing, including by directly infringing, contributorily infringing and/or inducing infringement of, U.S. Patent No. 6,046,076. The complaint requests of the Court, among other things, a judgment that Amkor has infringed or will infringe, induce others to infringe, and/or commit acts of contributory infringement of one or more claims of U.S. Patent No. 6,046,076; an order that Amkor, its affiliates, subsidiaries, directors, officers, employees, attorneys, agents, and all persons in active concert or participation with any of them be preliminarily and permanently enjoined from further acts of infringement, inducing infringement, or contributory infringement of the U.S. Patent No. 6,046,076; an order that the infringement be adjudged willful and that the damages be increased under 35 U.S.C § 284 to three times the amount found or measured; an order for an accounting; and an award of damages that result from Amkor’s infringing acts, interest on damages, attorneys’ fees and such other and further relief as the Court deems just and proper.

The accused products include, for example and without limitation, infringing vacuum encapsulated and molded underfill semiconductor packages manufactured by Amkor that are not licensed based on the July 6, 2012 arbitration award in Amkor Technology, Inc., v. Tessera, Inc., 16531/VRO. On August 14, 2012, Amkor filed an answer and counterclaims seeking a declaratory judgment that U.S. Patent No. 6,046,076 is not infringed and is invalid. It also interposed affirmative defenses, including but not limited to, non-infringement, invalidity, estoppel, license, patent exhaustion, failure to mark, and laches. Further, Amkor is seeking an award of attorneys’ fees and costs, and such other relief as the Court deems to be just and proper.

 

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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.

From time to time we enter into license agreements that have fixed expiration dates and if, upon expiration or termination, we are unable to renew or relicense such license agreements on terms favorable to us, our results of operations could be harmed.

From time to time we enter into license agreements that have fixed expiration dates. Upon expiration of such agreements we need to renew or replace these agreements in order to maintain our revenue base. For example, our license agreement with Micron Technology, Inc. expired in May 2012. Micron Technology, Inc. accounted for 10% or more of revenue for the year ended December 31, 2011 and has since entered into a definitive sponsor agreement to acquire and support Elpida Memory, Inc., a leading dynamic random access memory (“DRAM”) manufacturer, which is expected to close in the first half of 2013 subject to numerous closing conditions and approvals. If we fail to replace the expired Micron Technology, Inc. license agreement, it will have a negative impact on our revenue and our results of operations.

Furthermore, we may not be able to continue licensing customers on terms favorable to us, under the existing terms or at all, which would harm our results of operations. While we have expanded our licensable technology portfolio through internal development and patents purchased from third parties, there is no guarantee that these measures will lead to continued royalties. If we fail to continue to do business with our current licensees, our business would be materially adversely affected.

The success of our licensing business is dependent on the quality of our patent portfolios and our ability to create and implement new technologies or expand our licensable technology portfolio through acquisitions.

We derive a significant portion of our revenues from licenses and royalties. The success of our licensing business depends on our ability to continue to acquire and develop high quality patent portfolios. We devote significant resources to sourcing and acquiring patent portfolios and to developing new technologies to address the evolving needs of the semiconductor and the consumer and communication electronics industries and we must continue to do so in the future to remain competitive. The competition for acquiring high quality patent portfolios is intense and there is no assurance that we can continue to acquire such patent portfolios on favorable terms. Moreover, developments in our technologies are inherently complex, and require long development cycles and a substantial investment before we can determine their commercial viability. We may not be able to develop and market new or improved technologies in a timely or commercially acceptable fashion. Furthermore, our acquired and developed patents will expire in the future. Our current U.S. issued patents expire at various times from 2012 through 2030. We need to develop or acquire successful innovations and obtain revenue-generating patents on those innovations before our current patents expire, and our failure to do so would significantly harm our business, financial position, results of operations or cash flows.

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

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

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

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

 

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

From time to time, our efforts to obtain a reasonable royalty through our sales effort does not result in the prospective customer agreeing to license our patents. In those cases, we generally will use litigation in order to secure payment for past infringement and as means of securing future royalties for the use of our patents in the customer’s products. We also litigate to enforce our other intellectual property rights, to enforce the terms of our license agreements, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others and to defend against claims of infringement or invalidity. Our current legal actions, as described in Part II, Item 1 – Legal Proceedings , are examples of disputes and litigation that impact our business. We expect to be involved in similar legal proceedings in the future, including proceedings to ensure proper and full payment of royalties by licensees under the terms of their license agreements.

These existing and any future legal actions may harm either or both of our business segments, and may hinder our ability to independently optimize each of them. For example, they could cause an existing licensee or strategic partner to cease making royalty or other payments to us, or to challenge the validity and enforceability of our patents or the scope of our license agreements, and could significantly damage our relationship with such licensee or strategic partner and, as a result, prevent the adoption of our other Intellectual Property or DigitalOptics technologies by such licensee or strategic partner. Litigation could also severely disrupt or shut down the business operations of our licensees or strategic partners, which in turn would significantly harm our ongoing relations with them and cause us to lose royalty revenues. Moreover, the timing and results of any of our legal proceedings are not predictable and may vary in any individual proceeding.

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

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

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

From time to time we enter into license agreements that include pricing or payment terms that provide for fluctuations in our quarterly results of operations.

From time to time we enter into license agreements that include pricing or payment terms that result in quarter-to-quarter fluctuations in our revenues, such as volume pricing adjustments. The effect of these terms may also cause our aggregate annual royalty revenues to grow less rapidly than annual growth in overall unit shipments in the applicable end market.

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

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

 

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

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

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

Current conditions in the DRAM market are challenging. Prices for many DRAM chips are less than our licensees’ or potential licensees’ variable costs of making that chip. The DRAM market has gone through many cycles of unprofitability, resulting in the bankruptcy, consolidation or discontinuation of DRAM production by many semiconductor companies. For example, Elpida Memory Inc. filed for bankruptcy protection in 2012, and Micron Technology, Inc. has subsequently entered into a definitive sponsor agreement to acquire and support Elpida Memory Inc., which is expected to close in the first half of 2013 subject to numerous closing conditions and approvals. We are unable to predict the effect of the current market conditions on our licensees or potential licensees. The poor profitability, bankruptcy, consolidation or discontinuation of DRAM production by any of these companies could have a material adverse effect on our business.

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

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

Our revenues are concentrated in a few customers and if we lose any of these customers our revenues could 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, 2012, there were four and two customers, respectively, that each accounted for 10% or more of total revenues. We expect that a significant portion of our revenues will continue to come from a limited number of customers for the foreseeable future. If we lose any of these customers, our revenues could decrease substantially. Powertech Technology Inc. (“PTI”), one of our customers that accounted for 10% or more of revenue for the year ended December 31, 2011 filed a complaint against Tessera, Inc. in December of 2011, seeking a declaratory judgment that PTI had the right to terminate its license agreement due to a breach of contract by Tessera, Inc., and subsequently notified Tessera, Inc. in June 2012 of its purported termination of its license agreement. See Part II, Item 1 — Legal Proceedings for additional detail. PTI also notified Tessera, Inc. in its June 2012 letter that PTI will make a final payment under the license agreement in July. If we are not able to continue or to replace the revenue from PTI or if we receive an adverse determination in the litigation with PTI, it could have a substantial adverse impact on our royalty revenue in the near term. In addition, our license agreement with Micron Technology, Inc., our other customer that accounted for 10% or more of revenue for the year ended December 31, 2011, expired in May 2012. If we are not able to enter into a new license agreement with Micron Technology, Inc., it would have a substantial adverse impact on our royalty revenue in the near term.

The long-term success of our Intellectual Property business is dependent on a royalty-based business model, which is inherently risky.

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

 

   

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

 

   

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

 

   

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

 

   

the 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.

 

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

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

The future success of our DigitalOptics business depends on our ability to become a vertically integrated camera module supplier.

As part of our DigitalOptics business, we currently derive revenues from licenses to and royalties from our DigitalOptics technologies in consumer electronics, such as mobile phones, digital still cameras, wireless devices, personal computers and other consumer electronics. Our future success depends upon transitioning our image enhancement solutions into the mobile imaging market through delivering revolutionary MEMS actuators and becoming a vertically integrated camera module supplier. Any of the following factors could limit the growth of our DigitalOptics technology, and therefore could have an adverse effect on our business and results of operations:

 

   

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

 

   

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

 

   

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

 

   

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

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

The semiconductor industry is highly concentrated in that a small number of semiconductor designers and manufacturers account for a substantial portion of the purchases of semiconductor products generally, including our products and products incorporating our technologies. Consolidation in the semiconductor industry may increase this concentration. For example, Micron Technology, Inc. entered into a definitive sponsor agreement to acquire and support Elpida Memory Inc., which is expected to close in the first half of 2013 subject to numerous closing conditions and approvals. Accordingly, we expect that licenses of our technologies and sales of our products will be concentrated with a limited number of customers for the foreseeable future. As we acquire new technologies and integrate them into our product line, we will need to establish new relationships to sell these products. Our financial results depend in significant part on our success in establishing and maintaining relationships with, and effecting substantial sales to, these customers. Even if we are successful in establishing and maintaining such relationships, our financial results will be dependent in large part on these customers’ sales and business results. This is also true for the camera module market which is the target market for our DigitalOptics business. In this market, a small number of original equipment manufacturers (“OEMs”) account for a substantial portion of purchases of camera-enabled cell phones and other mobile devices. We have been promoting the adoption of our technologies in this market through the supply chain infrastructure by signing licenses with the sensor, lens and camera manufacturers and assemblers. Consolidation of the OEMs may affect our licensees’ ability to maintain or establish relationships with these OEMs through which they sell products incorporating our DigitalOptics technologies. As a result, our financial results could be materially adversely affected.

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

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

Competing technologies may harm our business.

We expect that our technologies will continue to compete with technologies of internal design groups at semiconductor manufacturers, assemblers, electronic component and system manufacturers, image sensor and lens manufacturers and camera module companies such as Omnivision Technologies, Inc., Aptina Imaging Corporation, STMicroelectronics, Inc., Samsung Electronics Co, Ltd., and Toshiba Corporation. The internal design groups of these companies create their own packaging, imaging and optics solutions. If these internal design

 

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groups design around our patents or introduce unique solutions superior to our technology, they may not need to license our technology. These groups may design technology that is less expensive to implement or that enables products with higher performance or additional features. Many of these groups have substantially greater resources, greater financial strength and lower cost structures which may allow them to undercut our price. They also have the inherent advantage of access to internal corporate strategies, technology roadmaps and technical information. As a result, they may be able to bring alternative solutions to market more easily and quickly.

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

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

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

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

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

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

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

 

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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. For example, it may be particularly difficult to protect our DigitalOptics technology and intellectual property in the manufacturing facility in Zhuhai, China that we acquired in June 2012. Therefore, in certain jurisdictions, including China, we may be unable to protect our technology and intellectual property adequately against unauthorized use, which could adversely affect our business.

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

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

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

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

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

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

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

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

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

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

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

A number of companies in the semiconductor and consumer electronics industries are facing severe financial difficulties. As a result, there have been recent bankruptcies and restructuring of companies in these industries. Our licensees may face similar financial difficulties which may

 

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result in their inability to make payments to us in a timely manner or if at all. In addition, our licensees may merge with or may shift the manufacture of licensed products to companies that are not currently licensees to us. This could make the collection process complex and difficult which could adversely impact our business, financial condition, results of operations and cash flows.

The success of our recently acquired manufacturing facility in Zhuhai, China will depend on our ability to realize the anticipated benefits from integrating the acquired business and assets into our operations.

We may fail to realize the anticipated benefits from our integration of the manufacturing facility and related assets that we acquired in Zhuhai, China from Flextronics International, Ltd. in June 2012 (the “Zhuhai Transaction”) on a timely basis, or at all, for a variety of reasons, including the following:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

failure to integrate our existing DigitalOptics technologies, such as our MEMS solutions, with the manufacturing capabilities of the acquired business.

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

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

We acquired our first large-scale manufacturing operation in the Zhuhai Transaction. We are also investing in le