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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, 2014
OR
 
o    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)
 _______________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
 
Name of each exchange on which registered
Common stock, par value $0.001 per share
 
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:    None
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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act). Yes ¨ No ý
The number of shares outstanding of the registrant’s common stock as of October 24, 2014 was 52,770,296.
 





TESSERA TECHNOLOGIES, INC.
FORM 10-Q — QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 2014
TABLE OF CONTENTS
 

  
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2




TESSERA TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for par value)
 (unaudited)
 
September 30, 2014
 
December 31, 2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
47,338

 
$
73,722

Short-term investments
351,370

 
285,865

Accounts receivable
2,662

 
3,138

Current deferred tax assets
7,015

 
56

Current assets of discontinued operations
5,575

 
7,029

Other current assets
16,852

 
22,501

Total current assets
430,812

 
392,311

Property and equipment, net
4,363

 
9,481

Intangible assets, net
74,655

 
81,202

Long-term deferred tax assets
45,989

 
904

Other assets
298

 
855

Long-term assets of discontinued operations
406

 

Total assets
$
556,523

 
$
484,753

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
2,124

 
$
3,209

Accrued legal fees
5,780

 
10,189

Accrued liabilities
11,104

 
23,535

Deferred revenue
9,406

 
1,149

Current liabilities of discontinued operations
11,507

 
407

Total current liabilities
39,921

 
38,489

Long-term deferred tax liabilities
520

 
520

Other long-term liabilities
1,911

 
5,110

Long-term liabilities of discontinued operations
197

 
197

Commitments and contingencies (Note 12)


 


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

 

Common stock: $0.001 par value; 150,000 shares authorized; 57,156 and 55,617 shares issued, respectively, and 52,688 and 53,442 shares outstanding, respectively
57

 
55

Additional paid-in capital
564,231

 
530,762

Treasury stock at cost; 4,468 and 2,175 shares of common stock at each period end, respectively
(89,910
)
 
(39,918
)
Accumulated other comprehensive income (loss)
(145
)
 
133

Retained earnings (deficit)
39,741

 
(50,595
)
Total stockholders’ equity
513,974

 
440,437

Total liabilities and stockholders’ equity
$
556,523

 
$
484,753


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

3


TESSERA TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 (unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Revenues:
 
 
 
 
 
 
 
Royalty and license fees
$
93,334

 
$
37,261

 
$
218,883

 
$
112,478

Total revenues
93,334

 
37,261

 
218,883

 
112,478

Operating expenses:
 
 
 
 
 
 
 
Cost of revenues
243

 
849

 
1,289

 
2,640

Research, development and other related costs
10,327

 
8,394

 
29,082

 
24,686

Selling, general and administrative
14,887

 
15,280

 
45,203

 
59,996

Litigation expense
5,821

 
12,698

 
22,986

 
44,111

Restructuring, impairment of long-lived assets and other charges
67

 
993

 
1,594

 
4,335

Total operating expenses
31,345

 
38,214

 
100,154

 
135,768

Operating income (loss)
61,989

 
(953
)
 
118,729

 
(23,290
)
Other income and expense, net
338

 
160

 
1,101

 
922

Income (loss) before taxes from continuing operations
62,327

 
(793
)
 
119,830

 
(22,368
)
Provision for (benefit from) income taxes
(40,357
)
 
33,363

 
(18,795
)
 
25,571

Income (loss) from continuing operations
102,684

 
(34,156
)
 
138,625

 
(47,939
)
Income (loss) from discontinued operations, net of tax
6,012

 
(36,813
)
 
(5,260
)
 
(83,467
)
Net income (loss)
$
108,696

 
$
(70,969
)
 
$
133,365

 
$
(131,406
)
Income (loss) per share:
 
 
 
 
 
 
 
Income (loss) from continuing operations:
 
 
 
 
 
 
 
Basic
$
1.96

 
$
(0.63
)
 
$
2.62

 
$
(0.90
)
Diluted
$
1.93

 
$
(0.63
)
 
$
2.59

 
$
(0.90
)
Income (loss) from discontinued operations:
 
 
 
 
 
 
 
Basic
$
0.11

 
$
(0.68
)
 
$
(0.10
)
 
$
(1.57
)
Diluted
$
0.11

 
$
(0.68
)
 
$
(0.10
)
 
$
(1.57
)
Net income (loss):
 
 
 
 
 
 
 
Basic
$
2.07

 
$
(1.31
)
 
$
2.52

 
$
(2.47
)
Diluted
$
2.04

 
$
(1.31
)
 
$
2.49

 
$
(2.47
)
Cash dividends declared per share
$
0.10

 
$
0.10

 
$
0.82

 
$
0.60

Weighted average number of shares used in per share calculations-basic
52,500

 
54,076

 
52,842

 
53,199

Weighted average number of shares used in per share calculations-diluted
53,286

 
54,076

 
53,519

 
53,199

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


4


 
TESSERA TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
 (unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Net income (loss)
$
108,696

 
$
(70,969
)
 
$
133,365

 
$
(131,406
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Net unrealized gains (losses) on available-for- sale securities, net of tax
(237
)
 
167

 
(278
)
 
(59
)
Other comprehensive income (loss)
(237
)
 
167

 
(278
)
 
(59
)
Comprehensive income (loss)
$
108,459

 
$
(70,802
)
 
$
133,087

 
$
(131,465
)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



5


TESSERA TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
Cash flows from operating activities:
 
 
 
Net income (loss)
$
133,365

 
$
(131,406
)
Adjustments to reconcile net income (loss) to net cash from operating activities:
 
 
 
Depreciation and amortization of property and equipment
1,432

 
13,070

Amortization of intangible assets
13,772

 
17,151

Stock-based compensation expense
9,824

 
10,015

Gain on disposal of property and equipment and other assets, net
(335
)
 
(9,137
)
Impairment of goodwill

 
6,664

Non-cash restructuring, impairment of long-lived assets and other charges
820

 
23,142

Deferred income tax and other, net
(55,243
)
 
22,909

Amortization of discount on investments and other

 
209

Patents received through settlement agreements
(1,591
)
 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(442
)
 
8,981

Inventories

 
1,123

Other assets
5,178

 
(9,640
)
Accounts payable
(806
)
 
(4,869
)
Accrued legal fees
(3,872
)
 
711

Accrued and other liabilities
(2,147
)
 
(8,214
)
Deferred revenue
8,257

 
(3,608
)
Net cash from operating activities
108,212

 
(62,899
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(1,275
)
 
(15,826
)
Proceeds from sale of property and equipment and other assets
7,470

 
18,544

Purchases of short-term available-for-sale investments
(215,584
)
 
(188,491
)
Proceeds from maturities and sales of short-term and long-term investments
149,801

 
228,486

Purchases of intangible assets
(5,634
)
 
(2,350
)
Net cash from investing activities
(65,222
)
 
40,363

Cash flows from financing activities:
 
 
 
Dividend paid
(43,029
)
 
(32,167
)
Proceeds from exercise of stock options
21,947

 
31,198

Proceeds from employee stock purchase program
1,700

 
3,417

Repurchase of common stock
(49,992
)
 
(5,438
)
Net cash from financing activities
(69,374
)
 
(2,990
)
Net decrease in cash and cash equivalents
(26,384
)
 
(25,526
)
Cash and cash equivalents at beginning of period
73,722

 
103,802

Cash and cash equivalents at end of period
$
47,338

 
$
78,276

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



6


TESSERA TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION
Tessera Technologies, Inc. and its subsidiaries (the “Company”) generate revenue from licensing to manufacturers and other implementers that use the Company's technology in areas such as mobile computing and communications, memory and data storage, and 3-D Integrated Circuit (“3DIC”) technologies. The Company's technology is both developed internally and acquired and includes chip-scale packaging solutions, interconnect solutions and solutions for mobile imaging which include its FaceToolsTM, FacePowerTM, FotoSavvyTM, face beautification, red-eye removal, High Dynamic Range, panorama, and image stabilization intellectual property.
The accompanying interim unaudited condensed consolidated financial statements as of September 30, 2014 and 2013, 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, 2013 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, 2013, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed on March 3, 2014 (the “Form 10-K”).
The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2014 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 the current period’s presentation. In addition, certain operations are being classified in discontinued operations, and these items have been correspondingly reclassified for all prior periods presented. See Note 5 - “Discontinued Operations.”
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes in the Company’s significant accounting policies during the nine months ended September 30, 2014, as compared to the significant accounting policies described in the Form 10-K.
Recently Adopted Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry-forward, a Similar Tax Loss, or a Tax Credit Carry-forward Exists.” This ASU provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carry forward or a tax credit carry forward exists. Under the ASU, the Company’s unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carry forward or a tax credit carry forward. This ASU applies to all entities that have unrecognized tax benefits when a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward exists at the reporting date. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this ASU did not have a material impact on the Company's financial statements.
Recent Accounting Pronouncements
In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Accounting Standards Codification Topic No. 718, “Compensation - Stock Compensation” (“ASC 718”), as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in ASU 2014-12 either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period

7


presented in the financial statements and to all new or modified awards thereafter. The adoption of ASU 2014-12 is not expected to have a material effect on the Company’s unaudited condensed consolidated financial statements or disclosures.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts.” ASU 2014-09’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for the Company beginning January 1, 2017 and, at that time, the Company may adopt the new standard under the full retrospective approach or the modified retrospective approach. Early adoption is not permitted. The Company is currently evaluating the method and impact the adoption of ASU 2014-09 will have on the Company’s unaudited condensed consolidated financial statements and disclosures.
In April 2014, the FASB issued ASU 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU 2014-08 changes the criteria for reporting a discontinued operation. Under the new pronouncement, a disposal of a part of an organization that has a major effect on its operations and financial results is a discontinued operation. The Company is required to adopt ASU 2014-08 prospectively for all disposals or components of its business classified as held for sale during fiscal periods beginning after December 15, 2014. The Company is currently evaluating what impact, if any, the adoption of this ASU will have on the presentation of the Company's financial statements.


NOTE 3 – COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

Other current assets consisted of the following (in thousands):
 
September 30, 2014
 
December 31, 2013
Prepaid income taxes
$
12,666

 
$
14,817

Interest receivable
1,884

 
2,311

Other
2,302

 
5,373

 
$
16,852

 
$
22,501



Property and equipment, net consisted of the following (in thousands):
 
September 30, 2014 (1)
 
December 31, 2013 (1)
Furniture and office equipment
$
19,800

 
$
21,288

Production equipment

 
2,527

Land, buildings and leasehold improvements
4,170

 
4,151

 
23,970

 
27,966

Less: Accumulated depreciation and amortization
(19,607
)
 
(18,485
)
 
$
4,363

 
$
9,481

(1) The cost and accumulated depreciation and amortization of these assets have been reduced by the amount of impairment taken on these assets. See Note 14 - "Restructuring, Impairment of Long-lived Assets and Other Charges" for additional details.
Accrued liabilities consisted of the following (in thousands):

8


 
September 30, 2014
 
December 31, 2013
Employee compensation and benefits
$
9,092

 
$
7,460

Purchase obligations (2)

 
9,800

Other (3)
2,012

 
6,275

 
$
11,104

 
$
23,535


(2) Purchase obligations related to inventory and equipment. See Note 14 - "Restructuring, Impairment of Long-lived Assets and Other Charges" for additional details.
(3) Accrued liabilities relating to the Company's operations in Zhuhai, China and the mems|cam manufacturing operations are included in current liabilities of discontinued operations. See Note 5 – "Discontinued Operations," for additional details.

Other long-term liabilities consisted of the following (in thousands):
 
September 30, 2014
 
December 31, 2013
Unrecognized tax benefits
$
1,911

 
$
5,110

 
$
1,911

 
$
5,110

Accumulated other comprehensive income consisted of the following (in thousands):
 
September 30, 2014
 
December 31, 2013
Unrealized gains and losses on available-for-sale securities, net of tax
$
(145
)
 
$
133

 
$
(145
)
 
$
133

NOTE 4 – FINANCIAL INSTRUMENTS
The following is a summary of marketable securities at September 30, 2014 and December 31, 2013 (in thousands):
 
 
September 30, 2014
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Values
Available-for-sale securities
 
 
 
 
 
 
 
Corporate bonds and notes
$
236,188

 
$
60

 
$
(270
)
 
$
235,978

Municipal bonds and notes
53,724

 
39

 

 
53,763

Commercial paper
30,785

 
4

 

 
30,789

Treasury and agency notes and bills
39,617

 
27

 
(4
)
 
39,640

Money market funds
16,960

 

 

 
16,960

Total available-for-sale securities
$
377,274

 
$
130

 
$
(274
)
 
$
377,130

Reported in:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
$
25,760

Short-term investments
 
 
 
 
 
 
351,370

Total marketable securities
 
 
 
 
 
 
$
377,130


9


 
December 31, 2013
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Values
Available-for-sale securities
 
 
 
 
 
 
 
Corporate bonds and notes
$
131,374

 
$
75

 
$
(31
)
 
$
131,418

Municipal bonds and notes
109,879

 
74

 
(3
)
 
109,950

Treasury and agency notes and bills
28,038

 
17

 
(2
)
 
28,053

Commercial paper
21,216

 
4

 
(1
)
 
21,219

Money market funds
13,198

 

 

 
13,198

Total available-for-sale securities
$
303,705

 
$
170

 
$
(37
)
 
$
303,838

Reported in:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
$
17,973

Short-term investments
 
 
 
 
 
 
285,865

Total marketable securities
 
 
 
 
 
 
$
303,838

At September 30, 2014 and December 31, 2013, the Company had $398.7 million and $359.6 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 $21.6 million and $55.8 million at September 30, 2014 and December 31, 2013, respectively, was cash held in operating accounts not included in the tables above.
The gross realized gains and losses on sales of marketable securities were not significant during the three and nine months ended September 30, 2014 and 2013.
Unrealized loss (net of unrealized gains) of $(0.1) million, net of tax, as of September 30, 2014, were related to temporary fluctuations 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, 2014 because the Company has the ability to hold these investments to allow for recovery, and 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, 2014 and 2013, respectively, the Company did not record any impairment charges related to its marketable securities.
The following table summarizes the fair value and gross unrealized losses related to individual available-for-sale securities at September 30, 2014 and December 31, 2013, which have been in a continuous unrealized loss position, aggregated by investment category and length of time (in thousands):
 
September 30, 2014
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
$
145,099

 
$
(270
)
 
$
5,006

 
$

 
$
150,105

 
$
(270
)
Treasury and agency notes and bills
7,534

 
(4
)
 

 

 
7,534

 
(4
)
Commercial paper
5,497

 

 

 

 
5,497

 

Total
$
158,130

 
$
(274
)
 
$
5,006

 
$

 
$
163,136

 
$
(274
)
 
December 31, 2013
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
$
9,151

 
$
(31
)
 
$

 
$

 
$
9,151

 
$
(31
)
Municipal bonds and notes
5,495

 
(3
)
 

 

 
5,495

 
(3
)
Commercial paper
66,379

 
(1
)
 

 

 
66,379

 
(1
)
Total
$
81,025

 
$
(35
)
 
$

 
$

 
$
81,025

 
$
(35
)

The estimated fair value of marketable securities by contractual maturity at September 30, 2014 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.

10


 
 
Estimated
Fair Value
Due in one year or less
$
240,131

Due in one to two years
136,999

Total
$
377,130

NOTE 5 – DISCONTINUED OPERATIONS
The following are included in the Company's discontinued operations:

In the second quarter of 2012, the Company completed an acquisition of certain assets of Vista Point Technologies, from Flextronics International Ltd. (the “Zhuhai Transaction”). At the time of the closing, the Company intended to use the acquired assets and related manufacturing business to accelerate its strategy of building the DigitalOptics business into a manufacturer and supplier of camera modules in the mobile phone market. However, in the first quarter of 2013, the Company determined the DigitalOptics business was to be restructured and announced its plans to close its leased manufacturing facility in Zhuhai, China. As a result of this restructuring, certain assets acquired in the transaction were considered impaired or written off entirely.

In the third quarter of 2013, the Company continued to restructure its DigitalOptics business through the sale of its Micro-Optics business based in Charlotte, North Carolina. Originally purchased in 2006, this business focused on diffractive optical elements, refractive optical elements, and integrated micro-optic sub-assemblies. The Company determined these offerings were no longer part of its long-term strategy for the DigitalOptics business. As a result, in August 2013, the Company sold all of the related assets of the Micro-Optics business. The Company retained ownership of the related land and building and certain fabrication assets for this facility. These assets were classified as assets held for sale until they were sold in August 2014.

In the first quarter of 2014, the Company announced the cessation of all mems|cam manufacturing operations. This was the last manufacturing operation in the DigitalOptics business. This action will include a reduction of over 300 employees and a closure of facilities in Arcadia, California, Rochester, New York and in Taiwan and Japan.

For more information regarding these actions, see Note 7 – "Goodwill and Identified Intangible Assets" and Note 14 – "Restructuring, Impairment of Long-Lived Assets and Other Charges."
The businesses discussed above are considered discontinued operations, and accordingly, the Company has reported the results of operations and financial position of these businesses in discontinued operations within the Condensed Consolidated Statements of Operations and Condensed Consolidated Balance Sheets for all periods presented.
The results from discontinued operations were as follows (in thousands):

11


 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
Revenues:
 
 
 
 
 
 
 
 
Product and service revenues
$

 
$
1,194

 
$
32

 
$
6,378

 
Total revenues

 
1,194

 
32

 
6,378

 
Operating expenses:
 
 
 
 
 
 
 
 
Cost of revenues

 
1,808

 
21

 
12,265

 
Research, development and other related costs
253

 
13,324

 
5,807

 
45,403

 
Selling, general and administrative
263

 
2,986

 
2,640

 
9,931

 
Restructuring, impairment of long-lived assets and other charges
1,231

(1
)
764

(2
)
5,768

(1
)
19,668

(2
)
Impairment of goodwill

 

 

 
6,664

(3
)
Total operating expenses
1,747

 
18,882

 
14,236

 
93,931

 
Operating loss before taxes
(1,747
)
 
(17,688
)
 
(14,204
)
 
(87,553
)
 
Other income and expense, net
198

 
258

 
685

 
318

 
Provision (benefit) from income taxes
(7,561
)
 
19,383

 
(8,259
)
 
(3,768
)
 
Net income (loss) from discontinued operations
$
6,012

 
$
(36,813
)
 
$
(5,260
)
 
$
(83,467
)
 

(1) As noted above, in January 2014, the Company announced the cessation of all mems|cam manufacturing operations. As part of these actions, the Company incurred severance and accelerated lease obligations and other charges. See Note 14 for additional information.

(2) As part of the restructuring of its DigitalOptics business, the Company incurred $5.2 million in workforce and corporate overhead reductions and $13.7 million impairment of long-lived assets, which included an $8.7 million charge due to the abandonment of patents and technology which caused a revision of the useful life estimate of these patent and technology assets thus fully impairing them.

(3) See Note 7 – "Goodwill and Identified Intangible Assets."

The current assets and current liabilities of discontinued operations were as follows (in thousands):

 
September 30, 2014
 
December 31, 2013
Accounts receivable and other assets, net
$
930

 
$
29

Property and equipment, net (1)
4,318

 
7,000

Other
327

 

Total current assets of discontinued operations
$
5,575

 
$
7,029

 
 
 
 
Long-term assets of discontinued operations
$
406

 
$

Accounts payable
279

 

Accrued legal fees
537

 

Accrued liabilities (2)
10,691

 
407

Total current liabilities of discontinued operations
$
11,507

 
$
407

 
 
 
 
Long-term liabilities of discontinued operations
$
197

 
$
197


(1) The decrease in the September 30, 2014 balance from the December 31, 2013 balance results from the sale of land and building assets of our DigitalOptics operations in Charlotte in August 2014, partially offset by the inclusion in discontinued

12


operations of assets related to our former mems|cam manufacturing operations since January 2014, whereas they were included in continuing operations as of December 31, 2013. The mems/cam assets are classified as held for sale.

(2) The increase in the September 30, 2014 balances from the December 31, 2013 balances is related to the cessation of all mems|cam manufacturing operations with the liabilities of those operations being included in discontinued operations since 2014, whereas they were included in continuing operations as of December 31, 2013. At September 30, 2014, this amount is primarily related to lease obligations, purchase commitments and employee severance.

NOTE 6 – FAIR VALUE

The Company follows the authoritative guidance for fair value measurement for financial assets and financial liabilities. 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. There are 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, 2014 (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)
$
16,961

 
$
16,961

 
$

 
$

Corporate bonds and notes (2)
235,978

 

 
235,978

 

Municipal bonds and notes (2)
53,763

 

 
53,763

 

Treasury and agency notes and bills (2)
39,639

 

 
39,639

 

Commercial paper (3)
30,789

 

 
30,789

 

Total Assets
$
377,130

 
$
16,961

 
$
360,169

 
$

The following footnotes indicate where the noted items were recorded in the Condensed Consolidated Balance Sheet at September 30, 2014:
(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, 2013 (in thousands):
 

13


 
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)
$
13,198

 
$
13,198

 
$

 
$

Corporate bonds and notes (2)
131,418

 

 
131,418

 

Municipal bonds and notes (2)
109,950

 

 
109,950

 

Treasury and agency notes and bills (2)
28,053

 

 
28,053

 

Commercial paper (3)
21,219

 

 
21,219

 

Total Assets
$
303,838

 
$
13,198

 
$
290,640

 
$

 
The following footnotes indicate where the noted items were recorded in the Condensed Consolidated Balance Sheet at December 31, 2013:
(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.
Non-Recurring Fair Value Measurements

The following table represents the activity in level 3 assets (in thousands):
 
Assets included in discontinued operations and held for sale
 
Other
 
Balance at December 31, 2013
$
9,720

(1
)
$

 
Asset additions
1,598

(1
)

 
Assets sold
(7,000
)
(2
)

 
Assets received

 
1,591

(3
)
Balance at September 30, 2014
$
4,318

 
$
1,591

 

(1) These assets are categorized as level 3 assets as a result of the sale of our Micro-Optics business located in Charlotte, North Carolina, which was completed in August 2013 and as a result of the cessation of our mems|cam manufacturing activities. See Note 5 - "Discontinued Operations" for more information. These assets are carried at market value as determined by specific third party quotes.

(2) These assets related to the land and building which were part of our DigitalOptics business. This business was discontinued in 2013 and these assets were sold in August 2014.

(3) This amount represents the value of the patents that were received as part of a litigation settlement. These assets were valued using a methodology based on an arms-length purchase price of bulk patent assets, with adjustments based on limited pick rights, the total available market, and remaining average patent life.


NOTE 7 – GOODWILL AND IDENTIFIED INTANGIBLE ASSETS

In March 2013, the Company revised its business strategy for the DigitalOptics business to concentrate its manufacturing efforts on the lens barrel, rather than the whole camera module. This revised strategy made the Zhuhai Facility unnecessary. The Company announced the closure of the Zhuhai Facility in March 2013. This decision triggered an impairment review of the related goodwill and purchased intangible assets. As a result of the Company's impairment assessment, completed in the first quarter of 2013, the Company recorded an impairment charge to goodwill of $6.7 million.

14


Identified intangible assets consisted of the following (in thousands):
 
 
 
 
September 30, 2014
 
December 31, 2013
 
Average
Life
(Years)
 
Gross
Assets
 
Accumulated
Amortization
 
Net
 
Gross
Assets
 
Accumulated
Amortization
 
Net
Acquired patents / core technology
3-15
 
$
129,187

 
$
(57,787
)
 
$
71,400

 
$
121,962

 
$
(45,551
)
 
$
76,411

Existing technology
5-10
 
18,700

 
(17,742
)
 
958

 
18,700

 
(16,939
)
 
1,761

Customer contracts
3-9
 
8,600

 
(6,331
)
 
2,269

 
8,600

 
(5,614
)
 
2,986

Trade name
4-10
 
520

 
(492
)
 
28

 
520

 
(476
)
 
44

 
 
 
$
157,007

 
$
(82,352
)
 
$
74,655

 
$
149,782

 
$
(68,580
)
 
$
81,202

Amortization expense for the three months ended September 30, 2014 and 2013 amounted to $4.6 million and $5.3 million, respectively. Amortization expense for the nine months ended September 30, 2014 and 2013 amounted to $13.8 million and $17.2 million, respectively.
As of September 30, 2014, the estimated future amortization expense of intangible assets is as follows (in thousands):
2014 (remaining 3 months)
$
4,616

2015
17,887

2016
17,036

2017
14,762

2018
13,014

Thereafter
7,340

 
$
74,655


NOTE 8 – NET INCOME (LOSS) PER SHARE
The Company has a share-based compensation plan under which employees may be granted share-based awards including shares of restricted stock and restricted stock units ("RSUs"). Non-forfeitable dividends are paid on unvested shares of restricted stock. No dividends are accrued or paid on unvested RSUs. As such, shares of restricted stock are considered participating securities under the two-class method of calculating earnings per share. The two-class method of calculating earnings per share did not have a material impact on the Company’s earnings per share calculation for the three and nine months ended September 30, 2014 and 2013.
The following table sets forth the computation of basic and diluted shares (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2014
 
September 30,
2013
 
September 30,
2014
 
September30,
2013
Denominator:
 
 
 
 
 
 
 
     Weighted average common shares outstanding
52,571

 
54,176

 
52,926

 
53,277

      Less: Unvested common shares subject to repurchase
(71
)
 
(100
)
 
(84
)
 
(78
)
Total common shares-basic
52,500

 
54,076

 
52,842

 
53,199

Effect of dilutive securities:
 
 
 
 
 
 
 
     Stock awards
325

 

 
319

 

     Restricted stock awards and units
461

 

 
358

 

Total common shares-diluted
53,286

 
54,076

 
53,519

 
53,199

 

15


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 the three and nine months ended September 30, 2014, in the calculation of net income per share, 1.0 million and 2.0 million shares, respectively, subject to stock options and restricted stock awards and units were excluded from the computation of diluted net loss per share as they were anti-dilutive.
For the three and nine months ended September 30, 2013, in the calculation of net loss per share, all 2.2 million and 2.9 million shares, respectively, subject to stock options and restricted stock awards and units were excluded from the computation of diluted net loss per share as they were anti-dilutive.

NOTE 9 – STOCKHOLDERS’ EQUITY
Stock Repurchase Programs
In August 2007, the Company’s Board of Directors (“the Board”) authorized a plan to repurchase up to a maximum total of $100.0 million of the Company’s outstanding shares of common stock dependent on market conditions, share price and other factors. In November 2013, the Board increased the amount authorized to be used for repurchases to $150.0 million. In October 2014, the Board increased the amount authorized to be used for repurchases to $250.0 million. As of September 30, 2014, the Company had repurchased a total of approximately 4,435,000 shares of common stock, since inception of the plan, at an average price of $20.11 per share for a total cost of $89.2 million. As of December 31, 2013, the Company had repurchased a total of approximately 2,145,000 shares of common stock, since inception of the plan, at an average price of $18.32 per share for a total cost of $39.3 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, 2014, the total amount available for repurchase was $60.8 million and after taking into account the additional $100 million authorized by the Board in October 2014, approximately $160 million as of the date of this filing. The Company plans to continue to execute authorized repurchases from time to time under the plan.

Stock Option Plans
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 Company’s employees at an exercise price of no less than 100% of the fair value on the date of grant, and non-statutory stock options may be granted to the Company’s employees, non-employee directors and consultants at an exercise price of no less than 85% of the fair value. In both cases, when the optionees own stock representing more than 10% of the voting power of all classes of stock of the Company, the exercise price shall be no less than 110% of the fair value on the date of grant. Options under the 2003 Plan generally have a term of ten years from the date of grant. Options, restricted stock awards, and restricted stock units granted under the 2003 Plan generally 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, 2014, there were approximately 4.8 million shares reserved for future grant under the 2003 Plan.
A summary of the stock option activity is presented below (in thousands, except per share amounts):

16


 
Options Outstanding
 
Number of
Shares Subject to Options
 
Weighted
Average
Exercise
Price Per
Share
Balance at December 31, 2013
3,917

 
$18.37
Options granted
185

 
$21.33
Options exercised
(1,290
)
 
$17.00
Options canceled / forfeited / expired
(700
)
 
$17.97
Balance at September 30, 2014
2,112

 
$19.60
 
 
 
 

Restricted Stock Awards and Units
Information with respect to outstanding restricted stock awards and units as of September 30, 2014 is as follows (in thousands, except per share amounts):
 
Restricted Stock and Restricted Stock Units
 
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, 2013
737

 
348

 
1,085

 
$
18.46

Awards and units granted
215

 
309

 
524

 
$
22.33

Awards and units vested / earned
(143
)
 

 
(143
)
 
$
17.97

Awards and units canceled / forfeited
(156
)
 
(24
)
 
(180
)
 
$
17.88

Balance at September 30, 2014
653

 
633

 
1,286

 
$
20.17


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 Plans
In August 2003, the Board adopted the 2003 Employee Stock Purchase Plan (the "ESPP"), which was approved by the Company’s stockholders in September 2003 and became effective February 1, 2004. Subsequently, the Board adopted the International Employee Stock Purchase Plan (the “International ESPP”) in June 2008.
As of September 30, 2014, there were approximately 574,000 shares reserved for grant under the ESPP and the International ESPP, collectively.
NOTE 10 – STOCK-BASED COMPENSATION EXPENSE
The effect of recording stock-based compensation expense for the three and nine months ended September 30, 2014 and 2013 is as follows (in thousands):

17


 
Three Months Ended
 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Cost of revenues
$

 
$
(101
)
 
$
18

 
$
26

Research, development and other related costs
609

 
468

 
2,276

 
2,543

Selling, general and administrative
2,784

 
1,977

 
7,530

 
7,446

Total stock-based compensation expense
$
3,393

 
$
2,344

 
$
9,824

 
$
10,015


Stock-based compensation expense categorized by various equity components for the three and nine months ended September 30, 2014 and 2013 is summarized in the table below (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Employee stock options
$
781

 
$
1,416

 
$
2,582

 
$
6,363

Restricted stock awards and units
2,522

 
603

 
6,783

 
2,421

Employee stock purchase plan
90

 
325

 
459

 
1,231

Total stock-based compensation expense
$
3,393

 
$
2,344

 
$
9,824

 
$
10,015

The Company uses the Black-Scholes option pricing model to determine the estimated fair value of options. 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 based on the cash dividend declared by the Board for the past four quarters 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 the Company records 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, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Expected life (in years)
4.9

 
5.0

 
4.9
 
5.0
Risk-free interest rate
1.8
%
 
1.4
%
 
1.6-1.8%
 
0.8-1.4%
Dividend yield
3.5
%
 
3.8
%
 
3.4 -4.1%
 
2.3 -3.8%
Expected volatility
37.3
%
 
56.7
%
 
37.3 - 41.4%
 
56.7 - 59.5%

ESPP grants occur in February and August. The following assumptions were used to value the ESPP shares for these grants:

18


 
 
 
 
 
 
 
 
February 2014
 
February 2013
 
August 2014
August 2013
Expected life (years)
 
2.0

 
2.0

 
2.0

2.0

Risk-free interest rate
 
0.3
%
 
0.3
%
 
0.5
%
0.4
%
Dividend yield
 
3.4
%
 
2.3
%
 
3.5
%
3.8
%
Expected volatility
 
31.0
%
 
40.6
%
 
27.6
%
38.9
%

NOTE 11 – INCOME TAXES

The benefit from income taxes for the three months ended September 30, 2014 was $40.4 million and the benefit for income taxes for the nine months ended September 30, 2014 was $18.8 million. The benefit from income taxes for the three and nine months ended September 30, 2014 was primarily due to a benefit from the release of valuation allowance on U.S. federal deferred taxes offset by foreign withholding tax and foreign income taxes. The benefit from release of valuation allowance for the three and nine months ended September 30, 2014 is approximately $61.0 million. The provision for income taxes for the three and nine months ended September 30, 2013 was $33.4 million and $25.6 million, respectively, and was largely due to a projected tax benefit from domestic and certain foreign losses as offset by an increase in valuation allowance on U.S. federal deferred taxes. The Company's provision for income taxes is based on its worldwide estimated annualized effective tax rate, except for jurisdictions for which a loss is expected for the year and no benefit can be realized for those losses, and the tax effect of discrete items occurring during the period. The tax for jurisdictions for which a loss is expected and no benefit can be realized for the year is based on actual taxes and tax reserves for the quarter. The increase in the benefit for income taxes for the nine months ended September 30, 2014 as compared to the same period in the prior year is largely attributable to the release in valuation allowance on U.S. federal deferred taxes recognized in the current period as opposed to an increase in valuation allowance that was recognized in the same period last year.
The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified. After considering both negative and positive evidence to assess the recoverability of the net deferred tax assets during the third quarter of 2014, the Company determined that it was more likely than not that it would realize the majority of U.S. federal deferred tax assets. This resulted in the reestablishment of U.S. federal deferred tax assets of $53.0 million at September 30, 2014.

As of September 30, 2014, unrecognized tax benefits approximated $3.0 million, of which $1.4 million would affect the effective tax rate if recognized. At December 31, 2013, unrecognized tax benefits were $5.0 million of which $3.5 million would affect the effective tax rate if recognized. It is reasonably possible that unrecognized tax benefits may decrease by a range of $0.6 million to $0.9 million in the next 12 months due to the expected lapse of statutes of limitation relating to the federal and state research tax credit, certain domestic deductions, as well as foreign tax incentives.
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, 2014, the Company recognized an insignificant amount of interest and penalties related to unrecognized tax benefits. As of September 30, 2014 and December 31, 2013, the Company had accrued $0.5 million and $0.6 million, respectively, of interest and penalties related to unrecognized tax benefits.
At September 30, 2014, the Company's 2008, 2009, and 2011 through 2013 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 recently completed an Internal Revenue Service examination related to its 2008 and 2009 tax returns which resulted in minimal changes to the statement of operations. The Company is not currently under any domestic state income tax examination.


NOTE 12 – COMMITMENTS AND CONTINGENCIES
Lease and Purchase Commitments
The Company leases office and research facilities and office equipment under operating leases which expire at various dates through 2020. The amounts reflected in the table below are for the aggregate future minimum lease payments under non-

19


cancelable facility and equipment operating leases. Under lease agreements that contain escalating rent provisions, lease expense is recorded on a straight-line basis over the lease term. Rent expense for the three months ended September 30, 2014 and 2013 amounted to $0.9 million and $1.2 million, respectively. Rent expense for the nine months ended September 30, 2014 and 2013 amounted to $2.8 million and $3.6 million, respectively.
As of September 30, 2014, future minimum lease payments are as follows (in thousands):
 
Lease
Obligations
2014 (remaining 3 months)
$
973

2015
3,037

2016
2,713

2017
2,773

2018
2,575

Thereafter
3,919

 
$
15,990

Contingencies
For all legal proceedings, at each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies.
Litigation Matters
The Company and its subsidiaries are involved in 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 the Company’s business. 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 technologies by such licensee or strategic partner. Litigation could also severely disrupt or shut down the business operations of licensees or strategic partners of the Company’s subsidiaries, which in turn would significantly harm ongoing relations with them and cause the Company to lose royalty revenues.
The costs associated with legal proceedings are typically high, relatively unpredictable and not completely within the Company’s control. These costs may be materially higher than expected, which could adversely affect the Company’s operating results and lead to volatility in the price of its common stock. Whether or not determined in the Company’s favor or ultimately settled, litigation diverts managerial, technical, legal and financial resources from the Company’s business operations. Furthermore, an adverse decision in any of these legal actions could result in a loss of the Company’s proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from others, limit the value of the Company’s licensed technology or otherwise negatively impact the Company’s stock price or its business and consolidated financial position, results of operations or cash flows.
NOTE 13 – SEGMENT AND GEOGRAPHIC INFORMATION

In the first quarter of 2014, following the Company’s actions to cease manufacturing operations in the DigitalOptics business, the Company determined that it operates its business in one operating segment, focused on the monetization of intellectual property, both internally developed and acquired, through royalties, licenses and other means. Previously, the Company operated in two operating segments Intellectual Property and DigitalOptics. Our chief operating decision maker is our Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance.

20


A significant portion of the Company’s revenues is derived from licensees headquartered outside of the U.S., principally in Asia, and it is expected that these revenues will continue to account for a significant portion of total revenues in future periods. The table below lists the geographic revenues from continuing operations for the periods indicated (in thousands):
 
 
Three Months Ended,
 
Nine Months Ended,
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Taiwan
$
46,612

 
50
%
 
$
786

 
2
%
 
$
97,654

 
44
%
 
$
1,954

 
2
%
Korea
24,308

 
26

 
17,760

 
48

 
74,037

 
34

 
49,788

 
44

Japan
2,049

 
2

 
5,777

 
16

 
11,977

 
6

 
15,066

 
13

U.S.
12,832

 
14

 
12,163

 
32

 
19,769

 
9

 
39,699

 
35

Other Asia
7,533

 
8

 
775

 
2

 
15,446

 
7

 
5,971

 
6

 
$
93,334

 
100
%
 
$
37,261

 
100
%
 
$
218,883

 
100
%
 
$
112,478

 
100
%
For the three months ended September 30, 2014 and 2013, there were four and three customers, respectively, that each accounted for 10% or more of total revenues. For the nine months ended September 30, 2014 and 2013, there were two and three customers, respectively, that each accounted for 10% or more of total revenues.

As of September 30, 2014 and December 31, 2013, property and equipment, net, by geographical area are presented below (in thousands):
 
 
 
September 30, 2014
 
December 31, 2013
U.S.
$
3,795

 
$
4,725

Taiwan

 
2,394

Israel

 
1,431

Romania and other
568

 
931

Total
$
4,363

 
$
9,481

NOTE 14 – RESTRUCTURING, IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER CHARGES

In January 2014, the Company announced the cessation of all mems|cam manufacturing operations. As part of these efforts, the Company is undertaking a workforce reduction of over 300 employees and is in the process of closing its facilities in Arcadia, California, Rochester, New York and in Taiwan and Japan. These actions triggered a $32.8 million impairment of manufacturing equipment, a $4.8 million impairment of intangible assets, purchase obligations of $9.8 million for inventory and equipment, and impairments of IT related assets of $2.1 million in the fourth quarter of 2013. Additionally, in the first nine months of 2014, the Company incurred additional restructuring and other charges including $3.6 million of employee severance. In this document, the operations and financial results of the mems|cam operations are considered discontinued operations. For more information regarding these actions, see Note 5 - "Discontinued Operations" and Note 7"Goodwill and Identified Intangible Assets."

NOTE 15 – SUBSEQUENT EVENTS

On October 30, 2014, the Board declared a cash dividend of $0.10 per share of common stock, payable on December 17, 2014, for the stockholders of record at the close of business on November 26, 2014.

    



21


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 year ended December 31, 2013 found in the Form 10-K.

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, statements regarding the likelihood or timing of the closing of the transaction with O-Film, the effect of cost-saving measures, 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, our plans for quarterly and special dividends and stock repurchases, 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, DOC, the DOC logo, FotoNation, the FotoNation logo, FaceTools, FacePower, FotoSavvy, Invensas, the Invensas logo, xFD, BVA and SHELLCASE are trademarks or registered trademarks of the Company or its affiliated companies in the 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
We generate revenue from licensing to manufacturers and other implementers that use our technology in areas such as mobile computing and communications, memory and data storage, and 3DIC technologies. Our technology is both developed internally and acquired and includes chip-scale packaging solutions, interconnect solutions and product and solutions for

22


mobile imaging which include our FaceToolsTM, FacePowerTM, FotoSavvyTM, face beautification, red-eye removal, High Dynamic Range, panorama, and image stabilization intellectual property.

In April 2014, the Company and its wholly-owned subsidiary DigitalOptics Corporation (together with its subsidiaries, “DOC”) entered into a definitive agreement with Shenzhen O-Film Tech Co., LTD. (“Shenzhen O-Film,” together with affiliates, collectively, “O-Film”) whereby O-Film has agreed to pay DOC $50.0 million, consisting of a $20.5 million prepaid royalty and support fee for a non-exclusive license to specific FotoNation product features ($3.5 million of which was already paid by O-Film in the second quarter of 2014), $7.5 million for a non-exclusive license for core MEMS auto-focus and other related intellectual property and $22.0 million for certain manufacturing equipment and supplies and certain non-core patents and patent applications (including patents and patent applications for Wafer Level Optics, Micro Optics and camera module technology), in each case, at the closing of the transaction (except for the $3.5 million related to the FotoNation product features which was already paid). O-Film has also agreed to pay DOC a per unit royalty for O-Film’s MEMS-based camera models beginning after an initial royalty free period of time. We have met our obligations under the agreement and are seeking to close the transaction. At present, however, timing and consummation of the transaction is uncertain.

In March 2014, in connection with entering into a letter of intent with DOC, O-Film paid DOC a $5.0 million deposit, which will be credited toward the $50.0 million purchase price under the definitive agreement. The deposit is non-refundable in the event the transaction does not close, except in certain circumstances. In April 2014, O-Film also paid DOC a non-refundable fee of $2.0 million to retain an option to purchase leasehold improvements related to DOC’s manufacturing facility in Taiwan. O-Film has agreed to cover substantially all of DOC’s MEMS-related operating costs, including costs of DOC’s facility in Arcadia, California, during the period from the date of the definitive agreement through October 2014.

In January 2014, we announced the cessation of all mems|cam manufacturing operations. As part of these efforts, we are undertaking a workforce reduction of over 300 employees and are in the process of closing our facilities in Arcadia, California, Rochester, New York and in Taiwan and Japan. As a result of these closures, certain assets were impaired or were written off entirely and restructuring and other charges were taken in 2013. In the first nine months of 2014, we incurred an additional $5.8 million of restructuring and other charges. In this document, the operations and financial results of the mems|cam operations are considered discontinued operations. For more information regarding these actions, see Note 5 - "Discontinued Operations", Note 7"Goodwill and Identified Intangible Assets" and Note 14 – "Restructuring, Impairment of Long-Lived Assets and Other Charges" in the Notes to Condensed Consolidated Financial Statements. As a result of these actions, during the first quarter of 2014, we determined that we operate our business in one operating segment, focused on the monetization of intellectual property, both internally developed and acquired, through royalties, licenses and other means. Previously, we operated in two operating segments Intellectual Property and DigitalOptics.

All financial results and discussions below relate to continuing operations unless otherwise specified and conform to our determination that we now operate in a single operating segment.


Results of Operations
Revenues
Our revenues are generated primarily from royalty and license fees. Royalty and license fees are 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 generally recognize royalty revenues on a one quarter lag. The timing of revenue recognition and the amount of revenue actually recognized for each type of revenues depends upon a variety of factors, including the specific terms of each arrangement, our ability to derive fair value of the element and the nature of our deliverables and obligations. In addition, our royalty revenues will fluctuate based on a number of factors such as: (a) the timing of receipt of royalty reports; (b) the rate of adoption and incorporation of our technology by licensees; (c) the demand for products incorporating semiconductors that use our licensed technology; (d) the cyclicality of supply and demand for products using our licensed technology; (e) volume incentive pricing terms in licensing agreements that may result in significant variability in quarterly revenue recognition from customers and (f) 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. If we are unable to replace the revenue from an expiring license with similar revenue from other customers, our royalty revenue could be adversely impacted as compared to periods prior to such expiration.

23



Powertech Technology, Inc. ("PTI"), a customer that accounted for 10% or more of total revenues for the year ended December 31, 2012, ceased making payments in 2012, which caused a substantial adverse impact to our royalty revenue as compared to prior periods. On February 27, 2014, we announced a settlement with PTI related to Tessera, Inc.’s and PTI’s pending cases in the U. S. District Court for the Northern District of California. The settlement provides that PTI will pay $196 million to Tessera, Inc. with two required payments to be made in 2014 and quarterly recurring payments beginning in 2015 through the end of 2018. In addition, Tessera, Inc. and PTI have agreed to stay the pending cases. If Tessera, Inc. receives a majority of the total amount owed by PTI under the settlement, and other conditions are met, by March 31, 2015, Tessera, Inc. and PTI will dismiss the pending cases.

In the past, we 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. For example, on May 9, 2014 (as amended on June 23, 2014), the International Court of Arbitration of the International Chamber of Commerce issued an award in favor of Tessera, Inc. in its dispute with Amkor Technology, Inc. ("Amkor"). We believe that the dispute with Amkor and similar future proceedings may result in fluctuations in our revenue and expenses.
The following table presents our historical operating results for the periods indicated as a percentage of revenues:

 
Three Months Ended
 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Revenues:
 
 
 
 
 
 
 
Royalty and license fees (1)
100
 %
 
100
 %
 
100
 %
 
100
 %
Total Revenues
100

 
100

 
100

 
100

Operating expenses:
 
 
 
 
 
 
 
Cost of revenues
1

 
2

 

 
2

Research, development and other related costs
11

 
23

 
16

 
22

Selling, general and administrative
16

 
41

 
20

 
53

Litigation expense
6

 
34

 
10

 
39

Restructuring, impairment of long-lived assets and other charges

 
3

 

 
5

Total operating expenses
34

 
103

 
46

 
121

Operating income (loss) from continuing operations
66

 
(3
)
 
54

 
(21
)
Other income and expense, net
1

 
1

 
1

 
1

Income (loss) from continuing operations before taxes
67

 
(2
)
 
55

 
(20
)
Provision for (benefit from) income taxes
(43
)
 
90

 
(8
)
 
23

Income (loss) from continuing operations
110

 
(92
)
 
63

 
(43
)
Income (loss) from discontinued operations, net of tax
6

 
(98
)
 
(2
)
 
(74
)
Net income (loss)
116
 %
 
(190
)%
 
61
 %
 
(117
)%

(1) Revenue previously classified as past production payments, defined as royalty payments for the use of our intellectual property and where payments are made as part of a settlement of a patent infringement dispute from previously unlicensed parties, has been reclassified and is included in "Royalty and license fees"

Our royalty and license fees were as follows (in thousands, except for percentages):

24


 
 
Three Months Ended
 
 
 
 
 
September 30, 2014
 
September 30, 2013
 
Increase/
(Decrease)
 
%
Change
Royalty and license fees
$
93,334

 
$
37,261

 
$
56,073

 
150
%
 
 
 
 
 
 
 
 

The $56.1 million or 150% increase in revenues was primarily due to the second payment made by PTI in connection with Tessera, Inc.'s settlement with PTI noted above and the impact of our new license agreement with Micron Technology, Inc..

 
Nine Months Ended
 
 
 
 
 
September 30, 2014
 
September 30, 2013
 
Increase/
(Decrease)
 
%
Change
Royalty and license fees
$
218,883

 
$
112,478

 
$
106,405

 
95
%
 
 
 
 
 
 
 
 


The $106.4 million or 95% increase in revenues was primarily due to episodic payments in the nine months ended September 30, 2014, including payments made by PTI in connection with Tessera, Inc.’s settlement with PTI noted above and payments related to new license agreements with Micron Technology, Inc. and Samsung Electronics Co., Ltd.
Cost of Revenues
Cost of revenues consists of direct compensation and depreciation expense. 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. For each associated period, cost of revenues as a percentage of total revenues varies based on the rate of adoption of our technologies and the timing of property and equipment being placed in service.
Cost of revenues for the three months ended September 30, 2014 was $0.2 million, as compared to $0.8 million for the three months ended September 30, 2013, a decrease of $0.6 million, or 75%. Cost of revenues for the nine months ended September 30, 2014 was $1.3 million, as compared to $2.6 million for the nine months ended September 30, 2013, a decrease of $1.3 million, or 50%. The decreases were primarily related to a decrease in amortization due to the impairment of intangibles in 2013 (see Note 7 – "Goodwill and Identified Intangibles Assets" in the Notes to Condensed Consolidated Financial Statements).
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, product "tear downs" and reverse engineering, materials, supplies and equipment depreciation. Research and development is conducted primarily in-house and targets development of chip-scale and multi-chip packaging, circuitry design, 3D architectures, wafer-level packaging technology, advanced substrates, and image enhancement technology. All research, development and other related costs are expensed as incurred.
Research, development and other related costs for the three months ended September 30, 2014 were $10.3 million, as compared to $8.4 million for the three months ended September 30, 2013, an increase of $1.9 million, or 23%. The increase was primarily related to an increase in salary and benefit costs partially offset by a decrease in legal expense related to the maintenance of patents.
Research, development and other related costs for the nine months ended September 30, 2014 were $29.1 million, as compared to $24.7 million for the nine months ended September 30, 2013, an increase of $4.4 million, or 18%. The increase was primarily related to an increase in salary and benefit costs and outside services, partially offset by a decrease in legal expense related to the maintenance of patents.
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, amortization of intangibles, marketing programs, public relations, promotional materials, travel, trade

25


show expenses, and stock-based compensation expense. General and administrative expenses consist primarily of compensation and related costs for general management, information technology, and finance 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. Our selling, general and administrative expenses have declined as we have implemented cost savings strategies.
Selling, general and administrative expenses for the three months ended September 30, 2014 were $14.9 million, as compared to $15.3 million for the three months ended September 30, 2013, a decrease of $0.4 million, or 3%. The decrease was primarily attributable to a decrease of $0.6 million in outside services and a decrease of $0.5 million in depreciation due to the impairment of fixed assets during 2013. These savings were offset by an increase of $1.2 million in stock based compensation related to restricted stock granted to certain executives during the quarter.
Selling, general and administrative expenses for the nine months ended September 30, 2014 were $45.2 million, as compared to $60.0 million for the nine months ended September 30, 2013, a decrease of $14.8 million, or 25%. The decrease was primarily attributable to a decrease of $5.4 million in salary and benefit costs related to the employee reductions resulting from our restructuring activities over the past several quarters, a decrease of $5.2 million in outside services and a decrease of $1.9 million in depreciation due to the impairment of fixed assets during 2013.
Litigation Expense
Litigation expense for the three months ended September 30, 2014 was $5.8 million, as compared to $12.7 million for the three months ended September 30, 2013, a decrease of $6.9 million, or 54%. Litigation expense for the nine months ended September 30, 2014 was $23.0 million, as compared to $44.1 million for the nine months ended September 30, 2013, a decrease of $21.1 million, or 48%. These decreases were primarily attributable to the decrease of our docket of legal proceedings, including the recent settlement activities.
We expect that litigation expense may continue to be a material portion of our operating expenses in future periods, and may fluctuate significantly between 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 may increase.
Restructuring, Impairment of Long-Lived Assets and Other Charges
Restructuring, impairment of long-lived assets and other charges for the three months ended September 30, 2014 was $0.1 million, as compared to $1.0 million for the three months ended September 30, 2013, a decrease of $0.9 million. Restructuring, impairment of long-lived assets and other charges for the nine months ended September 30, 2014 was $1.6 million, as compared to $4.3 million for the nine months ended September 30, 2013, a decrease of $2.7 million. These expenses result from the continued restructuring of our DigitalOptics business. The costs are decreasing as the restructuring activities are nearly completed and we anticipate these activities will be completed within the near future.
Stock-based Compensation Expense
The following table sets forth our stock-based compensation expense for the three and nine months ended September 30, 2014 and 2013 (in thousands):
 
 
Three Months Ended,
 
September 30, 2014
 
September 30, 2013
Cost of revenues
$

 
$
(101
)
Research, development and other related costs
609

 
468

Selling, general and administrative
2,784

 
1,977

Total stock-based compensation expense
$
3,393

 
$
2,344


26


 
Nine Months Ended,
 
September 30, 2014
 
September 30, 2013
Cost of revenues
$
18

 
$
26

Research, development and other related costs
2,276

 
2,543

Selling, general and administrative
7,530

 
7,446

Total stock-based compensation expense
$
9,824

 
$
10,015

Stock-based compensation awards included employee stock options, restricted stock awards and units, and employee stock purchases. For the three months ended September 30, 2014, stock-based compensation expense was $3.4 million, of which $0.8 million related to employee stock options, $2.5 million related to restricted stock awards and units and $0.1 million related to employee stock purchases. For the three months ended September 30, 2013, stock-based compensation expense was $2.3 million, of which $1.4 million related to employee stock options, $0.6 million related to restricted stock awards and units and $0.3 million related to employee stock purchases. The increase in stock based compensation for the three months ended September 30, 2014 resulted from an increase in restricted stock grants given to certain executives. This increase was partially offset by fewer options outstanding due to employee reductions that were part of our restructuring activities that have occurred over the past several quarters.
For the nine months ended September 30, 2014, stock-based compensation expense was $9.8 million, of which $2.6 million related to employee stock options, $6.8 million related to restricted stock awards and units and $0.5 million related to employee stock purchases. For the nine months ended September 30, 2013, stock-based compensation expense was $10.0 million, of which $6.4 million related to employee stock options, $2.4 million related to restricted stock awards and $1.2 million related to employee stock purchases. The decrease in stock based compensation for the nine months ended September 30, 2014 resulted from fewer options outstanding due to employee reductions that were part of our restructuring activities that have occurred over the past several quarters. This decrease was partially offset by an increase in restricted stock grants given to certain executives.
Other Income and Expense, Net
Other income and expense, net for the three months ended September 30, 2014 was $0.3 million, as compared to $0.2 million for the three months ended September 30, 2013. Other income and expense, net for the nine months ended September 30, 2014 was $1.1 million, as compared to $0.9 million for the three months ended September 30, 2013.
Provision for (benefit from) Income Taxes

The benefit from income taxes for the three months ended September 30, 2014 was $40.4 million and the benefit for income taxes for the nine months ended September 30, 2014 was $18.8 million. The benefit from income taxes for the three and nine months ended September 30, 2014 was primarily due to a benefit from the release of valuation allowance on U.S. federal deferred taxes offset by foreign withholding tax and foreign income taxes. The benefit from release of valuation allowance for the three and nine months ended September 30, 2014 is approximately $61.0 million. The provision for income taxes for the three and nine months ended September 30, 2013 was $33.4 million and $25.6 million, respectively, and was largely due to a projected tax benefit from domestic and certain foreign losses as offset by an increase in valuation allowance on U.S. federal deferred taxes. The Company's provision for income taxes is based on its worldwide estimated annualized effective tax rate, except for jurisdictions for which a loss is expected for the year and no benefit can be realized for those losses, and the tax effect of discrete items occurring during the period. The tax for jurisdictions for which a loss is expected and no benefit can be realized for the year is based on actual taxes and tax reserves for the quarter. The increase in the benefit for income taxes for the nine months ended September 30, 2014 as compared to the same period in the prior year is largely attributable to the release in valuation allowance on U.S. federal deferred taxes recognized in the current period as opposed to an increase in valuation allowance that was recognized in the same period last year.
The Company released substantially all of its valuation allowance against U.S. federal deferred tax assets. The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified. After considering both negative and positive evidence to assess the recoverability of our net deferred tax assets during the third quarter of 2014, we determined that it was more likely than not that we would realize substantially all of our U.S. federal deferred tax assets. Accordingly, we determined that no valuation allowance is required on substantially all of our federal deferred tax assets. We continue to monitor the likelihood that we will be able to recover our deferred tax assets. Adjustments could be required in the future if we conclude that it is more likely than not that deferred tax assets are not recoverable. A provision for a valuation allowance could

27


have the effect of increasing the income tax provision in the statement of operations in the period the valuation allowance is provided.
 
Discontinued Operations
Income from discontinued operations for the three months ended September 30, 2014 was $6.0 million, as compared to a loss of $36.8 million for the three months ended September 30, 2013. Loss from discontinued operations for the nine months ended September 30, 2014 was $5.3 million, as compared to a loss of $83.5 million for the nine months ended September 30, 2013. The improving financial performance during 2014 results from fewer active businesses included in discontinued operations during the first nine months of 2014 when compared to the first nine months of 2013. In the third quarter of 2013, we sold our Micro-Optics business located in Charlotte, North Carolina, and at the end of the first quarter of 2013, we shut-down our camera module manufacturing facility in Zhuhai, China so both of these operations had significant operations in 2013 but had no impact in 2014. Additionally, the Company received tax benefits in 2014 related to the release of a valuation on tax assets. The Company anticipates that the expenses associated with discontinued operations will reduce significantly over the reminder of the year. For further information about discontinued operations, see Note 5 – "Discontinued Operations" in the Notes to Condensed Consolidated Financial Statements for additional details.


Liquidity and Capital Resources
 
 
As of
(in thousands, except for percentages)
September 30, 2014
 
December 31, 2013
Cash and cash equivalents
$
47,338

 
$
73,722

Short-term investments
351,370

 
285,865

Total cash, cash equivalents and short-term investments
$
398,708

 
$
359,587

Percentage of total assets
72
%
 
74
%
 
 
 
 
 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
Net cash from operating activities
$
108,212

 
$
(62,899
)
Net cash from investing activities
$
(65,222
)
 
$
40,363

Net cash from financing activities
$
(69,374
)
 
$
(2,990
)
Our primary source of liquidity and capital resources is our investment portfolio. Cash, cash equivalents and investments were $398.7 million at September 30, 2014, an increase of $39.1 million from $359.6 million at December 31, 2013. This increase resulted from $133.4 million in net income which generated $108.2 million in cash from operations and from $23.6 million in proceeds from the exercise of stock options and employee stock purchases. This increase was partially offset by $50.0 million in stock repurchases and $43.0 million in dividends paid during the first nine months of 2014. Cash and cash equivalents were $47.3 million at September 30, 2014, a decrease of $26.4 million from $73.7 million at December 31, 2013.
Cash flows provided by operations were $108.2 million for the nine months ended September 30, 2014, primarily due to our net income of $133.4 million being adjusted for non-cash items of depreciation of $1.4 million, amortization of intangible assets of $13.8 million, stock-based compensation expense of $9.8 million and by $4.1 million in changes in operating assets and liabilities. These were partially offset by $53.2 million in reserves released in relation to deferred tax assets.

Cash flows used in operations were $62.9 million for the nine months ended September 30, 2013, primarily due to our net loss of $131.4 million being adjusted for non-cash items of depreciation and amortization of $13.1 million, restructuring and impairment of $23.1 million, amortization of intangible assets of $17.2 million, impairment of goodwill of $6.7 million, stock-based compensation expense of $10.0 million and deferred income taxes of $22.9 million, offset by changes in operating assets and liabilities of $15.5 million.
Net cash used in investing activities was $65.2 million for the nine months ended September 30, 2014, primarily related to the purchases of available-for-sale securities of $215.6 million and the purchase of $5.6 million in intangible assets, offset by maturities and sales of short-term investments of $149.8 million and $7.5 million in proceeds primarily from the sale of land and a building from our DigitalOptics business which was discontinued in 2013. Net cash provided by investing activities was $40.4 million for the nine months ended September 30, 2013, primarily related to the maturities and sales of short-term

28


investments of $228.5 million, offset by purchases of available-for-sale securities of $188.5 million, purchases of intangible assets of $2.4 million, and purchases of property and equipment of $15.8 million.
Net cash used in financing activities was $69.4 million for the nine months ended September 30, 2014 due to dividend payments of $43.0 million and stock repurchases of $50.0 million, offset by $23.6 million in proceeds due to the issuance of common stock under our employee stock option programs and employee stock purchase plans. Net cash used in financing activities was $3.0 million for the nine months ended September 30, 2013 due to dividend payments of $32.2 million and stock repurchases of $5.4 million, offset by $36.4 million in proceeds due to the issuance of common stock under our employee stock option programs and employee stock purchase plans.
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 corporate bonds and notes, municipal 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 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, on a net basis, and the remaining noncredit loss portion in accumulated other comprehensive income. For the nine months ended September 30, 2014 and 2013, no impairment charges with respect to our investments were recorded.
In August 2007, the Company’s 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. In November 2013, the Board increased the amount authorized to be used for repurchases to $150.0 million. In October 2014, the Board increased the amount authorized to be used for repurchases to $250.0 million. As of September 30, 2014, we had repurchased a total of approximately 4,435,000 shares of common stock, since inception of the plan, at an average price of $20.11 per share for a total cost of $89.2 million. As of December 31, 2013, we had repurchased a total of approximately 2,145,000 shares of common stock, since inception of the plan, at an average price of $18.32 per share for a total cost of $39.3 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, 2014, the total amount available for repurchase was $60.8 million and after taking into account the additional $100 million authorized by the Board in October 2014, approximately $160 million as of the date of this filing. We plan to continue to execute authorized repurchases from time to time under the plan.

In April 2013, we announced plans for a capital allocation strategy.  The strategy maintains the current quarterly dividend of $0.10 per share that we originally instituted in March 2012.  We also announced a plan to provide for special dividends once a year equal to 20-30% of “Episodic Gain,” which is net gain resulting from “Episodic Revenue”. We define Episodic Revenue as revenue other than revenue payable over at least one year pursuant to a contract, and may include revenue such as non-recurring engineering fees, initial license fees, back payments resulting from audits, damages awards from courts or tribunals, and lump sum settlement payments. Another 20-30% of Episodic Gain would be used to provide a “sinking fund” to provide for the growth of the quarterly dividends. We also announced a plan to repurchase outstanding shares of our common stock in an amount equal to 20-30% of Episodic Gain.  The Company evaluates the ratio of dividends and common stock repurchases under its capital allocation strategy from time to time, and may adjust such ratio to allocate all or a greater percentage of the total Episodic Gain towards stock repurchases or dividends, taking into account market conditions and other factors. We anticipate that all quarterly and special dividends, as well as stock repurchases, would be paid out of cash, cash equivalents and short-term investments.

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, dividends and stock repurchases and acquisition 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
 

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Payments Due by Period
 
Total
 
Less than
1 Year
 
1-3
Years
 
4-5
Years
 
Thereafter
 
(In thousands)
Operating lease obligations
$
15,990

 
$
3,251

 
$
5,552

 
$
4,869

 
$
2,318

The amounts reflected in the table above for operating lease obligations represent aggregate future minimum lease payments under non-cancelable facility and equipment operating leases, and purchase obligations relating to fixed assets and inventory. 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.

As of September 30, 2014, the Company had accrued $1.4M of unrecognized tax benefits in long term income taxes payable related to uncertain tax positions, and accrued approximately $0.5M of interest. At this time, we are unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time. As a result, this amount is not included in the table above.
See Note 12 – "Commitments and Contingencies" of the Notes to the Condensed Consolidated Financial Statements for additional detail.
Off-Balance Sheet Arrangements
As of September 30, 2014, we did not have any off-balance sheet arrangements as defined in item 303(a)(4)(ii) of Regulation S-K.
Critical Accounting Policies and Estimates
During the nine months ended September 30, 2014, 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 the Form 10-K.

Recent Accounting Pronouncements
See Note 2 – “Summary of Significant Accounting Policies” of the Notes to the Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For a discussion of the Company’s market risk, see Item 7A – Quantitative and Qualitative Disclosures About Market Risk in the Form 10-K.

Item 4. Controls and Procedures
Attached as exhibits to this Form 10-Q are certifications of Tessera Technologies, Inc.’s Chief Executive Officer and Chief Financial Officer, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications and it should be read in conjunction with the certifications, for a more complete understanding of the topics presented.
Evaluation of Controls and Procedures
Tessera Technologies, Inc. maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

30


Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report (the evaluation date). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures were effective to provide reasonable assurance that the information relating to Tessera Technologies, Inc., including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to Tessera Technologies Inc.’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 has been no change in Tessera Technologies, Inc.’s internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), during Tessera Technologies, Inc.’s most recent quarter that has materially affected, or is reasonably likely to materially affect, Tessera Technologies, Inc.’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 and cash flows. The disclosure in this Item 1 updates the disclosure contained in Part I, Item 3 of the Form 10-K.
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 U.S. 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.
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. (collectively “ASE”), ChipMOS Technologies, Inc., ChipMOS U.S.A., Inc., Siliconware Precision Industries Co. Ltd and Siliconware USA Inc. (collectively “SPIL”), STMicroelectronics N.V., STMicroelectronics, Inc. (collectively “ST”), STATS ChipPAC Ltd., STATS ChipPAC, Inc. and STATS ChipPAC Ltd. (BVI). The defendants in this action asserted affirmative defenses to Tessera, Inc.’s claims, and some of them 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 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. 
On December 5, 2012 and January 28, 2013, respectively, Tessera, Inc. entered into a settlement with Spansion LLC, Spansion, Inc., and Spansion Technology, Inc. (collectively “Spansion”) and STATS ChipPAC Ltd,, STATS ChipPAC, Inc. and STATS ChipPAC (BVI) Limited (collectively “STATS ChipPac”). Tessera, Inc. filed a stipulated dismissal on December 30, 2012 as to the Spansion entities only and on January 30, 2013 as to the STATS ChipPAC entities only.

31


On January 31, 2013, the court issued three summary judgment opinions on motions filed related to alleged breach of contract claims. The court denied the defendants’ motion for summary judgment relating to sales to Motorola Inc., granted in part and denied in part ASE’s motion for summary judgment and granted ST’s motion for summary judgment. Breach of contract claims remained against several defendants after these motions.
On February 27, 2013, Tessera Inc. announced that it had entered into a settlement with AMD. Tessera, Inc. filed a stipulated dismissal as to AMD on March 22, 2013.
On April 30, 2013, Tessera, Inc. entered into a settlement with SPIL. Tessera, Inc. filed a stipulated dismissal as to SPIL on May 9, 2013.
On November 8, 2013, Tessera, Inc. entered into a settlement with ChipMOS Technologies, Inc., and related entities, and filed a stipulated dismissal as to them on November 12, 2013.
On February 24, 2014, Tessera Inc. announced that it had entered into a settlement with ASE. Tessera, Inc. and ASE filed a stipulated dismissal as to ASE on October 28, 2014.
On September 3, 2014, Tessera, Inc. announced that it had entered into a settlement with ST. Tessera, Inc. and ST filed a stipulated dismissal as to ST on September 4, 2014.
This matter is now complete.

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 U.S. 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.
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.
On May 3, 2012, the notice of Elpida’s foreign bankruptcy and related Delaware proceedings was filed, which has stayed the case.
On July 31, 2014, Tessera, Inc. and Elpida jointly filed a stipulation to dismiss Elpida from the case.

On August 26, 2014, Tessera, Inc. filed a motion to lift the stay and set answer deadlines. Several defendants filed a notice indicating that they did not oppose the motion. The motion is currently pending.
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 U.S. District Court for the Northern District of California seeking a declaratory judgment of non-infringement and invalidity of Tessera, Inc.’s U.S. Patent

32


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 between PTI and Tessera, Inc. 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.
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.
On March 31, 2013, the Court issued an order granting Tessera, Inc.’s motion for summary judgment and denying PTI’s motion for entry of judgment under Federal Rule of Civil Procedure 54(b). The Court stated that because of the close relationship between this case and Civil Action No. 4:11-06121-CW, the Court intends to delay entry of judgment until judgment can be entered in both cases simultaneously.
On February 27, 2014, Tessera, Inc. announced a settlement with PTI, pursuant to which the parties agreed to stay the case. On April 22, 2014, the Court convened a hearing on certain tax issues concerning the settlement agreement. On June 5, 2014, Magistrate Judge Paul S. Grewal issued an order regarding that tax dispute, finding that PTI has the tax burden on $31.4 million of the settlement amount. On September 24, 2014, the Court entered a stipulated conditional order dismissing the case with prejudice. If the settlement amounts payable by March 31, 2015 have not been paid, the conditional order dismissing the case may be vacated.
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 sought a declaratory judgment that PTI had the right to terminate its license with Tessera, Inc. as of

33


December 6, 2011. The complaint also sought 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 sought 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 granting 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 between PTI and Tessera, Inc. 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, Inc. had 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. On August 1, 2013, the court denied both parties’ summary judgment motions without prejudice to renew on the presently-set date for hearing summary judgment motions of December 12, 2013. On October 11, 2013, PTI filed a motion for summary judgment. Tessera, Inc. filed its opposition and cross-motion for summary judgment on November 1, 2013.
On October 23, 2012, the Court granted PTI leave to file its fourth amended and supplemental complaint. PTI’s fourth amended complaint adds an allegation to PTI’s claim for declaratory relief seeking the recovery and return of royalty payments made to Tessera, Inc. from at least March 2010 in an amount exceeding $130 million and continues to seek the recovery sought in PTI’s third amended complaint.
On February 6, 2013, the parties stipulated to Tessera, Inc.’s filing Amended Counterclaims adding claims for fraudulent transfer, intentional interference with prospective economic advantage and negligent interference with economic advantage,

34


and seeking damages, punitive damages, to void the fraudulent transfer of PTI’s business to Macrotech Technology Inc. (“MTI”), to enjoin PTI from any such transfers in the future, and attorneys’ fees and costs. The parties further stipulated to PTI’s filing of a response to Tessera, Inc.’s counterclaims adding affirmative defenses of nonoccurrence of conditions precedent, unilateral contract, and mistake. On March 8, 2013, the Court gave Tessera, Inc. leave to file the Amended Counterclaims. On March 21, 2013, PTI filed an answer to the Amended Counterclaims.
On March 19, 2013, the parties stipulated to Tessera, Inc.’s Second Amended Counterclaims to add MTI as a party, and to add Tessera, Inc.’s claims of intentional interference with prospective economic advantage, negligent interference with economic advantage, inducing breach of contract, and constructive trust against MTI, which seek damages, punitive damages, attorneys’ fees and costs, and an order that the royalties owed by MTI be held in a trust for Tessera, Inc. On March 21, 2013, the Court entered an order giving Tessera, Inc. leave to file the Second Amended Counterclaims. On March 28, 2013, PTI and MTI filed answers to the Second Amended Counterclaims.
On October 11, 2013, PTI and MTI filed a motion for summary judgment. Tessera, Inc. cross-moved for summary judgment. Oral argument on the motions was heard on December 12, 2013. On January 15, 2014, the Court issued a 31-page order on the cross motions. The Court granted summary judgment in favor of Tessera, Inc. on: PTI’s claim for declaratory judgment that it has the right to terminate the contract; Tessera, Inc.’s claim for declaratory judgment that PTI has no right to terminate the contract; PTI’s breach of contract claim; PTI’s fraud claim; PTI’s claims for patent misuse and for declaratory judgment that the TCC License requires infringement for royalty obligations to accrue; and Tessera, Inc.’s breach of contract claim. The Court granted PTI’s motion for summary judgment on Tessera, Inc.’s claim for declaratory judgment of indemnification. The Court denied PTI’s motions for summary judgment on: Tessera, Inc.’s claim for breach of the implied covenant of good faith and fair dealing; Tessera, Inc.’s claim for fraudulent transfer; Tessera, Inc.’s interference claims; that testing-only products be excluded from the breach of contract damages; and to preclude Tessera, Inc.’s claims based on lack of an alter ego theory.
On February 27, 2014, Tessera, Inc. announced a settlement with PTI, pursuant to which the parties agreed to stay the case. On April 22, 2014, the Court convened a hearing on certain tax issues concerning the settlement agreement. On June 5, 2014, Magistrate Judge Paul S. Grewal issued an order regarding that tax dispute, finding that PTI has the tax burden on $31.4 million of the settlement amount. On September 24, 2014, the Court entered a stipulated conditional order dismissing the case with prejudice. If the settlement amounts payable by March 31, 2015 have not been paid, the conditional order dismissing the case may be vacated.
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 U.S. District Court for the Northern District of California. Tessera, Inc.’s complaint names as defendant UTAC Taiwan and alleges causes of action for breach of contract, declaratory relief, and breach of the implied covenant of good faith and fair dealing. The complaint requests of the Court, among other things, a judicial determination and declaration that UTAC Taiwan remains contractually obligated to pay royalties to Tessera, Inc., an accounting and restitution in an amount to be determined at trial, and an award of damages in an amount to be determined at trial, plus interest on damages, costs, disbursements, attorneys’ fees, and such other and further relief as the Court may deem just and proper.
On March 16, 2011, UTAC Taiwan filed a motion to dismiss the complaint. On March 28, 2012, the Court granted UTAC Taiwan’s motion with leave to amend. On April 19, 2012, Tessera, Inc. filed an amended complaint against UTAC Taiwan alleging in further detail causes of action for breach of contract, declaratory relief and breach of the implied covenant of good faith and fair dealing. The amended complaint seeks the same relief as the original complaint. 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. On January 3, 2013 the Court granted a stipulation by the parties to extend the case schedule. On February 13, 2013, the Court granted a stipulation by the parties further extending the case schedule. Both Tessera, Inc. and UTAC Taiwan filed cross motions for summary judgment on the issue of contract interpretation. The Court held a hearing on November 8, 2013 on Tessera, Inc. and UTAC Taiwan’s summary judgment motions and took both motions under submission. On April 1, 2014 the Court granted UTAC Taiwan’s summary judgment and denied Tessera, Inc.’s summary judgment motion on the issue of contract interpretation. The Court set May 9, 2014 for a case management conference to consider the schedule for the next phase of the lawsuit.
On May 7, 2014 the Court issued a schedule for the next phase of the lawsuit. On June 4, 2014 the Court amended the schedule to reset certain dates pursuant to the stipulation of the parties. Under the current schedule, the Court will hold a claim construction hearing on January 15, 2015.

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Reexamination Proceedings
On February 9, 2007 and February 15, 2007, SPIL filed with the PTO requests for inter partes reexamination relating to U.S. Patent Nos. 6,433,419 and 6,465,893. 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. 6,433,419 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 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 U.S. 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 December 21, 2012, Tessera, Inc. filed a petition for the entry of additional evidence after appeal. SPIL filed an opposition to Tessera, Inc.’s December 21, 2012 petition on January 2, 2013. On January 28, 2013, the Patent Trial and Appeal Board denied Tessera, Inc.’s December 21, 2012 petition and dismissed SPIL’s January 2, 2013 opposition to same. On December 21, 2012, the Patent Trial and Appeal Board issued a Decision on Appeal, reversing the Examiner’s favorable decision of patentability, by rejecting all of the claims subject to reexamination on a new ground. On January 4, 2013, the Patent Trial and Appeal Board granted a petition filed by Tessera, Inc. on December 28, 2012 to extend Tessera, Inc.’s deadline for responding to the Decision on Appeal to February 21, 2013. On February 21, 2013, Tessera, Inc. filed a response and request to reopen prosecution together with new evidence to address the new ground of rejection in the Board’s December 21, 2012 Decision on Appeal. On March 21, 2013, SPIL filed comments in response to Tessera, Inc.’s February 21 response and request to reopen prosecution. On May 9, 2013, SPIL withdrew from the inter partes reexamination of U.S. Patent No. 6,433,419, indicating that it will make no further comment or otherwise participate in the proceeding and also that it does not object to Tessera, Inc. having substantive ex parte communication with the Patent Office for the remainder of the proceeding. On June 25, 2013, the Patent Trial and Appeal Board issued an Order remanding the proceeding to the examiner for consideration of Tessera, Inc.’s response filed February 21, 2013. The order entered certain new evidence submitted by Tessera Inc. in said response and dismissed SPIL’s March 21, 2013 comments as moot in view of SPIL’s withdrawal. On September 25, 2013, the Examiner issued a determination in which the Examiner recommended that the Patent Trial and Appeal Board maintain the new grounds of rejection in the Board’s December 21, 2012 Decision on Appeal. On October 25, 2013, Tessera, Inc. submitted comments in response to the Examiner’s determination, after which the proceeding will be returned to the Patent Trial and Appeal Board for reconsideration. Also, on October 25, 2013, Tessera, Inc. requested an oral hearing before the Patent Trial and Appeal Board. U.S. Patent No. 6,433,419 expired on September 24, 2010, but the inter partes reexamination will continue after expiration.
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. 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,

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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 December 21, 2012, Tessera, Inc. filed a petition for the entry of additional evidence after appeal. SPIL filed an opposition to Tessera, Inc.’s December 21, 2012 petition on January 2, 2013. On January 28, 2013 the Patent Trial and Appeal Board denied Tessera, Inc.’s December 21, 2012 petition and dismissed SPIL’s January 2, 2013 opposition to same. On December 21, 2012, the Patent Trial and Appeal Board issued a Decision on Appeal, affirming the Examiner’s previous holding of unpatentability as to some claims, reversing the Examiner’s favorable decision of patentability as to other claims by rejecting those claims on new grounds of rejection, and affirming the Examiner’s favorable decision of patentability as to still other claims. On January 4, 2013, the Patent Trial and Appeal Board granted a petition filed by Tessera, Inc. on December 28, 2012 to extend Tessera, Inc.’s deadline for responding to the Decision on Appeal to February 21, 2013. On February 21, 2013, Tessera, Inc. filed a request to reopen prosecution together with new evidence to address the new grounds of rejection in the Board’s December 21, 2012 Decision on Appeal. On March 21, 2013, SPIL filed comments in response to Tessera, Inc.’s February 21 request to reopen prosecution. On May 9, 2013, SPIL withdrew from the inter partes reexamination of U.S. Patent No. 6,465,893, indicating that it will make no further comment or otherwise participate in the proceeding and also that it does not object to Tessera, Inc. having substantive ex parte communication with the Patent Office for the remainder of the proceeding. On June 25, 2013, the Patent Trial and Appeal Board issued an Order remanding the proceeding to the examiner for consideration of Tessera, Inc.’s request filed February 21, 2013. The order entered certain new evidence submitted by Tessera Inc. in said request and dismissed SPIL’s March 21, 2013 comments as moot in view of SPIL’s withdrawal. On July 17, 2013, the Examiner issued a determination in which the Examiner recommended that the Patent Trial and Appeal Board maintain certain of the new grounds of rejection in the board’s December 21, 2012 Decision on Appeal as to certain claims, and recommended that the board withdraw other new grounds of rejection as to certain claims. On August 16, 2013, Tessera, Inc. submitted comments in response to the Examiner’s determination, after which the proceeding will be returned to the Patent Trial and Appeal Board for reconsideration. On August 19, 2013, Tessera, Inc. requested an oral hearing before the Patent Trial and Appeal Board. U.S. Patent No. 6,465,893 expired on September 24, 2010, but the inter partes reexamination will continue after expiration.
European Oppositions
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. On September 17, 2013, the EPO Board of Appeals issued a “Summons to attend oral proceedings” which states “preliminary” opinions which expresses the Board’s view that the principal reason for revocation of EP672 Patent set forth by the Opposition Division is incorrect. On December 20, 2013, Tessera, Inc. filed a response to the Summons to Oral Proceedings. On December 30, 2013, the opponent filed a response to the Summons to Oral Proceedings. An oral hearing before the EPO Board of Appeals was held on January 30, 2014. On March 7, 2014, the EPO Board of Appeals issued a formal decision in Tessera, Inc.'s favor that both reversed the decision of the Opposition Division (which revoked the EP672 Patent) and remanded the case for further proceedings before the Opposition Division on other reasons for opposition, asserted by the opponent. On September 24, 2011, the EP672 Patent expired, but remains as now-expired but unrevoked patent. On September 17, 2014, STM, the sole remaining opponent, withdrew its opposition. Although the appeal continues, the next action may be a communication from the Opposition Division advising whether the Opposition Division intends to continue the proceedings of its own motion without any opponents.
Inter Partes Review Proceedings
On April 9, 2013, Amkor Technologies, Inc. filed a petition for inter partes review of Tessera, Inc.’s U.S. Patent No. 6,046,076 (IPR2013-00242). On July 12, 2013, Tessera, Inc. filed a patent owner preliminary response. On October 11, 2013 the Patent Trial and Appeal Board instituted a trial for claims 1-8, 10-13, 18, 19, 24, and 25 on a single ground of unpatentability for each claim. On October 23, 2013, Tessera, Inc. filed a Request for Rehearing directed to Amkor’s lack of standing to bring the IPR. On October 25, 2013 Amkor filed a Request for Reconsideration of Non-Instituted Grounds. On November 5, 2013, Tessera,

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Inc. filed a motion to terminate; and on November 12, 2013, Amkor filed its opposition to Tessera, Inc.’s motion to terminate. On December 26, 2013, Tessera, Inc. filed its Patent Owner’s Response. On January 10, 2014, the Board denied both Tessera, Inc.’s motion for rehearing and Amkor’s motion for reconsideration. On January 31, 2014, the Board denied Tessera, Inc.’s motion to terminate due to Amkor’s lack of standing. On March 15, 2014, Amkor filed its reply to Tessera’s, Inc.'s Patent Owner’s Response. On March 31, 2014, Tessera, Inc filed a motion to strike portions of Amkor’s reply and accompanying expert declaration. On April 11, 2014, Tessera, Inc. filed a Terminal Disclaimer in the patent file of U.S. Patent No. 6,046,076 dedicating the remaining term of that to the public. The oral argument was held on June 12, 2014. On October 10, 2014 the Board issued its final written decision holding that claims 1-8, 10-13, 18, and 19 had not been shown to be unpatentable, but that claims 24 and 25 were shown to be unpatentable. The Board also directed the Office to process the Terminal Disclaimer Tessera, Inc. filed on April 11, 2014. On October 22, 2014, Amkor filed a notice of appeal to the United States Court of Appeals for the Federal Circuit.
The patents that are subject to the above-described reexamination, opposition and inter partes review 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 and cash flows.
Insolvency Proceedings over the Estate of Qimonda AG, Local Court of Munich, Insolvency Court, File No. 1542 IN 209/09
On January 23, 2009, Qimonda AG filed a bankruptcy petition with the Local Court of Munich, Insolvency Court. On April 1, 2009, the Court opened insolvency proceedings over the estate of Qimonda AG and appointed Rechtsanwalt Dr. Michael Jaffé as the insolvency administrator.
On or about May 27, 2009, Dr. Jaffé chose non-performance of Tessera, 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.
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; and 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

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prospective business relationships; interest on any damages; attorneys’ fees and costs incurred by Tessera, Inc.; denial of Amkor’s claims against Tessera, Inc.; an order that awards Tessera, Inc. all other relief recoverable under the rules of Arbitration of the ICC; and an order for such other and further relief as the arbitrators deem just and proper.
On January 15, 2010, Amkor filed its response to Tessera, Inc.’s counterclaims, along with new counterclaims by Amkor and a motion for priority consideration of certain issues. In its responsive pleading, Amkor denied Tessera, Inc.’s counterclaims, arguing in part that Tessera, Inc.’s counterclaims for royalties are barred by the doctrines of collateral estoppel and res judicata, and sought a declaratory judgment that it has not infringed and that its packages are not made under any of the patents asserted in Tessera, Inc.’s answer and that the patents are invalid and unenforceable. Amkor also claimed a credit for royalties it alleges it overpaid Tessera, Inc.
On May 14, 2010, Amkor filed a motion to bar Tessera, Inc.’s counterclaims for royalties before December 1, 2008, as res judicata. The Tribunal ruled on Amkor’s motion on November 15, 2010, granting Amkor’s motion as to Tessera, Inc.’s counterclaims for royalties on some products and timeframes at issue, and denying the motion as to other products and timeframes.
On October 20, 2010, Amkor paid Tessera, Inc. approximately $2.3 million to address a portion of the past royalties claimed by Tessera, Inc.
On December 9 and December 10, 2010, the Tribunal held a two-day trial on certain issues in the arbitration, including (1) royalties payable on a going-forward basis for the patents addressed in the previous arbitration, including but not limited to royalties applicable to packages assembled for Qualcomm, Inc.; (2) Tessera, Inc.’s counterclaim for breach of the audit provision of the license agreement; (3) Tessera, Inc.’s claim for breach of the covenant of good faith and fair dealing, to the extent that it is based on issues (1) and (2) above; and (4) the status of Tessera, Inc.’s latest request to terminate the license agreement, to the extent that it is based on issues (1), (2), and (3) above.
On February 17, 2011, Tessera, Inc. sent Amkor an official notice of termination of Amkor’s license agreement with Tessera, Inc. Amkor has disputed Tessera, Inc.’s right to terminate the license agreement.
On March 11, 2011, Tessera, Inc. filed a motion seeking, among other things, to strike Amkor’s defense of invalidity for the time period before Amkor challenged the validity of the asserted patents. The Tribunal granted Tessera, Inc.’s motion on July 1, 2011, striking (1) Amkor’s invalidity and unenforceability defenses to the payment of royalties that accrued under the asserted U.S. patents before those defenses were raised, and (2) Amkor’s invalidity defenses to the payment of royalties due under the asserted foreign patents regardless of when the royalties accrued.
On June 1, 2011, the Tribunal issued an order construing certain claims of the patents-in-suit.
On July 11, 2011, the Tribunal issued a Partial Award on certain issues tried to the Tribunal on December 9-10, 2010. The Tribunal (1) granted Tessera, Inc.’s request for additional royalties due for the patents addressed in the previous arbitration, in an amount to be determined later, but denied Tessera, Inc.’s claim for additional royalties owing from certain packages assembled for customers including Qualcomm, Inc., (2) found that Amkor was in breach of the License Agreement as to its royalty obligations and the audit provision of the license agreement, and (3) deferred a final decision on certain grounds for termination of the license agreement until the second phase of this arbitration has concluded.
On August 15, 2011, pursuant to the parties’ stipulation, the Tribunal entered an Order dismissing with prejudice the parties’ respective tortious interference claims.
A seven-day hearing on the remaining issues was held from August 15, 2011 to August 21, 2011.
On October 17, 2011, the Tribunal issued a Partial Award on certain issues tried to the Tribunal on December 9-10, 2010. The Tribunal awarded Tessera, Inc. approximately $0.5 million associated with additional royalties due for the patents addressed in the previous arbitration.
On July 5, 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

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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 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 5, 2012.
On November 27, 2012, the Tribunal issued an Addendum to its Partial Award dated July 6, 2012.
On February 20, 2013, the Tribunal issued another Partial Award. Among other things, the February 20, 2013 Partial Award further interpreted the parties’ agreement and the scope of products covered by the now-terminated license agreement.
On April 16, 2013, the Tribunal issued an Order laying out a schedule for the exchange of additional discovery and the preparation of a joint expert report in order to finalize the award of damages consistent with Partial Awards issued on July 5, 2012 and February 20, 2013. On September 26, 2013, the Tribunal heard oral arguments concerning disputes over the damages amount. On October 7, 2013, the Tribunal issued an interim order, ordering Amkor to provide additional discovery. The Tribunal also ordered a supplemental joint expert report and further briefing, which was completed on December 30, 2013. On January 30, 2014 the Tribunal issued an order making certain findings and requesting the provision of further damages information to the Tribunal. On April 16, 2014, the Tribunal submitted for review an award to the International Chamber of Commerce, concerning amounts that Amkor may owe. On May 12, 2014, the ICC served the parties Partial Award No. 5, awarding Tessera, Inc. $112,851,731 in damages plus interest. This amount is in addition to $16,657,749 plus interest that Amkor paid on August 17, 2012. On June 23, 2014, the Tribunal issued an addendum to Partial Award No. 5, correcting certain typographical errors while leaving the total award intact.
On April 9, 2013, Amkor filed a request for inter partes review of U.S. Patent No. 6,046,076, one of the patents on which the Tribunal awarded damages as part of the July 5, 2012 Partial Award. Further information regarding this inter partes review proceeding is provided above.

Another phase of the proceedings addressed Tessera, Inc.’s claims for royalties against certain Amkor packages based on certain additional patents Tessera, Inc. has asserted against Amkor. On January 25, 2013 the Tribunal denied Amkor’s motion for partial Summary Judgment seeking to exclude certain packages as not covered by the license agreement. On June 4, 2013, the Tribunal issued a claim construction ruling on the additional patents. A hearing on these additional patents was held on June 23-27, 2014. The closing argument concerning the liability issues in this phase of the proceedings was held on October 6, 2014. The Panel has not yet issued a decision regarding the matters at issue in this phase.
Amkor Technology, Inc. v. Tessera, Inc., Civil Action No. CPF-13-512796 (S.F. Superior Ct.); A139596 (1st District of California Court of Appeal, Third Division)
On February 27, 2013, Amkor filed a petition in San Francisco Superior Court to correct the July 5, 2012 arbitration award in Amkor Technology, Inc., v. Tessera, Inc., ICC Case No.16531/VRO, to remove the grant of damages from February 2011 to July 2012, or in the alternative to vacate the award. On March 8, 2013, Amkor filed a motion to Correct An Arbitration Award in the San Francisco Superior Court that substantially repeated the request for relief in its Petition. Amkor’s Motion to Correct was heard, and orally denied, on June 14, 2013. The Court issued a signed order denying Amkor’s Motion to Correct on June 25, 2013. Amkor filed a notice of appeal on August 26, 2013. Amkor filed its appeal brief on January 21, 2014. Tessera, Inc. filed its Respondent’s brief on April 23, 2014. Amkor filed its reply brief on June 12, 2014. Oral argument is set for November 12, 2014.
On July 14, 2014, Tessera, Inc. filed a petition to confirm Partial Award No. 5 as amended in San Francisco Superior Court. On August 8, 2014, Amkor filed a petition to vacate Partial Award No. 5, as well as a notice of removal in San Francisco Superior Court and in the California Court of Appeal stating that the action was removed to the United States District Court for the Northern District of California. On August 22, 2014, Tessera, Inc. filed a motion to remand in the District Court. On September 9, 2014, the District Court granted Tessera’s motion to remand and remanded the proceedings to the San Francisco Superior Court. On September 12, 2014, Amkor filed a motion to stay the Superior Court proceedings pending the resolution of Amkor's appeal of the denial of its motion to correct the July 5, 2012 arbitration award. Tessera, Inc.'s petition to confirm Partial Award No. 5, Amkor's petition to vacate Partial Award No. 5, and Amkor's motion to stay were heard on October 6, 2014. On October 9, 2014, the Superior Court signed and entered an order granting Tessera, Inc.'s petition to confirm Partial Award No. 5, denying Amkor's motion to stay and its petition to vacate Partial Award No. 5. Also on October 9, 2014, the Superior Court signed and entered a judgment in favor of Tessera, Inc. and against Amkor stating that Amkor must pay Tessera, Inc. damages in the amount of US$112,851,731, pre-judgment interest in the amount of US$15,483,773, and post-judgment

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interest beginning on October 11, 2014 at the legal rate until judgment is fully satisfied. On October 23, 2014, Amkor filed a notice of appeal to the California Court of Appeal, and posted a bond in the amount of $192,503,256.00.
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.
On April 25, 2013, the parties and Panel jointly requested a stay of these proceedings until the earlier of June 30, 2014 or the final resolution of ICC Case No. 16531/VRO. On April 30, 2013, the ICC advised the parties that (unless otherwise advised by May 3, 2013) the matter would remain in abeyance for the period requested. On May 28, 2013, the ICC informed the parties that it had extended the time limit for establishing the terms of reference until July 31, 2014. On July 14, 2014, the ICC informed the parties that this matter would now proceed, and that the time limit for establishing the terms of reference had been extended until September 30, 2014. On August 29, 2014, the parties submitted proposals to the Panel regarding the terms of reference and a procedural order. On September 5, 2014, the ICC informed the parties that the time limit for establishing the terms of reference had been extended until November 28, 2014.
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 U.S. 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 5, 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.
On April 9, 2013, Amkor filed a request for inter partes review of U.S. Patent No. 6,046,076. The USPTO held the oral argument on June 12, 2014. Further information regarding this inter partes review proceeding is provided above.
On April 29, 2013 Tessera, Inc. filed a reply to Amkor’s counterclaims and an additional counterclaim against Amkor regarding infringement of U.S. Patent No. 6,046,076. Tessera, Inc. interposed affirmative defenses, including but not limited to, arbitration and award, res judicata and issue preclusion, failure to state a claim, validity and infringement, and equitable relief.

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On May 23, 2013, Amkor filed an answer to Tessera, Inc.’s counterclaim in reply, seeking to dismiss Tessera, Inc.’s counterclaim in reply. Amkor also asserted affirmative defenses, including but not limited to, non-infringement, invalidity, estoppel, license, patent exhaustion, failure to mark, laches, equitable estoppel, failure to state a claim, and no irreparable harm.
On November 13, 2013, the Court granted the parties’ stipulation to stay this district court proceeding pending the determination by the Tribunal in ICC 16531/VRO identifying the packages on which the ICC will award damages under U.S. Pat. No. 6,046,076.
On May 27, 2014, Amkor filed a motion to vacate, modify or correct Partial Award No. 5. On June 20, 2014, Tessera, Inc. filed a motion to strike Amkor's motion to vacate, modify or correct Partial Award No. 5 and its opposition to Amkor's motion to vacate, modify or correct Partial Award No. 5. On July 14, 2014, Amkor filed its reply brief in support of its motion to vacate, modify or correct Partial Award No. 5 and its opposition to Tessera, Inc.'s motion to strike. On July 24, 2014, Tessera, Inc. filed its reply brief in support of its motion to strike. On September 24, 2014, Amkor filed a supplement to its motion to vacate, modify, or correct an arbitration award.  On October 14, 2014, Tessera, Inc. filed a supplement to its motion to strike Amkor’s motion to vacate, modify or correct Partial Award No. 5.


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.
Our revenues are concentrated in a few customers and if we lose any of these customers, or these customers do not pay us, 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, 2014, 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, or these customers do not pay us, our revenues could decrease substantially. If we are unable to replace the revenue from an expiring license with similar revenue from other customers, our royalty revenue could be adversely impacted as compared to periods prior to such expiration.
We expect to continue to be involved in material legal proceedings in the future to enforce or protect our intellectual property rights, including material litigation with existing licensees or strategic partners, which could harm our business.
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 certain cases, we will use litigation in order to secure payment for past infringement and as a 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 our business, and may hinder our ability to independently optimize each of them. For example, legal actions could cause an existing licensee or strategic partner to cease making royalty or other payments to us, or to challenge the validity and enforceability of our patents or the scope of our license agreements, and could significantly damage our relationship with such licensee or strategic partner and, as a result, prevent the adoption of our intellectual property 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 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.

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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 and cash flows.
Even if we prevail in our legal actions, significant contingencies may 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 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. If we are unable to replace the revenue from an expiring license with similar revenue from other customers, our royalty revenue could be adversely impacted as compared to periods prior to such expiration.
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 develop and acquire high quality patent portfolios. We devote significant resources to developing new technologies and to sourcing and acquiring patent portfolios 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. Developments in our technologies are inherently complex, and require long development cycles and a substantial investment before we can determine their commercial viability. Moreover, 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. 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 through 2033. 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 and 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.

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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 or concludes that they are unpatentable, 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 and cash flows, as well as 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 have historically been protracted and complex. The time to resolution and complexity of our litigation, its disproportionate importance to our business compared to other companies, the propensity for delay in patent litigation, and the potential that we may lose particular motions as well as the overall litigation could all cause significant volatility in our stock price and have a material adverse effect on our business and consolidated financial position, results of operations and cash flows.
The timing of payments under our license agreements may cause fluctuations in our quarterly or annual results of operations.
From time to time we enter into license agreements that include pricing or payment terms that result in quarter-to-quarter or year-over-year 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. Additionally, our licensees may fail to pay, delay payment of or underpay what they owe to us under our license agreements, which may in turn require us to enforce our contractual rights through litigation, resulting in payment amounts and timing different than expected based on the terms of our license agreements. This also may cause our licensing revenues to fluctuate on a quarter-to-quarter or year-over-year basis.
Recent and proposed 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 June 4, 2013, President Obama issued five executive actions and seven legislative recommendations related to U.S. patent laws and regulations, including, among other things, making “Real Party-in-Interest” the new default in the PTO (patent applicants and owners will regularly update ownership information when they are involved in proceedings before the PTO), strengthening the enforcement process of Exclusion Orders, and providing additional training to PTO examiners. The effects of these changes and recommendations on our patent portfolio and business have yet to be determined, as legislation incorporating the recommendations is currently being debated and the PTO is still in the process of implementing these changes. As another example, in 2014, Congress has considered several bills relating to patent reform that could adversely impact our business depending on the scope of any bills that are ultimately enacted into law. We expect Congress to continue considering potential amendments to the U.S. patent laws. In addition, in recent years, the courts have interpreted U.S. patent laws and regulations differently, and in particular the U.S. Supreme Court has decided a number of patent cases and continues to actively review more patent cases than it has in the past. Some of these changes or potential changes may not be advantageous for us, and may make it more difficult to obtain adequate patent protection or to enforce our patents against parties using them without a license or payment of royalties. These changes or potential changes could increase the costs and uncertainties surrounding the prosecution of our patent applications and the enforcement or defense of our patent rights, and could have a deleterious effect on our licensing program and, therefore, the royalties we can collect.
Some of our license agreements may convert to fully paid-up licenses at the expiration of their terms, and we may not receive royalties after that time.
From time to time we enter into license agreements that automatically convert to fully paid-up licenses upon expiration. For example, Tessera, Inc.'s license agreement with Texas Instruments, Inc. automatically converted to a fully paid-up license on December 31, 2013, assuming that Texas Instruments complied with all terms and conditions of the license agreement up through its expiration. 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 the relevant intellectual property under the terms of the license agreements without further payment, even if relevant patents are still in

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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.

We have in the past recorded, and may in the future record, significant valuation allowances on our deferred tax assets, which may have a material impact on our results of operations and cause fluctuations in such results.
In the third quarter of 2014, we released substantially all of the valuation allowance related to our United States federal deferred tax assets. As of September 30, 2014, our remaining valuation allowance is approximately $27.2 million for tax assets in California, Ireland, Taiwan and other jurisdictions. Our net deferred tax assets relate predominantly to the United States federal tax jurisdiction. The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified. After considering both negative and positive evidence to assess the recoverability of our net deferred tax assets during the third quarter of 2014, we determined that it was not more likely than not we would realize the full value of our state and foreign deferred tax assets. Accordingly, we continue to record a valuation allowance on our net deferred tax assets. Depending on our success in completing significant licensing agreements, as well as the outcome of legal proceedings and the ability and willingness of the parties to make any payments owed or awarded by the relevant court, we may release our valuation allowance and recognize deferred tax assets in the future if we conclude that it is more likely than not that deferred tax assets are recoverable. We continue to monitor the likelihood that we will be able to recover our deferred tax assets in the future. Future adjustments in our valuation allowance may be required. The recording of any future increases in our valuation allowance could have a material impact on our reported results, and both the recording and release of the valuation allowance could cause fluctuations in our quarterly and annual results of operations.
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 DRAM, 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.
The long-term success of our business is dependent on a royalty-based business model, which is inherently risky.
The long-term success of our 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 rate 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
 

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*
 
the timing of receipt of royalty reports may not meet our revenue recognition criteria resulting in fluctuation in our results of operations.
 
It is difficult for us to verify royalty amounts owed to us under our licensing agreements, and this may cause us to lose revenues.
The terms of our license agreements generally require our licensees to document their use of our technology and report related data to us on a quarterly basis. Although our license terms generally give us the right to audit books and records of our licensees to verify this information, audits can be expensive, time consuming, and may not be cost justified based on our understanding of our licensees' businesses. Our license compliance program audits certain licensees to review the accuracy of the information contained in their royalty reports in an effort to decrease the likelihood that we will not receive the royalty revenues to which we are entitled under the terms of our license agreements, but we cannot give assurances that such audits will be effective to that end.
The markets for semiconductors and related products 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. acquired Elpida Memory, Inc., a leading DRAM manufacturer, in July 2013. 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 significantly depend 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.
 
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 advanced semiconductor packaging. Investments in new technologies are speculative and technological feasibility may not be achieved. Commercial success depends on many factors including demand for innovative 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. For example, in January 2014 we announced that we were ceasing all manufacturing efforts for our MEMS-based autofocus technologies. In conjunction with this decision, we are undertaking a workforce reduction of over 300 employees and are in the process of closing our facilities in Arcadia, California, Rochester, New York, and in Taiwan and Japan. We incurred approximately $49.0 million and $5.6 million in impairment and other charges in the fourth quarter of 2013 and the first nine months of 2014, respectively, related to certain assets which were impaired or written off entirely.
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. The internal design groups of these companies create their own packaging and imaging. If these internal design groups design around our patents or introduce unique solutions superior to our technology, they may not need to license our technology. These groups may design technology that is less expensive to implement or that enables products with higher performance or additional features. Many of these groups have substantially greater resources, greater financial strength and lower cost structures which may allow them to undercut our price. They also have the inherent advantage of access to internal corporate strategies, technology roadmaps and technical information. As a result, they may be able to bring alternative solutions to market more easily and quickly.

For our embedded image processing technologies such as Face Detection and our other FaceTools 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. Our MEMS-based autofocus technology enables high-precision control of a moving lens for autofocus functionality with a small form factor. This technology competes with autofocus technologies including traditional lens-motion-type autofocus, emerging lens-modification-type autofocus, solutions

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using voice coil motor technology, and also other computational-type autofocus solutions and other solutions and technologies provided by companies such as DxO Labs. 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 further developing and acquiring 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 and 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 and 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.
In certain instances, we attempt to obtain patent protection for portions of our technology, and our license agreements typically include both issued patents and pending patent applications. If we fail to obtain patents in a timely manner or if the patents issued to us do not cover all of the inventions disclosed in our patent applications, others could use portions of our technology and intellectual property without the payment of license fees and royalties. For example, our business may suffer if we are unable to obtain patent protection in a timely manner from the PTO due to processing delays resulting from examiner turnover and a continuing backlog of patent applications.
We also rely on trade secret laws rather than patent laws to protect other portions of our proprietary technology. However, trade secrets can be difficult to protect. The misappropriation of our trade secrets or other proprietary information could seriously harm our business. We protect our proprietary technology and processes, in part, through confidentiality agreements with our employees, consultants, suppliers and customers. We cannot be certain that these contracts have not been and will not be breached, that we will be able to timely detect unauthorized use or transfer of our technology and intellectual property, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by competitors. If we fail to use these mechanisms to protect our technology and intellectual property, or if a court fails to enforce our intellectual property rights, our business will suffer. We cannot be certain that these protection mechanisms can be successfully asserted in the future or will not be invalidated or challenged.

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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. In certain jurisdictions we may be unable to protect our technology and intellectual property adequately against unauthorized use, which could adversely affect our business.
Our business may suffer if third parties assert that we violate their intellectual property rights.
Third parties may claim that either 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 on reasonable terms, or need to substitute similar technology from another source, our business, financial position, results of operations and 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 SK hynix Inc. and Samsung Electronics, Co., Ltd. and Micron, who are paying royalties for DRAM chips in advanced packages.
DRAM manufacturers are also currently developing next generation high performance DRAM chips, including the 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 chips and find a viable alternative packaging technology for use with next generation high performance DRAM chips, or if we do not receive royalties from the 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. As such, we may incur significant losses in any particular period before any associated revenue stream begins.
Our Intellectual Property business incurs significant reverse engineering expenditures on products of potential licensees 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 and 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 face severe financial difficulties from time to time. As a result, there have been recent bankruptcies and restructuring of companies in these industries. Our licensees may face similar financial difficulties which may result in their inability to make payments to us in a timely manner, or at all. In

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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.
Our financial and operating results may vary, which may cause the price of our common stock to decline.
Our quarterly operating results have fluctuated in the past and are likely to do so in the future. Because our operating results are difficult to predict, one should not rely on quarterly or annual comparisons of our results of operations as an indication of our future performance. Factors that could cause our operating results to fluctuate during any period or that could adversely affect our ability to achieve our strategic objectives include those listed in this “Risk Factors" section of this report and the following:
 

 
*
 
the timing of, and compliance with license or service agreements and the terms and conditions for payment to us of license or service fees under these agreements;
 
 
*
 
fluctuations in our royalties caused by the pricing terms of certain of our license agreements;
 
 
*
 
changes in our royalties caused by changes in demand for products incorporating semiconductors or wireless devices that use our licensed technology;
 
 
*
 
the amount of our product and service revenues;
 
 
*
 
changes in the level of our operating expenses;
 
 
*
 
delays in our introduction of new technologies or market acceptance of these new technologies through new license agreements;
 
 
*
 
our ability to protect or enforce our intellectual property rights or the terms of our agreements;
 
 
*
 
legal proceedings affecting our patents, patent applications or license agreements;
 
 
*
 
the timing of the introduction by others of competing technologies;
 
 
*
 
changes in demand for semiconductor chips in the specific end markets in which we concentrate;
 
 
*
 
changes in demand for semiconductor capital equipment, digital still cameras and other camera-enabled devices including cell phones, security systems and personal computers;
 
 
*
 
the timing of the conclusion of license agreements;
 
 
*
 
the length of time it takes to establish new licensing arrangements;
 
 
*
 
meeting the requirements for revenue recognition under generally accepted accounting principles;
 
 
*
 
changes in generally accepted accounting principles; and
 
 
*
 
cyclical fluctuations in semiconductor markets generally.
Due to fluctuations in our operating results, reports from market and security analysts, litigation-related developments, and other factors, the price at which our common stock will trade is likely to continue to be highly volatile. In future periods, if our revenues or operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline. In the past, securities class action litigation has often been brought against companies following a decline in the

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market price of their securities. If our stock price is volatile, we may become involved in this type of litigation in the future. Any litigation could result in substantial costs and a diversion of management's attention and resources that are needed to successfully run our business.
Our stockholders may not receive the level of dividends provided for in our dividend policy or any dividend at all, and any decrease in or suspension of the dividend could cause our stock price to decline.
In April 2013, we announced plans for a revised capital allocation policy.  The revised policy maintains the current quarterly dividend.  We also announced a plan to provide for special dividends once a year equal to 20-30% of “Episodic Gain,” which is a net gain resulting from “Episodic Revenue”. We define Episodic Revenue as revenue other than revenue payable over at least one year pursuant to a contract, and may include revenue such as non-recurring engineering fees, initial license fees, back payments resulting from audits, damages awards from courts or tribunals, and lump sum settlement payments. Another 20-30% of Episodic Gain would be used to provide a “sinking fund” to provide for the growth of the quarterly dividends. We anticipate that all quarterly and special dividends would be paid out of cash, cash equivalents and short-term investments. The amount of special dividends under the dividend policy will vary based on the Episodic Gain we achieve. Additionally, the dividend policy and the payment of future cash dividends under the policy are subject to the final determination each quarter by our Board of Directors that the policy remains in our best interests, which determination will be based on a number of factors, including our earnings, financial condition, capital resources and capital requirements, alternative uses of capital, economic condition and other factors considered relevant by the Board of Directors. Also, the Company may change the allocation of Episodic Gain from dividends to the repurchase of the Company’s common stock, depending on market conditions and other factors at the time. Given these considerations, our Board of Directors may increase or decrease the amount of the dividend at any time and may also decide to suspend or discontinue the payment of cash dividends in the future. Any decrease in the amount of the dividend, or suspension or discontinuance of payment of a dividend, could cause our stock price to decline.
Our stock repurchase program could increase the volatility of the price of our common stock, and the program may be suspended or terminated at any time, which may cause the trading price of our common stock to decline.
In August 2007, we 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. In November 2013, the Board increased the amount authorized to be used for repurchases to $150.0 million. In October 2014, the Board increased the amount authorized to be used for repurchases to $250.0 million. As of September 30, 2014, the total amount available for repurchase was $60.8 million. Additionally, in April 2013, we announced a plan to repurchase outstanding shares of our common stock, on an opportunistic basis, in an amount equal to 20-30% of Episodic Gain. Therefore, the amount of repurchases under our stock repurchase program will vary, in part, based on the amount of Episodic Gain we achieve. During 2013, we repurchased 1,500,000 shares for an aggregate amount of $28.8 million. In the first nine months of 2014, we repurchased 2,289,000 shares for an aggregate amount of $49.9 million. Additionally, the timing of repurchases is at our discretion and the program may be suspended or discontinued at any time and any suspension or discontinuation could cause the market price of our stock to decline. The timing of repurchases pursuant to our stock repurchase program could affect our stock price and increase its volatility. Furthermore, there can be no assurance that any stock repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we effected repurchases.
The investment of our cash, cash equivalents and investments in marketable debt securities are subject to risks which may cause losses and affect the liquidity of these investments.
At September 30, 2014, we held approximately $47.3 million in cash and cash equivalents and $351.4 million in short-term investments. These investments include various financial securities such as municipal bonds and notes, corporate bonds and notes, commercial paper, treasury and agency notes and bills, and money market funds. Although the Company invests in high quality securities, ongoing financial events have at times adversely impacted the general credit, liquidity, market and interest rates for these and other types of debt securities. The European fiscal crises and the U.S. "fiscal cliff" and government sequester have sometimes impacted market conditions for government debt securities. Additionally, changes in monetary policy by the Federal Open Market Committee and recent concerns about the rising U.S. government debt level may cause an increase in prevailing interest rates and adversely affect our investment portfolio. The financial market and monetary risks associated with our investment portfolio may have a material adverse effect on our financial condition, results of operations and cash flows.
We operate in a highly cyclical semiconductor industry, which is subject to significant downturns.
The semiconductor industry has historically been cyclical and is characterized by wide fluctuations in product supply and demand. From time to time, this industry has experienced significant downturns, often in connection with, or in anticipation of, declining economic conditions, maturing product and technology cycles, and excess inventories. This cyclicality could cause

50


our operating results to decline dramatically from one period to the next. Our business depends heavily upon the volume of production by our licensees, which, in turn, depends upon the current and anticipated market demand for semiconductors and products that use semiconductors. Similarly, our product revenues rely at least in part upon the demand of the semiconductor equipment market. Semiconductor manufacturers and package assembly companies generally sharply curtail their spending during industry downturns, such as in the recent global economic downturn, and historically have lowered their spending more than the decline in their revenues. As a result, our financial results have been, and will continue to be, significantly impacted by the cyclicality of the semiconductor industry. If we are unable to control our expenses adequately in response to lower revenues from our licensees and service customers in such downturns, our results of operations and cash flows will be materially and adversely impacted.
Changes in financial accounting or existing taxation standards, rules, practices or interpretation may cause adverse unexpected revenue and expense fluctuations which may impact our reported results of operations.
We prepare our consolidated financial statements in accordance with U.S. GAAP. These principles are subject to interpretations by the SEC and various accounting bodies. In addition, we are subject to various taxation rules in many jurisdictions. The existing taxation rules are generally complex, frequently changing and often ambiguous. Changes to existing taxation rules, changes to the financial accounting standards such as the proposed convergence to international financial reporting standards, or any changes to the interpretations of these standards or rules may adversely affect our reported financial results or the way in which we conduct business. Recent accounting pronouncements and their estimated potential impact on our business are addressed in Note 2 - “Summary of Significant Accounting Policies” in the Notes to Condensed Consolidated Financial Statements.
The international nature of our business exposes us to financial and regulatory risks that may have a negative impact on our consolidated financial position, results of operations and cash flows, and we may have difficulty protecting our intellectual property in some foreign countries.
We derive a significant portion of our revenues from licensees headquartered outside of the U.S. We also have operations outside of the U.S., including our research and development facilities in Ireland and Romania, to design, develop, test or market certain technologies. International operations are subject to a number of risks, including but not limited to the following:
 

 
*
 
fluctuations in exchange rates between the U.S. dollar and foreign currencies as our revenues are denominated principally in U.S. dollars and a portion of our costs are based in local currencies where we operate;
 
 
*
 
changes in trade protection laws, policies and measures, and other regulatory requirements affecting trade and investment;
 
 
*
 
regulatory requirements and prohibitions that differ between jurisdictions;
 
 
*
 
laws and business practices favoring local companies;
 
 
*
 
withholding tax obligations on license revenues that we may not be able to offset fully against our U.S. tax obligations, including the further risk that foreign tax authorities may re-characterize license fees or increase tax rates, which could result in increased tax withholdings and penalties;
 
 
*
 
security concerns, including crime, political instability, terrorist activity, armed conflict and civil or military unrest;
 
 
*
 
differing employment practices, labor issues and business and cultural factors;
 
 
*
 
less effective protection of intellectual property than is afforded to us in the U.S. or other developed countries; and
 

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

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

We may not be able to consummate our transaction with O-Film, or the consummation of such transaction may be delayed, which would adversely affect our financial condition and results of operations.

In April 2014, we entered into a definitive agreement with O-Film whereby O-Film has agreed to pay us $50.0 million, consisting of a $20.5 million prepaid royalty and support fee for a non-exclusive license to specific FotoNation product features ($3.5 million of which was already paid by O-Film in the second quarter of 2014), $7.5 million for a non-exclusive license for core MEMS auto-focus and other related intellectual property and $22.0 million for certain manufacturing equipment and supplies and certain non-core patents and patent applications (including patents and patent applications for Wafer Level Optics, Micro Optics and camera module technology), in each case, at the closing of the transaction (except for the $3.5 million related to the FotoNation product features which was already paid). Although the Company expects the closing of the transaction to be completed before the end of the year, it is subject to customary closing conditions. These closing conditions include regulatory approvals or filings by relevant outbound investment authorities in China, including the local offices of the Ministry of Commerce, the Taiwan Affairs Office and the National Development and Reform Commission, as well as approvals by authorities in Taiwan, including approval by the Investment Commission Ministry of Economic Affairs of Taiwan. We have met our obligations under the agreement and are seeking to close the transaction. At present, however, timing and consummation of the transaction is uncertain. If the transaction is not consummated, our results of operations and financial condition will be adversely affected, and we will need to seek alternative avenues for the sale of the associated assets and the monetization of the associated patents and patent applications, which we may be unable to do on favorable terms, if at all. If the failure to consummate the transaction is a result of our material breach of contract or as a result of proceedings of a United States governmental authority, we may be required to return the $5.0 million deposit O-Film paid to us in connection with the signing of the letter of intent for the transaction, which deposit is otherwise non-refundable. If the closing of the transaction is further delayed, we will incur additional expenses associated with maintaining the assets and associated facilities that we currently do not expect to incur.


We are in the process of implementing a restructuring to cease our remaining manufacturing operations. The restructuring may take longer than we anticipate or require us to incur a greater amount of charges than we currently estimate.
In January 2014, we announced a restructuring to cease our remaining manufacturing operations. In connection with the restructuring, we are undertaking a related workforce reduction of over 300 employees primarily in Taiwan, the United States, and Japan, and we are in the process of closing our facilities in Arcadia, California, Rochester, New York and in Taiwan and Japan. We undertook these actions to reduce operating costs in conjunction with the decision to no longer pursue a strategy of manufacturing and selling mems|cam products, but instead to focus on our core intellectual property business, including our FotoNation image enhancement business and monetizing the intellectual property portfolio and technology of DigitalOptics Corporation, through a sale, licensing or other means. The restructuring, workforce reduction and facility closures have taken longer than anticipated, primarily due to delays in closing the O-Film transaction discussed above, and further delays would cause disruption to our business activities, diminish anticipated savings and result in increased restructuring costs, which would adversely affect our operating results and financial condition. We incurred approximately $49.0 million in the fourth quarter of 2013 and $5.8 million in the first nine months of 2014 in connection with this restructuring. The restructuring could result in additional charges, in particular if the O-Film transaction does not close within a reasonable period of time or if we are required to enforce terms of the definitive agreement with O-Film through litigation, which could adversely affect our operating results and financial condition.
Our business and operating results may be harmed if we are unable to manage growth in our business, if we undertake any further restructuring activities or if we dispose of a business division or dispose of or discontinue any product lines.
We have in the past expanded our operations, domestically and internationally, and may continue to do so through both internal growth and acquisitions. For example, in 2012, we acquired manufacturing capabilities in Zhuhai, China and commenced building out a manufacturing facility in Hsinchu, Taiwan, and we subsequently closed the Zhuhai, China facility in the second quarter of 2013 and announced our plans to close the Taiwan facility in January, 2014. To manage our growth effectively, we must continue to improve and expand our management, systems and financial controls. We also need to continue to expand,

52


train and manage our employee base. If we are unable to effectively manage our growth or we are unsuccessful in recruiting and retaining personnel, our business and operating results will be harmed.
From time to time, we may undertake to restructure our business, including the disposition of a business division, or the disposition or discontinuance of a product line. For example, in 2011, we announced that we were exploring a possible separation of our DigitalOptics business from the parent corporation; in November 2012, we announced the planned closure of our facility located in Israel; in March 2013, we announced the planned closure of our leased manufacturing facility in Zhuhai, China; in April 2013, we announced that we were exploring a sale or other strategic alternatives for our DigitalOptics business; in August 2013, we announced the sale of a significant portion of the assets of the DigitalOptics manufacturing facility based in Charlotte, North Carolina; and in January 2014, we announced a restructuring to cease our remaining manufacturing operations, and announced that we were undertaking a workforce reduction and facility closures in connection with the restructuring. There are several factors that could cause a restructuring, a disposition or a discontinuance to have an adverse effect on our business, financial position, results of operations and cash flows. These include potential disruption of our operations and our information technology systems, the timing of development of our technology, the deliveries of products or services to our customers, changes in our workforce and other aspects of our business. In addition, such actions may increase the risk of claims or threats of lawsuits by our customers or former employees. In the case of a disposition of a product line, there may be a risk of not identifying a purchaser, or, if identified, the purchase price may be less than the net asset book value for the product line. Employee morale and productivity could also suffer and we may lose employees whom we want to keep. Any restructuring, disposition or discontinuance would require substantial management time and attention and may divert management from other important work. There are no assurances that a restructuring, disposal or discontinuance will result in future profitability. We may also incur other significant liabilities and costs including employee severance costs, relocation expenses, and impairment of lease obligations and long-lived assets. Moreover, we could encounter delays in executing any restructuring plans, which could cause further disruption and additional unanticipated expense.
Disputes regarding our intellectual property may require us to indemnify certain licensees, the cost of which could adversely affect our business operations and financial condition.
While we generally do not indemnify our licensees, some of our license agreements in our image enhancement business provide limited indemnities for certain actions brought by third parties against our licensees, and some require us to provide technical support and information to a licensee that is involved in litigation for using our technology. We may agree to provide similar indemnity or support obligations to future licensees. Our indemnity and support obligations could result in substantial expenses. In addition to the time and expense required for us to indemnify or supply such support to our licensees, a licensee's development, marketing and sales of licensed image enhancement products could be severely disrupted or shut down as a result of litigation, which in turn could have a material adverse effect on our business operations, consolidated financial position, results of operations and cash flows.
If we lose any of our key personnel or are unable to attract, train and retain qualified personnel, we may not be able to execute our business strategy effectively.
Our success depends, in large part, on the continued contributions of our key management, engineering, sales, marketing, intellectual property, legal and finance personnel, many of whom are highly skilled and would be difficult to replace. None of our senior management, key technical personnel or key sales personnel are bound by written employment contracts to remain with us for a specified period. In addition, we do not currently maintain key person life insurance covering our key personnel or restrictions on their post-employment ability to solicit our employees, contractors or customers if key personnel voluntarily terminate their employment. The loss of any of our senior management or other key personnel, some of whom have only been in their current positions for a relatively short period of time, could harm our ability to implement our business strategy and respond to the rapidly changing market conditions in which we operate. Thomas Lacey has served as our Chief Executive Officer since December 2013 and served as our Interim Chief Executive Officer from May 2013 until December 2013. In January 2014, we announced the appointment of Robert Andersen as our Chief Financial Officer. Our future success will depend to a significant extent on the ability of these executives to effectively drive execution of our business strategy, and on the ability of our management team to work together effectively.
Our success also depends on our ability to attract, train and retain highly skilled managerial, engineering, sales, marketing, legal and finance personnel and on the abilities of new personnel to function effectively, both individually and as a group. Competition for qualified senior employees can be intense. We have also experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled engineers with appropriate qualifications to support our growth and expansion. Further, we must train our new personnel, especially our technical support personnel, to respond to and support our licensees and customers. If we fail to do this, it could lead to dissatisfaction among our licensees or customers, which could slow our growth or result in a loss of business.

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Our business operations could suffer in the event of information technology systems' failures or security breaches.
Despite system redundancy and the implementation of security measures within our internal and external information technology and networking systems, our information technology systems may be subject to security breaches, damages from computer viruses, natural disasters, terrorism, and telecommunication failures. Any system failure or security breach could cause interruptions in our operations in addition to the possibility of losing proprietary information and trade secrets. To the extent that any disruption or security breach results in inappropriate disclosure of our confidential information, we may incur liability or additional costs to remedy the damages caused by these disruptions or security breaches.
Decreased effectiveness of share-based compensation could adversely affect our ability to attract and retain employees.
We have historically used stock options and other forms of stock-based compensation as key components of employee compensation in order to align employees' interests with the interests of our stockholders, encourage employee retention and provide competitive compensation and benefit packages. We incur significant compensation costs associated with our stock-based compensation programs. Difficulties relating to obtaining stockholder approval of equity compensation plans or changes to the plans could make it harder or more expensive for us to grant stock-based compensation to employees in the future. As a result, we may find it difficult to attract, retain and motivate employees, and any such difficulty could have a materially adverse impact on our business.
Failure to comply with environmental regulations could harm our business.
We use hazardous substances in the manufacturing and testing of prototype products and in the development of technologies in our research and development laboratories. We are subject to a variety of local, state and federal regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances. Our past, present or future failure to comply with environmental regulations could result in the imposition of substantial fines, suspension of production, and alteration of our manufacturing processes or cessation of operations. Compliance with such regulations could require us to acquire expensive remediation equipment or to incur other substantial expenses. Any failure to control the use, disposal, removal or storage of, or to adequately restrict the discharge of, or assist in the cleanup of, hazardous or toxic substances, could subject us to significant liabilities, including joint and several liabilities under certain statutes. The imposition of such liabilities could significantly harm our business, financial position, results of operations and cash flows.
Our effective tax rate depends on our ability to secure the tax benefits of our international corporate structure, on the application of the tax laws of various jurisdictions and on how we operate our business.
Our international corporate structure and intercompany arrangements, including the manner in which we market, develop, use and license our intellectual property, fund our operations and structure transactions with our international subsidiaries, may result in the reduction of our worldwide effective tax rate. Such international corporate structure and intercompany arrangements are subject to examination by the tax authorities of the jurisdictions in which we operate, including the United States. The application of the tax laws of these jurisdictions to our international business activities is subject to interpretation and depends on our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. Moreover, such tax laws are subject to change. Tax authorities may disagree with our intercompany transfer pricing arrangements, including our transfer of intangibles, or determine that the manner in which we operate our business does not achieve the intended tax consequences. Additionally, future changes in the tax laws (such as proposed legislation to reform U.S. taxation of international business activities) may have an adverse effect on our international corporate structure and operations. The result of an adverse determination of any of the above items could increase our worldwide effective tax rate and harm our financial position and results of operations.
We have business operations located in places that are subject to natural disasters.

Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel. Our corporate headquarters are located in the San Francisco Bay Area, which in the past has experienced severe earthquakes. We do not carry earthquake insurance. Earthquakes or other natural disasters could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition and prospects.
We have made and may continue to make or to pursue acquisitions which could divert management's attention, cause ownership dilution to our stockholders, or be difficult to integrate, which may adversely affect our financial results.
We have made several acquisitions, and it is our current plan to continue to acquire companies, assets, patent portfolios and technologies that we believe are strategic to our future business. Investigating businesses, assets, patent portfolios or technologies and integrating newly acquired businesses, assets, patent portfolios or technologies could put a strain on our

54


resources, could be costly and time consuming, and might not be successful. Such activities divert our management's attention from other business concerns. In addition, we might lose key employees while integrating new organizations or operations. Acquisitions could also result in customer dissatisfaction, performance problems with an acquired company or technology, potentially dilutive issuances of equity securities or the incurrence of debt, the assumption or incurrence of contingent liabilities, impairment charges related to goodwill and possible impairment charges related to other intangible assets or other unanticipated events or circumstances, any of which could harm our business.
Our plans to integrate and expand upon research and development programs and technologies obtained through acquisitions may result in products or technologies that are not adopted by the market. The market may adopt competitive solutions to our products or technologies. Consequently, we might not be successful in integrating any acquired businesses, assets, products or technologies, and might not achieve anticipated revenues and cost benefits.
There are numerous risks associated with our acquisitions of businesses, technologies and patents
We have made a number of acquisitions of businesses, technologies and patents in recent years. These acquisitions are subject to a number of risks, including but not limited to the following:
 

 
*
 
These acquisitions could fail to produce anticipated benefits, or could have other adverse effects that we currently do not foresee. As a result, these acquisitions could result in a reduction of net income per share as compared to the net income per share we would have achieved if these acquisitions had not occurred. We may also be required to recognize impairment charges of acquired assets or goodwill, and if we decide to restructure acquired businesses, we may incur other restructuring charges. For example, in June 2012, we acquired a manufacturing operation in Zhuhai, China and, subsequently, this facility was closed in the third quarter of 2013. In January 2014, we announced a restructuring of our DigitalOptics business to cease its remaining manufacturing operations, in connection with which we incurred approximately $49.0 million in restructuring and impairment charges in the fourth quarter of 2013 and $5.8 million in the first nine months of 2014.
 
 
*
 
The purchase price for each acquisition is determined based on significant judgment on factors such as projected value, quality and availability of the business, technology or patent. In addition, if other companies have similar interests in the same business, technology or patent, our ability to negotiate these acquisitions at favorable terms may be limited and the purchase price may be artificially inflated.
 
 
*
 
Following completion of these acquisitions, we may uncover additional liabilities, patent validity, infringement or enforcement issues or unforeseen expenses not discovered during our diligence process. Any such additional liabilities, patent validity, infringement or enforcement issues or expenses could result in significant unanticipated costs not originally estimated, such as impairment charges of acquired assets and goodwill, and may harm our financial results.
 
 
*
 
The integration of technologies, patent portfolios and personnel, if any, will be a time consuming and expensive process that may disrupt our operations if it is not completed in a timely and efficient manner. If our integration efforts are not successful, our results of operations could be harmed, employee morale could decline, key employees could leave, and customer relations could be damaged. In addition, we may not achieve anticipated synergies or other benefits from any of these acquisitions.
 
 
*
 
We have incurred substantial direct transaction and integration costs as a result of past acquisitions. In future acquisitions, the total direct transaction costs and the costs of integration may exceed our expectations.
 
 
*
 
Sales by the acquired businesses may be subject to different accounting treatment than our existing businesses, especially related to the recognition of revenues. This may lead to potential deferral of revenues due to new multiple-element revenue arrangements.
 
 
*
 
There is a significant time lag between acquiring a patent portfolio and recognizing revenue from those patent assets. During that time lag, material costs are likely to be incurred in preparing licensing and/or litigation campaigns that would have a negative effect on our results of operations, cash flows and financial position.
 

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*
 
We may require external financing that is dilutive or presents risks of debt.
 
 
*
 
We are required to estimate and record fair values of contingent assets, liabilities, deferred tax assets and liabilities at the time of an acquisition. Even though these estimates are based on management's best judgment, the actual results may differ. Under the current accounting guidance, differences between actual results and management's estimate could cause our operating results to fluctuate or could adversely affect our results of operations.
If our amortizable intangible assets (such as acquired patents) become impaired, we may be required to record a significant charge to earnings.
In addition to internal development, we intend to broaden our intellectual property portfolio through strategic relationships and acquisitions. We believe this will enhance the competitiveness and size of our current businesses and diversify into markets and technologies that complement our current businesses. These acquisitions could be in the form of asset purchases, equity investments, or business combinations. As a result, we may have intangible assets which are amortized over their estimated useful lives, equity investments, in-process research and development, and goodwill. Under U.S. GAAP, we are required to review our amortizable intangible assets (such as our patent portfolio)for impairment at least annually or more often when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our amortizable or other intangible assets may not be recoverable include a decline in future cash flows, fluctuations in market capitalization, slower growth rates in our industry or slower than anticipated adoption of our products by our customers. In the first quarter of 2013, we recorded an impairment of goodwill of $6.7 million when we revised our business strategy for the DigitalOptics business to concentrate its manufacturing efforts on the lens barrel, rather than the whole camera module. This revised strategy made our leased manufacturing facility in Zhuhai, China unnecessary and the goodwill tied to the facility became impaired. We also recorded an $8.7 million charge due to the abandonment of existing patents and technology, which caused a revision of the useful life estimate of these patent and technology assets thus fully impairing them. In the fourth quarter of 2013, we recorded an impairment of intangible assets of approximately $7.0 million in connection with the restructuring that we announced in January 2014. As we continue to review for factors that may affect our business which may not be in our control, we may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our amortizable intangible assets or equity investments is determined, resulting in an adverse impact on our business, financial position or results of operations.
Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.
Changing laws, regulations and standards relating to corporate governance and public disclosure, new SEC regulations, requirements placed on non-financial companies under the Dodd-Frank Act and the NASDAQ Stock Market rules, have created uncertainty for companies. These laws, regulations and standards are often subject to varying interpretations. As a result, their application in practice may evolve as new guidance is provided by regulatory and governing bodies, which could result in higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result of our efforts to comply with evolving laws, regulations and standards, we have increased and may continue to increase general and administrative expenses and diversion of management time and attention from revenue-generating activities to compliance activities.
Provisions of our certificate of incorporation and bylaws or Delaware law might delay or prevent a change of control transaction and depress the market price of our stock.
Various provisions of our certificate of incorporation and bylaws might have the effect of making it more difficult for a third party to acquire, or discouraging a third party from attempting to acquire, control of our company. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock. Certain of these provisions eliminate cumulative voting in the election of directors, authorize the board to issue “blank check” preferred stock, prohibit stockholder action by written consent, eliminate the right of stockholders to call special meetings, limit the ability of stockholders to remove directors, and establish advance notice procedures for director nominations by stockholders and the submission of other proposals for consideration at stockholder meetings. We are also subject to provisions of Delaware law which could delay or make more difficult a merger, tender offer or proxy contest involving our company. In particular, Section 203 of the Delaware General Corporation Law prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years unless specific conditions are met. Any of these provisions could have the effect of delaying, deferring or preventing a change in control, including without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock.


56


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Items 2(a) and 2(b) are not applicable.
(c) Stock Repurchases
 
 
 
 
 
 
Total number of
 
Approximate dollar
 
 
 
 
 
 
shares purchased as
 
value of shares that
 
 
Total number
 
Average
 
part of our share
 
may yet be purchased
 
 
of shares
 
price paid
 
repurchase
 
under our share
Period
 
purchased
 
per share
 
program
 
repurchase program (a)
(Share in thousands)
 
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
 
July
 
6

 
$
21.90

 
6

 
 
August
 
131

 
28.59

 
131

 
 
September
 
25

 
29.55

 
25

 
 
Total
 
162

 
$
28.49

 
162

 
$160.8 million
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a) In August 2007, the Board 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. In November 2013, the Board increased the amount authorized to be used for repurchases to $150.0 million. In October 2014, the Board increased the amount authorized to be used for repurchases to $250.0 million. The approximate dollar value of shares that may yet be purchased under our share repurchase program reflects this October 2014 increase. No expiration date has been specified for this plan. All repurchases in the nine months ended September 30, 2014 were made under this plan.

Item 3. Defaults Upon Senior Securities
Not applicable.

Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.

Item 6. Exhibits
 

57


Exhibit
Number
 
Exhibit Title
 
 
 
3.1
 
Restated Certificate of Incorporation (filed as Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1 (SEC File No. 333-108518), effective November 12, 2003, and incorporated herein by reference)
 
 
 
3.2
 
Amended and Restated Bylaws, dated September 14, 2011, as amended August 29, 2012, December 19, 2012, March 2, 2013, March 25, 2013, April 29, 2013 and May 22, 2013 (filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q, filed on August 6, 2013, and incorporated herein by reference)
 
 
 
31.1
 
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
 
 
 
31.2
 
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
 
 
 
32.1
 
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 



58


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 4, 2014
 
 
 
 
TESSERA TECHNOLOGIES, INC.
 
 
By:
 
/s/    Thomas Lacey
 
 
Thomas Lacey
Chief Executive Officer


59


EXHIBIT INDEX
 

Exhibit
Number
 
Exhibit Title
 
 
 
3.1
 
Restated Certificate of Incorporation (filed as Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1 (SEC File No. 333-108518), effective November 12, 2003, and incorporated herein by reference)
 
 
 
3.2
 
Amended and Restated Bylaws, dated September 14, 2011, as amended August 29, 2012, December 19, 2012, March 2, 2013, March 25, 2013, April 29, 2013 and May 22, 2013 (filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q, filed on August 6, 2013, and incorporated herein by reference)
 
 
 
31.1
 
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
 
 
 
31.2
 
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
 
 
 
32.1
 
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 


60