TESSERA TECHNOLOGIES INC - FORM 10-Q - August 5, 2015

Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - TESSERA TECHNOLOGIES INCexhibit311.htm
EX-10.3 - EXHIBIT 10.3 - TESSERA TECHNOLOGIES INCexhibit103.htm
EX-31.2 - EXHIBIT 31.2 - TESSERA TECHNOLOGIES INCexhibit3121.htm
EX-32.1 - EXHIBIT 32.1 - TESSERA TECHNOLOGIES INCexhibit3211.htm
EX-10.2 - EXHIBIT 10.2 - TESSERA TECHNOLOGIES INCexhibit102.htm

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 June 30, 2015
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 July 24, 2015 was 52,117,405.




TESSERA TECHNOLOGIES, INC.
FORM 10-Q — QUARTERLY REPORT
FOR THE QUARTER ENDED JUNE 30, 2015
TABLE OF CONTENTS
 

  
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2



TESSERA TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for par value)
 (unaudited)
 
June 30, 2015
 
December 31, 2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
21,412

 
$
50,908

Short-term investments
410,481

 
383,513

Accounts receivable, net
6,970

 
4,478

Current deferred tax assets
20,586

 
19,334

Other current assets
20,218

 
17,277

Total current assets
479,667

 
475,510

Intangible assets, net
66,489

 
72,925

Long-term deferred tax assets
13,303

 
21,759

Other assets
6,419

 
6,929

Total assets
$
565,878

 
$
577,123

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,364

 
$
3,509

Accrued legal fees
4,797

 
4,143

Accrued liabilities
7,815

 
16,157

Deferred revenue
10,295

 
10,217

Total current liabilities
24,271

 
34,026

Long-term deferred tax and other liabilities
1,906

 
1,738

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; 58,527 and 57,800 shares issued, respectively, and 52,115 and 52,840 shares outstanding, respectively
58

 
58

Additional paid-in capital
591,530

 
576,341

Treasury stock at cost; 6,412 and 4,960 shares of common stock at each period end, respectively
(163,577
)
 
(106,231
)
Accumulated other comprehensive loss
(507
)
 
(333
)
Retained earnings
112,197

 
71,524

Total stockholders’ equity
539,701

 
541,359

Total liabilities and stockholders’ equity
$
565,878

 
$
577,123


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
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Revenues:
 
 
 
 
 
 
 
Royalty and license fees
$
64,188

 
$
37,213

 
$
144,038

 
$
125,549

Total revenues
64,188

 
37,213

 
144,038

 
125,549

Operating expenses:
 
 
 
 
 
 
 
Cost of revenues
166

 
95

 
308

 
103

Research, development and other related costs
7,866

 
8,958

 
15,234

 
16,490

Selling, general and administrative
11,119

 
11,928

 
22,116

 
24,350

Amortization expense
4,691

 
4,570

 
9,386

 
9,173

Litigation expense
3,519

 
10,214

 
8,023

 
17,165

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

 
488

 
—

 
1,527

Total operating expenses
27,361

 
36,253

 
55,067

 
68,808

Operating income
36,827

 
960

 
88,971

 
56,741

Other income and expense, net
770

 
432

 
1,418

 
762

Income before taxes from continuing operations
37,597

 
1,392

 
90,389

 
57,503

Provision for (benefit from) income taxes
11,828

 
(1,124
)
 
29,052

 
21,562

Income from continuing operations
25,769

 
2,516

 
61,337

 
35,941

Income (loss) from discontinued operations, net of tax
342

 
1,255

 
369

 
(11,272
)
Net income
$
26,111

 
$
3,771

 
$
61,706

 
$
24,669

Income (loss) per share:
 
 
 
 
 
 
 
Income from continuing operations:
 
 
 
 
 
 
 
Basic
$
0.49

 
$
0.05

 
$
1.17

 
$
0.68

Diluted
$
0.49

 
$
0.05

 
$
1.15

 
$
0.67

Income (loss) from discontinued operations:
 
 
 
 
 
 
 
Basic
$
0.01

 
$
0.02

 
$
0.01

 
$
(0.21
)
Diluted
$
0.01

 
$
0.02

 
$
0.01

 
$
(0.21
)
Net income:
 
 
 
 
 
 
 
Basic
$
0.50

 
$
0.07

 
$
1.18

 
$
0.47

Diluted
$
0.49

 
$
0.07

 
$
1.16

 
$
0.46

Cash dividends declared per share
$
0.20

 
$
0.62

 
$
0.40

 
$
0.72

Weighted average number of shares used in per share calculations-basic
52,293

 
52,812

 
52,387

 
53,016

Weighted average number of shares used in per share calculations-diluted
53,052

 
53,397

 
53,265

 
53,610

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


4

 
TESSERA TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 (unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Net income
$
26,111

 
$
3,771

 
$
61,706

 
$
24,669

Other comprehensive income (loss):
 
 
 
 
 
 
 
Net unrealized gains (losses) on available-for- sale securities, net of tax
(690
)
 
42

 
(174
)
 
(41
)
Other comprehensive income (loss)
(690
)
 
42

 
(174
)
 
(41
)
Comprehensive income
$
25,421

 
$
3,813

 
$
61,532

 
$
24,628

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)
 
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
Cash flows from operating activities:
 
 
 
Net income
$
61,706

 
$
24,669

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation and amortization of property and equipment
823

 
1,011

Amortization of intangible assets
9,386

 
9,174

Stock-based compensation expense
5,571

 
6,415

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

 
820

Deferred income tax and other, net
7,199

 
(1,944
)
Excess tax benefit from stock based compensation
(714
)
 
135

Patents received through settlement agreements
—

 
(1,591
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(2,492
)
 
(249
)
Other assets
(2,751
)
 
3,324

Accounts payable
(2,411
)
 
(2,123
)
Accrued legal fees
357

 
3,220

Accrued and other liabilities
(6,897
)
 
393

Deferred revenue
78

 
(28
)
Net cash from operating activities
69,855

 
43,226

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(503
)
 
(1,143
)
Purchases of short-term available-for-sale investments
(243,606
)
 
(134,068
)
Proceeds from maturities and sales of short-term investments
216,469

 
122,287

Purchases of intangible assets
(2,950
)
 
(5,100
)
Net cash from investing activities
(30,590
)
 
(18,024
)
Cash flows from financing activities:
 
 
 
Dividend paid
(21,033
)
 
(37,766
)
Excess tax benefit from stock-based compensation
714

 
—

Proceeds from exercise of stock options
8,018

 
14,711

Proceeds from employee stock purchase program
886

 
1,103

Repurchase of common stock
(57,346
)
 
(45,334
)
Net cash from financing activities
(68,761
)
 
(67,286
)
Net decrease in cash and cash equivalents
(29,496
)
 
(42,084
)
Cash and cash equivalents at beginning of period
50,908

 
73,722

Cash and cash equivalents at end of period
$
21,412

 
$
31,638

 
 
 
 
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 its technologies and intellectual property to customers and others who implement it for use in areas such as mobile computing and communications, memory and data storage, and 3-D Integrated Circuit (“3DIC”) technologies, among others. The Company's technologies include semiconductor packaging and interconnect solutions, and products and solutions for mobile and computational imaging, including our FaceToolsTM, FacePowerTM, FotoSavvyTM, DigitalApertureTM, face beautification, red-eye removal, High Dynamic Range, autofocus, panorama, and image stabilization intellectual property.
The accompanying interim unaudited condensed consolidated financial statements as of June 30, 2015 and 2014, and for the three and six 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, 2014 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, 2014, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, filed on February 25, 2015 (the “Form 10-K”).
The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2015 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. The most significant of these reclassifications are as follows:
•
Amortization expense is now shown separately on the Condensed Consolidated Statements of Operations.
•
Certain balance sheet items from 2014 have been grouped together to conform with current periods presented.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes in the Company’s significant accounting policies during the six months ended June 30, 2015, as compared to the significant accounting policies described in the Form 10-K.

Recent Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board (“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 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

7

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, 2018 and, at that time, the Company may adopt the new standard under the full retrospective approach or the modified retrospective approach. At this time, some of the current guidance impacting the Intellectual Property licensing industry is still under review by the FASB based on exposure drafts. Therefore, the Company is still considering how the guidance might affect its financial reporting once finalized.
NOTE 3 – COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

Other current assets consisted of the following (in thousands):
 
June 30, 2015
 
December 31, 2014
Prepaid income taxes
$
14,925

 
$
12,841

Interest receivable
2,566

 
2,138

Other
2,727

 
2,298

 
$
20,218

 
$
17,277


Accrued liabilities consisted of the following (in thousands):
 
June 30, 2015
 
December 31, 2014
Employee compensation and benefits
$
5,401

 
$
10,734

Other
2,414

 
5,423

 
$
7,815

 
$
16,157


Accumulated other comprehensive income (loss) consisted of the following (in thousands):
 
June 30, 2015
 
December 31, 2014
Unrealized gains (loss) on available-for-sale securities, net of tax
$
(507
)
 
$
(333
)
 
$
(507
)
 
$
(333
)
NOTE 4 – FINANCIAL INSTRUMENTS
The following is a summary of marketable securities at June 30, 2015 and December 31, 2014 (in thousands):
 

8

 
June 30, 2015
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Values
Available-for-sale securities
 
 
 
 
 
 
 
Corporate bonds and notes
$
311,108

 
$
81

 
$
(513
)
 
$
310,676

Municipal bonds and notes
73,590

 
13

 
(96
)
 
73,507

Commercial paper
9,389

 
3

 
—

 
9,392

Treasury and agency notes and bills
19,202

 
10

 
(6
)
 
19,206

Money market funds
2,296

 
—

 
—

 
2,296

Total available-for-sale securities
$
415,585

 
$
107

 
$
(615
)
 
$
415,077

Reported in:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
$
4,596

Short-term investments
 
 
 
 
 
 
410,481

Total marketable securities
 
 
 
 
 
 
$
415,077

 
December 31, 2014
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Values
Available-for-sale securities
 
 
 
 
 
 
 
Corporate bonds and notes
$
282,279

 
$
13

 
$
(538
)
 
$
281,754

Municipal bonds and notes
37,201

 
15

 
(1
)
 
37,215

Treasury and agency notes and bills
41,271

 
10

 
(13
)
 
41,268

Commercial paper
33,774

 
2

 
(1
)
 
33,775

Money market funds
20,883

 
—

 
—

 
20,883

Total available-for-sale securities
$
415,408

 
$
40

 
$
(553
)
 
$
414,895

Reported in:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
$
31,382

Short-term investments
 
 
 
 
 
 
383,513

Total marketable securities
 
 
 
 
 
 
$
414,895

At June 30, 2015 and December 31, 2014, the Company had $431.9 million and $434.4 million, respectively, in cash, cash equivalents and short-term investments. The majority of these amounts were held in marketable securities, as shown above. The remaining balance of $16.8 million and $19.5 million at June 30, 2015 and December 31, 2014, 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 six months ended June 30, 2015 and 2014.
Unrealized losses and unrealized gains were $0.4 million and $0.1 million, respectively, net of tax, as of June 30, 2015. These amounts 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 June 30, 2015 because the Company has the ability to hold these investments to allow for recovery, does not anticipate having to sell these securities with unrealized losses and continues to receive interest at the maximum contractual rate. For the three months ended June 30, 2015 and 2014, 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 June 30, 2015 and December 31, 2014, which have been in a continuous unrealized loss position, aggregated by investment category and length of time (in thousands):
 

9

June 30, 2015
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
$
190,667

 
$
(475
)
 
$
46,714

 
$
(38
)
 
$
237,381

 
$
(513
)
Treasury and agency notes and bills
4,618

 
(6
)
 
—

 
—

 
4,618

 
(6
)
Municipal bonds and notes
56,584

 
(96
)
 
—

 
—

 
56,584

 
(96
)
Total
$
251,869

 
$
(577
)
 
$
46,714

 
$
(38
)
 
$
298,583

 
$
(615
)
 
December 31, 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
$
240,165

 
$
(535
)
 
$
5,453

 
$
(3
)
 
$
245,618

 
$
(538
)
Municipal bonds and notes
1,061

 
(1
)
 
—

 
—

 
1,061

 
(1
)
Commercial paper
9,482

 
(1
)
 
—

 
—

 
9,482

 
(1
)
Treasury and agency notes and bills
16,245

 
(13
)
 
—

 
—

 
16,245

 
(13
)
Total
$
266,953

 
$
(550
)
 
$
5,453

 
$
(3
)
 
$
272,406

 
$
(553
)

The estimated fair value of marketable securities by contractual maturity at June 30, 2015 is shown below (in thousands). Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.
 
 
Estimated
Fair Value
Due in one year or less
$
142,238

Due in one to two years
144,683

Due in two to three years
128,156

Total
$
415,077

NOTE 5 – DISCONTINUED OPERATIONS

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 and for the entire Company. This action, which occurred primarily during the first half of 2014, included a reduction of over 300 employees and the closure of facilities in Arcadia, California, Rochester, New York, Hsinchu, Taiwan and Japan and was substantially complete in the first quarter of 2015.

For more information regarding these actions, see Note 14 – "Restructuring, Impairment of Long-Lived Assets and Other Charges."
The Company has reported the results of operations and financial position of this business in discontinued operations within the Condensed Consolidated Statements of Operations for all periods presented. Assets and liabilities of discontinued operations are not material as of December 31, 2014 and June 30, 2015 and are, therefore, included in other line items on the Condensed Consolidated Balance Sheets. See below for more information regarding balance sheet classification.
The results from discontinued operations were as follows (in thousands):

10

 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
 
Revenues:
 
 
 
 
 
 
 
 
Product and service revenues
$
—

 
$
32

 
$
—

 
$
32

 
Total revenues
—

 
32

 
—

 
32

 
Operating expenses:
 
 
 
 
 
 
 
 
Cost of revenues
—

 
2

 
—

 
21

 
Research, development and other related costs
—

 
442

 
—

 
5,554

 
Selling, general and administrative
—

 
142

 
389

 
2,379

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

 
419

(1
)
(371
)
 
4,535

(1
)
Total operating expenses
—

 
1,005

 
18

 
12,489

 
Operating loss before taxes
—

 
(973
)
 
(18
)
 
(12,457
)
 
Other income and expense, net
—

 
307

 
—

 
487

 
Benefit from income taxes
(342
)
 
(1,921
)
 
(387
)
 
(698
)
 
Net income (loss) from discontinued operations
$
342

 
$
1,255

 
$
369

 
$
(11,272
)
 

(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.

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

 
June 30, 2015
 
December 31, 2014
 
Accounts receivable and other assets, net
$
—

(1)
$
390

(2)
Total current assets of discontinued operations
$
—

 
$
390

 
Accrued liabilities
—

(1)
2,873

(3)
Total current liabilities of discontinued operations
$
—

 
$
2,873

 

(1) As of June 30, 2015, the activities related to the discontinued operations described above have been substantially completed. Consequently, all balance sheet items have been written off, disposed of or settled.
(2) This amount is included in "Other current assets" on the condensed consolidated balance sheet.
(3) This amount is included in "Accrued liabilities" on the condensed consolidated balance sheet.

NOTE 6 – FAIR VALUE

The Company follows the authoritative guidance fair value measurement and the fair value option 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:

11

Level 1
 
Quoted prices in active markets for identical assets.
Level 2
 
Observable market-based inputs or unobservable inputs that are corroborated by market data.
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.
When applying fair value principles in the valuation of assets, we are required to maximize the use of quoted market prices and minimize the use of unobservable inputs. We calculate the fair value of our Level 1 and Level 2 instruments based on the exchange traded price of similar or identical instruments, where available, or based on other observable inputs. There were no significant transfers into or out of Level 1 or Level 2 that occurred between December 31, 2014 and June 30, 2015.
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 June 30, 2015 (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)
$
2,296

 
$
2,296

 
$
—

 
$
—

Corporate bonds and notes (2)
310,677

 
—

 
310,677

 
—

Municipal bonds and notes (2)
73,507

 
—

 
73,507

 
—

Treasury and agency notes and bills (2)
19,206

 
—

 
19,206

 
—

Commercial paper (3)
9,391

 
—

 
9,391

 
—

Total Assets
$
415,077

 
$
2,296

 
$
412,781

 
$
—

The following footnotes indicate where the noted items were recorded in the Condensed Consolidated Balance Sheet at June 30, 2015:
(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, 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)
$
20,883

 
$
20,883

 
$
—

 
$
—

Corporate bonds and notes (2)
281,754

 
—

 
281,754

 
—

Municipal bonds and notes (2)
37,215

 
—

 
37,215

 
—

Treasury and agency notes and bills (2)
41,268

 
—

 
41,268

 
—

Commercial paper (3)
33,775

 
—

 
33,775

 
—

Total Assets
$
414,895

 
$
20,883

 
$
394,012

 
$
—

 
The following footnotes indicate where the noted items were recorded in the Condensed Consolidated Balance Sheet at December 31, 2014:

12

(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):
 
Patent Assets
 
Balance at December 31, 2014
$
4,280

(1
)
Asset additions
—

 
Assets sold
—

 
Assets received
—

 
Balance at June 30, 2015
$
4,280

 

(1) This amount represents the value of the patents that were received in 2014 as part of settlement agreements reached with parties to resolve prior disputes. 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. The value above is gross and the accumulated amortization to date is $0.6 million.
 
NOTE 7 – IDENTIFIED INTANGIBLE ASSETS
Identified intangible assets consisted of the following (in thousands):
 
 
 
 
June 30, 2015
 
December 31, 2014
 
Average
Life
(Years)
 
Gross
Assets
 
Accumulated
Amortization
 
Net
 
Gross
Assets
 
Accumulated
Amortization
 
Net
Acquired patents / core technology
3-15
 
$
135,107

 
$
(70,572
)
 
$
64,535

 
$
132,157

 
$
(62,053
)
 
$
70,104

Existing technology
5-10
 
18,920

 
(18,530
)
 
390

 
18,700

 
(17,932
)
 
768

Customer contracts
3-9
 
8,600

 
(7,047
)
 
1,553

 
8,600

 
(6,569
)
 
2,031

Trade name
4-10
 
300

 
(289
)
 
11

 
520

 
(498
)
 
22

 
 
 
$
162,927

 
$
(96,438
)
 
$
66,489

 
$
159,977

 
$
(87,052
)
 
$
72,925

Amortization expense for the three months ended June 30, 2015 and 2014 amounted to $4.7 million and $4.6 million, respectively. Amortization expense for the six months ended June 30, 2015 and 2014 amounted to $9.4 million and $9.2 million, respectively.
As of June 30, 2015, the estimated future amortization expense of intangible assets is as follows (in thousands):
2015 (remaining 6 months)
$
9,381

2016
17,994

2017
15,719

2018
13,936

2019
5,504

Thereafter
3,955

 
$
66,489



13

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 six months ended June 30, 2015 and 2014.
The following table sets forth the computation of basic and diluted shares (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30,
2015
 
June 30,
2014
Denominator:
 
 
 
 
 
 
 
     Weighted average common shares outstanding
52,333

 
52,896

 
52,435

 
53,106

      Less: Unvested common shares subject to repurchase
(40
)
 
(84
)
 
(48
)
 
(90
)
Total common shares-basic
52,293

 
52,812

 
52,387

 
53,016

Effect of dilutive securities:
 
 
 
 
 
 
 
     Stock awards
348

 
268

 
398

 
306

     Restricted stock awards and units
411

 
317

 
480

 
288

Total common shares-diluted
53,052

 
53,397

 
53,265

 
53,610

 
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 six months ended June 30, 2015, in the calculation of net income per share, 0.8 million and 1.1 million shares, respectively, subject to stock options and restricted stock awards and units were excluded from the computation of diluted net income per share as they were anti-dilutive.
For the three and six months ended June 30, 2014, in the calculation of net income per share, 2.0 million and 2.2 million shares, respectively, subject to stock options and restricted stock awards and units were excluded from the computation of diluted net income per share as they were anti-dilutive.
NOTE 9 – STOCKHOLDERS’ EQUITY
Stock Repurchase Programs
In August 2007, the Company’s Board of Directors (“the Board”) authorized a plan to repurchase the Company’s outstanding shares of common stock dependent on market conditions, share price and other factors. As of June 30, 2015, the amount authorized under this plan to be used for repurchases is $250.0 million. As of June 30, 2015, the Company had repurchased a total of approximately 6,268,000 shares of common stock, since inception of the plan, at an average price of $25.34 per share for a total cost of $158.9 million. As of December 31, 2014, the Company had repurchased a total of approximately 4,901,000 shares of common stock, since inception of the plan, at an average price of $21.39 per share for a total cost of $104.9 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 June 30, 2015, the total amount available for repurchase was $91.1 million. The Company plans to continue to execute authorized repurchases from time to time under the plan.

Stock Option Plans

14

The 2003 Plan
As of June 30, 2015, there were approximately 4.2 million shares reserved for future grants under the 2003 Plan.
A summary of the stock option activity is presented below (in thousands, except per share amounts):
 
Options Outstanding
 
Number of
Shares Subject to Options
 
Weighted
Average
Exercise
Price Per
Share
Balance at December 31, 2014
1,616

 
$19.34
Options granted
50

 
$38.34
Options exercised
(408
)
 
$19.67
Options canceled / forfeited / expired
(67
)
 
$17.34
Balance at June 30, 2015
1,191

 
$20.14
 
 
 
 

Restricted Stock Awards and Units
Information with respect to outstanding restricted stock awards and units as of June 30, 2015 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, 2014
502

 
633

 
1,135

 
$
20.30

Awards and units granted
398

 
74

 
472

 
$
40.77

Awards and units vested / earned
(158
)
 
(144
)
 
(302
)
 
$
20.44

Awards and units canceled / forfeited
(27
)
 
(60
)
 
(87
)
 
$
19.11

Balance at June 30, 2015
715

 
503

 
1,218

 
$
28.27


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
As of June 30, 2015, there were approximately 530,586 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 six months ended June 30, 2015 and 2014 is as follows (in thousands):

15

 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Cost of revenues
$
—

 
$
—

 
$
—

 
$
18

Research, development and other related costs
1,006

 
740

 
1,696

 
1,657

Selling, general and administrative
2,558

 
2,171

 
3,875

 
4,740

Total stock-based compensation expense
3,564

 
2,911

 
$
5,571

 
$
6,415


Stock-based compensation expense categorized by various equity components for the three and six months ended June 30, 2015 and 2014 is summarized in the table below (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Employee stock options
$
620

 
$
812

 
$
1,506

 
$
1,801

Restricted stock awards and units
2,786

 
1,931

 
3,760

 
4,245

Employee stock purchase plan
158

 
168

 
305

 
369

Total stock-based compensation expense
$
3,564

 
$
2,911

 
$
5,571

 
$
6,415

The following assumptions were used to value the options granted:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Expected life (in years)
3.8

 
4.9

 
3.8
 
4.9
Risk-free interest rate
1.1
%
 
1.6
%
 
1.1-1.4%
 
1.6-1.7%
Dividend yield
2.1
%
 
4.1
%
 
2.1 -2.9%
 
3.4 -4.1%
Expected volatility
35.6
%
 
39.0
%
 
35.5 - 35.6%
 
39.0 - 41.4%

ESPP grants occur in February and August. The following assumptions were used to value the ESPP shares for these grants:
 
 
 
 
 
 
February 2015
 
February 2014
 
Expected life (years)
 
2.0

 
2.0

 
Risk-free interest rate
 
0.4
%
 
0.3
%
 
Dividend yield
 
3.4
%
 
3.4
%
 
Expected volatility
 
30.0
%
 
31.0
%
 

NOTE 11 – INCOME TAXES

The provision for income taxes for the three months and six months ended June 30, 2015 was $11.8 million and $29.1 million, respectively. The provision for income taxes for the three months and six months ended June 30, 2015 was primarily related to tax liability generated from U.S. and foreign operations, and foreign withholding taxes. The benefit from income taxes for the three months ended June 30, 2014 was $1.1 million and the provision for income taxes for the six months ended June 30, 2014 was $21.6 million. The benefit from income taxes for the three months ended June 30, 2014 was primarily due to a decrease in the forecasted effective tax rate applied to actual year-to-date income that remained relatively constant as compared to the first

16

quarter of 2014. The provision for income taxes for the six months ended June 30, 2014 was primarily related to foreign withholding taxes and foreign tax liability generated from foreign operations. 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 provision for income taxes for the six months ended June 30, 2015 as compared to the same period in the prior year is largely attributable to higher profitability in 2015 as compared to the prior year.
As of June 30, 2015, unrecognized tax benefits approximated $3.0 million, of which $1.3 million would affect the effective tax rate if recognized. At December 31, 2014, unrecognized tax benefits were $2.7 million of which $1.1 million would affect the effective tax rate if recognized. It is reasonably possible that unrecognized tax benefits may decrease by a range of $0.8 million to $1.0 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 six months ended June 30, 2015, the Company recognized an insignificant amount of interest and penalties related to unrecognized tax benefits. As of June 30, 2015 and December 31, 2014, the Company had accrued $0.4 million and $0.5 million, respectively, of interest and penalties related to unrecognized tax benefits.
At June 30, 2015, the Company's 2010 through 2014 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 audit was settled last year but the Company is currently disputing the interest calculation for the audit assessment amount. The Company is currently under an Internal Revenue Service examination for the 2010 - 2013 tax years. The Company also is currently under examination in California for the 2011 and 2012 tax years.

NOTE 12 – COMMITMENTS AND CONTINGENCIES
Lease 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-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 June 30, 2015 and 2014 amounted to $0.5 million and $0.9 million, respectively. Rent expense for the six months ended June 30, 2015 and 2014 amounted to $1.0 million and $1.9 million, respectively.
As of June 30, 2015, future minimum lease payments are as follows (in thousands):
 
Lease
Obligations
2015 (remaining 6 months)
$
1,167

2016
2,237

2017
2,270

2018
2,306

2019
2,135

Thereafter
1,808

 
$
11,923

Contingencies
For all legal proceedings described below, 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. The Company is currently unable to predict the final outcome of these lawsuits and therefore cannot determine the likelihood of loss nor estimate a range of possible loss. An adverse decision in any of these proceedings could significantly harm the Company’s business and consolidated financial position, results of operations or cash flows.

Tessera, Inc. v. Toshiba Corporation, Civil Action No. 5:15-cv-02543-BLF (N.D. Cal.)

17

On May 12, 2015, Tessera, Inc. filed a complaint against Toshiba Corporation (“Toshiba”) in California Superior Court, in Santa Clara County. Tessera, Inc.’s complaint alleges causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief. The complaint seeks, among other things, a judicial determination and declaration that Toshiba must pay royalties on certain types of face-up ball grid array packages, must cooperate in good faith with audits conducted pursuant to the parties’ license agreement, and must allow the auditor to examine and audit all records of Toshiba, including records of all of its divisions, subsidiaries, and affiliates, that may contain information bearing upon the amounts payable under the license agreement. The complaint also seeks an award of damages in an amount to be determined at trial, interest on damages, attorneys’ fees, costs, and such other and further relief as the court may deem proper.
On June 8, 2015, Toshiba removed the action to the U. S. District Court for the Northern District of California.
On June 18, 2015, Toshiba filed its answer, affirmative defenses, and counterclaims to Tessera, Inc.’s complaint. Toshiba alleges counterclaims for declaratory judgment and breach of the implied warranty of good faith and fair dealing. The counterclaims seek, among other things, judicial determinations and declarations regarding the definition of “TCC” as used in the parties’ license agreement and whether any Toshiba products are currently royalty-bearing, the conditions precedent to the accrual of royalties under the license agreement, the manner and scope of Tessera, Inc.’s audit rights under the license agreement, termination of the license agreement, and Tessera, Inc.’s alleged failure to identify specific patents that serve as the basis for its claim that it is entitled to royalties under the license agreement. The counterclaims also seek an accounting of any amount of alleged overpayment by Toshiba under the license agreement, restitution, damages in an amount to be determined at trial, costs, expenses, attorneys’ fees, and such other and further relief as the court may deem just and proper.
On July 10, 2015, Tessera, Inc. filed its answer and affirmative defenses to Toshiba’s counterclaims. An initial case management conference is scheduled for October 15, 2015.
Other Litigation Matters
In addition to the foregoing 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.
The existing and any future legal actions may harm the Company’s business. For example, legal actions 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

The Company 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.
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):
 

18

 
Three Months Ended,
 
Six Months Ended,
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Taiwan
$
7,833

 
12
%
 
$
415

 
1
%
 
$
42,615

 
30
%
 
$
51,043

 
41
%
U.S.
25,263

 
39

 
3,053

 
8

 
50,793

 
35

 
6,938

 
5

Korea
23,858

 
37

 
23,209

 
62

 
39,224

 
27

 
49,729

 
40

Japan
4,576

 
7

 
4,450

 
12

 
6,220

 
4

 
9,928

 
8

Other
2,658

 
5

 
6,086

 
17

 
5,186

 
4

 
7,911

 
6

 
$
64,188

 
100
%
 
$
37,213

 
100
%
 
$
144,038

 
100
%
 
$
125,549

 
100
%
For the three months ended June 30, 2015 and 2014, there were four and two customers, respectively, that each accounted for 10% or more of total revenues. For the six months ended June 30, 2015 and 2014, there were four and two customers, respectively, that each accounted for 10% or more of total revenues.

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 had a workforce reduction of over 300 employees and closed facilities in Arcadia, California, Rochester, New York, Hsinchu, 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 three months of 2014, the Company incurred additional restructuring and other charges of $1.0 million of employee severance. As of December 31, 2014 these actions were substantially complete so the expenses in the three and six months ended June 30, 2015 were immaterial. 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 15 - SUBSEQUENT EVENTS

Dividend Payment

On July 31, 2015, the Board declared a cash dividend of $0.20 per share of common stock, payable on September 18, 2015 for the stockholders of record at the close of business on August 28, 2015.

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, 2014 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, 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

19

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, µPILR, DOC, the DOC logo, FotoNation, the FotoNation logo, DigitalAperture, FaceTools, FacePower, FotoSavvy, Invensas, the Invensas logo, xFD, FD, DFD, TFD, QFD, and BVA 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
Tessera Technologies, Inc., including its Invensas and FotoNation subsidiaries, generates revenue from licensing our technologies and intellectual property to customers and others who implement it for use in areas such as mobile computing and communications, memory and data storage, and 3-D Integrated Circuit (“3DIC”) technologies, among others. Our technologies include semiconductor packaging and interconnect solutions, and products and solutions for mobile and computational imaging, including our FaceToolsTM, FacePowerTM, FotoSavvyTM, DigitalApertureTM, face beautification, red-eye removal, High Dynamic Range, autofocus, panorama, and image stabilization intellectual property.

In January 2014, we announced the cessation of all mems|cam manufacturing operations. As part of these efforts, we are no longer operating facilities in Arcadia, California, Rochester, New York, Hsinchu, Taiwan and Japan. As a result of these actions, certain assets were impaired or were written off entirely and restructuring and other charges were taken in 2013 and the first half of 2014. All material assets of these operations were sold or licensed to a third party in December 2014.

All financial results and discussions below relate to continuing operations unless otherwise specified and conform to our determination that we 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

20

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.
We are currently, and have been in the past, engaged in litigation and arbitration proceedings to directly or indirectly enforce our intellectual property rights and the terms of our license agreements, including proceedings to ensure proper and full payment of royalties by our current licensees and by third parties whose products incorporate our intellectual property rights. We cannot predict the extent or timing of future proceedings that may result in fluctuations in our revenue and expenses. For example, in February 2014 we settled a dispute with Powertech Technology, Inc. ("PTI") related to a license agreement between PTI and Tessera, Inc. Pursuant to our settlement, PTI is obligated to pay Tessera, Inc. a total of $196 million. PTI made two episodic payments in 2014 for a total of $96 million in 2014 and will make quarterly recurring payments from 2015 through the end of 2018. Additionally, in January 2015, Tessera, Inc. entered into an agreement with Amkor to settle all pending litigation and arbitration proceedings between Amkor and Tessera, Inc. Under the terms of the agreement, Amkor will pay Tessera, Inc. a total of $155 million comprised of sixteen equal quarterly recurring payments which commenced in the first quarter of 2015 and will continue through the fourth quarter of 2018.
The following table presents our historical operating results for the periods indicated as a percentage of revenues:

 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Revenues:
 
 
 
 
 
 
 
Royalty and license fees
100
%
 
100
 %
 
100
%
 
100
 %
Total Revenues
100

 
100

 
100

 
100

Operating expenses:
 
 
 
 
 
 
 
Cost of revenues
—

 
—

 
—

 
—

Research, development and other related costs
12

 
24

 
11

 
13

Selling, general and administrative
17

 
32

 
15

 
20

Amortization expense
7

 
12

 
7

 
7

Litigation expense
6

 
28

 
5

 
14

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

 
1

 
—

 
1

Total operating expenses
42

 
97

 
38

 
55

Operating income from continuing operations
58

 
3

 
62

 
45

Other income and expense, net
1

 
1

 
1

 
1

Income from continuing operations before taxes
59

 
4

 
63

 
46

Provision for (benefit from) income taxes
18

 
(3
)
 
20

 
17

Income from continuing operations
41

 
7

 
43

 
29

Income (loss) from discontinued operations, net of tax
—

 
3

 
—

 
(9
)
Net income
41
%
 
10
 %
 
43
%
 
20
 %

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

21

 
 
Three Months Ended
 
 
 
 
 
June 30, 2015
 
June 30, 2014
 
Increase/
(Decrease)
 
%
Change
Royalty and license fees
$
64,188

 
$
37,213

 
$
26,975

 
72
%
 
 
 
 
 
 
 
 

The $27.0 million or 72% increase in revenues was due to an increase in recurring revenue of $27.4 million which was partially offset by a decrease in episodic revenue of $0.4 million in the three months ended June 30, 2015 when compared to the three months ended June 30, 2014. Recurring revenue was up $27.4 million primarily as a result of our settlement agreement with Amkor, our settlement agreement with PTI and the license agreements entered into with Micron in July 2014.

 
Six Months Ended
 
 
 
 
 
June 30, 2015
 
June 30, 2014
 
Increase/
(Decrease)
 
%
Change
Royalty and license fees
$
144,038

 
$
125,549

 
$
18,489

 
15
%
 
 
 
 
 
 
 
 

The $18.5 million or 15% increase in revenues was due to an increase in recurring revenue of $55.9 million which was partially offset by a decrease in episodic revenue of $37.4 million in the six months ended June 30, 2015 when compared to the six months ended June 30, 2014. Recurring revenue was up $55.9 million primarily as a result of our settlements agreement with Amkor and PTI and the license agreements entered into with Micron in July 2014. The episodic revenue decrease was primarily the result of a $50.0 million episodic payment made by PTI in connection with Tessera, Inc.'s settlement with PTI, and episodic payments made in connection with the execution of a license agreement in the first quarter of 2014, which was partially offset by a $27.0 million episodic payment made by ASE in the first quarter of 2015.
Cost of Revenues
Cost of revenues consists of direct compensation and related expenses to provide non-recurring engineering services ("NRE"). We anticipate these expenses will continue to be a low percentage of total revenue as our NRE services are not a significant portion of our revenues.
Cost of revenues for the three months ended June 30, 2015 was $0.2 million, as compared to $0.1 million for the three months ended June 30, 2014. The increase related to direct labor from non-recurring engineering services associated with a contract that was signed in the fourth quarter of 2014.
Cost of revenues for the six months ended June 30, 2015 was $0.3 million, as compared to $0.1 million for the six months ended June 30, 2014. The increase related to direct labor from non-recurring engineering services associated with a contract that was signed in the fourth quarter of 2014.
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 June 30, 2015 were $7.9 million, as compared to $9.0 million for the three months ended June 30, 2014, a decrease of $1.1 million. The decrease was primarily related to a $1.1 million decrease in legal costs which resulted from focusing our patent maintenance efforts in critical markets and renegotiating fees with key vendors and a $0.2 million decrease in our personnel related expenses. These decreases were partially offset by a $0.3 million increase in stock-based compensation.
Research, development and other related costs for the six months ended June 30, 2015 were $15.2 million, as compared to $16.5 million for the six months ended June 30, 2014, a decrease of $1.3 million. The decrease was primarily related to a $1.0 million decrease in legal costs which resulted from focusing our patent maintenance efforts in critical markets and renegotiating fees with key vendors and a $0.3 million decrease in operating equipment and supplies. These decreases were partially offset by a $0.4 million increase in stock-based compensation.

22

We believe that a significant level of research and development expenses will be required for us to remain competitive in the future.
Selling, General and Administrative
Selling expenses consist primarily of compensation and related costs for sales and marketing personnel, reverse engineering personnel and services, marketing programs, public relations, promotional materials, travel, trade show expenses, and stock-based compensation expense. General and administrative expenses consist primarily of compensation and related costs for general management, information technology, corporate development 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 June 30, 2015 were $11.1 million, as compared to $11.9 million for the three months ended June 30, 2014, a decrease of $0.8 million. The decrease was primarily attributable to a decrease of $1.1 million in salary and benefits due to our reduced headcount resulting from restructuring activities during 2014 and a $1.0 million decrease in legal costs related to the O-Film closure in FY14 and reduced patent evaluation expenses. These decreases were partially offset by a $0.6 million increase in stock-based compensation.
Selling, general and administrative expenses for the six months ended June 30, 2015 were $22.1 million, as compared to $24.4 million for the six months ended June 30, 2014, a decrease of $2.3 million. The decrease was primarily attributable to a decrease of $2.4 million in salary and benefits due to our reduced headcount resulting from restructuring activities during 2014 and a $0.8 million decrease in legal costs related to the O-Film closure in FY14 and reduced patent evaluation expenses. These decreases were partially offset by a $0.7 million increase in operating equipment and supplies related to significant purchases of market research reports and a $0.5 million increase in stock based compensation.
Amortization Expense
Amortization expense for the three months ended June 30, 2015 was $4.7 million, as compared to $4.6 million for the three months ended June 30, 2014, an increase of $0.1 million. This increase was attributable to the acquisition of $6.0 million in intangible assets since June 30, 2014.
Amortization expense for the six months ended June 30, 2015 was $9.4 million, as compared to $9.2 million for the six months ended June 30, 2014, an increase of $0.2 million. This increase was attributable to the acquisition of $6.0 million in intangible assets since June 30, 2014.
We expect amortization expense to continue being a material portion of our operating expenses in future periods as we are actively pursuing additional acquisitions of intellectual property assets.
Litigation Expense
Litigation expense for the three months ended June 30, 2015 was $3.5 million, as compared to $10.2 million for the three months ended June 30, 2014, a decrease of $6.7 million, or 66%. The decrease was primarily attributable to the decrease of our docket of legal proceedings, largely due to settlement activities in the past twelve months.
Litigation expense for the six months ended June 30, 2015 was $8.0 million, as compared to $17.2 million for the six months ended June 30, 2014, a decrease of $9.2 million, or 53%. The decrease was primarily attributable to the decrease of our docket of legal proceedings, largely due to settlement activities in the past twelve months.
We expect that litigation expense may continue to be a material portion of our operating expenses in future periods, and may fluctuate between periods, because of 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

23

Substantially all restructuring, impairment of long-lived assets and other charges were concluded prior to 2015. The restructuring, impairment of long-lived assets and other charges for the three and six months ended June 30, 2014 related to the restructuring of our DigitalOptics business.
Stock-based Compensation Expense
The following table sets forth our stock-based compensation expense for the three and six months ended June 30, 2015 and 2014 (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Cost of revenues
$
—

 
$
—

 
$
—

 
$
18

Research, development and other related costs
1,006

 
740

 
1,696

 
1,657

Selling, general and administrative
2,558

 
2,171

 
3,875

 
4,740

Total stock-based compensation expense
$
3,564

 
$
2,911

 
$
5,571

 
$
6,415

Stock-based compensation awards included employee stock options, restricted stock awards and units, and employee stock purchases. For the three months ended June 30, 2015, stock-based compensation expense was $3.6 million, of which $0.6 million related to employee stock options, $2.8 million related to restricted stock awards and units and $0.2 million related to employee stock purchases. For the three months ended June 30, 2014, stock-based compensation expense was $2.9 million, of which $0.8 million related to employee stock options, $1.9 million related to restricted stock awards and units and $0.2 million related to employee stock purchases.
For the six months ended June 30, 2015, stock-based compensation expense was $5.6 million, of which $1.5 million related to employee stock options, $3.8 million related to restricted stock awards and units and $0.3 million related to employee stock purchases. For the six months ended June 30, 2014, stock-based compensation expense was $6.4 million, of which $1.8 million related to employee stock options, $4.2 million related to restricted stock awards and units and $0.4 million related to employee stock purchases.
The decrease in stock-based compensation for the six months ended June 30, 2015, when compared to the six months ended June 30, 2014, resulted from headcount reductions, including an executive officer, that were part of our restructuring activities that have occurred over the past several quarters. Additionally, there was a downward adjustment of expense related to certain performance-based restricted stock units for certain executives.
Other Income and Expense, Net
Other income and expense, net for the three months ended June 30, 2015 was $0.8 million, as compared to $0.4 million for the three months ended June 30, 2014. Other income and expense, net for the six months ended June 30, 2015 was $1.4 million, as compared to $0.8 million for the six months ended June 30, 2014. These increases resulted from higher interest income due to higher interest rates achieved from extending the average maturity of our portfolio and from interest rates rising in general during 2015.
Provision for (benefit from) Income Taxes

The provision for income taxes for the three months and six months ended June 30, 2015 was $11.8 million and $29.1 million, respectively. The provision for income taxes for the three months and six months ended June 30, 2015 was primarily related to tax liability generated from U.S. and foreign operations, and foreign withholding taxes. The benefit from income taxes for the three months ended June 30, 2014 was $1.1 million and the provision for income taxes for the six months ended June 30, 2014 was $21.6 million. The benefit from income taxes for the three months ended June 30, 2014 was primarily due to a decrease in the forecasted effective tax rate applied to actual year-to-date income that remained relatively constant as compared to the first quarter of 2014. The provision for income taxes for the six months ended June 30, 2014 was primarily related to foreign withholding taxes and foreign tax liability generated from foreign operations. Our provision for income taxes is based on our 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

24

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 provision for income taxes for the six months ended June 30, 2015 as compared to the same period in the prior year is largely attributable to an increase in profit incurred for the current period.
We released a majority of our valuation allowance against U.S. federal deferred tax assets during the third quarter of 2014. 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 we would realize the majority of our U.S. federal deferred tax assets. As such, we determined that no valuation allowance is required on the majority of our federal deferred tax assets. We continue to monitor the likelihood that we will be able to recover our deferred tax assets, including those for which a valuation allowance is still recorded. There can be no assurance that we will generate profits in future periods enabling us to fully realize our deferred tax. The timing of recording a valuation allowance or the reversal of such valuation allowance is subject to objective and subjective factors that cannot be readily predicted in advance. 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 have the effect of increasing the income tax provision in the statement of operations in the period the valuation allowance is provided. We may release valuation allowance and recognize deferred tax assets on one of our foreign subsidiaries during the second half of 2015. Achievement of forecasted profitability by this subsidiary is one of many positive factors that we continue to monitor that could lead us to reverse the valuation allowance.
 
Discontinued Operations
The activity related to discontinued operations was substantially completed prior to 2015. The gain from discontinued operations for the three months ended June 30, 2014 was $1.3 million. The loss from discontinued operations for the six months ended June 30, 2014 was $11.2 million. These activities related to our cessation of all mems|cam manufacturing operations. This was the last manufacturing operation in the DigitalOptics business. This action included a reduction of over 300 employees and the closure of facilities in Arcadia, California, Rochester, New York, Hsinchu, Taiwan and Japan. For further information about discontinued operations, see Note 5 - "Discontinued Operations" and Note 14 - "Restructuring, Impairment of long-lived assets and other charges" in the Notes to Condensed Consolidated Financial Statements for additional details.

Liquidity and Capital Resources
 
 
As of
(in thousands, except for percentages)
June 30, 2015
 
December 31, 2014
Cash and cash equivalents
$
21,412

 
$
50,908

Short-term investments
410,481

 
383,513

Total cash, cash equivalents and short-term investments
$
431,893

 
$
434,421

Percentage of total assets
76
%
 
75
%
 
 
 
 
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
Net cash from operating activities
$
69,855

 
$
43,226

Net cash from investing activities
$
(30,590
)
 
$
(18,024
)
Net cash from financing activities
$
(68,761
)
 
$
(67,286
)
Our primary source of liquidity and capital resources is our investment portfolio. Cash, cash equivalents and investments were $431.9 million at June 30, 2015, a decrease of $2.5 million from $434.4 million at December 31, 2014. This decrease resulted primarily from $57.3 million and $21.0 million in cash used in repurchasing stock and paying dividends, respectively. This was partially offset by net income of $61.7 million. Cash and cash equivalents were $21.4 million at June 30, 2015, a decrease of $29.5 million from $50.9 million at December 31, 2014.
Cash flows provided by operations were $69.9million for the six months ended June 30, 2015, primarily due to our net income of $61.7 million being adjusted for non-cash items of amortization of intangible assets of $9.4 million, stock-based

25

compensation expense of $5.6 million and $7.2 million in deferred taxes. These were partially offset by $14.1 million in changes in operating assets and liabilities.
Cash flows provided by operations were $43.2 million for the six months ended June 30, 2014, primarily due to our net income of $24.7 million being adjusted for non-cash items of depreciation of $1.0 million, amortization of intangible assets of $9.2 million, stock-based compensation expense of $6.4 million and by $4.5 million in changes in operating assets and liabilities. These were partially offset by $1.6 million in patents acquired through settlement agreements.
Net cash used in investing activities was $30.6 million for the six months ended June 30, 2015, primarily related to the purchases of available-for-sale securities of $243.6 million and the purchase of $3.0 million in intangible assets, offset by maturities and sales of short-term investments of $216.5 million. Net cash used in investing activities was $18.0 million for the six months ended June 30, 2014, primarily related to the purchases of available-for-sale securities of $134.1 million and the purchase of $5.1 million in intangible assets, offset by maturities and sales of short-term investments of $122.3 million.
Net cash used in financing activities was $68.8 million for the six months ended June 30, 2015 due to dividend payments of $21.0 million and stock repurchases of $57.3 million, partially offset by $8.9 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 $67.3 million for the six months ended June 30, 2014 due to dividend payments of $37.8 million and stock repurchases of $45.3 million, offset by $15.8 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 three 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 six months ended June 30, 2015 and 2014, no impairment charges with respect to our investments were recorded.
In August 2007, our Board of Directors ("the Board") authorized a plan to repurchase our outstanding shares of common stock dependent on market conditions, share price and other factors. Currently, the amount authorized in this plan to be used for repurchases is $250.0 million. No expiration has been specified for this plan. As of June 30, 2015, we have repurchased approximately 6.3 million shares of common stock since the inception of the plan, at an average price of $25.34 per share for a total cost of $158.9 million. As of June 30, 2015, the total amount available for repurchase under the plan was $91.1 million. We plan to continue to execute authorized repurchases from time to time under the plan.

In February 2015, we updated our capital allocation strategy.  Given the change in business approach that moves us away from backward looking “episodic” payments, we will discontinue the once-a-year payment of special dividends on episodic proceeds and instead announced a doubling of the current quarterly dividend to $0.20 per share beginning in March 2015.  The Company also returns capital to shareholders through stock repurchases and plans to continue repurchasing stock in future periods.  We anticipate that all quarterly dividends and stock repurchases will 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
 

26

 
Payments Due by Period
 
Total
 
Less than
1 Year
 
1-3
Years
 
4-5
Years
 
Thereafter
 
(In thousands)
Operating lease obligations
$
11,923

 
$
2,285

 
$
4,540

 
$
4,194

 
$
904

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. 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 June 30, 2015, the Company had accrued $1.3M of unrecognized tax benefits in long term income taxes payable related to uncertain tax positions, and accrued approximately $0.4M 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 June 30, 2015, 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 six months ended June 30, 2015, 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 are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and

27

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. 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 alleges causes of action for breach of contract, declaratory relief, and breach of the implied covenant of good faith and fair dealing. The complaint seeks, 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 April 19, 2012, Tessera, Inc. filed an amended complaint against UTAC Taiwan seeking 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.
In July 2013, both Tessera, Inc. and UTAC Taiwan filed cross motions for partial summary judgment concerning an issue of contract interpretation. On April 1, 2014 the Court issued an order granting UTAC Taiwan’s motion and denying Tessera, Inc.’s motion, and the case has proceeded under the contract interpretation ordered by the Court. On December 1, 2014, UTAC Taiwan filed another motion for partial summary judgment on a contract interpretation issue, concerning the geographic scope of UTAC Taiwan's royalty obligation under the parties' license agreement. The motion has been fully briefed and is currently under submission. Claim construction issues were heard on February 19, 2015, and are also under submission. Fact and expert discovery are now concluded.
Under the current case schedule, the parties may file motions for summary judgment in August 2015, and a summary judgment hearing is scheduled for September 24, 2015. A jury trial is scheduled to begin on February 23, 2016.

Tessera, Inc. v. Toshiba Corporation, Civil Action No. 5:15-cv-02543-BLF (N.D. Cal.)
On May 12, 2015, Tessera, Inc. filed a complaint against Toshiba Corporation (“Toshiba”) in California Superior Court, in Santa Clara County. Tessera, Inc.’s complaint alleges causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief. The complaint seeks, among other things, a judicial determination and declaration that Toshiba must pay royalties on certain types of face up ball grid array packages, must cooperate in good faith with audits conducted pursuant to the parties’ license agreement, and must allow the auditor to examine and audit all records of Toshiba, including records of all of its divisions, subsidiaries, and affiliates, that may contain information bearing upon the amounts payable under the license agreement. The complaint also seeks an award of damages in an amount to be determined at trial, interest on damages, attorneys’ fees, costs, and such other and further relief as the court may deem proper.

28

On June 8, 2015, Toshiba removed the action to the U. S. District Court for the Northern District of California.
On June 18, 2015, Toshiba filed its answer, affirmative defenses, and counterclaims to Tessera, Inc.’s complaint. Toshiba alleges counterclaims for declaratory judgment and breach of the implied warranty of good faith and fair dealing. The counterclaims seek, among other things, judicial determinations and declarations regarding the definition of “TCC” as used in the parties’ license agreement and whether any Toshiba products are currently royalty-bearing, the conditions precedent to the accrual of royalties under the license agreement, the manner and scope of Tessera Inc.’s audit rights under the license agreement, termination of the license agreement, and Tessera Inc.’s alleged failure to identify specific patents that serve as the basis for its claim that it is entitled to royalties under the license agreement. The counterclaims also seek an accounting of the amount of alleged overpayment by Toshiba under the license agreement, restitution, damages in an amount to be determined at trial, costs, expenses, attorneys’ fees, and such other and further relief as the court may deem just and proper.
On July 10, 2015, Tessera, Inc. filed its answer and affirmative defenses to Toshiba’s counterclaims. An initial case management conference is scheduled for October 15, 2015.
Reexamination Proceedings
U.S. Patent No. 6,465,893
On February 15, 2007, Siliconware Precision Industries Co. Ltd and Siliconware USA Inc. (collectively “SPIL”) filed with the U.S. Patent and Trademark Office (“PTO”) a request for inter partes reexamination relating to U.S Patent No. 6,465,893. On May 4, 2007, the PTO granted the request. On February 15, 2008, the PTO issued an official action, denominated as an action closing prosecution, rejecting a number of patent claims of U.S. Patent No. 6,465,893. Following additional proceedings, a 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 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 May 9, 2013, SPIL withdrew from the inter partes reexamination of U.S. Patent No. 6,465,893.
On June 25, 2013, the Patent Trial and Appeal Board issued an Order remanding the proceeding to the Examiner for consideration of certain new evidence submitted by Tessera, Inc. On July 17, 2013, the Examiner issued a determination in which the Examiner recommended that the Patent Trial and Appeal Board maintain certain grounds of rejection in the board’s December 21, 2012 Decision on Appeal as to certain claims, and recommended that the board withdraw other grounds of rejection as to certain claims.
On November 14, 2014, the Patent Trial and Appeal Board issued a decision affirming the Examiner's July 17, 2013 determinations, therefore maintaining rejections of certain of the claims subject to reexamination. On January 9, 2015, Tessera, Inc. filed an appeal of the Patent Trial and Appeal Board’s November 14 decision with the U.S. Court of Appeals for the Federal Circuit. On April 5, 2015, Tessera, Inc. voluntarily moved to dismiss the appeal. On April 7, 2015, the court of appeals granted the motion and issued a mandate to the PTO confirming dismissal of the appeal.
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. 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 24, 2011, the EP672 Patent expired, but remains as a now-expired but unrevoked patent.
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 17, 2014, STM, the sole remaining opponent, withdrew its opposition. On April 7, 2015 the Opposition Division indicated that it will continue the proceedings on its own motion without any opponent. Along with the summons, the

29

Opposition Division issued a preliminary communication indicating that it is disposed to revoke the EP672 Patent. Oral proceedings in the opposition are set for December 3, 2015.
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. Both the date and the final amount of recovery for unsecured debtors remain uncertain.


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 six months ended June 30, 2015, there were five and three 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. In addition, a significant portion of our recurring revenue is the result of structured payment terms in connection with the settlement of litigation matters. If we are unable to replace the revenue from an expiring license or at the end of structured payment terms of a settlement agreement with similar revenue from other customers, our royalty revenue could be adversely impacted as compared to periods prior to such expiration or the end of such payment terms.
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 technologies 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 including structured settlement payments. 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

30

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 2034. 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 have in the past and may in the future be 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.
We have been in the past and may in the future be involved in litigation involving some of our patents. The parties in these legal actions often challenge the validity, scope, enforceability and ownership of our patents. In addition, in the past requests for reexamination or review have been filed in the U.S. Patent and Trademark Office ("PTO") with respect to patent claims that were 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 ("EPO"). During a reexamination or review proceeding and upon completion of the proceeding, the PTO or EPO 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. For example the PTO has issued several Official Actions rejecting or maintaining earlier rejections of many of the claims in some of our patents. From time to time we assert 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 PTO reexaminations or review proceedings, and other courts or tribunals reviewing our legal actions could make findings adverse to our interests, even if the PTO actions are not final.
We cannot predict the outcome of any of these proceedings or the myriad procedural and substantive motions in these proceedings. If there is an adverse ruling in any legal or administrative proceeding relating to the infringement, validity, enforceability or ownership of any of our patents, or if a court or an administrative body such as the PTO limits the scope of the claims of any of our patents 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 and settlement agreements may cause fluctuations in our quarterly or annual results of operations.
From time to time we enter into license and settlement 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 customers may fail to pay, delay payment of or underpay what they owe to us under our license and settlement 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 and settlement agreements. This also may cause our 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 have been numerous recent changes and proposed changes to the patent laws and 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, we expect that Congress may consider bills relating to patent reform that could adversely impact our business depending on the scope of

31

any bills that may ultimately be enacted into law. In addition, in recent years, courts have interpreted U.S. patent laws and regulations differently than in the past, and in particular the U.S. Supreme Court has decided a number of patent cases and continues to 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, on the royalties we can collect.
Some of our license agreements may convert to fully paid-up licenses at the expiration of their terms, or upon certain milestones, 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 or upon reaching certain milestones. 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 or technology under the terms of the license agreements without further payment, even if relevant patents or technologies are still in effect. If we cannot find another source of revenue to replace the revenues from these license agreements converting to fully paid-up licenses, our results of operations following such conversion would be materially adversely affected.
A significant amount of our royalty revenues comes from a few end markets and products, and our business could be harmed if demand for these market segments or products declines.
A significant portion of our royalty revenues comes from the manufacture and sale of packaged semiconductor chips for 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, consumer and computing. 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 may be based, among other things, upon the number of electrical connections to the semiconductor chip in a package covered by our licensed technology, a percent of net sales, a rate per package, a per unit sold basis or a fixed quarterly amount. 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, manufacturers of consumer and communication electronics, and the automotive and surveillance industry;
 
*
 
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 length of the design cycle and the ability of us and our customers to successfully integrate certain of our FotoNation technologies into their integrated circuits;
 
*
 
the demand for products incorporating semiconductors that use our licensed technology;
 
*
 
the cyclicality of supply and demand for products using our licensed technology;
 
*
 
the impact of economic downturns; and
 
*
 
the timing of receipt of royalty reports may not meet our revenue recognition criteria resulting in fluctuation in our results of operations.

32

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 often 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, especially given the international nature of our licensees. 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. 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 undertook a workforce reduction of over 300 employees and we have closed or transferred to third parties our facilities in Arcadia, California, Rochester, New York, Japan and Hsinchu, Taiwan. We incurred impairment and other charges in the fourth quarter of 2013 and the first half of 2014 related to restructuring, impairment and other charges.
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 do not result in the prospective customer agreeing to license our patents or our technology. In certain cases, we use litigation in order to secure payment for past infringement and as a means of securing future royalties for the use of our patents and technology 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. If we are not able to reach agreement with customers or potential customers we may 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. 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.

33

From time to time we identify products that we believe infringe our patents. We seek to license the companies that design, make, use, import, or sell those products but sometimes those companies are 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 significantly reduce our profits.
The costs associated with legal proceedings are typically high, relatively unpredictable and not completely within our control. These costs may be materially higher than expected, which could adversely affect our operating results and lead to volatility in the price of our common stock. Whether or not determined in our favor or ultimately settled, litigation diverts our managerial, technical, legal and financial resources from our business operations. Furthermore, an adverse decision in any of these legal actions could result in a loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses from others, limit the value of our licensed technology or otherwise negatively impact our stock price or our business and consolidated financial position, results of operations 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.
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 solutions. If these internal design groups design around our patents or introduce unique solutions superior to our technology, they may not need to license our technology. These groups may design technology that is less expensive to implement or that enables products with higher performance or additional features. Many of these groups have substantially greater resources, greater financial strength and lower cost structures which may allow them to undercut our price. They also have the inherent advantage of access to internal corporate strategies, technology roadmaps and technical information. As a result, they may be able to bring alternative solutions to market more easily and quickly.

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.
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

34

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. Moreover, with respect to certain of our FotoNation technologies, even after we have signed a license agreement with a customer, we will often not see significant revenue from that customer until after such technologies have been successfully designed into their integrated circuits, which can take 18 months or longer. 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.
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.
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, and/or for our customers to incorporate certain FotoNation technologies in their integrated circuits, can take 18 months or longer. As such, we may incur significant losses in any particular period before any associated revenue stream begins.

35

Our 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, refuse to or are unable to make payments to us due to financial difficulties or otherwise, 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 addition, we have had a history of, and we may in the future experience, customers that delay or refuse to make payments owed to us under license agreements. Our licensees may also 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.

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.
During the third quarter of 2014, we released the valuation allowance recorded against the majority of our U.S. 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 we would realize our U.S. federal deferred tax assets. As such, we determined that no valuation allowance is required on the majority of our U.S. federal deferred tax assets. In addition, we may release valuation allowance and recognize deferred tax assets on one of our foreign subsidiaries depending on achievement of its forecasted profitability. We continue to monitor the likelihood that we will be able to recover our deferred tax assets, including those for which a valuation allowance is still recorded. There can be no assurance that the Company will generate profits in future periods enabling it to fully realize its deferred tax. The timing of recording a valuation allowance or the reversal of such valuation allowance is subject to objective and subjective factors that cannot be readily predicted in advance. Both the establishment of a valuation and the reversal of a previously recorded valuation allowance may have a material impact on our quarterly financial results, which may lead to fluctuation in the value of our stock.
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 DDR3 and DDR4 DRAM and we currently have licensees, including SK hynix Inc., Samsung Electronics, Co., Ltd. and Micron Technology, Inc., who are paying royalties for DRAM chips in advanced packages.
DRAM manufacturers are also currently developing next generation high performance DRAM chips 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.
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

36

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 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 including new accounting standards which may materially affect our revenue recognition; 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 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 quarterly dividend or any dividend at all, and any decrease in or suspension of the dividend could cause our stock price to decline.

37


In February 2015, we updated our capital allocation strategy. Given the change in business approach that moves us away from backward looking “episodic” payments, we discontinued the once-a-year payment of special dividends on episodic proceeds and instead announced a doubling of the current quarterly dividend to $0.20 per share which began in March 2015. We also return capital to shareholders through stock repurchases and plan to continue repurchasing stock in future periods. We anticipate that all quarterly dividends and stock repurchases will be paid out of cash, cash equivalents and short-term investments. The payment of future cash dividends are subject to the final determination each quarter by our Board of Directors that the dividend 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 management and the Board of Directors. 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 our outstanding shares of common stock dependent on market conditions, share price and other factors. Currently, the amount authorized in this plan to be used for repurchases is $250.0 million. As of June 30, 2015, the total amount available for repurchase under the plan was $91.1 million. The amount of repurchases under our stock repurchase program will vary. During 2013, we repurchased approximately 1,500,000 shares for an aggregate amount of $28.8 million. In 2014, we repurchased approximately 2,800,000 shares for an aggregate amount of $65.6 million. In the first six months of 2015, we repurchased 1,367,000 shares for an aggregate amount of $53.9 million. Additionally, the timing of repurchases is at our discretion and the program may be suspended or discontinued at any time. 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. 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. Furthermore, the Company may engage in mergers, acquisitions, or other activity that could result in us reducing or discontinuing share repurchases for a period of time.

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 June 30, 2015, we held approximately $21.4 million in cash and cash equivalents and $410.5 million in short-term investments. These investments include various financial securities such as municipal bonds and notes, corporate bonds and notes, commercial paper, treasury and agency notes and bills, and money market funds. 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. 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. While we have historically held our investments to maturity, we may in the future have a need to sell investments before their maturity dates, which could result in losses on the sale of those investments. 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 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, 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.

38

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 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, Romania and the United Kingdom, 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.
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.
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 ceased operations in our Taiwan facility in 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, 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 November 2012, we announced the planned closure of our

39

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, as well as the 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 have 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.
Our business operations could suffer in the event of information technology system 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

40

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 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.

41

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.
 
*
 
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 efforts that would have a negative effect on our results of operations, cash flows and financial position.
 
*
 
We may require external financing that is dilutive or presents risks of debt.

42

 
*
 
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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Items 2(a) and 2(b) are not applicable.

43

(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)
 
 
 
 
 
 
 
 
2015
 
 
 
 
 
 
 
 
April
 
—

 
$
—

 
—

 
 
May
 
248

 
38.83

 
248

 
 
June
 
397

 
38.66

 
397

 
 
Total
 
645

 
$
38.73

 
645

 
$91.1 million
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a) Calculated as of June 30, 2015. In August 2007, the Company’s Board of Directors authorized a plan to repurchase the Company’s outstanding shares of common stock dependent on market conditions, share price and other factors. As of June 30, 2015, the amount authorized under this plan to be used for repurchases is $250.0 million. No expiration date has been specified for this plan. All repurchases in the three months ended June 30, 2015 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
 

44

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, May 22, 2013 and April 30, 2015 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed on May 5, 2015, and incorporated herein by reference)

 
 
 
10.1
 
Sixth Amended and Restated 2003 Equity Incentive Plan (filed as Appendix A to the Registrant’s Definitive Proxy Statement, filed on March 18, 2015, and incorporated herein by reference)
 
 
 
10.2
 
Form of Stock Option Agreement for the Sixth Amended and Restated 2003 Equity Incentive Plan
 
 
 
10.3
 
Form of Restricted Stock Agreement for the Sixth Amended and Restated 2003 Equity Incentive Plan
 
 
 
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
 



45

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: August 5, 2015
 
 
 
 
TESSERA TECHNOLOGIES, INC.
 
 
By:
 
/s/    Thomas Lacey
 
 
Thomas Lacey
Chief Executive Officer


46

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, May 22, 2013 and April 30, 2015 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed on May 5, 2015, and incorporated herein by reference)
 
 
 
10.1
 
Sixth Amended and Restated 2003 Equity Incentive Plan (filed as Appendix A to the Registrant’s Definitive Proxy Statement, filed on March 18, 2015, and incorporated herein by reference)
 
 
 
10.2
 
Form of Stock Option Agreement for the Sixth Amended and Restated 2003 Equity Incentive Plan
 
 
 
10.3
 
Form of Restricted Stock Agreement for the Sixth Amended and Restated 2003 Equity Incentive Plan
 
 
 
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
 


47

Stock widget

Investing forum

TESSERA TECHNOLOGIES INC Reports

Also read