features. These semiconductors are utilized in a broad range of electronics products, including digital audio players, digital cameras, personal computers, personal digital assistants (PDAs), video game consoles and mobile phones. In addition, by using our technology, we believe that our customers are also able to reduce the time to market, and the development costs of their semiconductors.
Our patented chip packaging technology enables our customers to assemble semiconductor chips into chip-scale packages (CSPs) that are almost as small as the chip itself. This technology also enables multiple chips to be stacked vertically in a single three-dimensional multi-chip package that occupies almost the same circuit board area as a CSP. Our technology allows several semiconductor chips and passive components to be densely combined in ultra-compact electronics modules. By reducing the size of the semiconductor package and shortening electrical connections between the chip and the circuit board, our technology allows further miniaturization and increases in performance and functionality for electronic products. We achieve these benefits without sacrificing reliability by allowing movement within the package, thus addressing critical problems associated with thermally-induced stress which can occur when packages decrease in size. Our technologies also enable our customers to package semiconductor chips and micro-devices at the wafer level (wafer level packaging or WLP) and to create high-density interconnections between electronic components using flexible substrate materials.
We have a significant consumer optics technology portfolio that includes image sensor packaging, wafer-level camera manufacturing technology, camera assembly technology and technology for auto focus and zoom. According to market research firm Prismark, the market for consumer electronic devices that contain cameras, including mobile phones, notebook computers, security systems and automotive electronics, will increase to approximately 1.7 billion units in 2010. We believe that we are well-positioned to take advantage of this expected significant growth in consumer optics. We have an ongoing effort to develop and license optical technologies for the mobile phone market. This market is growing rapidly, with over 1.0 billion cameras expected to be incorporated in mobile phones in 2010.
We derive license fees and royalties based upon our intellectual property, and generate fees for related services. Our semiconductor chip packaging technology has been widely adopted and is currently licensed to more than 60 companies, including Intel Corporation, Renesas Technology Co., Samsung Electronics Co., Ltd., Sharp Corporation, Texas Instruments, Inc. and Toshiba Corporation. We believe that more than 100 companies across the semiconductor supply chain have invested in the materials, equipment and assembly infrastructure needed to manufacture products that incorporate our packaging technology. As a result, our technology has been incorporated into more than 10.0 billion semiconductors worldwide. Based upon Gartner Dataquest, we anticipate that the market using Tessera CSP technology will grow to more than 16.4 billion units in 2008, from 8.1 billion units in 2005, representing a compound annual growth rate of 27%.
Industry Background
Packaged semiconductor chips, which we refer to as semiconductors, are essential components in a broad range of communications, computing and consumer electronic products. According to the Semiconductor Industry Association, worldwide semiconductor sales totaled $ 247.7 billion in 2006 and are expected to grow to $321.0 billion in 2009. Many electronic products require increasingly complex semiconductors that are smaller and higher-performing, integrate more features and functions and are less expensive to produce than previous generations of semiconductors. Satisfying the demand for these complex semiconductors requires advances in semiconductor design, manufacturing and packaging technologies.
The disaggregation of the semiconductor industry and the emergence of intellectual property companies
Historically, most semiconductor companies were vertically integrated. They designed, fabricated, packaged and tested their semiconductors using internally developed software design tools and manufacturing processes
and equipment. As the cost and skills required for designing and manufacturing complex semiconductors have increased, the semiconductor industry has become disaggregated, with companies concentrating on one or more individual stages of the semiconductor development and production process. This disaggregation has fueled the growth of fabless semiconductor companies, design tool vendors, semiconductor equipment manufacturers, third-party semiconductor manufacturers, or foundries, semiconductor assembly, package and test companies and intellectual property companies that develop and license technology to others.
While specialization has enabled greater development and manufacturing efficiency, it has also created an opportunity for intellectual property companies that develop and license technology to meet fundamental, industry-wide challenges. These intellectual property companies gain broad adoption of their technology throughout the industry by working with companies within the semiconductor supply chain to invest in the infrastructure needed to support their technology. This collaboration and investment benefit semiconductor companies by enabling them to bring new technology to market faster and more cost-effectively, without having to make the investment themselves.
Demand for system-level miniaturization and increased performance
Miniaturization of electronic products, or system-level miniaturization, is a significant challenge for manufacturers of electronic products and their suppliers, including semiconductor companies. Digital cameras, digital audio players, personal computers, PDA’s, video game consoles, mobile phones and other electronic products are being made smaller with improved performance and an increasing number of advanced features. Semiconductor companies have traditionally responded to these challenges by shrinking the size of the basic semiconductor building block, or transistor, allowing for more transistors to be integrated on a single chip. For decades, the consistent reduction in transistor size has resulted in higher-performance, lower-cost chips that require less silicon area. In addition, transistors have become small enough to make it economical to combine multiple functions, such as logic, memory and analog, on a single chip, in what is commonly referred to as a system-on-a-chip.
Importance of semiconductor packaging and interconnect
While the integration of increased functionality on a chip is critical to the miniaturization of electronic products, its impact has been limited by packaging and interconnect technology, which has not kept pace with the advancements achieved by chip integration. Semiconductor chips are typically assembled in packages that act as the physical and electrical interface between the chip and the printed wiring board. The package protects the chip from breakage, contamination and stress. In addition, the package enables a chip to be easily tested prior to its incorporation into a system, enabling high system yields and lowering the total system cost. Traditional semiconductor packages are much larger than the chip itself and occupy significant printed wiring board and system area. Traditional packaging technologies are less capable of accommodating faster semiconductor speeds due to longer electrical connections. Due to these limitations, traditional semiconductor packages are not well suited to meet the increasing demand for product miniaturization, functionality and performance. The miniaturization of packaged semiconductors often presents reliability problems because the shorter connections are more vulnerable to breakage due to thermally-induced stress and mechanical shock. Overcoming these problems has been one of the most significant technical challenges in shrinking semiconductor packages to the size of the chip itself. As a result, in addition to continuing advancements in chip integration, advanced packaging and interconnect technologies are required to achieve further miniaturization and higher performance cost-effectively.
Growth of consumer optics creating demand for lower cost production and simpler integration
The integration and use of optics in volume products has grown dramatically over the last two decades. Miniature cameras have proliferated in wireless consumer devices such as smart phones, PDAs, and notebook computers. According to market research firm Prismark, the market for consumer electronic devices that contain
cameras, including mobile phones, notebook computers, security systems and automotive electronics will increase to approximately 1.7 billion units in 2010. Recent trends to increase the functionality and decrease the size of such wireless consumer devices and penetrate additional markets such as the automotive and security markets present significant challenges to manufacturers of miniature cameras. In particular, the explosive growth of the mobile phone camera market has created a need for new techniques to provide a continued path to lowered costs. Consumers and manufacturers of mobile phones desire to continually reduce the size of and create thinner phones in order to free up space for additional functionality. Particularly in the case of camera modules, there is a significant need for lower cost and lower height. As the cost of electronic devices has dropped, optics and optics assembly have become a significant portion of the cost of mobile phone camera modules. In addition, newer image sensors require higher precision optics to get the benefit of increased resolutions. At the same time, the miniaturization of these devices is creating a need for new ways of integrating optics with electronics. Traditional approaches to optics manufacturing have limitations in their ability to reduce size and cost. Traditional approaches involve bulky and complex optical assemblies, expensive connectors and other components, and labor for assembly and testing, all of which tend to increase the final system package size and cost. Conventional approaches to volume optics production involve molding of plastic or glass, which are time-consuming and produce small numbers of optics at a time. Glass molding requires relatively long cycle times and consequently has a higher cost than plastic molding. As demand for optics in consumer applications grows, we believe the limitations of conventional approaches will become a barrier to further adoption. In addition, we believe there is a significant opportunity for technologies that eliminate moving parts, and provide size, cost, reliability and power advantages over existing mechanical technologies for focus and zoom.
Our Solution
We are a leading provider of intellectual property for chip-scale, multi-chip and wafer-level packaging, and of micro-optics solutions, all of which meet the increasing demand for miniaturization and high performance in electronic products. We license a substantial portion of our intellectual property on a worldwide basis under our Tessera Compliant Chip, or TCC, license. This license primarily covers our core chip-scale and multi-chip packaging patents. We also offer an intellectual property license on a worldwide basis under our wafer level technologies license, which covers our wafer level optical packaging patents. In addition, we offer an intellectual property license on a worldwide basis under our interconnect technologies license, which covers our advanced package substrate, flexible printed circuit and printed wiring board patents. We support the adoption of our technology by providing our customers with engineering services focused on addressing key issues related to the miniaturization and performance of electronics products. Our packaging and interconnect technologies provide the following benefits which are not provided by traditional packaging technologies:
Miniaturization . Our CSP technology and associated CSP substrate technology enables fully-packaged chips to be almost as small as the chip itself, which permits increased product miniaturization and functionality. Our multi-chip packaging, or MCP, technology and associated MCP substrate technology extends this benefit by enabling multiple semiconductors to be stacked vertically, while occupying about the same printed wiring board area as a CSP. For example, our technology is broadly used to produce Flash memory and static random access memory, or SRAM, devices stacked in a multi-chip package utilized in mobile phones. As a result, we believe our MCP technology enables electronic products to achieve new levels of miniaturization and functionality. In addition, our WLP technology enables chip packages in which the area of the package is exactly the same size as the area of the chip itself.
High performance. Our packaging and interconnect technology offers shorter electrical connections between the chip and printed wiring board and between adjacent chips. Shorter connections allow information to be more rapidly transferred between the semiconductors and the system, yielding better system performance. Our technology is used for high performance DRAM chip, such as Double-Data-Rate two, or DDR2 DRAM. Our CSP technology has been widely adopted for use in high-speed memory applications, such as high-performance personal computers, network switches and routers, set-top boxes, workstations and video game consoles, such as the Microsoft ® Xbox and Xbox ® 360 ® as well as Sony Playstation ® 2 and Playstation ® 3.
High reliability. Our CSP technology addresses the reliability problems of miniaturized semiconductor packages due to thermally-induced stress and mechanical shock by allowing movement within the package. In addition, our WLP technology provides the ability to protect an image sensor wafer from contamination at the wafer level early in the packaging process. As a result, our technology provides high reliability without the increased package size or cost of competing technologies for a broad range of applications that require miniaturization.
Cost effectiveness. The significant investment made by semiconductor chip makers, assemblers, and material and equipment providers in the manufacturing infrastructure that supports our technology enables high-volume production and broad availability of semiconductors and electronic products that incorporate our technology. This in turn has reduced the cost of manufacturing semiconductors and electronic products that incorporate our technology, allowing it to be used in cost-sensitive semiconductor applications such as dynamic random access memory, or DRAM, Flash memory, SRAM, digital signal processors and image sensors. This subsequently reduces the cost of electronic product applications such as mobile phones, digital still cameras, PDAs, memory modules and MP3 players. We believe that this broad adoption and high volume production of our technology will further increase its cost-effectiveness.
Miniaturization of consumer optics. Our micro-optics technology offers a fundamentally different approach to manufacturing optics, leveraging technologies and processes originally developed for the semiconductor industry. The resulting optics, known as wafer based optics, are created by forming small features on the surface of glass or other substrates. These optics are then used to shape or manipulate light and can be applied to many applications of optics including miniature cameras for mobile phones and automotive applications. Due to the fact that such optics are created at the wafer-scale, hundreds or thousands of optics can be manufactured simultaneously, with great precision and repeatability. In addition, wafers of optics can be stacked to create miniature optical systems. This approach also provides a convenient opportunity to align the optics system in parallel which we believe significantly improves upon the conventional process of one-at-a-time assembly. Wafer based optics provide advantages over conventional optics due to lower cost and lower profile, with the potential of rapidly increasing the capacity of optics available. We are investing in additional consumer optics technology and we also offer an intellectual property license under our wafer based optics technology license, which covers our wafer based optics patents.
Our Strategy
Our objective is to be the leading provider of miniaturization technologies for the electronics industry by developing and licensing technologies that meet the increasing demand for miniaturization, performance and costs in a broad range of communication, computing and consumer electronic products. The following are key elements of our strategy:
Expand the market penetration of our current CSP and MCP technologies. Our patented CSP and MCP technologies have been incorporated in over 10 billion semiconductors worldwide. As a result of the broad adoption of our technology and existing infrastructure that supports our technologies, we believe that we are well positioned to benefit from the substantial growth projected for the CSP and MCP markets. We intend to further increase our share of the CSP and MCP markets by:
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continuing to target and optimize our technology for large, growing product markets such as digital cameras, digital audio players, personal computers, PDAs, video game consoles and mobile phones; •
making continued design, process and cost improvements that drive the incorporation of our technology in new semiconductor applications, such as application specific integrated circuits, or ASIC semiconductors, high-performance DRAM, and other logic applications; and •
identifying and approaching companies whose current products potentially incorporate our technology, offering them licenses to our technology, and when necessary, enforcing our intellectual property rights to obtain compensation for the use of our technology consistent with our existing licensing program, Drive the market acceptance of our next generation CSP and MCP technologies. Our next generation CSP and MCP technologies are being developed to enable Tessera to continue to meet the industry’s demand for small form factor, higher functionality and higher reliability in the future. This technology is designed for products in which miniaturization and feature integration will continue to be critical, including digital cameras, digital audio players, PDAs and mobile phones. We intend to drive the adoption of our next generation CSP and MCP technologies by:
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collaborating with our customers to develop chip-scale and multi-chip packages to meet their specific product requirements; •
capitalizing on the existing materials, equipment and assembly infrastructure that supports our current CSP and MCP technology; and •
continuing to reduce the cost of manufacturing semiconductors that incorporate our technology through internal development and collaboration with leading semiconductor materials and equipment companies. Accelerate the market acceptance of our wafer level packaging technology. Our WLP technology permits the routing of device contacts either to the front or back side of the package, thereby enabling reduction in the overall size of the finished packaged chip relative to non-WLP packages. In addition, our technology has the ability to protect the image sensor wafer from contamination early in the packaging process, at the wafer level. This technology is designed for products in which miniaturization and manufacturing yield are critical, including camera-equipped mobile phones, digital cameras and PDAs. We intend to accelerate the adoption of our WLP technology by:
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continuing to target and optimize our technology for large, growing product markets; •
making continued design, process and cost improvements that drive the incorporation of our technology in new applications, such as microelectromechanical systems (MEMS); and •
identifying and approaching companies which we believe could benefit from incorporating our technology, and offering them licenses to our technology. Accelerate the market acceptance of our consumer optics technology. Our technology is based on our expertise in the design, assembly and manufacturing of micro optics systems, which leverages the existing semiconductor manufacturing infrastructure and processes to enable highly miniaturized, lower cost optical systems. In addition, we are developing technology and acquiring best of class technology to complement core technology developed by Tessera. This technology is designed for products in which miniaturization, alignment, and cost are critical, including camera-equipped mobile phones, digital cameras, and PDAs. We intend to accelerate the adoption of our consumer optics technology by:
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continuing to target and optimize our technology for large, growing product markets; •
making continued design, process and cost improvements that drive the incorporation of our technology in a broad range of camera module applications, such as VGA, 2MP and 3MP pixel cameras; •
developing partnerships with significant customers in consumer optics fields to assist in defining defacto solutions for optics; and •
identifying and approaching companies which we believe could benefit from incorporating our technology, and offering them licenses to our technology. Provide engineering services to develop and promote the adoption of our technology. We intend to continue to use our engineering services to accelerate the adoption of our technology, better understand our customers’ advanced packaging requirements, and develop and broaden our intellectual property portfolio. For example, we provide our customers with a broad range of services, such as product and package design and simulation, prototype manufacturing and reliability analysis, and product and package testing to help them develop products that incorporate our technology. This collaboration allows us to better understand our
customers’ future product and packaging technology requirements. We have generated a substantial portion of
our service revenues by providing our engineering services to various government agencies. These relationships contribute to the development of our next generation technologies such as three-dimensional multi-chip packaging, which we have offered to commercial customers.
Utilize and enhance the infrastructure supporting our technology. For more than a decade, we have collaborated with our infrastructure partners to help them develop and make widely available low-cost materials, equipment and assembly capacity to manufacture products that incorporate our technology. We design new technologies that are compatible with this existing infrastructure, which facilitates more rapid adoption of these new technologies. We plan to continue to work with our infrastructure partners to expand the adoption of our technology.
Broaden our intellectual property portfolio. We intend to continue to broaden our intellectual property portfolio through internal development, strategic relationships and acquisitions, to enhance the competitiveness and size of our current businesses and diversify into markets and technologies that complement our current businesses. For example, we extended our intellectual property portfolio in the area of WLP by purchasing certain assets of Shellcase, Ltd., and in the area of micro-optics through our acquisition of Digital Optics Corporation. We also intend to continue to utilize our core competency in aggregating and licensing intellectual property to grow and expand our business.
Create demand by collaborating with system manufacturers and electronic manufacturing service providers. We work with leading system manufacturers and electronic manufacturing service providers to increase demand for our technologies. Through these relationships, we align our research and development efforts to better meet their needs.
Our Technology and Services
We derive the majority of our revenues from license fees and royalties associated with our TCC license. Our TCC license grants a worldwide royalty-bearing right to develop, assemble, use and sell certain CSPs and multi- chip packages. The licensed technology primarily includes issued patents and pending patent applications during the term of the license. We also license components of our intellectual property portfolio outside of the TCC license, such as our wafer level packaging technology. In addition, we provide a broad range of engineering, assembly and infrastructure services to our customers.
Our Technology
Our packaging technology is incorporated into packaged semiconductors for use in a broad range of communication, computing and consumer electronics applications. These semiconductors include:
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Flash memory, SRAM and certain logic integrated circuits (Logic ICs) like digital signal processors (DSPs), ASIC and application specific standard products semiconductors (ASSPs), for use in wireless communication and digital consumer products, including digital cameras, digital audio players, PDAs and mobile phones. These markets are expected to enjoy strong growth. For example, based on Gartner Dataquest forecasts, we anticipate that the market for CSP packaged Logic ICs incorporating Tessera technology will grow from 3.4 billion units in 2005 to 6.2 billion units in 2008, representing a compound annual growth rate of 22%. •
DRAM, for use in computing, networking and home entertainment applications, such as personal computers, servers, network switches and routers, set-top boxes and video game consoles. Based on Gartner Dataquest forecasts, we anticipate that the market for CSP packaged DRAM will grow from 2.7 billion units in 2005 to 8.0 billion units in 2008, a compound annual growth rate of 44%. •
Image sensors for use in consumer electronic devices that contain cameras, including camera phones, notebooks, security systems and automotive electronics. Based on Techno Systems Research forecasts, we anticipate that the market for images sensors will grow from 0.5 billion units in 2006 to 1.0 billion units in 2008, a compound annual growth rate of 26%. We also offer packaging solutions for image sensors in electronic devices, including advanced stacked lenses, auto focus and zoom features.
Chip-Scale Package Technology Platforms
Although most of our licensees have developed their own proprietary packages incorporating our intellectual property, we have developed the following CSP platforms which are included in our TCC license:
Micro Ball Grid Array, or µBGA ® Platform. Our µBGA ® platform includes the lead-bonded µBGA ® package and the µBGA ® -W package, an alternative that uses wire-bonding as opposed to lead bonding as the package’s internal electrical interconnect. In the µBGA ® platform the chip is oriented face-down in the package with its contacts facing the circuit board. We believe this CSP platform offers the best combination of features to meet the requirements of high-performance DRAM semiconductors.
µBGA ® -F Platform. The µBGA ® -F platform has the chip oriented face-up in the package, with its contacts facing away from the circuit board, and utilizes standard wire-bonding for the package’s internal electrical interconnect. The technology underlying this platform has been broadly adopted and incorporated into a large number of customer-developed proprietary packages for Flash memory, SRAM, DSP, ASIC and ASSP semiconductors used in wireless communication and consumer electronics products.
Multi-Chip Package Technology Platforms
Our technology is incorporated into a number of three-dimensional multi-chip packages used in wireless communication and digital consumer electronics products, such as digital cameras, digital audio players, PDAs and mobile phones. These packages include various combinations of ASIC, ASSP, DSP, Flash memory and SRAM semiconductors. In addition, we have developed a family of three-dimensional multi-chip platforms, which are collectively referred to as the µZ ® Stack Package family, to extend this innovative technology into new applications to meet the growing demand for higher levels of integration in computing, communications and consumer electronics. We also develop and design solutions which incorporate analog and RF devices in three-dimensional platforms for a broad range of wireless handheld, computing and consumer electronic products.
We expect these platforms to build upon the existing CSP infrastructure and to enable further miniaturization and increased performance and functionality for a broad range of cost-sensitive, high volume applications. Each platform was developed to resolve complex, technical and business challenges inherent in the miniaturization of electronic products.
We offer the following multi-chip package platforms:
µZ ® Chip Stack Platform . The µZ ® Chip Stack platform consists of two or more chips, stacked vertically on top of each other and wire-bonded to the package substrate. This is a cost-effective, versatile platform that is used in a broad range of semiconductors and product applications. The technology underlying this platform has been broadly adopted and incorporated into a large number of customer-developed proprietary stacked multi-chip packages for Flash memory, SRAM, DSP, ASIC and ASSP semiconductors, that are used in wireless communication and consumer electronics products.
µZ ® Fold-Over Stack Platform . We have introduced our µZ ® Fold-Over Stack platform to solve an industry-wide problem associated with the integration of different types of functional blocks, such as processor, memory and various analog blocks, onto a single system-on-a-chip. For example, this package enables ASSP, ASIC and different memory semiconductors to be fully packaged, tested and then integrated, resulting in a high-yielding system-in-a-package. The µZ ® Fold-Over Stack platform provides a cost-effective solution that meets mobile phone package height requirements and saves valuable circuit board space, enabling mobile products that are smaller and lighter with more functionality.
µZ ® - Ball Stack Platform . We have also introduced our µZ ® -Ball Stack platform as a multi-chip solution that enables the integration of high-performance DRAM while occupying 25% less circuit board area with 60% of the height of a traditional DRAM package. Because each DRAM chip can be individually tested prior to being assembled in the multi-chip package, common yield problems associated with competing technologies can be overcome. Our µZ ® -Ball Stack platform can be used for cost-sensitive, high-volume applications, including DRAM modules for high-performance personal computers, workstations and network switches and routers.
Wafer Level Package Technology Platforms
Our WLP technologies are suitable for a variety of electronics products. The principal application to date is optical sensors-in particular complementary metal oxide semiconductor, or CMOS image sensors for camera-equipped mobile phones, charge-coupled device, or CCD area sensors and linear array image sensors. Our WLP technologies include the following platforms:
SHELLCASE ® OP . The SHELLCASE ® OP package utilizes an innovative glass-silicon-glass sandwich structure to enable image-sensing capabilities through the actual packaging structure. The end result is a true chip size package with horizontal and vertical dimensions identical to the original die size, and a total package thickness, that in most cases is similar to the original silicon thickness. The SHELLCASE ® OP platform is offered in two configurations: “face up”, where the assembled die faces up towards the target image; or “face down” where the assembled die observes the target image through a port in the printed circuit board. SHELLCASE ® OP packages offer significant advantages for CMOS and CCD linear and array image sensors, digital imaging and light detection applications. SHELLCASE ® OP platforms have been in commercial production since 2000, and can be found in a wide variety of devices, including camera phones, digital cameras and medical devices.
SHELLCASE ® OC . The SHELLCASE ® OC package is a true chip size package that utilizes an innovative glass-silicon-glass sandwich to enable image-sensing capabilities through the actual packaging structure. SHELLCASE ® OC provides an air cavity between the package and the die, making it the packaging solution of choice for image sensors with micro-lenses, such as those used in digital cameras and camera phones, fax machines and digital scanners and machine vision applications, among other portable electronics.
SHELLCASE ® CF . The SHELLCASE ® CF platform is suitable for image sensors, some types of MEMs, and other optical-based devices. SHELLCASE ® CF protects these components from contamination from the initial stage of processing and is compatible with standard wire-bond assembly processes. SHELLCASE ® CF provides significant improvement in yield over existing Chip-on-Board (COB) alternatives used to assemble these devices today. This yield improvement is realized through the protection of the sensor’s active area from contamination and the ability to perform wafer-level optical testing prior to module assembly, both of which improve camera module yield and reduce its overall cost.
SHELLCASE ® RT . The SHELLCASE ® RT platform utilizes an innovative glass-silicon structure to enable image-sensing capabilities through the actual packaging structure. In a SHELLCASE ® RT package, the bottom glass layer has been replaced with a polymer layer. That structure provides a true die-sized package with horizontal and vertical dimensions identical to the original chip size, and a total package thickness smaller than the original silicon thickness. The SHELLCASE ® RT platform is available in both cavity and non-cavity formats.
Wafer Based Optics Technology Platform
With our recent acquisition of Digital Optics Corporation, we acquired a wafer-based optics platform with three core areas of expertise.
Wafer-based diffractive optics . Diffractive optical elements are microscopic patterns that are formed in a substrate (for example, a sheet or wafer of glass or plastic) and are used to manipulate light. Tessera’s wafer-based diffractive optics may be etched in to the surface of glass or silicon wafers in 4 inch to 6 inch diameters, each containing up to several thousand diffractive die. These elements are made with a process similar to that used to make semiconductor microelectronics. These diffractive elements are then used in a variety of end-products such as semiconductor manufacturing equipment (e.g., lithographic steppers) and fiber-optic transceivers. Diffractive elements can also be used in imaging applications, such as camera modules for cell phones, in conjunction with refractive elements to reduce chromatic aberrations.
Wafer-based refractive optics . Refractive optical elements are lenses that bend light through refraction. Instead of conventional fabrication processes in which lenses are fabricated either through grinding individual elements or a molding process in which single or small numbers of elements with each cycle of a machine, Digital Optics Corporation’s wafer based refractive optics are made on 4 inch or 6 inch wafers where thousands of lenses are simultaneously formed on the surface. Refractive lenses are formed on both the front and back surface with submicron precision. Digital Optics Corporation has several methods of manufacturing including direct etch in to the substrate and replication of the lenses in to a polymer layer located on the wafer surface.
Wafer-based assembly and integration . Our wafer-based assembly platform is used to bond multiple wafers of optics together to form integrated miniature optical systems such as visible and IR camera systems. All elements needed to implement an optical system are mapped on to surfaces of wafers. Spacer elements, filters and apertures are also fabricated on wafers with the use of processes similar to those used in our refractive and diffractive optics technologies. The wafers are bonded together and then diced to form individual entire optical systems or sub-systems. In addition we are developing certain technologies that we recently acquired from Eyesquad GmbH in February 2007 related to auto focus and optical zoom capabilities. We continue to develop the Eyesquad GmbH technologies and believe when completed they will be licensable to manufacturers of miniature cameras, either directly or bundled with our wafer level optics technology platforms as they become available, such as a Wafer Level Camera (WLC).
The following table provides a summary of the key features and applications for each of our technologies and the related platforms that are available for licensing.
Chip-Scale
Package
Technology
Technology
Platform
Key Features
Semiconductor
Applications
µBGA ®
• Small
• High performance
• High reliability
DRAM, Flash, SRAM µBGA ® -W
• Small
• High performance
• High reliability
• Wire-bond
DRAM, Baseband, µProcessor, RF µBGA ® -F
• Small
• Design flexibility
• Low cost
• Wire-bond
ASIC, ASSP, DSP, Flash, SRAM
Multi-Chip
Package
Technology
Technology
Platform
Key Features
Semiconductor
Applications
µZ ® Chip Stack
• Vertical stack
• Small
• Wire-bond
• Design flexibility
Flash/SRAM/DRAM stack µZ ® Fold-Over Stack
• Pre-test
• Stacked logic and memory
• Enables system-in-a-package
• Small
• Low profile
• 2-4 semiconductor stack
• High reliability
Numerous logic /memory configurations µZ ® -Ball Stack
• Pre-test
• Stacked memory
• Small
• Low profile
• 2-8 Semiconductor Stack
• High reliability
DRAM, Flash, numerous logic /memory configurations
Wafer
Level
Package
Technology
SHELLCASE ® OP
• Wafer level
Image sensors SHELLCASE ® OC
• Wafer level
• Internal cavity
Image sensors SHELLCASE ® CF
• Wafer level
• Internal cavity
• Thin
• COB processing
• Cleanliness Free
Image sensors
MEMS, Hermetic
Packaging for DLP
SHELLCASE ® RT
• Wafer level
• Internal cavity
• Thin
Image sensors
MEMS
Wafer
Based
Optics
Technology
Diffractive Optics
• Wafer level
• Color Correction
Image sensors Refractive Optics
• Wafer level
• Small Size
• Spherical or Highly Aspheric
Image sensors Assembly and Integration
• Wafer level
• Internal cavity
• Thin
Image sensors
Our Services
We provide our customers and partners with engineering, assembly and infrastructure services that we believe accelerate the adoption of our technology for a broad range of cost-sensitive, high-volume applications. We provide engineering services to semiconductor makers and assemblers, system manufacturers, electronic manufacturing service companies and government agencies and their contractors to enable the development of new packaging technologies. Most of our service revenues are derived from government-related engineering services.
Engineering services. Our engineering services include customized product and package design, prototyping and testing, modeling, simulation, failure analysis and reliability testing and related training services. We provide these services to semiconductor makers and assemblers, system manufacturers, electronic manufacturing service companies and government agencies and their contractors. We believe that offering these services accelerates the incorporation of our intellectual property into our customers’ products and aids in our understanding of the electronic industry future packaging requirements.
Assembly services. We provide training and consulting services to assist semiconductor assemblers in designing, implementing, upgrading and maintaining their CSP and WLP assembly lines. We also offer services to help customers address process, equipment, materials and other manufacturing-related issues. This allows our assembly customers to bring their manufacturing lines incorporating our technology into production more rapidly and cost-effectively.
Infrastructure services. We offer evaluation, qualification, cost reduction and cost analysis services to companies that develop and manufacture equipment and materials to support the infrastructure needed to manufacture semiconductors that incorporate our technology. These services enable infrastructure customers to evaluate the impact of their specific materials and equipment on the manufacturability and reliability of our technology.
Optics design and manufacturing services . We offer custom design, simulation, prototyping and small-volume manufacturing of wafer optics. These products address high value-add applications in various industries including communications and semiconductor equipment. In addition, we provide these services as part of development programs targeted at our licensees in the consumer optics markets.
Operating Segments
Effective 2006 we organized our business units into three operating divisions: the Licensing Business, the Product Division and Emerging Markets and Technologies Group. These divisions are reported into, the Intellectual Property segment, which consists primarily of our Licensing Business, and Emerging Markets and Technologies Segment group and the Services segment, which consists primarily of the Product Division. The Product Division incorporates operational functions that are reported in both our Intellectual Property and Services segments.
Intellectual Property Segment:
Licensing Business. Our licensing business is focused on licensing technologies in our core markets, including DRAM, Flash, SRAM, DSP, ASIC, ASSP, micro-controllers, general purpose logic and analog devices and imaging and micro-optics solutions. Key functions of this group include licensing, intellectual property management and marketing.
Emerging Markets and Technologies Group . Our Emerging Markets and Technologies group is focused on expanding our technology portfolio into areas outside of our core markets that represent long-term growth opportunities through application of products and technologies, research and development of new technologies for high growth markets and applications such as packaging, imaging, interconnect and materials. The Emerging Markets and Technologies group also focuses on long-term growth opportunities through new partnerships, ventures and acquisitions of complementary technology.
Services Segment:
Product Division. Our Services segment is composed of our Product Division, which performs key research and development and drives our production development services revenues. This segment also addresses the challenges of electronic products miniaturization from a system perspective, through the dense interconnection of components, extensive use of three-dimensional packaging technologies, and the use of micro-optics technologies. This segment provides a vehicle for transitioning our research efforts into fully developed technologies both internally and externally with partners that can be licensed.
The Product Division incorporates operational functions that are reported in both the Intellectual Property and Services segments.
Our segments were determined based upon the manner in which our management views and evaluates our operations. Segment information below in Part II, Item 7— Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 13 of the Notes to Financial Statements is presented in accordance with the Statement of Financial Accounting Standards No. 131 (SFAS No. 131), Disclosure about Segments of an Enterprise and Related Information . We do not present financial data to our management for each of our divisions and our management does not evaluate each division separately from our segments when measuring the operating performance of our business. For years prior to 2005, revenues were presented to management in the Intellectual Property and Services categories; however expenses were not allocated or presented to our management for these categories. It would be impractical to determine an allocation method for prior year expenses, therefore only revenues will be presented for these segments. In addition to our reportable segments, we also have a Corporate Overhead category that is not a reportable segment. This category includes certain operating expenses and credits that are not allocated to our business segments because these operating expenses and credits are not considered in evaluating the operating performance of our business segments.
Customers
Our technology is currently licensed to more than 60 companies. The following table sets forth sales to customers comprising of 10% or more of total revenues for the periods indicated:
| Years Ended December 31, |
|||||||||
| 2006 | 2005 | 2004 | |||||||
| Intel Corporation |
* | * | 18 | % | |||||
| Micron Technology, Inc. |
15 | % | — | — | |||||
| Qimonda, AG |
21 | % | — | — | |||||
| Samsung Electronics, Ltd. |
* | 20 | % | * | |||||
| Texas Instruments, Inc |
* | 17 | % | 20 | % |
A significant portion of our revenues is derived from licensees headquartered outside of the United States, principally in Asia and Europe, and we expect these revenues will continue to account for a significant portion of total revenues in future periods. The table below lists the geographic regions of the headquarters of our customers and the percentage of revenues derived from each region for the periods indicated:
| Years Ended December 31, |
|||||||||
| 2006 | 2005 | 2004 | |||||||
| Asia |
17 | % | 28 | % | 11 | % | |||
| Europe |
32 | % | 0 | % | 0 | % | |||
| Japan |
15 | % | 28 | % | 31 | % | |||
| Other |
— | 1 | % | 1 | % | ||||
| USA |
36 | % | 43 | % | 56 | % |
The international nature of our business exposes us to a number of risks, including but not limited to: 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; less effective protection of intellectual property than is afforded to us in the United States or other developed countries and international terrorism and anti-American sentiment, particularly in the emerging markets.
Most of our long-lived assets are located in the United States. In December 2005 we completed the acquisition of certain assets of Shellcase, Ltd., which included a research and development facility in Jerusalem, Israel and intellectual property that is owned by our subsidiary in Budapest, Hungary. In February 2007, we completed the acquisition of Eyesquad GmbH, which included intellectual property that is held in Germany and a research and development facility in Tel Aviv, Israel.
The following is a list of our current licensees and, where indicated, our current sublicensees.
Semiconductor Manufacturers
Semiconductor Assemblers
Semiconductor Material Suppliers
Advanced Micro Devices Inc.
Asahi Kasei Microsystems Co. Ltd.
Cochlear Co.
Fujitsu Limited
Hitachi Limited.
Hynix Semiconductor, Inc.
Infineon Technologies AG
Intel Corporation
Matsushita Electric Industrial Co., Ltd
Micron Technology, Inc.
Mitsubishi Electric and Electronics, Inc.
NEC Electronics Co.
NXP BV
Oki Electric Industry Co., Ltd.
Qimonda AG
Renesas Technology Co.*
ROHM Co., Ltd
Samsung Electronics Co., Ltd.
Sanyo Electric Co., Ltd.
Seiko Epson Co.
Sharp Corporation
Siemens AG
Sony Co.
STMicroelectronics, Inc.
Texas Instruments, Inc.
Toshiba Corporation
Advanced Semiconductor Engineering, Inc. (ASE)
Akita Elpida Memory, Inc.
Amkor Technology, Inc.
ChipMOS Technologies, Inc.
ChipPAC, Ltd. (BVI)
EEMS Italia, SpA
Hitachi Cable, Ltd.
Mitsui High-tec Inc.
North Dakota State University
Renesas Northern Japan Semiconductor, Inc.*
Renesas Eastern Japan Semiconductor, Inc.*
Renesas Kyushu Semiconductor Corporation
Orient Semiconductor Electronics Ltd (OSE)
Plexus Co.
Powertech Technology Inc. (PTI)
Shinko Electric Industries Co., Ltd
Siliconware Precision Industries Co., Ltd. (SPIL)
United Test and Assembly Center Ltd. (UTAC)
United Test Center Inc. (UTC)
University of Alaska
Walton Advanced Electronics, Ltd.
3M Company
Compeq Manufacturing Inc.
Hitachi Cable, Ltd.
Hitachi Limited.
LG Electronics Inc.
LG Micron Ltd.
Mitsui Mining & Smelting Co., Ltd.
Samsung Electro-Mechanics Co., Ltd.
Samsung Techwin Co., Ltd.
Shinko Electric Industries Co.
Sunright Ltd.
Original Equipment Manufacturers
UTStarcom, Inc.
Electronic Manufacturing Services
Flextronics International, Ltd
* denotes a TCC sublicense
Most semiconductor material suppliers are licensed under our Tessera Compliant Mounting Tape (“TCMT”) license, which requires these licensees to pay us a license fee, but not royalties.
Sales and Marketing
Our sales activities focus primarily on developing strong, direct relationships at the technical, marketing and executive management levels with leading companies in the semiconductor and consumer optics industry to license our technologies and sell our services. We also sell our engineering services to system manufacturers and government agencies and their contractors. Marketing activities include identifying and promoting application-based technologies
that enable further advances in electronics miniaturization for the cell phone, portable electronics and computing markets, and identifying major business opportunities for current and future product development. Product marketing focuses on identifying the needs and product requirements of our customers. Product marketing also manages the development of all of our technology throughout the development cycle and creates the required marketing materials to assist with the adoption of the technology. Marketing communications focuses on advertising and communications that promote the adoption of our technology.
Research and Development
We believe that our success depends in part on our ability to achieve the following in a cost-effective and timely manner:
•
develop new technologies that meet the changing needs of our customers and their markets; •
improve our existing technologies to enable growth into new application areas; and •
expand our intellectual property portfolio. Our research and development employees work closely with our sales and marketing employees, as well as our customers and partners, to bring new products incorporating our technology to market in a timely, high quality and cost-efficient manner. We also work closely with material and equipment infrastructure providers to identify new technologies and improve existing technologies for use in the assembly and manufacture of semiconductor packages that incorporate our technology. Research, development and other related costs were approximately $20.1 million in 2006, $7.5 million in 2005 and $7.2 million in 2004.
Our service contracts involve research and development for commercial entities and government agencies. For example, some of our development activities for the µZ ® Fold-Over Stack package and µZ ® -Ball Stack package technologies were partially funded through government and commercial service contracts, which provided for improvements and enhancements to our fundamental designs. Our government contracts include terms required by the government that are not customary in commercial contracts, including a right of the government to terminate the contract at any time for convenience of the government. See Item 1A below —Risk Factors for a description of other risks involving government contracts.
Our research and development efforts currently focus on four major areas:
Chip-scale and Multi-chip packaging. Our CSP and MCP efforts focus on developing specific technologies for incorporation of existing or new CSP and MCP technologies into new applications, developing prototypes and supporting customers or infrastructure providers with improvements to products for existing applications. We are developing next generation chip-scale and multi-chip packages that could offer higher off-chip wiring density, higher density, better signal performance and more functionality per electronic product.
Advanced packaging substrates. Our advanced packaging substrate efforts focus on working with customers to incorporate our technology into their products and applications as well as developing packaging prototypes that utilize and leverage the benefits of this substrate technology. We are working closely with infrastructure providers developing a manufacturing process capable of cost-effectively delivering high yield, high reliability and high performance.
Wafer level packaging. Our WLP efforts focus on developing specific technologies for packaging of image sensors and other devices at the wafer level, developing prototypes and supporting customers with improvements to designs and process technologies.
Consumer optics. Our consumer optics efforts include image sensor packaging, wafer level optics and related advanced optics functionality directed at low cost and small packaged image sensors in miniature camera
modules. These low-cost, small cameras are utilized primarily for the mobile handset market, but also have applications in the automotive and security markets. These efforts integrate and expand upon research and development programs and technologies initiated at each of our operating locations, including image sensor packaging from our operation in Jerusalem, Israel, wafer level optics and camera technology from our operation in Charlotte, North Carolina, image enhancement technology for digital auto focus and optical zoom from our operation in Tel Aviv, Israel, and microelectronics packaging and system integration from our operation in San Jose, California.
We have additional research and development efforts underway in a number of areas related to the miniaturization of electronic products, including areas relating to materials, equipment, packaging, interconnect, assembly and testing of semiconductors and three-dimensional modules.
Intellectual Property
Our future success and competitive advantage depend upon our continued ability to develop and protect our intellectual property. To protect our intellectual property, we rely on a combination of patents, trade secrets and trademarks. We also attempt to protect our trade secrets and other proprietary information through confidentiality agreements with licensees, customers and potential customers and partners, and through proprietary information agreements with employees and consultants.
Our patents address advanced single and multi-chip and wafer level packaging, micro-optical elements, integrated optical assemblies, image processing algorithms related processes, and complementary technologies. We have made and continue to make considerable investments in expanding and defending our patent portfolio. See Item 3 below— Legal Proceedings for a description of material legal proceedings in which we have recently been involved.
As of February 26, 2007, our intellectual property portfolio included 488 issued U.S. patents and 127 issued international patents. In 2006, 88 additional U.S. standard or provisional patent applications were filed, along with 23 additional international patent applications. In addition we have 230 domestic and 225 international patent applications. Our patents have expiration dates ranging from January 25, 2009 to December 29, 2024. We continually file new patent applications for new developments in our technology.
There are many countries in which we currently have no issued patents; however, products incorporating our technology that are sold in jurisdictions where patents have been issued must be licensed, or stem from a licensed source, in order to avoid infringing our intellectual property.
Competition
As a developer and licensor of semiconductor packaging and consumer optics technology, we compete with other technologies, as opposed to other companies selling products. These competing technologies come principally from the internal design groups of a number of semiconductor and package assembly companies. Many of these companies are licensees, or potential licensees, of ours. In fact, many of our licensees consider packaging research and development to be one of their core competencies.
Semiconductor companies that have their own package design and manufacturing capabilities include, but are not limited to, Texas Instruments, Inc., Intel Corporation and the semiconductor divisions of Sharp Corporation and Samsung Electronics Co., Ltd. Among the advanced packaging technologies developed by such companies are flip-chip and chip-on-board technologies that compete with our CSP, multi-chip and WLP technologies. Our technologies also compete with technologies developed by the internal design groups of package assembly companies, such as Advanced Semiconductor Engineering, Inc., Amkor Technology, Inc. and STATS ChipPAC, Inc.
We believe the principal competitive factors in the selection of semiconductor package technology by potential customers are:
•
proven technology; •
cost; •
size and circuit board area; •
performance; •
reliability; and •
available infrastructure. We believe that our CSP, multi-chip and WLP technologies compete favorably in each of these factors with other advanced packaging technology solutions.
For consumer optics, major semiconductor companies producing image sensors are also developing internal solutions that may compete with our technology offering. These semiconductor companies include, but are not limited to, Omnivision, Micron Technology, Inc., ST Microelectronics, Inc., Samsung Electronics Co, Ltd., and Toshiba Corporation. In addition to semiconductor companies, there are several other licensing and manufacturing companies, including Anteryon and Heptagon, which are developing consumer optics technology that may compete with ours.
Employees
As of February 26, 2007, we had 271 employees, with 27 in sales, marketing and licensing, 173 in research and development (including employees who perform engineering, assembly and infrastructure services under our service agreements with third parties) and 71 in finance and administration. We have never had a work stoppage among our employees and no personnel are represented under collective bargaining agreements other than certain ordinary course agreements of an employers’ collective which may bind our Israeli subsidiaries under Israel law. We consider our relations with our employees to be good.
Available Information
Our Internet address is www.tessera.com. There we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Our SEC reports can be accessed through the investor relations section of our Web site. The information found on our Web site is not part of this or any other report we file with or furnish to the SEC.
The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room located at 450 Fifth Street NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic versions of our reports on its website at www.sec.gov.
Item 1A. Risk Factors
Any invalidation or limitation of our key patents could significantly harm our business.
Our patent portfolio contains some patents that are particularly significant to our ongoing revenues and business. If any of these key patents are invalidated, or if a court or an administrative body such as the United States Patent and Trademark Office limits the scope of the claims in any of these key patents, the likelihood that companies will take new licenses and that current licensees will continue to agree to pay under their existing
licenses could be significantly reduced. The resulting loss in license fees and royalties could significantly harm our business. As discussed below and in Item 3 —Legal Proceedings , we are currently involved in legal proceedings involving some of its key patents. Any adverse rulings relating to the infringement, validity or enforceability of these key patents could significantly harm our business.
We are currently in litigation involving some of our key patents.
On October 7, 2006, we filed a complaint for patent infringement against Advanced Micro Devices, Inc., or AMD, and Spansion LLC, or Spansion, in the United States District Court for the Northern District of California, alleging infringement of Tessera’s U.S. Patents 5,679,977, 5,852,326, 6,433,419 and 6,465,893 arising from AMD’s and Spansion’s respective manufacture, use, sale, offer to sell and/or importation of certain packaged semiconductor components and assemblies thereof. We seek to recover damages, up to treble the amount of actual damages, together with attorney’s fees, interest and costs. We also seek other relief, including enjoining AMD and Spansion from continuing to infringe these patents. We have amended our complaint to add as defendants Spansion Inc., Spansion Technology, Inc., Advanced Semiconductor Engineering, Inc. ASE (U.S.) Inc., ChipMOS Technologies, Inc., ChipMOS U.S.A., Inc., Siliconware Precision Industries Co. Ltd, Siliconware USA Inc., STMicroelectronics N.V., STMicroelectronics, Inc., STATS ChipPAC Ltd., STATS ChipPAC, Inc. and STATS ChipPAC Ltd. (BVI). The defendants in this action have asserted affirmative defenses to our patent infringement claims, and some of them have brought related counterclaims alleging that the Tessera patents at issue are not infringed, invalid and unenforceable and/or that Tessera is not the owner of the patents. We cannot predict the outcome of this proceeding. Discovery is ongoing, and trial is currently set for January 28, 2008. An adverse decision in this proceeding could significantly harm our business and financial condition.
On March 2, 2006, we issued a request for arbitration with Amkor Technology, Inc., or Amkor, regarding Amkor’s failure to pay royalties under its license agreement with Tessera. On November 1, 2006, the arbitration tribunal issued a provisional timetable specifying a seven-day tribunal hearing starting October 1, 2007. We cannot predict the outcome of this proceeding. An adverse decision in this proceeding could significantly harm our business and financial condition.
We are currently, and may in the future be involved in material litigation with our licensees, potential licensees or strategic partners, which could harm our business.
Our current legal actions, as described below in Item 3—Legal Proceedings , are examples of significant disputes and litigation that impact our business. Any similar dispute in the future could cause an existing licensee or strategic partner to cease making royalty or other payments to us and could substantially damage our relationship with the licensee or strategic partner on both business and technical levels. Any litigation stemming from such a dispute could be very expensive and may reduce or eliminate our profits. 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. Any such litigation 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. We are not able to predict the outcome of any of our legal actions and an adverse decision in any of our legal actions could significantly harm our business and financial condition. Moreover, even if we settle our legal actions, significant contingencies will exist to their final resolution, including our receipt of any payments owed and the dismissal of the legal action by the relevant court, none of which are completely within our control.
In addition, many semiconductor and package assembly companies maintain their own internal design groups and have their own package design and manufacturing capabilities. If we believe these groups have designed technologies that infringe upon our intellectual property, and if they fail to enter into a license agreement with us or pay for licensed technology, then we may be forced to commence legal proceedings against them.
If we fail to protect and enforce our intellectual property rights, 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 intellectual property rights. If we fail to protect our intellectual property rights, our licensees and others may seek to use our technology 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 convince third parties of the applicability of our intellectual property to their products, and our ability to enforce our intellectual property rights against them.
In certain instances, we attempt to obtain patent protection for portions of our intellectual property, and our license agreements typically include both issued patents and pending patent applications. If we fail to obtain patents or if the patents issued to us do not cover all of the claims included in our patent applications, others could use portions of our intellectual property without the payment of license fees and royalties. 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. We protect our proprietary technology and processes, in part, through confidentiality agreements with our employees, consultants and customers. We cannot be certain that these contracts have not been and will not be breached, 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 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.
We may not be able to protect our confidential information, and this could adversely affect our business.
We generally enter into contractual relationships with our employees that protect our confidential information. The misappropriation of our trade secrets or other proprietary information could seriously harm our business. In addition, we may not be able to timely detect unauthorized use or transfer of our intellectual property and take appropriate steps to enforce our rights. In the event we are unable to enforce these contractual obligations and our intellectual property rights, our business could be adversely affected.
We may be required to continue to undertake costly legal proceedings to enforce or protect our intellectual property rights and this may harm our business.
In the past we have found it necessary to litigate to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. We currently are involved in litigation regarding our intellectual property rights, as described below in Item 3 —Legal Proceedings , and we expect to be involved in similar litigation in the future. Litigation is inherently uncertain and any adverse decision 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 business. Whether or not determined in our favor or settled by us, litigation is costly and diverts our managerial, technical, legal and financial resources from our business operations.
The costs associated with the legal proceedings in which we are involved can be substantial and specific costs are unpredictable and not completely within our control, and unexpected increases in litigation costs could adversely affect our operating results.
As described below in Item 3 —Legal Proceedings , we are currently involved in legal proceedings against a number of different companies. The costs associated with legal proceedings are typically high, relatively unpredictable and not completely within our control. While we do our best to forecast and control such costs, the costs may be materially more than expected, which could adversely affect our operating results. Moreover, we
may become involved in unexpected litigation with additional companies at any time, which would increase our aggregate litigation costs and could adversely affect our operating results.
Our revenues may suffer if we cannot continue to license or enforce our intellectual property rights or if third parties assert that we violate their intellectual property rights.
We rely upon patent, copyright, trademark and trade secret laws in the United States and similar laws in other countries, and agreements with our employees, customers, suppliers and other parties, to establish and maintain our intellectual property rights in our technology. However, any of our direct or indirect intellectual property rights could be challenged, invalidated or circumvented. Further, the laws of certain countries do not protect our proprietary rights to the same extent as do the laws of the United States. Therefore, in certain jurisdictions we may be unable to protect our technology adequately against unauthorized third-party use, which could adversely affect our business. Third parties also may claim that we or our customers are infringing upon their intellectual property rights. Even if we believe that the claims are without merit, the claims can be time-consuming and costly to defend and divert management’s attention and resources away from our business. Claims of intellectual property infringement also might require us to enter into costly settlement or license agreements or pay costly damage awards. Even if we have an agreement that provides for a third party to indemnify us against such costs, the indemnifying party may be unable to uphold its contractual obligations to us. If we cannot or do not license the infringed intellectual property at all or on reasonable terms, or substitute similar technology from another source, our business could suffer.
If the U.S. patent laws and regulations are changed, we could be adversely impacted.
Tessera relies on the uniform and historically consistent application of United States patent laws and regulations. Changes to these laws and regulations may occur as a result of decisions and actions of Congress, the U.S. Patent and Trademark Office, and the courts, including the U.S. Supreme Court. Some of these 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 a payment of royalties. Any such changes could have a deleterious affect on our licensing program and, therefore, the royalties we receive.
We could experience losses due to product liability claims.
We sell products that may subject us to product liability claims in the future. Although we carry liability insurance in amounts that we believe are appropriate, product liability claims can be costly and any future product liability claim made against us may exceed the coverage limits of our insurance policies, be excluded form coverage under the terms of our policies or cause us to record a self-insured loss. A product liability claim in excess of our insurance policies could have a material adverse effect on our business, financial condition and results of operations. Even if a product liability loss is covered by our insurance policies, such policies contain substantial retentions and deductibles that we would be required to pay. Our existing insurance may not be renewed at a cost and level of coverage comparable to that presently in effect, or at all. The payment of retentions or deductibles for a significant amount of claims could have a material adverse effect on our business, financial condition and results of operations.
A significant amount of our royalty revenues comes from a few market segments and products, and our business could be harmed if these market segments or products decline.
A significant portion of our royalty revenues comes from the manufacture and sale of packaged semiconductor chips for DSP, ASSP, ASIC and memory. In addition, we derive substantial revenues from the incorporation of our technology into mobile phones. If demand for semiconductors in any one or a combination of these market segments or products declines, our royalty revenues may be reduced significantly and our business could be harmed. Moreover, were such a decline to occur, our business could become more cyclical in nature.
Our revenue is concentrated in a few customers and if we lose any of these customers our revenues may decrease substantially.
We receive a significant amount of our revenues from a limited number of customers. For the year ended December 31, 2006, revenues from Micron Technology, Inc. and Qimonda AG accounted for 15% and 21% of total revenues, respectively. For the year ended December 31, 2005 revenues from Samsung Electronics Co., Ltd., and Texas Instruments, Inc., accounted for 20% and 17% of total revenues, respectively. 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 if our revenues from them decline, our revenues may decrease substantially.
Future changes in financial accounting standards or practices or existing taxation rules or practices may cause adverse unexpected revenue and expense fluctuations and affect our reported results of operations.
A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practice have occurred and may occur in the future. Changes to existing rules or the questioning current practices may adversely affect our reported financial results or the way we conduct our business.
We are subject to laws and regulations governing government contracts, and failure to address these laws and regulations or comply with government contracts could harm our business by leading to a reduction in revenue associated with these customers.
We have agreements relating to services provided to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government. The laws governing government contracts differ from the laws governing private contracts. For example, many government contracts contain pricing terms and conditions that are not applicable to private contracts. We are also subject to audits relating to compliance with the regulations governing government contracts. A failure to comply with these regulations might result in suspension of these contracts, debarment from future government contracts, or civil and criminal penalties. In addition, the government may acquire certain intellectual property rights in data produced or delivered under such contracts and inventions made under such contracts.
Our financial and operating results may vary which may cause the price of our common stock to decline.
We currently provide guidance on revenue, expenses and cash taxes on a quarterly and annual basis. 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, you 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 include those listed in this “Risk Factors” section of this report and the following:
•
the timing and compliance with license or service agreement and the terms and conditions for payment to us of license or service fees under these agreements; •
changes in our royalties caused by changes in demand for products incorporating semiconductors that use our licensed technology; •
the amount of our 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 failure to protect or enforce our intellectual property rights; •
legal proceedings affecting our patents or patent applications; •
the timing of the introduction by others of competing technologies; •
changes in demand for semiconductor chips in the specific markets in which we concentrate—DSP, ASIC, ASSP semiconductors and memory; •
changes in accounting principles or a requirement to treat stock option grants as an operating expense; and •
cyclical fluctuations in semiconductor markets generally. It is difficult to predict when we will enter into license agreements. The time it takes to establish a new licensing arrangement can be lengthy. Delays or deferrals in the execution of license agreements may also increase as we develop new technologies. Because we generally recognize a significant portion of license fee revenues in the quarter that the license is signed, the timing of signing license agreements may significantly impact our quarterly or annual operating results. Under our typical license agreements, we also receive ongoing royalty payments, and these payments may fluctuate significantly from period to period based on manufacture or sales of products incorporating our licensed technology. We expect to continue to expand our business rapidly which will require us to increase our operating expenses. We may not be able to increase revenues in an amount sufficient to offset these increased expenditures, which may lead to a loss for a quarterly period.
Due to fluctuations in our quarterly operating results 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 our estimates or 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. Technology companies have experienced greater than average stock price volatility than companies in many other industries in recent years and, as a result, have, on average, been subject to a greater number of securities class action claims. 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.
Network outages could disrupt our internal operations, which could adversely affect our revenues, customers and stock price.
Despite our concerted effort to minimize risk to our corporate information systems and to reduce the effect of unscheduled interruptions to the Company through implementation of Business Continuity Plans, our Company may still be exposed to interruptions due to natural disasters, terrorism or acts of war which are beyond our control. Disruptions to these systems could also interrupt operational processes and adversely impact our ability to provide services and support to our customers and fulfill contractual obligations. As a result, our results of our operations, financial position, cash flows and stock price could be adversely affected.
We recently conducted our yearly evaluation of our internal controls systems in order to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act of 2002, but we cannot ensure that these practices will satisfy future audits.
We have performed the system and process evaluation and testing required for compliance with the management certification and attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. While we have implemented the requirements relating to internal controls and all other aspects of Section 404 in a timely fashion, we cannot be certain as to the timing of completion of our future evaluations or as to the results of the evaluations. Additionally, there are no assurances that we will be able to continue to comply with the requirements relating to internal controls and all other aspects of Section 404 in a timely fashion in any given period.
We have a royalty-based business model, which is inherently risky.
Our long-term success depends on future royalties paid to us by licensees. Royalty payments under our TCC licenses are primarily based upon the number of electrical connections to the semiconductor chip in a package covered by our licensed technology, although we do have royalty arrangements in which royalties are paid based upon a percent of the net sales price or in which royalties are paid on a per package basis. We are dependent upon our ability to structure, negotiate and enforce agreements for the determination and payment of royalties. We face risks inherent in a royalty-based business model, many of which are outside of our control, such as the following:
•
the rate of adoption and incorporation of our technology by semiconductor manufacturers and assemblers; •
the extent to which large equipment vendors and materials providers develop and supply tools and materials to enable manufacturing using our packaging technology; •
the demand for products incorporating semiconductors that use our licensed technology; and •
the cyclicality of supply and demand for products using our licensed technology. 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 standard terms of our license agreements require our licensees to document the manufacture and sale of products that incorporate our technology and report this data to us on a quarterly basis. Although our standard license terms give us the right to audit books and records of our licensees to verify this information, audits can be expensive, time consuming, flawed and potentially detrimental to our ongoing business relationship with our licensees. Our license compliance program randomly audits licensees to independently verify 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 to under the terms of our license agreements, but we cannot give assurances that the random audits will be effective to that end.
Failure by our licensees to introduce products using our technology could limit our royalty revenue growth.
Because we expect a significant portion of our future revenues to be derived from royalties on semiconductors that use our licensed technology, our future success depends upon our licensees developing and introducing commercially successful products. Any of the following factors could limit our licensees’ ability to introduce products that incorporate our technology:
•
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 willingness of our licensees and others to make investments in the manufacturing process that supports our licensed technology, and the amount and timing of those investments; and •
our licensees’ ability to design and assemble packages incorporating our technology that are acceptable to their customers. Failure by the semiconductor industry to adopt next generation high performance DRAM chips that utilize our packaging technology would significantly harm our business.
To date, our packaging technology has been used by several companies for high performance DRAM chips. For example, packaging using our technology is used for DDR2 DRAM and we currently have licensees,
including Samsung Electronics, Co., Ltd., Qimonda AG, Hynix Semiconductor Inc. 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, including next generation of DDR referred to as DDR3 and DDR4, to meet increasing speed and performance requirements of electronic products. We believe that these next generation, high performance DRAM chips will require advanced packaging technologies such as CSP.
We anticipate that royalties from shipments of these next generation, high performance DRAM chips packaged using our technology may account for a significant percentage of our future revenues. If semiconductor manufacturers do not continue to adopt next generation, high performance DRAM packages using our technology and find an alternate viable packaging technology for use with next generation high performance DRAM chips, or if we do not receive royalties from next generation, high performance DRAM chips that use our technology, our future revenues could be adversely affected.
Our technology may be too expensive for certain next generation high performance DRAM manufacturers, which could significantly reduce the adoption rate of our packaging technology in next generation high performance DRAM chips. Even if our package technology is selected for at least some of these next generation high performance DRAM chips, there could be delays in the introduction of products utilizing these chips that could materially affect the amount and timing of any royalty payments that we receive. Other factors that could affect adoption of our technology for next generation high performance DRAM products include delays or shortages of materials and equipment and the availability of testing services.
Failure by the semiconductor industry to adopt broadly WLP packaging technology could limit our royalty revenue growth.
To date, wafer level packaging technologies have been adopted for a limited number of semiconductor products. To date, our packaging technology has been used by several companies for CMOS image sensor chips principally for use in camera-equipped mobile phones. We believe that such WLP packages will be useful for image sensors in other applications such as personal digital assistants and digital cameras, and for other applications such as MEMS devices.
We anticipate that royalties from shipments of chips packaged using our WLP technology may account for a small but increasing percentage of our future revenues. If semiconductor manufacturers do not adopt our WLP technology as quickly as is currently being projected by industry sources or find an alternate viable packaging technology for use with their image sensor and MEMS chips, or if we do not receive royalties from image sensor and MEMS chips that use our technology, our future revenues could be adversely affected. In addition our technology may be too expensive for certain image sensor manufacturers, which could significantly reduce the adoption rate of our WLP packaging technology in image sensor applications. Other factors that could affect adoption of our WLP technology for image sensors and MEMS chips include delays or shortages of materials and equipment.
Competing technologies may harm our business.
We expect that our technologies will continue to compete with technologies of internal design groups of semiconductor manufacturers and assemblers. These internal design groups create their own packaging solutions, and have direct access to their company’s technical information and technology roadmaps, and have capacity, cost and technical advantages over us. If these internal design groups design around our patents, they may not need to license our technology. These groups may design package technology that is less expensive to implement than ours or provides products with higher performance or additional features. Many of these groups have substantially greater resources, financial or otherwise, than us and lower cost structures. As a result, they may be able to bring alternative package technologies solutions to market more easily and quickly. For instance, certain
flip chip technologies are being used by large semiconductor manufacturers and assemblers for a variety of semiconductors, including processors and memory. Another example of a competitive technology is the small format lead frame packages that are also gaining popularity. The companies using these technologies are utilizing their current lead frame infrastructure to achieve cost-effective results. Another example of a competitive technology is the chip-on-board technique to package image sensors.
In the future, our licensed technologies may also compete with other package technologies. These technologies may be less expensive than ours and provide higher or additional performance. Companies with these competing technologies may also have greater resources than us. Technological change could render our technologies obsolete, and new, competitive technologies could emerge that achieve broad adoption and adversely affect the use of our intellectual property.
If we do not create and implement new designs to expand our licensable technology portfolio, our competitive position could be harmed and our operating results adversely affected.
We derive a significant portion of our revenues from licenses and royalties from a relatively small number of key technologies. We plan to devote significant engineering resources in order to develop new packaging technologies to address the evolving needs of the semiconductor and the consumer and communication electronics industries. To remain competitive, we must introduce new technologies or designs in a timely manner and the market must adopt them. Developments in packaging technologies are inherently complex, and require long development cycles and a substantial investment before we can determine their commercial viability. We may not be able to develop and market new technologies in a timely or commercially acceptable fashion. Moreover, our currently issued U.S. patents expire at various times from January 25, 2009 through December 29, 2024. We need to develop and patent successful innovations before our current patents expire and our failure to do so could significantly harm our business.
If we do not successfully license the technologies we acquire, our competitive position could be harmed and our operating results adversely affected.
We also attempt to expand our licensable technology portfolio and technical expertise by acquiring technology or developing strategic relationships with others. These strategic relationships may include the right for us to sublicense technology to others. However, we may not be able to acquire or obtain rights to licensable technology 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 packaging needs of the semiconductor, consumer and communication electronics industries. Our failure to acquire new technologies that are commercially viable in the semiconductor, consumer and communication electronics industries could significantly harm our business.
Some of our license agreements have fixed terms and, in order to maintain our relationships with licensees under such agreements, we will need to renegotiate some of our existing license agreements in the future.
Some of our license agreements have fixed terms. We will need to renegotiate license agreements with fixed terms prior to the expiration of such license agreements and, based on various factors including the technology and business needs of our licensees, we may not be able to renegotiate such license agreements on similar terms, or at all. In order to maintain existing relationships with some of our licensees, we may be forced to renegotiate license agreements on terms that are more favorable to such licensees, which could harm our results of operations. If we fail to renegotiate our license agreements we would lose existing licensees and our business would be materially adversely affected.
Some of our license agreements convert to fully paid-up licenses at the expiration of their terms, and we may not receive royalties after that time.
Some of our license agreements convert to fully paid-up licenses at the expiration of their terms, either automatically or if the licensee exercises an option to extend the term for an additional royalty payment. We may not receive further royalties from licensees for any licensed technology under those agreements after they convert to fully paid-up licenses because such licensees will be entitled to continue using some, if not all, of our relevant intellectual property under the terms of the license agreements, even if relevant patents are still in effect. A significant conversion of our license agreements to fully paid-up licenses could materially harm our results of operations following such conversion.
Our licensing cycle is lengthy and costly and our marketing and sales efforts may be unsuccessful.
We generally incur significant marketing and sales expenses prior to entering into our license agreements, generating a license fee and establishing a royalty stream from each licensee. The length of time it takes to establish a new licensing relationship can range from six to 18 months or longer. As such, we may incur significant losses in any particular period before any associated revenues stream begins.
We employ intensive marketing and sales efforts to educate materials suppliers, equipment vendors, 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 packaging technology. In addition ongoing litigation could impact our ability to gain new licensees.
Cyclicality in the semiconductor industry may affect our revenues, and as a result, our operating results could be adversely affected.
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, maturing product and technology cycles, excess inventories and declines in general economic conditions. 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 services business relies at least in part upon the outsourcing of design and engineering projects by the semiconductor industry. 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, if we are unable to control our expenses adequately in response to lower revenues from our licensees and service customers, our operating results will suffer and we might experience operating losses.
The international nature of our business exposes us to financial and regulatory risks 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 United States, principally in Asia and Europe. For the year ended December 31, 2006, these revenues accounted for 64% of our total revenues. For the year ended December 31, 2005, these revenues accounted for 56% of our total revenues. International operations are subject to a number of risks, including the following:
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international terrorism and anti-American sentiment, particularly in the emerging markets; •
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; and •
less effective protection of intellectual property than is afforded to us in the United States or other developed countries. Our intellectual property is also used in a large number of foreign countries. There are many countries, such as China, 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 in countries which provide less protection for intellectual property. Our inability to enforce our intellectual property rights in some countries may harm our business.
Our services business may subject us to specific costs and risks that we may fail to manage adequately which could harm our business.
We derive a portion of our revenues from engineering services. Among the engineering services that we offer are customized package design and prototyping, modeling, simulation, failure analysis and reliability testing and related training services. A number of factors, including, among others, the perceived value of our intellectual property portfolio, our ability to convince customers of the value of our engineering services and our reputation for performance under our service contracts, could cause our revenues from engineering services to decline, which would in turn harm our operating results.
Moreover, most of our service revenues are derived from engineering services we provide to government agencies and their contractors to enable the development of new packaging technologies. If demand for our services from government agencies declines, due to changes in government policies or otherwise, our service revenues will be adversely affected.
Under our services contracts we are required to perform certain services, including sometimes delivering designs and prototypes. If we fail to deliver as required under our service contracts, we could lose revenues and become subject to liability for breach of contract.
We provide certain services at below cost in an effort to increase the speed and breadth with which the semiconductor industry adopts our technologies. For example, we provide modeling, manufacturing process training, equipment and materials characterization and other services to assist licensees in designing, implementing, upgrading and maintaining their packaging assembly line. We frequently provide these services as a form of training to introduce new licensees to our technology and existing clients to new technologies, with the aim that these services will help us to generate revenues in the future. We need to monitor these services adequately in order to ensure that we do not incur significant expenses without generating corresponding revenues. Our failure to monitor these services or our design and prototype services adequately may harm our operating results.
Because our services sometimes involve the delivery of package designs and prototypes, we may be subject to claims that we infringed or induced the infringement of patents and other intellectual property rights belonging to others. If such a claim were made, we may have to take a license or stop manufacturing the accused packages, which could cause our services revenues to decrease. If we choose not to take a license, we may be sued for infringement, and may incur significant litigation costs in defending against the lawsuit. If we are found to infringe the intellectual property rights of others, we may have to pay damages and could be subject to an injunction preventing us from continuing to provide the services. Any of these outcomes could harm our business.
If our prototypes, manufactured packages or products based on our designs are used in defective products, we may be subject to product liability or other claims.
Under our service contracts, we may, at times, manufacture packages on a limited basis, deliver prototypes or designs or help to design prototypes or products. If these prototypes, packages or designs are used in defective or malfunctioning products, we could be sued for damages, especially if the defect or malfunction causes physical harm to people. The occurrence of a problem could result in product liability claims and/or a recall of, or safety alert or advisory notice relating to, the product. While we believe the amount of product liability insurance maintained by us combined with the indemnities that we have been granted under these service contracts are adequate, there can be no assurance that these will be adequate to satisfy claims made against us in the future or that we will be able to obtain insurance in the future at satisfactory rates or in adequate amounts. Product liability claims or product recalls in the future, regardless of their ultimate outcome, could have a material adverse effect on our business, financial condition and reputation, and on our ability to attract and retain licensees and customers.
We intend to continue to expand our operations which may strain our resources and increase our operating expenses.
We plan to continue the expansion of our operations, domestically and internationally, and may do so through both internal growth and acquisitions. We expect that this expansion will strain our systems and operational and financial controls. In addition, we are likely to incur higher operating costs. To manage our growth effectively, we must continue to improve and expand our systems and controls. If we do fail to do so, our growth would be limited. Our officers have limited experience in managing large or rapidly growing businesses through acquisitions. Further, our officers have limited experience managing companies through acquisitions and technological changes. In addition, our management has limited experience in managing a public company.
We have made and may continue to make acquisitions which could divert management’s attention, cause ownership dilution to our stockholders, be difficult to integrate and adversely affect our financial results.
We have made several acquisitions and it is our current plan to acquire companies and technologies that we believe are strategic to our future business. Integrating newly acquired businesses or technologies could put a strain on our resources, could be costly and time consuming, and might not be successful. Such acquisitions could divert our management’s attention from other business concerns. In addition, we might lose key employees while integrating new organizations. 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, possible impairment charges related to goodwill or other intangible assets or other unanticipated events or circumstances, any of which could harm our business. Our plans to integrate and expand upon research and development programs and technologies initiated at each of our operating locations, including image sensor packaging from our operation in Jerusalem, Israel, wafer level optics and camera technology from our operation in Charlotte, North Carolina, image enhancement technology for digital auto focus and optical zoom from our operation in Tel Aviv, Israel, and microelectronics packaging and system integration from our operation in San Jose, California, 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, products or technologies, and might not achieve anticipated revenues and cost benefits.
There are numerous risks with our recent acquisitions of Eyesquad GmbH, Digital Optics Corporation and of certain assets from Shellcase, Ltd.
In February 2007, we completed our acquisition of Eyesquad GmbH, a company based in Munich, Germany, and in July 2006, we completed our acquisition of Digital Optics Corporation, a company based in Charlotte, North Carolina. In December 2005, we completed our acquisition of certain equipment, intellectual
property and other intangible assets from Shellcase, Ltd., a company based in Israel. These acquisitions are subject to a number of risks, including the following:
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These acquisitions could fail to produce anticipated benefits, or could have other adverse effects that we currently do not foresee. As a result, either acquisition 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. •
Following completion of these acquisitions, we may uncover additional liabilities or unforeseen expenses not discovered during our diligence process. Any such additional liabilities or expenses could result in significant unanticipated costs not originally estimated and may harm our financial results. Impairment charges of acquired assets and goodwill. •
The integration of Eyesquad GmbH, Digital Optics Corporation and of the Shellcase, Ltd., assets 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 either acquisition. •
We have incurred substantial direct transaction costs as a result of these acquisitions and anticipate incurring substantial additional costs to support the integration of Eyesquad GmbH, Digital Optics Corporation and the assets of Shellcase, Ltd. The total cost of the integration may exceed our expectations. The way we integrate acquired company technology into our products may not be accepted by consumers.
We have devoted, and expect to continue to devote, considerable time and resources to acquiring and integrating new technologies, such as the technologies acquired from Eyesquad GmbH, Digital Optics Corporation and Shellcase, Ltd., into our products. However, if consumers do not accept the way we have integrated this technology, they may adopt competing solutions. In addition, as we introduce new products, we cannot predict with certainty if and when our customers will transition to those new products. If consumers fail to accept new or upgraded products incorporating our technologies, our financial results could be adversely impacted.
The market for semiconductors and related products is highly concentrated, and we have limited opportunities to sell our products.
The semiconductor industry is highly concentrated in that a small number of semiconductor designers and manufacturers account for a substantial portion of the purchases of semiconductor products generally, including our products and products incorporating technologies that we may acquire. Consolidation in the semiconductor industry may increase this concentration. Accordingly, we expect that sales of our products, including sales of products and technologies that we acquire, will be concentrated with a limited number of customers for the foreseeable future. As we acquire new technologies and integrate them into our product line, we will need to establish new relationships to sell these products. Our financial results depend in significant part on our success in establishing and maintaining relationships with, and effecting substantial sales to, these customers. Even if we are successful in establishing and maintaining such relationships, our financial results will be dependent in large part on these customers’ sales and business results.
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 and marketing, legal and finance personnel, many of whom are highly skilled and would be difficult to replace. In particular, the services of Dr. McWilliams, our President, Chief Executive Officer and the Chairman
of our Board of Directors, who has led our company since May 1999 and has been the Chairman of our board of directors since February 2002, are very important to our business. 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. The loss of any of our senior management or other key personnel could harm our ability to implement our business strategy and respond to the rapidly changing market conditions in which we operate.
Moreover, some of the individuals on our management team have been in their current positions for a relatively short period of time. For example, our chief financial officer has been with us for less than 12 months. Our future success will depend to a significant extent on the ability of our management team to work together effectively.
In addition, the initial stock options that were granted to many of our senior management and key employees are fully vested. Therefore, these employees may not have sufficient financial incentive to stay with us, we may have to incur costs to replace key employees that leave, and our ability to execute our business model could be impaired if we cannot replace departing employees in a timely manner.
Many of our senior management personnel and other key employees have become, or will soon become, substantially vested in their initial stock options grants. While we often grant additional stock options to management personnel and other key employees after their hire dates to provide additional incentives to remain employed by us, their initial grants