annual report and accounts 2006 arm holdings plc annual report and accounts 2006 2 arm at a glance
4 chairman’s statement
7 chief executive officer’s review of operations
10 financial reviewifrs
18 directors and advisers
20 corporate governanceuk reporting
24 corporate social responsibilityuk reporting
26 directors’ reportuk reporting
28 remuneration reportuk reporting
37 independent auditors’ report to the shareholders of arm holdings plcifrs
38 consolidated income statementifrs
39 consolidated balance sheetifrs
40 consolidated cash flow statementifrs
41 consolidated statement of changes in shareholders’ equityifrs
42 notes to the ifrs financial statements
78 selected consolidated financial dataus gaap
79 operating and financial review and prospectsus gaap
86 consolidated statements of incomeus gaap
86 consolidated statements of comprehensive incomeus gaap
87 consolidated balance sheetsus gaap
88 consolidated statements of cash flowsus gaap
89 consolidated statements of changes in shareholders’ equityus gaap
90 notes to the financial statementsus gaap
115 report of independent registered public accounting firmus gaap
116 company balance sheetuk gaap
117 notes to the financial statementsuk gaap
123 independent auditors’ report to the shareholders of arm holdings plcuk gaap
124 shareholder information
125 group directory arm designs the technology that lies at the heart of advanced
digital products from mobile home and enterprise solutions
to embedded and emerging applications
arm’s comprehensive product offering includes 1632bit
risc microprocessors data engines graphics processors
digital libraries embedded memories peripherals software
and development tools as well as analogue functions and
highspeed connectivity products
combined with the company’s broad partner community this
provides a total system solution that offers a fast reliable path
to market for leading electronics companies
arm annual report and accounts 2006 1 2 arm annual report and accounts 2005
arm at a glance
2 arm annual report and accounts 2006
arm holdings plc the world’s leading semiconductor
intellectual property ip supplier is at the heart of the
development of digital electronic products
the continuing evolution of electronic devices has escalated to
the extent that the use of ip is now providing the technological
foundation for nearly every electronic device in the world today
source gartner dataquest’s 2004 ip company rankings
arm north america
austin texas
boston massachusetts
detroit michigan
irvine california
cary north carolina
olympia washington
plano texas
salem new hampshire
san diego california
sunnyvale california
arm europe and middle east
aachen germany maidenhead uk
blackburn uk munich germany
cambridge uk paris france
grasbrunn germany sentjernej slovenia
grenoble france sheffield uk
kfar saba israel sophia antipolis france
leuvenheverlee belgium trondheim norway
arm asia pacific
beijing pr china
seoul south korea
shanghai pr china
singapore
taipei taiwan
shinyokohama japan
arm india
bangalore india arm annual report and accounts 2006 3
 total revenues of £2633 million in 2006 compared with £2324 million in 2005
 our partners shipped a total of 2450 million units in 2006 based on arm
®
technology an increase of 47 on 2005
 65 processor licences and 77 physical ip licences signed in 2006 bringing
cumulative totals to 463 and 287 respectively
 £89 million of cash returned to shareholders through share buyback programme
and dividends
total revenues
£ million  million
2006
2005      
2004
2003
2002
2633 
4836
4187
2324
2724
1529
2065
1281
2245
1509
royalty revenues 
pd royalties 
 million
pipd royalties 
 million
pd units shipped 
million
2006 
2005      
2004 
2003 
2002 
1641349      
2450      
1662
1311276
1272
1071 
782 
716 
456 
403 
cumulative pd processor licences and partners shipping
number of licences number of shippers
2006 
2005       
2004 
2003 
2002 
463 
76
68
398 
60
327
60
263
43
212
cash returned to shareholders £ million
dividends buybacks
2006 
2005       
2004 
889
266
90
0000000 888859985 
revenue analysis

licensing 42
royalties 41
development systems 11
services 6
processor division royalty units

embedded 8
enterprise 17
home 9
mobile 66 
royalty units by family 

arm7™ family 62
arm9™  family 37
arm11™ family 1
licence revenues by product

architecturesubscription 10
cortex™ 18
arm7 family 3
arm9 family 13
arm11 family 15
noncore licensing 10
physical ip licensing 31 
key performance indicators 4 arm annual report and accounts 2005
business reviewchairman’s statement
it was with great pleasure that i accepted the position of chairman
of arm from 1 october 2006 following the retirement of sir robin
saxby i took up my role towards the end of another successful year
for the company and we entered 2007 well placed to build on
our marketleading position
results and dividend
the increasingly widespread adoption of arm technology in consumer
electronic devices was illustrated during 2006 by the 47 increase in
the reported total shipments of arm powered
®
products to 245 billion
units up from the reported 166 billion units in 2005 our strong
financial performance continued dollar revenue growth increased
by 16 and there was a 20 increase compared with 2005 in the
yearend order backlog
the strong cash generation resulting from this robust operational
performance together with our confidence in the company’s long
term prospects enabled us to invest heavily in our business and to
strengthen our ip portfolio through the acquisitions during 2006 of
falanx microsystems an innovative graphics ip company and soisic
a leading company in physical ip based on silicon on insulator soi
technology these acquisitions add to arm’s microprocessor and physical
ip capabilities which have accelerated the company’s momentum
towards becoming the architecture for the digital world
strong cash flow has not only enabled us to invest in the business and
make acquisitions of operations with complementary technology but
also to return cash to shareholders through dividends and the share
buyback programme it is the board’s intention to increase the dividend
over time taking into account the opportunity for continued investment
in the business and the company’s underlying operational performance
with this in mind the board is recommending a final dividend of
060 pence per share bringing the total for the year to 10 pence per
share an increase of 19 over the dividend paid in respect of 2005
we see the return of cash to shareholders through a dividend as part
of a package of measures to make the best use of the business’s
cash resources and plan to continue the share buyback programme
which we initiated in july 2005 during 2006 we purchased a total
of 636 million shares at a total cost of £765 million
the market
the year was another one of healthy growth approximately 10 for
the semiconductor industry as a whole although it began to show signs
of slowing by the end of the year
the 16 increase in arm’s dollar revenue
was once again significantly ahead of the
industry growth rate and exemplifies the
opportunities that exist for the company arm annual report and accounts 2005 5
looking to 2007 we expect the industry to continue to be impacted by
the inventory correction in the first half at least but we believe that the
effect on arm will be attenuated and we expect to exceed the industry
growth rate in 2007 as we have done in past years
our confidence in the development of our business in 2007 is
underpinned by a healthy technology portfolio of processor and physical
ip  comprising new and mature products there is the prospect of more
synergistic deals for the physical ip division and continued acceleration
of the penetration of our ip into royaltygenerating designs in both
mobile and nonmobile markets
momentum for our processor and physical ip portfolio increased
throughout 2006 demand continues to grow for the cortex™ family
of processors which enabled arm to complete 13 licence deals in the
year this has been the most successful introduction of any family
of arm processors and we expect this success to continue in 2007
in physical ip  we completed seven licence deals with some of the
world’s largest foundries tsmc samsung ibm and chartered for our
most advanced 45nm physical ip products in 2007 further opportunities
for licensing exist across the physical ip portfolio as we seek to benefit
from the desire of semiconductor companies to offset the impact of
increasing costs as envisaged when we outlined industry transitions
in the original rationale for the acquisition of artisan in 2004
people
2006 was a year of investment in new businesses and people resulting
in a significant increase in our total number of employees i thank all
employees worldwide for the contribution they have made to the
excellent results achieved in 2006 in the increasingly demanding market
in which we operate at 31 december 2006 we had 1659 fulltime
employees compared with 1324 at the end of 2005 of these 671 are
based in the uk 582 in the us 153 in continental europe 203 in india
and 50 in the asia pacific region
we were delighted that the efforts of our people were recognised
recently by the company winning three prestigious awards which
were open to businesses from all sectors in november 2006 arm was
chosen as uk business of the year at the national business awards an
award which takes market leadership innovation growth and financial
return into consideration in january 2007 the company was recognised
as european business of the year competing against the other national
award winners within the european union further at the management
today awards in november 2006 for britain’s most admired companies
arm was recognised as the company with the “greatest capacity to
innovate” while these awards were for companies with headquarters
in the uk or the european union they recognise the efforts of all arm
employees worldwide
arm annual report and accounts 2006 5 business reviewchairman’s statementcontinued
these appointments are part of the planned succession for peter
cawdron who has been a member of the board since 1998 and will
step down at the agm on 15 may 2007 more detailed biographies
appear on page 18
current trading and prospects
2006 was a year of building for the future we invested significantly in
the business with the majority of the investment going to the physical ip
division and the emerging business units increasing momentum across
our business lines resulted in an aboveindustry level revenue growth
of 16
a broad technology portfolio for licensing a healthy opportunity pipeline
an increasing drive in royalties and the prospect of more synergistic
revenues arising from the combination of processor ip and physical ip 
underpin our confidence in another strong performance in 2007
doug dunn chairman
6 arm annual report and accounts 2006
board changes
as part of a planned succession sir robin saxby retired as chairman
and as a director of the company on 1 october 2006 when he took
up his role as president of the institute of engineering and technology
iet in his year as president of the iet robin will continue to be
associated with arm as chairman emeritus during his 15 years with
arm the company has earned a reputation as one of the world’s most
respected technology companies and has become a global leader in
semiconductor intellectual property on behalf of the board i thank him
for the very significant contribution he has made to arm’s success
we were very pleased to welcome kathleen o’donovan as an
independent nonexecutive director on 7 december 2006 she is a non
executive director and chairman of the audit committee of prudential plc
and great portland estates plc and a former nonexecutive director and
chairman of the audit committee of the court of the bank of england
she has been appointed to the audit and remuneration committees with
effect from 1 january 2007 we were also very pleased to welcome
young sohn as an independent nonexecutive director on 2 april 2007
he has extensive experience in the semiconductor industry both in
silicon valley and in asia he is a director of cymer inc and mstream
technology limited he will be appointed to the audit and remuneration
committees of the company with effect from 15 may 2007 arm has for some years defined itself as being the architecture
for the digital world and in last year’s report i wrote that we were
well on the way to achieving that what progress have we made
during 2006
a large number of products in everyday use from personal organisers
to cars and from televisions to washing machines are already likely
to have arm ip intellectual property embedded within them we are
at the point in the digital revolution where intelligent microelectronics
have made their way out of the workplace – where they have
been transforming technology for a number of years – into people’s
everyday lives
our products our ip enable companies to design and market their
electronic devices more quickly and more economically and what is
most important to end consumers to make them more “intelligent”
secure and reliable in my view we are still only part way through the
digital revolution and we do not really know when we will reach the
end therein lie the opportunities for arm by enabling innovative
products to be designed and brought to market our architecture
ensures that the digital revolution will continue to transform our lives
the digital world
advances in technology particularly over the past 20 years have made
people’s lives more productive and saved them time – man’s most
finite and therefore most valuable commodity people in the developed
world for example work approximately 17 fewer hours than they
did in 1950 work itself tends to be more rewarding because many
routine tasks have been taken over by technology and a huge number
of laboursaving devices at home have removed much of the time
consuming drudgery traditionally associated with housework the digital
world not only provides access to hitherto unprecedented levels of
communication information creation storage and retrieval but also
makes life that little bit easier
the widespread use of arm processors and technology in mobile
telephony and digital communications is well known but they
are increasingly permeating other aspects of our everyday lives
electronics have for example driven more than 90 of the innovation
in the automotive industry features which only a few years ago were
exclusive to luxury cars are now commonplace midrange vehicles now
incorporate up to 70 embedded processors which have improved safety
added convenience and increased functionality our microprocessors
improve braking systems by enabling the wheels to “talk” to one
another airbags to “read” the size and weight of the person they
are there to protect engines to start at one turn of the key no matter
arm annual report and accounts 2006 7
business reviewchief executive officer’s review of operations business reviewchief executive officer’s review of operationscontinued
how cold the weather car interiors quickly to reach a comfortable
temperature and sound systems to entertain passengers while gps
global positioning systems help find the way perhaps most important
however in a world in which car use is growing exponentially
technology has enabled manufacturers to reduce fuel consumption
by as much as 40 and as a result to reduce pollution safety and
environmental regulations will undoubtedly continue to become more
onerous for manufacturers and the need to replace expensive
mechanical parts in vehicles with more economical electromechanical
and electronic systems will increase the performance and power
consumption characteristics of our processors together with the
unparalleled scope of the design environment we facilitate for the
automotive manufacturers and their semiconductor suppliers means
that the automotive industry continues to be an exciting growth market
for arm technology
there is however more to the digital world than making life easier
and more enjoyable for those who live in developed countries
advanced technology is playing a leading role in fuelling growth in the
developing world its contribution to education one of the principal
means of lifting people out of poverty is immense equally it contributes
to saving lives worldwide by making it possible to predict accurately
natural disasters such as earthquakes and tsunamis and plays an
important role in drug research and delivery
technology will continue to evolve arm’s digital architects are a vital
part of that evolution – they create products that are and will continue
to be fundamental to the implementation of the digital world
our role in the industry
in any industry progress comes at a cost in the digital world this is
because of the significantly increased complexity of the underlying
technology while consumers you and i will be prepared to pay
some premium for new intelligence in a product they will not pay
significantly more as a result manufacturers – and their suppliers –
are under huge pressure to find less expensive ways to produce ever
more intelligent devices this is where arm comes into the picture
our technology makes it easier and more cost effective for companies
to design and make advanced digital products our role is not only to
innovate but also to take structural cost out of the process we enable
the retail cost of electronic devices to be reduced through our licensing
business model semiconductor companies can effectively share the cost
of the design of our products they can use our microprocessors at a
fraction of the cost of inhouse design this process applies across our
technology portfolio of microprocessors the brains of a digital device
and physical and fabric ip the bricks and mortar in the future it will
also apply to other new products including graphics security and digital
signal processing technology
8 arm annual report and accounts 2006
we estimate that in 2006 15 billion people a quarter of
the world’s estimated 6 billion population bought an arm
powered product the ip we sell to our customers enables end users to operate their
devices for long periods without recharging to connect people more
easily to one another and to access information whenever and wherever
they want to i believe it is true to say that without arm ip  which
balances power with performance and cost consumer electronics
would not have reached the point they are at today
when we our customers and the other companies which play a part in
bringing digital electronics to the market “get it right” consumers barely
notice that there is a digital revolution taking place products quickly
become “musthaves” because of the impact they have on peoples’
lives it is hard to believe that mp3 players were conceived as recently
as 1991 that the allinone blackberry wireless device was introduced
only seven years ago and that flatscreen televisions were first available
to the public as recently as 1997 digital cameras have become so
commonplace that kodak stopped selling film cameras in north america
and western europe in 2004
the opportunity
the semiconductor industry in which arm operates is huge – in 2006
it was worth approximately 260 billion of which ip was approximately
16 billion we occupy a leading position in the semiconductor market
and expect not only to benefit from the overall growth of the ip
industry but also to continue to expand our market share by continuing
to bring industryleading technology to the market we have already
built a consistently successful business by establishing the world’s
leading microprocessor technology in digital electronic products – now
we are on our way to achieving the same result with physical ip  which
we believe is the next wave of opportunity for optimising structural
costs in the semiconductor industry
our future success lies however in more than simply seizing the
opportunity to licence technology to our partners a bigger opportunity
lies in the ubiquity of our technologies in digital products used by
consumers we estimate that in 2006 15 billion people a quarter
of the world’s estimated 6 billion population bought an arm powered
product approximately 90 of the mobile phones manufactured
today contain at least one arm product our goal is for our technology
to penetrate the billions of other products – from washing machines
to printers and from cars to exercise bicycles – that are bought by the
other threequarters of the world’s population the more people who
use our technology in their daily lives the more benefit we will accrue
from the royalty revenue stream which forms the cornerstone of our
business model and strategy
during 2006 we implemented and delivered the highest quality
technology to our partners the industry and end consumers i am
confident that we have a bright future as we continue to benefit from
the digital revolution we are indeed well on the way to becoming
the architecture for the digital world
warren east chief executive officer
arm annual report and accounts 2006 9 business reviewfinancial reviewifrs
2006 was another year of consistent execution and significant
investment in our business and we are encouraged to have grown
revenues and maintained operating margins despite the weakened
dollar as well as seeing volumes of arm powered products growing
47 yearonyear to 245 billion units
performance
certain revenue key performance indicators appear on page 3
other cost and profit indicators are discussed as part of this review
revenues
total revenues for the year ended 31 december 2006 amounted to
£2633 million 2005 £2324 million in us dollar terms revenues
grew from 4187 million in 2005 to 4836 million in 2006 an
increase of 16 the actual average dollar exchange rate for arm
in 2006 was 184 compared with 180 in 2005 which had
the effect of reducing total reported revenues by approximately
£52 million based on 2005 rates
total licensing revenues in 2006 were £1106 million being 42
of total revenues compared with £1043 million or 45 of total
revenues in 2005 in us dollars total licensing revenues in 2006
were 2025 million compared with 1870 million in 2005 an
increase of 8
royalty revenues in 2006 were £1078 million representing 41
of total revenues in the year compared with £878 million or 38
of total revenues in 2005 total royalty revenues in us dollars in
2006 were 1990 million up 25 from 1587 million in 2005
sales of development systems in 2006 were up 13 to £288 million
being 11 of total revenues compared with £256 million or 11
of total revenues in 2005 service revenues which include consulting
services and revenues from support maintenance and training were
up 10 to £161 million in 2006 representing 6 of total revenues
compared with £147 million or 6 of total revenues in 2005
royalty revenues and unit shipments
total royalty revenues for 2006 were £1078 million comprising
£887 million from the processor division “pd” and £191 million from
the physical ip division “pipd” royalties in pd came from record unit
shipments of 245 billion compared with £725 million and 167 billion
units in 2005 dollar royalty revenues earned in pd were 1641 million
up 25 on 2005 compared with the increase in yearonyear unit
shipments of 47 unit volume growth more than compensated for
the lower average royalty rates and as all royalty revenue is earned
effectively at 100 margin represents incremental returns on the
development cost of the arm technology on which the royalty is earned arm continued to benefit from significant growth in the mobile
segment which includes mobile handsets bluetooth devices and
portable media players such as the apple ipod which accounted
for 66 of the units shipped by the arm partnership we also saw
significant growth across a myriad of applications outside the mobile
segment including smartcards microcontrollers automotive connectivity
devices hard disk drives and many others total nonmobile shipments
which at 838 million units in 2006 were higher than total shipments
into all applications as recently as 2003 illustrates arm’s increasing
penetration across the full range of consumer electronics products
the total number of partners shipping arm technologybased products
at the end of 2006 was 76 after taking into account corporate activity
within the arm partnership 29 companies were paying royalties for
physical ip products at the end of the year strong momentum in pipd
royalties continued with a 26 growth in both total and underlying
royalties sales of the 130nm and 90nm process nodes continued to
be the fastestgrowing segments for pipd although more than half of
royalties received in 2006 came from older geometries the growth in
royalties within pipd demonstrates the increasing penetration of arm
physical ip in chip designs
gross margin
gross margins for the year to 31 december 2006 were 883
compared with 886 in 2005 cost of sales in 2006 includes
compensation charges in respect of sharebased payments of
£10 million 2005 £13 million excluding compensation charges
in respect of sharebased payments gross margins for the year
to 31 december 2006 were 887 2005 891
operating expenses
over the past several years arm has acquired various companies
with significant values of intangible assets other than goodwill being
recognised these amounts are amortised over the expected useful lives
of the assets acquired with the cost recorded against research
and development sales and marketing or general and administrative
expenses as appropriate in order to aid comparability these costs
have been separately identified as “acquisitionrelated charges” in the
narrative below in addition the issuance of arm share options to the
employees of artisan on acquisition as well as to the ongoing share
based compensation to employees of the group gives rise to significant
noncash sharebased compensation charges these are also separately
identified in the narrative below
total operating expenses in the year to 31 december 2006 were
£1825 million compared with £1707 million in 2005 with the increase
primarily attributable to the increase in average headcount from
1234 in 2005 to 1472 in 2006 operating expenses in 2006 include
acquisitionrelated charges relating to amortisation of intangibles of
£193 million 2005 £179 million other acquisitionrelated charges
of £11 million 2005 £nil and compensation charges in respect of
sharebased payments and related payroll taxes of £164 million 2005
£203 million excluding acquisitionrelated charges and compensation
charges in respect of sharebased payments and related payroll taxes
total operating expenses in 2006 were £1457 million in 2005
compared with £1325 million in 2005
research and development expenses in 2006 were £845 million
representing 32 of revenues this compares with £803 million or 35
of revenues in 2005 average headcount in this area increased from
arm annual report and accounts 2006 11 business reviewfinancial reviewifrscontinued
12 arm annual report and accounts 2006
selected financial dataifrs
2006 2005 2004 2003 2002
£000 £000 £000 £000 £000
revenues 263254 232439 152897 128070 150922
cost of revenues 30825 26610 12240 11022 13185
gross profit 232429 205829 140657 117048 137737
total net operating expenses 182531 170672 112328 98609 96608
profit from operations 49898 35157 28329 18439 41129
investment income 6758 5317 6944 4801 4373
profit before tax 56656 40474 35273 23240 45502
tax 8068 10827 9398 7977 13031
profit after tax 48588 29647 25875 15263 32471
equity minority interest ––– 105 232
profit for the year 48588 29647 25875 15158 32239
dividends paid 12367 10436 8975 ––
capital expenditure 8559 6064 5036 3605 15616
research and development expenditure 84494 80273 54674 48131 48674
cash short and longterm investments 128494 160902 142817 159786 130304
shareholders’ funds 663204 746847 642538 180435 172140
employees at end of year number 1659 1324 1171 740 721
 figures for the years 2003 and 2002 are shown under uk gaap and are not comparable with 2004 to 2006 prepared under ifrs
 figures for 2004 have been restated from uk gaap to ifrs 783 in 2005 to 961 in 2006 research and development expenses
in 2006 include total acquisitionrelated charges of £106 million
2005 £81 million and compensation charges in respect of
sharebased payments and related payroll taxes of £101 million
2005 £123 million excluding acquisitionrelated charges and
compensation charges in respect of sharebased payments and related
payroll taxes research and development expenses in 2006 were
£638 million and £599 million in 2005 representing 24 and 26
of revenues respectively
sales and marketing costs in 2006 were £532 million or 20 of
revenues compared with £474 million or 20 of revenues in 2005
average headcount in this area increased from 286 in 2005 to 302 in
2006 sales and marketing costs in 2006 include total acquisitionrelated
charges of £91 million 2005 £91 million and compensation charges
in respect of sharebased payments and related payroll taxes of
£35 million 2005 £43 million excluding acquisitionrelated charges and
compensation charges in respect of sharebased payments and related
payroll taxes sales and marketing costs in 2006 were £406 million
and £340 million in 2005 representing 15 of revenues in both years
general and administrative expenses in 2006 were £501 million or
19 of revenues compared with £430 million or 19 of revenues
in 2005 average headcount in this area increased from 165 in 2005 to
209 in 2006 general and administrative expenses in 2006 include total
acquisitionrelated charges of £07 million 2005 £07 million and
compensation charges in respect of sharebased payments and related
payroll taxes of £28 million 2005 £36 million excluding acquisition
related charges and compensation charges in respect of sharebased
payments and related payroll taxes general and administrative
expenses in 2006 were £466 million compared with £387 million
in 2005 representing 18 and 17 of revenues respectively
additionally in 2006 the group sold its investment in csr plc resulting
in a profit of £53 million
operating margin
the operating margin in 2006 was 190 compared with 151 in
2005 the operating margin in 2006 excluding acquisitionrelated
charges of £204 million and compensation charges in respect of
sharebased payments and related payroll taxes of £174 million
was 333 compared with 321 before acquisitionrelated charges
of £179 million and compensation charges in respect of sharebased
payments of £215 million in 2005
earnings and taxation
profit before income tax in 2006 was £567 million compared with
£405 million in 2005 profit before income tax in 2006 excluding
acquisitionrelated charges of £204 million and compensation charges
in respect of sharebased payments and related payroll taxes of
£174 million was £945 million or 359 of revenues this compares
with £799 million before acquisitionrelated charges of £179 million
and compensation charges in respect of sharebased payments of
£215 million or 344 of revenues in 2005
arm annual report and accounts 2006 13 14 arm annual report and accounts 2006
business reviewfinancial reviewifrscontinued
the group’s effective taxation rate in 2006 was 142 compared with
268 in 2005 this reduction was primarily due to a nonrecurring tax
credit in the year arising from a taxdeductible foreign exchange loss
fullydiluted earnings per share in 2006 were 35 pence compared
with 21 pence in 2005 earnings per fully diluted share in 2006 before
acquisitionrelated charges of £204 million compensation charges
in respect of sharebased payments and related payroll taxes of
£174 million and related estimated tax adjustments thereon of
£92 million were 55 pence compared with 42 pence before
acquisitionrelated charges of £179 million compensation charges
in respect of sharebased payments of £215 million and related
estimated tax adjustments thereon of £89 million in 2005
balance sheet and cash flow
goodwill at 31 december 2006 was £4284 million compared with
£4744 million at 31 december 2005 the decrease in goodwill in 2006
is primarily due to foreign exchange movements given the weakening
of the us dollar against sterling from 172 at 31 december 2005 to
196 at the end of 2006 goodwill arising on the falanx acquisition
amounted to £94 million and on soisic to £22 million goodwill is not
amortised under ifrs but is subject to impairment review on at least
an annual basis the review performed in 2006 concluded that no
impairment was required
other intangible assets at 31 december 2006 were £629 million
compared with £797 million at 31 december 2005 the movement
in other intangible assets in 2006 reflects the amortisation in the year
of the intangible assets arising on acquisitions of £193 million the
addition of £105 million arising on the acquisitions of falanx and soisic
and certain assets of powerescape during the year and the revaluation
of the currency denominated intangibles predominantly those in us
dollars the other intangible assets will be amortised through the
income statement over their estimated useful lives to the group
accounts receivable at 31 december 2006 were £696 million compared
with £555 million at 31 december 2005 the allowance against
receivables was £26 million at 31 december 2006 compared with
£22 million at 31 december 2005 deferred revenues were £315 million
at 31 december 2006 compared with £204 million at the end of 2005
resources available
the consolidated cash cash equivalents shortterm investments and
marketable securities balance was £1285 million at 31 december 2006
compared with £1609 million at 31 december 2005 this reduction is
as a result of the continued share buyback programme and payment
of dividends see below as well as the acquisitions of falanx and
soisic excluding these outflows the group generated £737 million
of cash in the year 2005 £650 million arm annual report and accounts 2006 15
interest receivable
interest receivable was £68 million for the year to 31 december 2006
compared with £53 million in 2005
returns to shareholders
dividends
the directors recommend payment of a final dividend in respect of 2006
of 06 pence per share which taken together with the interim dividend
of 04 pence per share paid in october 2006 gives a total dividend
in respect of 2006 of 10 pence per share an increase of 19 over the
084 pence per share in 2005 subject to shareholder approval the final
dividend will be paid on 21 may 2007 to shareholders on the register
on 4 may 2007
total dividends actually paid in 2006 amounted to £124 million
2005 £104 million
share buyback programme
in 2006 the group continued its rolling sharebuyback programme
to supplement dividends in returning surplus funds to shareholders
during the year the company bought back 636 million shares
2005 139 million at a total cost of £765 million 2005 £162 million
since introducing dividend payments in 2004 and commencing the
company’s share buyback programme in july 2005 £125 million has
been returned to shareholders and 775 million shares 56 of issued
share capital have been bought back this has contributed to a net
reduction in the average fully diluted shares in issue from 1424 million
in 2005 to 1402 million in 2006 this programme will continue during
2007 and beyond
capital structure
the authorised share capital of the company is 2200000000 ordinary
shares of 005 pence each 2005 2200000000 the issued share
capital at 31 december 2006 was 1389907834 ordinary shares
of 005 pence each 2005 1386102680 as a result of the buyback
programme the company held 49500000 of its own shares at
31 december 2006 2005 12751107
treasury policies and objectives and liquidity
the group has established treasury policies aimed both at mitigating
the impact of foreign exchange fluctuations on reported profits and
cash flows and at ensuring appropriate returns are earned on the
group’s cash resources
with more than 95 of group revenues earned in us dollars and
approximately 45 of group costs being incurred in us dollars the
group has a significant exposure to movements in the exchange rate
between the us dollar and sterling this exposure is partially mitigated
by an ongoing hedging programme involving forward contracts and
lowrisk option contracts where appropriate business reviewfinancial reviewifrscontinued
principal risks and uncertainties
in line with the guidance for the preparation of an operating and
financial review certain risk factors faced by the group are identified
below a more detailed description is included in the group’s annual
report on form 20f details of the group’s internal control and risk
management procedures are included in the corporate governance
report on pages 20 to 23
arm’s quarterly results may fluctuate significantly and be
unpredictable which could adversely affect the market price
of arm ordinary shares
arm has experienced and may in the future experience significant
quarterly fluctuations in its results of operations quarterly results
may fluctuate because of a variety of factors such factors include
– the timing of entering into agreements with new licencees
– the mixture of licence fees royalties revenues from the sale of
development systems and fees from services
– the introduction of new technology by us our licencees or
our competition
– the timing of orders from and shipments to systems
companies of arm technologybased microprocessors from
our semiconductor partners
– sudden technological or other changes in the microprocessor
industry and
– new litigation or developments in current litigation
in future periods arm’s operating results may not meet the expectations
of public market analysts or investors in such an event the market price
of our shares could be materially adversely affected
general economic conditions may reduce arm’s revenues and harm
arm’s business
arm is subject to risks arising from adverse changes in global economic
conditions because of economic uncertainties in many of our key
markets many industries may delay or reduce technology purchases
and investments the impact of this on arm is difficult to predict
but if businesses defer licensing our technology require less services
or development tools or if consumers defer purchases of new products
which incorporate arm’s technology revenue could decline a decline
in revenue would have an adverse effect on the results of operations
and could have an adverse effect on arm’s financial condition
arm competes in the intensely competitive semiconductor market
the semiconductor market is intensely competitive and characterised
by rapid technological change arm cannot give assurance that it will
have the financial resources technical expertise or marketing or support
capabilities to compete successfully in the future
competition is based on a variety of factors including price performance
product quality software availability marketing and distribution capability
customer support name recognition and financial strength further
given arm’s reliance on our semiconductor partners its competitive
position is dependent on their competitive position in addition arm’s
16 arm annual report and accounts 2006 semiconductor partners do not license arm’s architecture exclusively
and several of them also design develop manufacture and market
microprocessors based on their own architectures or on other
nonarm architectures
arm may not operate systems which comply fully with the
requirements of the sarbanesoxley act
attestation under section 404 of the sarbanesoxley act as at
31 december 2006 has been successfuly completed full details appear
in the group’s annual report on form 20f there can be no guarantee
however that in future the detailed testing of internal controls required
as part of the attestation process will not identify significant control
deficiencies or material weaknesses that impact on the auditors’ opinion
on internal controls over financial reporting andor require disclosure
on form 20f for future years
other risks include arm’s inability to manage the significant changes
in the number of its employees and the size of its operations in the
united states dependence on semiconductor partners and systems
companies availability of development tools systems software and
operating systems compatible with arm’s architecture dependence on
a small number of customers and products arm’s inability to develop
new products on a timely basis unanticipated costs due to products that
could have technical difficulties or undetected design errors the arm
architecture not being continued to be accepted by the market risks
associated with any strategic investments or acquisitions dependence
on senior management personnel and on hiring and retaining qualified
engineers exposure from international operations litigation and threats
of litigation and protection of arm’s intellectual property unavailability
of debt financing or additional equity funding to satisfy future capital
needs adverse effects resulting from changes in stock option accounting
rules adversely impacting arm’s reported operating results and its
competitiveness in the marketplace
tim score chief financial officer
arm annual report and accounts 2006 17 18 arm annual report and accounts 2006
directors and advisers
doug dunn age 62 chairman
doug dunn joined the board as an independent nonexecutive director in
december 1998 and became nonexecutive chairman on 1 october 2006 he was
previously president and chief executive officer of asm lithography holding nv
until his retirement in december 2004 before joining asml he was chairman
and chief executive officer of the consumer electronics division of royal philips
electronics nv and a member of the board he was previously managing director
of the plessey and gec semiconductor divisions and held several engineering
and management positions at motorola he was awarded an obe in 1992
he is a nonexecutive director of st microelectronics nv soitec sa lg philips
lcd co ltd and tomtom nv
warren east age 45 chief executive officer
warren east joined arm in 1994 to set up arm’s consulting business he was
vice president business operations from february 1998 in october 2000 he
was appointed to the board as chief operating officer and in october 2001
was appointed chief executive officer before joining arm he was with texas
instruments he is a chartered engineer fiee and a companion of the chartered
management institute he is a nonexecutive director of reciva limited and
of de la rue holdings plc
tim score age 46 chief financial officer
tim score joined arm as chief financial officer and director in march 2002 before
joining arm he was finance director of rebus group limited he was previously
group finance director of william baird plc group controller at lucasvarity plc and
group financial controller at btr plc he is a nonexecutive director and chairman
of the audit committee of national express group plc
tudor brown age 48 chief operating officer
tudor brown was one of the founders of arm before joining the company he
was principal engineer at acorn computers where he worked on the arm rd
programme at arm he was engineering director and chief technical officer
from 1993 in october 2000 he was appointed executive vice president
global development and in october 2001 he was appointed to the board
as chief operating officer he is a nonexecutive director of ant plc
mike inglis age 47 executive vice president sales and marketing
mike inglis joined arm as evp  marketing in june 2002 and was appointed to the
board in august that year he became evp  sales and marketing in january 2007
before joining arm he led the uk communications and high technology team at
at kearney management consultants and held a number of senior operational
and strategic marketing positions at motorola he previously worked in marketing
design and consultancy with texas instruments fairchild camera and instruments
and bis macintosh and gained his initial industrial experience with gec
telecommunications he is a chartered engineer and a mcim he is a
nonexecutive director of superscape group plc
mike muller age 48 chief technology officer
mike muller was one of the founders of arm before joining the company he
was responsible for hardware strategy and the development of portable products
at acorn computers he was previously at orbis computers at arm he was vice
president marketing from 1992 to 1996 and executive vice president business
development until october 2000 when he was appointed chief technology
officer in october 2001 he was appointed to the board
simon segars age 39 executive vice president business development
simon segars joined the board in january 2005 he was appointed evp business
development in january 2007 he was previously evp of engineering and then
evp  worldwide sales from january 2004 he joined arm in early 1991 and has
worked on most of the arm cpu products since then he led the development
of the arm7 and arm9 thumb
®
families he holds a number of patents in
the field of embedded cpu architectures
kathleen o’donovan age 49 independent nonexecutive director
kathleen o’donovan joined the board in december 2006 she is a nonexecutive
director and chairman of the audit committees of prudential plc and great
portland estates plc and chairman of the invensys pension scheme she will
take up her appointment as a nonexecutive director of trinity mirror plc in may
2007 previously she was a nonexecutive director and chairman of the audit
committee of the court of the bank of england and a nonexecutive director
of o 2 plc and emi group plc prior to that she was chief financial officer
of btr and invensys and before that she was a partner at ernst  young arm annual report and accounts 2006 19
peter cawdron age 63 senior independent director nonexecutive
peter cawdron joined the board in march 1998 and will retire at the 2007 agm
from 1983 to 1997 he worked for grand metropolitan plc where he served as
group strategy development director he was previously chief financial officer
and a director of d’arcymacmanus  masius worldwide inc and before that a
member of the corporate finance team at sg warburg  co ltd he qualified as
a chartered accountant at peat marwick mitchell  co in 1966 he is chairman
of gcap media plc and punch taverns plc and is a nonexecutive director of the
following uk listed companies the capita group plc johnston press plc and
prostrakan group plc
young sohn age 51 independent nonexecutive director
young sohn joined the board in april 2007 he has extensive experience in the
semiconductor industry both in silicon valley and in asia he is a director of
cymer inc and mstream technology limited and an adviser to panorama capital
a silicon valley based venture capital firm previously he was president of the
semiconductor products group at agilent technologies inc and chairman of
oak technology inc prior to that he was president of the hard drive business of
quantum corporation and before that director of marketing at intel corporation
lucio lanza age 62 independent nonexecutive director
lucio lanza joined arm as a nonexecutive director in december 2004 following
arm’s acquisition of artisan he was previously a director of artisan from 1996
becoming chairman in 1997 he is currently managing director of lanza
techventures an early stage venture capital and investment firm which he
founded in january 2001 in 1990 he joined us venture partners a venture
capital firm as a venture partner and was a general partner from 1990 to 1995
he was an independent consultant to companies in the semiconductor
communications and computeraided design industries including cadence design
systems inc and from 1986 to 1989 was chief executive officer of eda systems
inc he is also on the board of directors of pdf solutions inc a provider of
technologies to improve semiconductor manufacturing yields he holds a
doctorate in electronic engineering from politecnico of milano
philip rowley age 54 independent nonexecutive director
philip rowley joined the board in january 2005 he was chairman and ceo
of aol europe the interactive services web brands internet technologies and
ecommerce provider until february 2007 he is a qualified chartered accountant
and was group finance director of kingfisher plc from 1998 to 2001 prior
to that his roles included executive vice president and chief financial officer
of emi music worldwide
john scarisbrick age 54 independent nonexecutive director
john scarisbrick joined the board in august 2001 he had previously worked for
25 years at texas instruments ti in a variety of roles including as senior vice
president responsible for ti’s 5 billion asp chip business president of ti europe
and leader of the team that created ti’s dsp business in houston texas before
joining ti he worked in electronics systems design roles at rank radio
international and marconi space and defence systems in the uk he is chief
executive officer of csr plc and a nonexecutive director of intrinsity inc
jeremy scudamore age 59 independent nonexecutive director
jeremy scudamore joined the board in april 2004 he was chief executive officer
of avecia group formerly the specialty chemicals business of zeneca until april
2006 and previously held senior management positions both in the uk and
overseas with zeneca and ici he has been a board member of the chemical
industries association and is chairman of england’s north west science council
he was also a member of the dti’s innovation and growth team for the chemical
industry and chairman of the innovation team he is a nonexecutive director of
stem cell sciences plc and oxford catalysts group plc
from left doug dunn warren east tim score tudor brown mike inglis mike muller simon segars
kathleen o’donovan peter cawdron young sohn lucio lanza philip rowley john scarisbrick
jeremy scudamore role of the board
the board is committed to high standards of corporate governance and
business integrity which it believes are essential to maintaining the
trust of investors and other stakeholders in the company the board is
responsible for setting the company’s strategic aims and standards of
conduct monitoring performance against the business plan and budget
prepared by the executive directors and ensuring that the necessary
financial and human resources are in place for it to meet its objectives
the board and all employees are subject to a code of business conduct
and ethics a copy of which is published on the corporate website at
wwwarmcom the board has a formal schedule of matters specifically
reserved for its decision which includes the approval of major business
matters policies and operating and capital expenditure budgets the
board is also responsible for sanctioning unusual commercial arrangements
such as atypical licence agreements and investments the board
delegates authority to various committees that are constituted within
written terms of reference and chaired by independent nonexecutive
directors where required by the combined code
compliance with the combined code
the group complies and complied throughout 2006 with the combined
code as issued in july 2003 with the exception only that the board did
not comprise a majority of independent nonexecutive directors
throughout the year the board has considered the overall balance
between executive and nonexecutive directors and believes that the
number of executive directors is fully justified by the contribution made
by each of them to increase the size of the board further to meet this
particular provision is not considered appropriate
composition and operation of the board
the balance of the board and roles of the directors have undergone
some changes during the year at the date of this report the board
comprises six executive directors seven independent nonexecutive
directors and the chairman the executive directors are the chief
executive officer the chief operating officer the chief financial officer
the chief technology officer the executive vice president sales and
marketing and the executive vice president business development
all of whom play significant roles in the daytoday management of
the business the board reviews the independence of directors on
appointment and at appropriate intervals and considers that each of
the seven nonexecutive directors is independent in character judgment
and behaviour based on both participation and performance at board
and committee meetings there are no relationships or circumstances
which are likely to affect the judgment of any of them the beneficial
interests of the directors in the share capital of the company are set
out on pages 30 to 35 in the opinion of the board these shareholdings
do not detract from their independent status
mark templeton stepped down as a nonexecutive director in july 2006
and doug dunn who was an independent nonexecutive director
became chairman on the retirement of sir robin saxby on 1 october
2006 kathleen o’donovan joined the board as an independent non
executive director on 7 december 2006 and became a member of
the audit and remuneration committees on 1 january 2007 she has a
strong financial background and is a financial expert the nonexecutive
directors provide a blend of experience and considerable knowledge to
the board’s deliberations young sohn joined the board as an
independent nonexecutive director on 2 april 2007 he has extensive
experience in the semiconductor industry in both silicon valley and asia
20 arm annual report and accounts 2006
corporate governanceuk reporting
he will join the audit and remuneration committees in may 2007
peter cawdron will be retiring from the board at the agm on 15 may
2007 having served for nine years he will be replaced as senior
independent director by jeremy scudamore who has a strong
background in industry and commerce jeremy has also taken over the
role of chairman of the remuneration committee following doug dunn’s
appointment as group chairman lucio lanza and john scarisbrick both
have a broad understanding of the group’s technology and the practices
of major usbased technology companies philip rowley is a financial
expert and has knowledge of internet technologies and ecommerce
as part of the planned succession philip replaced peter cawdron as
chairman of the audit committee in april 2006
the table below shows directors’ attendance at meetings which they
were eligible to attend during the 2006 financial year
audit remuneration nomination
board committee committee committee
total number of meetings 8442
doug dunn 78c – 11 22c
warren east 88 –––
tudor brown 78 –––
peter cawdron 58 24 34 12
mike inglis 78 –––
lucio lanza 88 44 – 22
mike muller 88 –––
kathleen o’donovan 11 –––
philip rowley 68 44c ––
john scarisbrick 68 24 34 22
jeremy scudamore 88 44 44c –
tim score 88 –––
simon segars 88 –––
sir robin saxby 66 –– 22
mark templeton 55 –––
 kathleen o’donovan was appointed to the board on 7 december 2006 and to the audit and
remuneration committees on 1 january 2007
 sir robin saxby retired from the board on 1 october 2006
 mark templeton resigned from the board on 25 july 2006
c chairman
there is a procedure in place for additional meetings or conference
calls on any pertinent issues to be organised as necessary during
the year in addition the chairman held at least two meetings with
the nonexecutive directors without the executives present and the
nonexecutive directors met on at least one occasion without the
chairman being present
the board has an established procedure for individual directors who
consider it necessary in the furtherance of their duties to obtain
independent professional advice at the group’s expense in addition all
members of the board have access to the advice of the company secretary
information and communication with shareholders
before each meeting the board is furnished with information
concerning the state of the business and its performance in a form
and of a quality appropriate for it to discharge its duties the ultimate
responsibility for reviewing and approving the annual report and
accounts and the quarterly reports and for ensuring that they present
a balanced assessment of the group’s position lies with the board
the board delegates daytoday responsibility for managing the group
to the executive committee and has a number of other committees
details of which are set out below the board makes considerable efforts to establish and maintain good
relationships with shareholders the main channel of communication
continues to be through the ceo the cfo and the vp investor relations
although the chairman the senior independent director and the other
nonexecutive directors remain willing to engage in dialogue with
major shareholders as appropriate the chairman met with one major
institutional shareholder at its request during 2006
there is regular dialogue with institutional shareholders throughout
the year other than during close periods the board also encourages
communication with private investors and part of the group’s website is
dedicated to providing accurate and timely information for all investors
including comprehensive information about the business its partners
and products all press releases rns and securities and exchange
commission “sec” announcements at present around 20 analysts
write research reports on the group the group publishes telephone
numbers on its website enabling shareholders to listen to earnings
presentations and audio conference calls with analysts and webcasts of
the agm and other key presentations are also made available through
the website members of the board including some of the nonexecutive
directors attend the annual analysts’ day and develop an understanding
of the views of major shareholders through any direct contact that may
be initiated by shareholders or through analysts’ and brokers’ briefings
the board also receives feedback from the group’s financial pr advisers
who obtain feedback from analysts and brokers following investor
roadshows all shareholders may register to receive the group’s press
releases via the internet
the board actively encourages participation at the annual general
meeting scheduled for 15 may 2007 which is the principal forum for
dialogue with private shareholders a presentation will be made
outlining recent developments in the business and an open question
andanswer session will follow to enable shareholders to ask questions
about the business in general
the resolutions put to shareholders at the meeting and the voting
results will be published via rns and the sec and will be available on
the group’s website
board evaluation induction and training
the board undertakes an annual board evaluation during 2006
this exercise was conducted internally with each director completing
a questionnaire and was facilitated by the company secretary
the evaluation covered board performance processes committees
composition skills director induction and performance of individual
directors against ten criteria the overall conclusion was that individual
board members are satisfied that the board works well they are also
satisfied with the contribution made by their colleagues and that board
committees operate properly and efficiently various recommendations
resulted from the evaluation which have been discussed by the board
and will be reviewed and acted upon by the board in 2007 as
appropriate it is intended that there will be a further board evaluation
each year involving external consultants as and when the board deems
appropriate a full formal induction programme is arranged for new
directors tailored to their specific requirements the aim of which is to
introduce them to key executives across the business and to enhance
their knowledge and understanding of the group and its activities
the group has a commitment to training and all directors executive
or nonexecutive are encouraged to attend suitable training courses
at the company’s expense
executive committee
the executive committee is responsible for implementing the strategy
approved by the board among other things this committee is
responsible for ensuring that the group’s budget and forecasts are
properly prepared that targets are met and generally managing and
developing the business within the overall budget variations from the
budget and changes in strategy require approval from the main board
of the group the executive committee which meets monthly
comprises the executive directors and the directors of arm limited
which now include the company secretary and meetings are attended
by other senior operational personnel as appropriate
audit committee
the audit committee has written terms of reference which are published
on the corporate website at wwwarmcom the committee has
responsibility for among other things monitoring the integrity of the
financial statements of the company and any formal announcements
relating to the company’s financial performance and for reviewing any
significant financial reporting judgments contained in them reviewing
the company’s internal controls and risk management systems making
recommendations to the board in relation to the appointment
remuneration and resignation or dismissal of the group’s external
auditors reviewing and monitoring the external auditors’ independence
and objectivity and the effectiveness of the audit process developing
and implementing policy on the engagement of the external auditors
to supply nonaudit services and considering compliance with legal
requirements accounting standards the listing rules of the financial
services authority and the requirements of the sec there is a procedure
in place for the committee to receive reports of any whistleblowing
incidents from the compliance committee no such incidents were
reported in 2006 or to date in 2007
the committee also keeps under review the value for money of the
audit and the nature extent and costeffectiveness of the nonaudit
services provided by the auditors the committee has discussed with
the external auditors their independence and has received and
reviewed written disclosures from the external auditors as required by
the auditing practices board’s international standard on auditing isa
uk and ireland 260 “communication of audit matters with those
charged with governance” as well as those required by the us
independence standards board’s standard no 1 “independence
discussions with audit committees” to avoid the possibility of the
auditors’ objectivity and independence being compromised the group’s
tax consulting work is carried out by the auditors only in cases where
they are best suited to perform the work in other cases the group has
engaged another independent firm of accountants to perform tax
consulting work the group does not normally award general consulting
work to the auditors from time to time however the group will engage
the auditors to perform work on matters relating to human resources
and royalty audits the group may also seek professional advice from
another firm of independent consultants or its legal advisers
the current audit committee comprises philip rowley chairman
kathleen o’donovan lucio lanza and jeremy scudamore philip rowley
is the financial expert as defined in the sarbanes oxley act 2002 us
“sox” and kathleen o’donovan and peter cawdron are also qualified
to fulfil this role the external auditors chief executive officer chief
financial officer and the company secretary attend all meetings in order
to ensure that all the information required by the audit committee for
arm annual report and accounts 2006 21 it to operate effectively is available representatives of the group’s
external auditors meet with the audit committee at least once a year
without any executive directors being present
remuneration committee
a description of the composition responsibility and operation of the
remuneration committee is set out in the remuneration report on
page 28 the terms of reference of the remuneration committee are
published on the group’s website wwwarmcom
nomination committee
the nomination committee leads the process for board appointments
and makes recommendations to the board in relation to new
appointments of executive and nonexecutive directors and on board
composition and balance the terms of reference of the nomination
committee are published on the group’s website wwwarmcom it is
chaired by doug dunn and the other members are peter cawdron
john scarisbrick and lucio lanza the committee considers the roles and
capabilities required for each new appointment based on an evaluation
of the skills and experience of the existing directors in relation to the
appointment of new directors the services of external search consultancies
are generally used
in relation to the appointment of doug dunn as chairman during 2006
the board considered that he had all the skills and experience to meet the
demands of the role and unanimously approved his appointment without
the need for an external search the appointments of kathleen o’donovan
and young sohn followed the prescribed procedure laid down by the
nomination committee and involved the use of external search consultants
internal controlrisk management
the company fully complies with the combined code’s provisions
on internal control having established procedures to implement the
guidance in the turnbull report 2005 the board has established
a continuous process for identifying evaluating and managing the
significant risks faced by the company the board confirms that the
necessary actions have been or are being taken to remedy any
significant failings or weaknesses identified from this process
the board of directors also has overall responsibility for ensuring that
the group maintains an adequate system of internal control and risk
management and for reviewing its effectiveness during 2006 a
considerable amount of resource and effort was committed to the project
to achieve compliance with section 404 of sox which was successfully
completed in relation to the 2006 year end and is reported on in more
detail in the annual report on form 20f that is filed with the sec
the processes and procedures which were successfully integrated into
daytoday business operations during 2006 provide a sustainable solution
for compliance in 2007 and beyond the board has reviewed the system
of internal control including internal financial controls which has been
in place for the year under review and up to the date of approval of the
annual report such systems are designed to manage rather than eliminate
the risks inherent in a fastmoving hightechnology business and can
therefore provide only reasonable and not absolute assurance against
material misstatement or loss
the company has a number of other committees which contribute to the
overall control environment
a risk review committee consisting of the chief technology officer
the chief financial officer the financial controller and the company
secretary which receives and reviews quarterly reports from the business
units and corporate functions the committee is responsible for identifying
and evaluating risks which may impact the group’s strategic and business
objectives and for monitoring the progress of actions designed to mitigate
such risks the risk review committee reports formally to the executive
committee twice a year where its findings are considered and challenged
and in turn the executive committee reports to the board once a year
a compliance committee consisting of the general counsel the chief
operating officer the chief financial officer the evp business development
the evp human resources the director of quality the director of it and
the company secretary the committee oversees compliance throughout
the business with all appropriate international regulations trading
requirements and standards including oversight of financial employment
environmental and security processes and policies the compliance
committee reports to the audit committee
a disclosure committee in compliance with sox comprises the chief
executive officer the chief financial officer the financial controller the
general counsel the vp investor relations and the company secretary
the committee is responsible for ensuring that disclosures made by the
company to its shareholders and the investment community are
accurate complete and fairly present the company’s financial condition
in all material respects
in addition there is a series of interconnected meetings that span the
group from the weekly management meeting chaired by the chief
executive officer and the weekly business review meeting chaired by
the chief operating officer the purpose of which is to monitor and
control all main business activities sales forecasts and other matters
requiring approval that have arisen within the week to the board
meetings of the group each month there are customer satisfaction and
process review meetings attended by managers representing different
functions across the group to review key performance indicators such as
revenues orders booked costs product and project delivery dates and
levels of defects found in products in development the outputs of the
weekly business review meeting and the monthly operations meeting
are reviewed by the executive committee which in turn raises relevant
issues with the board of the group these processes for identifying
evaluating and managing the significant business operational financial
compliance and other risks facing the group have been in place for the
year under review and up to the date of approval of the annual report
and financial statements
as required by the combined code the audit committee has considered
whether it would be appropriate for the group to have its own financial
internal audit function and has concluded that taking account of its
relatively small number of employees and a high degree of centralisation
in the way the business is run this is not appropriate at present
the committee has confirmed this view to the board the group does
however have an operational internal audit function that audits the
group’s business and productproject management processes
22 arm annual report and accounts 2006
corporate governanceuk reportingcontinued arm annual report and accounts 2006 23
these processes are documented maintained and continuously
improved for effectiveness and efficiency in addition they are audited
externally by independent auditors for compliance with iso 90012000
ernst  young has been retained by the company during 2006 to provide
skilled resource to assist with management’s testing of processes and
procedures for s404 compliance
any significant control failings identified are brought to the attention
of the compliance committee and undergo a detailed process of
evaluation of both the failing and the steps taken to remedy it there
is then a process for escalation of any significant control failures to the
audit committee
corporate social and ethical policies
while the group is accountable to its shareholders it also endeavours
to take into account the interests of all its stakeholders including its
employees customers and suppliers and the local communities and
environments in which it operates the chief financial officer takes
responsibility for matters relating to corporate social and ethical policies
and these matters are considered at board level a corporate social
responsibility report is on pages 24 to 25 of this report and also on the
group’s website wwwarmcom the company’s code of business
conduct and ethics is available on the group’s website wwwarmcom
the group also operates a whistleblowing policy which provides for
employees to have access to senior management to raise concerns
in strict confidence about any unethical business practices these
procedures were enhanced during 2006 by the addition of a facility
to make reports by telephone to an independent third party through
a whistleblowing hotline
as a company whose primary business is the licensing of ip  employees
are highly valued and their rights and dignity are respected the group
strives for equal opportunities for all its employees and does not
tolerate any harassment of or discrimination against its staff
in november 2006 arm was chosen as uk business of the year at
the national business awards an award taking account of market
leadership innovation growth and financial return in january 2007
arm was recognised as european business of the year competing
against other national award winners within the european union
further at the management today awards in november 2006 for
britain’s most admired companies arm was recognised as the
company with the “greatest capacity to innovate” whilst these awards
were for companies with headquarters in the uk or the european union
they recognise the efforts of all arm employees worldwide
the group endeavours to be honest and fair in its relationships with its
customers and suppliers and to be a good corporate citizen respecting
the laws of the countries in which it operates
environmental policies
the group’s premises are composed entirely of offices since it has no
manufacturing activities staff make use of computeraided design tools
to generate ip  this involves neither hazardous substances nor complex
waste emissions with the exception of development systems products
the majority of “products” sold by the group comprise microprocessor
core designs that are delivered electronically to customers
the group recognises the increasing importance of environmental issues
and these are discussed at board level where the chief financial officer
takes responsibility for them a number of initiatives in this area have
continued in 2006 the group’s environmental policy is published on its
website wwwarmcom within the corporate social responsibility
“csr” report an environmental action plan is implemented through
various initiatives these include monitoring resource consumption and
waste creation so that targets set for improvement are realistic and
meaningful ensuring existing controls continue to operate satisfactorily
and working with suppliers to improve environmental management
along supply chains
energy usage and resource consumption data is published in the group’s
csr report on its website
at the 2007 agm resolutions will be proposed to amend the articles of
association in line with the companies act 2006 to enable the company
to send information to shareholders electronically and make documents
available through the website rather than in hard copy which will
provide both environmental and cost benefits shareholders can opt to
continue receiving a printed copy of the annual report if they prefer
health and safety
although arm operates in an industry and in environments which are
considered low risk from a health and safety perspective the safety of
employees contractors and visitors is a priority in all arm workplaces
worldwide continual improvement in safety management systems is
achieved through detailed risk assessments to identify and eliminate
potential hazards and occupational health assessments for employees
more detail about the group’s approach to environmental matters and
health and safety is included in the csr report on page 25
by order of the board
patricia alsop company secretary 24 arm annual report and accounts 2006
arm considers itself to be a good corporate citizen and continually
strives to improve its performance in this area the group aims to
reduce the impact it makes on the environment and to make positive
connections with the communities in which it operates considerable
efforts are made to communicate effectively with the group’s
shareholders partners suppliers and employees
the group is a corporate member of the institute of business ethics ibe
and was one of the first members of the goodcorporation which was
founded in 2001 to help organisations to develop manage and monitor
their corporate responsibilities based on principles set out by the ibe
the goodcorporation charter enables companies to measure how
effective they are in achieving these responsibilities the charter
includes being verified against a 62point charter standard covering the
fair treatment and protection of its employees customers suppliers
shareholders the community and the environment this independent
verification process is repeated each year and during 2006 the group
successfully retained its membership the goodcorporation assessment
satisfied some of the testing requirements for sox compliance in 2006
in addition arm is listed on the ftse4good index is a member of
business in the community and takes part in its business in the
environment index and corporate responsibility index each year
the environment
the group’s business focuses on designing ip which enables devices
to use less power and as a result to be more environmentally friendly
its activities do not produce harmful waste or emissions and the ethical
investment research service eiris grades arm as an environmentally
“low impact” business nevertheless environmental performance is
monitored to enable targets to be set for example reducing resource
usage increasing the amount recycled and controlling carbon emissions
through energy use the group can demonstrate an increase in paper
and packaging recycling improved facilities to promote recycling of
these and other materials and increased recycling initiatives with much
impetus being created by employees themselves energy usage is now
monitored across an increased number of sites to understand how it is
used which aids the setting of new targets the monitoring of larger
sites in 2007 will see a webbased resource made available so that
all employees can understand the environmental impact and their role
in reducing it renewable energy sources have also been investigated
and are planned for 2007 where the majority of the uk sites will be
supplied with power through green tariffs application of a greener
policy on energy procurement will be extended to other arm locations
globally where the policy cannot be applied such as in smaller serviced
offices arm is committed to offsetting its carbon impact there are
recycling bins for aluminium cans in the majority of the group’s offices
and air conditioning systems run on nonozonedepleting refrigerants
the supply of company cars is discouraged and in a group of more than
1600 people there are less than 30 company cars employees are
encouraged to cycle to work through the provision of improved facilities
at the group’s offices to share car journeys or to use public transport
business travel is important in maintaining arm’s very effective
partnership network but ways in which it can be reduced are regularly
reviewed and where possible travel is reduced through the use of
video conferencing equipment
the group has continued to work closely with the british safety council
in 2006 to establish ways to formalise its environmental objectives and
performance as well as implementing recommendations made through
working with the carbon trust a facilities summit was held in 2006
where the sustainability of arm built environments dominated the
agenda arm invited key suppliers to the event which concluded with
a commitment to consider the environmental case in the provision
of facilities and infrastructure to arm’s business operations to this
end arm is working with suppliers and service providers to provide
sustainable solutions wherever practicable
connecting with local communities
the group aims to be a good corporate citizen of the communities in
which it operates and supports local initiatives and fundraising in the
uk the focus has been on educational projects particularly for pupils
who are interested in mathematics science it and business subjects
this support is sometimes financial and sometimes in the form of
providing employees’ time and skills arm has established relationships
with the local business community and is a founding member of the
learning collaboration tlc within the cambridge business community
in the uk the tlc enables member companies to pool resources to
collaborate to learn improving the quality availability and value of
training and related services
supporting education
arm’s support for education stretches from financial sponsorship
of scienceitrelated education initiatives donations of redundant
computer equipment to schools and education charities working on
extracurricular engineering projects with school and college students
and working on specific projects with students at management schools
the group supports the engineering education scheme young engineers
and contributes funding to train the uk team for the international
maths olympics arm’s university programme directly engages with
universities worldwide designing course material providing technical
seminars donating equipment and software and offering assistance to
students arm has now worked with universities in nearly every region
of the world including the eu north and south america australia and
with new initiatives in india and china this reflects arm’s commitment
to help universities produce graduates with the necessary skills that
its partners need in addition the group has some formal involvement
with a number of universities the chairman emeritus for example
is a visiting professor at liverpool university in the uk
supporting good causes
arm encourages employees to support their local communities some
are school governors some organise events to raise money others
support charities directly in india arm employees have given time
and donations to help children at a local orphanage in the us arm
employees have supported a variety of charitable organisations
including those supporting sufferers of cancer multiple sclerosis
diabetes and aids the group “doubles the efforts” of employees who
raise money for approved charities by matching the funds they raise
with the exception of political donations or other nonapproved
causes charities supporting the care of premature babies sufferers
of heart disease and those with autism or colitis and crohn’s disease
have been some of the beneficiaries of this scheme
corporate social responsibilityuk reporting arm annual report and accounts 2006 25
connecting with employees
arm’s aim is to attract and retain the best people available by being
a good and ethical employer the skills knowledge and motivation
of employees are crucial to arm’s success the group promotes and
supports individuals and teams through onthejob and formal training
coaching and mentoring a comprehensive portfolio of learning and
development opportunities is available to all employees depending
upon their needs and career aspirations every effort is made to keep
employees well informed about the company and matters that affect
them this is done through both formal and informal communication
methods across all offices worldwide and includes employee consultation
groups in regions where they are culturally appropriate the group also
carries out a regular comprehensive global opinion survey to monitor
employee views and to provide valuable input on how the company
operates the employee assistance programme helps staff and their
families with issues such as care for children or elderly relatives legal
and health advice and stress or other counselling
equal opportunities
the group needs highlyqualified staff and does not see age colour
disability ethnic origin gender political or other opinion religion or
sexual orientation as a barrier to employment if any member of staff
becomes disabled their needs and abilities are assessed with a view
to them continuing in their current role if this is impossible every effort
is made to offer them alternative employment
benefits
employees receive benefits including private medicalhealthcare health
travel and life insurance pensions401k plan sabbaticals flexible
working restricted shares under the employee equity plan and a save
as you earn share scheme the group supports family friendly initiatives
and offers a child care voucher scheme for uk tax payers flexible
working arrangements are available for all employees regardless of
whether they have children understanding and acceptance of national
and cultural diversity is encouraged by giving employees the opportunity
to work in offices other than in their home country where appropriate
accessibility
the group endeavours to provide access to all whether through building
design to allow easy disabled access or through improving access to our
website for those with visual impairments
health and safety
the safety and welfare of employees contractors and visitors is a
priority arm measures and analyses all accidents and “near misses”
as part of its continuous improvement in this area this data along with
sickness data is monitored to ensure trends are understood and action
taken to reduce these occurrences to date arm has had no serious
issues and retains a very low accident rate despite the lowrisk nature
of its operations arm aims to provide a safe secure and sustainable
working environment for all employees and stakeholders
the group is verified by goodcorporation each year to ensure that its
health and safety requirements are met and in addition its uk offices
are audited by the british safety council with the uk legislative
framework being seen as one of the most developed arm has adopted
this as a corporate standard in health and safety provision to all sites
worldwide to this end arm engaged the british safety council to audit
its two largest sites outside the uk in 2006 being sunnyvale california
and bangalore india in the uk there is a health and safety committee
and all other arm offices have fire wardens and first aiders health
and safety is high on the agenda and there has been an increase in the
amount of communication with employees particularly on occupational
health matters health and safety issues are communicated through
different media including the intranet and an extensive health and
safety workshop is run as part of the company’s induction process 26 arm annual report and accounts 2006
the directors present their annual report and audited financial
statements for the year ended 31 december 2006
principal activities and review of business
the principal activities of the group and its subsidiaries are the licensing
marketing research and development of riscbased microprocessors and
systems the nature of the global semiconductor industry is such that
most of its business is conducted overseas and to serve its customers
better the group has sales offices around the world these include
six offices in the us and offices in shanghai and beijing pr china
shinyokohama japan seoul south korea taipei taiwan kfar saba
israel paris france munich germany and bangalore india design offices
are based in cambridge maidenhead sheffield and blackburn uk sophia
antipolis and grenoble france leuvenheverlee belgium aachen and
grasbrunn germany trondheim norway sentjernej slovenia austin
texas olympia washington sunnyvale and san diego california in the
us and bangalore india more information about the business is set out
in the business review comprising the chairman’s statement on pages 4
to 6 the chief executive officer’s review of operations on pages 7 to 9
and the operating and financial review on pages 10 to 17
future developments
the group’s stated objective is to establish a global standard for risc
architecture and physical ip for the embedded microprocessor market
the directors believe that to achieve this goal it is important to expand
the number and range of potential customers for its technology the
group intends to enter into licence agreements with new customers and
to increase the range of new technology supplied to existing customers
relationships will continue to be established with thirdparty tools and
software vendors to ensure that their products will operate with the
arm architecture as a result of its position as an emerging standard in
its industry the group is presented with many opportunities to acquire
complementary technology or resources it continues to review these
opportunities and in may 2006 the group acquired falanx microsystems
as now arm norway as an innovative graphics ip company and
certain assets of powerescape inc which will enhance the portfolio of
development systems products in october 2006 the group acquired
soisic sa a company with physical ip based on silicon on insulator
“soi” technology
going concern
after reviewing the 2007 budget and longer term plans the directors
are satisfied that at the time of approving the financial statements
it is appropriate to adopt the going concern basis in preparing the
financial statements of both the group and the parent company
dividends
the directors recommend a final dividend in respect of the year to
31 december 2006 of 06 pence per share which subject to approval
at the annual general meeting on 15 may 2007 will be paid on
21 may 2007 to shareholders on the register on 4 may 2007 this final
dividend combined with the interim dividend of 04 pence per share
paid during the year makes a total of 10 pence per share for the year
2005 084 pence
share buyback programme
in accordance with the rolling authority given by shareholders at the
2006 agm 636 million shares of 005 pence each were bought back
by the company in 2006 2005 139 million at a total cost of
£765 million 2005 £162 million
research and development rd
rd is of major importance and as part of its research activities the group
collaborates closely with universities worldwide and plans to continue its
successful engagement with the university of michigan key areas of
product development for 2007 include the development of further low
power highperformance engines for both data and control applications
and arm processors based on symmetric multiprocessor and superscalar
technology the group is investing in future physical ip development
including low power low leakage technologies and through its recent
acquisition of soi technology to ensure leadership in this market in addition
the group will deliver development tools 3d graphics and fabric ip to
enable its customers to design and programme systemonchip products
the group incurred rd expenses of £845 million in 2006 representing
32 of revenues compared with £803 million in 2005 rd expenses
have been charged to the income statement since the requirements
for capitalisation were not met the requirements for capitalisation are
considered in more detail in note 1 on page 43
donations
during the year the group made donations for charitable purposes
of £44831 2005 £65795 the total amounts given were
local cambridge charities £9184
promotion of education £16616
wider understanding of science maths
and information technology £15000
medical research £3724
relief of poverty £250
other £57
the group does not make any political donations arm employees are
encouraged to offer their time and expertise to help charities and other
groups in need the group operates a gift matching system for
employee fundraising
directors in the year
the following served as directors of the company during the year ended
31 december 2006
doug dunn obe chairman from 1 october 2006 previously an
independent nonexecutive director
warren east chief executive officer
tim score chief financial officer
tudor brown chief operating officer
mike muller chief technology officer
mike inglis executive vice president sales and marketing
simon segars executive vice president business development
peter cawdron independent nonexecutive director and financial expert
lucio lanza independent nonexecutive director
kathleen o’donovan independent nonexecutive director and financial
expert – appointed 7 december 2006
philip rowley independent nonexecutive director and financial expert
john scarisbrick independent nonexecutive director
jeremy scudamore independent nonexecutive director
sir robin saxby kbe chairman – retired 1 october 2006
mark templeton resigned 25 july 2006
directors’ reportuk reporting arm annual report and accounts 2006 27
election and reelection of directors
in accordance with article 79 of the group’s articles of association
warren east and lucio lanza will retire by rotation at the company’s
annual general meeting agm and will seek reelection at that meeting
kathleen o’donovan and young sohn retire under article 83 and are
seeking election at that meeting see pages 18 to 19 for the directors’
biographies
directors’ shareholdings in the company
the interests of the directors in the company’s ordinary shares of
005 pence all of which were beneficially held are disclosed in the
remuneration report on page 30
substantial shareholdings
the directors are aware of the following substantial interests in the
issued share capital of the company as at 28 march 2007
percentage of issued
ordinary share capital
fidelity investments 1325
janus capital corporation 1104
capital group companies 885
legal and general investment management 623
nordea investment management 337
mfs international 309
save for the above the company has not been notified as at 28 march
2007 of any material interest of 3 or more or any nonmaterial
interest exceeding 10 of the issued share capital of the company
disabled persons
the group has a strong demand for highlyqualified staff and as such
disability is not seen to be an inhibitor to employment or career
development in the event of any staff becoming disabled while with
the group their needs and abilities would be assessed and the group
would where possible seek to offer alternative employment to them
if they were no longer able to continue in their current role
employee involvement
as the group is an ip enterprise it is vital that all levels of staff are
consulted and involved in its decisionmaking processes to this end
internal conferences and communications meetings are held regularly
which involve employees from all parts of the group in discussions on
future strategy and developments furthermore employee share
ownership is encouraged and all employees are able to participate in
one of the group’s schemes to encourage share ownership the group
has an informal and delegated organisational structure it does not
presently operate any collective agreements with any trade unions
policy on payment of creditors
the group’s policy is to pay suppliers before the end of the month
following receipt of the invoice unless terms have been specifically
agreed in advance this policy and any specific terms agreed with
suppliers are made known to the appropriate staff and to suppliers
on request trade creditors of the group at 31 december 2006 were
equivalent to nine days’ purchases for the group 2005 11 days’
and nil days for the company in both years
financial instruments
the group’s financial risk management and policies and exposure
to risks are detailed in note 20
annual general meeting agm
the agm will be held at 110 fulbourn road cambridge cb1 9nj uk
on 15 may 2007 at 2pm a presentation will be made at this meeting
outlining recent developments in the business the group will convey the
results of proxy votes cast at the agm shareholders are invited to submit
written questions in advance of the meeting questions should be sent to
the secretary arm holdings plc 110 fulbourn road cambridge cb1 9nj
a resolution to reappoint pricewaterhousecoopers llp as auditors to the
group will be proposed at the agm details of other resolutions to be
proposed at the meeting are set out in the circular and notice of agm
which will be sent to all shareholders together with a proxy card
statement of directors’ responsibilities
the directors are responsible for preparing the annual report remuneration
report and the financial statements in accordance with applicable law
and regulations
company law requires the directors to prepare financial statements for
each financial year that give a true and fair view of the state of affairs
of the group and the company and of the profit or loss of the group
for that period in preparing those financial statements the directors
are required to
 select suitable accounting policies and apply them consistently
 make judgments and estimates that are reasonable and prudent
 state whether applicable accounting standards have been followed
subject to any material departures disclosed and explained in the
financial statements and
 prepare the financial statements on the going concern basis unless
it is inappropriate to presume that the group and company will
continue in business
the directors confirm that they have complied with the above
requirements in preparing the financial statements the directors are
responsible for keeping proper accounting records which disclose with
reasonable accuracy at any time the financial position of the group and
company and for ensuring that the financial statements comply with
the companies act 1985 they are also responsible for the system of
internal control for safeguarding the assets of the group and company
and hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities
the directors are responsible for the maintenance and integrity of the
group’s website information published on the internet is accessible in
many countries with different legal requirements legislation in the uk
governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions
disclosure of information to auditors
so far as each director is aware there is no relevant audit information
of which the company’s auditors are unaware each director has taken
all steps that he or she ought to have taken in his or her duty as a
director in order to make himself or herself aware of any relevant audit
information and to establish that the company’s auditors are aware of
that information
by order of the board
patricia alsop company secretary 28 arm annual report and accounts 2006
remuneration committee
the remuneration committee has responsibility for determining and agreeing with the board within agreed terms of reference the group’s policy
for the remuneration of the executive directors and the individual remuneration packages for each executive director this includes basic salary
annual bonus the level and terms of conditional awards under the long term incentive plan and the terms of performance conditions that apply to
such benefits pension rights and any compensation payments where the remuneration committee considers it appropriate the committee will
make recommendations in relation to the remuneration of senior management the committee also liaises with the board in relation to the
preparation of the board’s annual report to shareholders on the group’s policy on the remuneration of executive directors and in particular the
directors’ remuneration report as required by the companies act 2005 the combined code and the listing rules of the financial services authority
chairmanship of the committee passed to jeremy scudamore on 1 october 2006 on the appointment of doug dunn as group chairman and the
other members are peter cawdron and kathleen o’donovan who was appointed with effect from 1 january 2007 in place of john scarisbrick
the committee met four times during 2006 given their diverse experience the three independent nonexecutive directors are able to offer a
balanced view with respect to remuneration issues for the group the committee has access to professional advice from external advisers generally
appointed by the executive vice president human resources in the furtherance of its duties and makes use of such advice during 2006 kpmg
provided advice on the new deferred annual bonus plan and employee equity plan linklaters provided legal services deloitte and the executive
vice president human resources have provided other advice or services to the committee and to the group the chief executive officer and the
executive vice president human resources normally attend for part of remuneration committee meetings no director is involved in deciding his
own remuneration
following an extensive review of executive remuneration by the remuneration committee a new deferred annual bonus plan for executive
directors and senior managers and an employee equity plan for all other employees were approved by shareholders at the 2006 agm these
plans brought the remuneration structure more closely in line with uk market norms increased alignment between remuneration and financial
performance and strengthened the retention aspect of the deferred bonus cessation of option grants to executive directors other than in
exceptional circumstances and the reduction from three plans to two for executive directors and senior managers together with the move
away from options to shares for all employees reduces potential dilution and simplifies remuneration arrangements
remuneration policy
the remuneration committee in its deliberations on the remuneration policy for the group’s directors seeks to give full consideration to the
principles set out in the combined code the committee also monitors developments in the accounting for equitybased remuneration on an
ongoing basis
the group operates a remuneration policy and framework for executive directors designed to ensure that it attracts and retains the highquality
management skills necessary to achieve a high level of corporate performance in line with the best interests of shareholders this policy seeks to
provide rewards and incentives for the remuneration of executive directors that reflect their performance and align with the objectives of the group
these comprise a mix of performancerelated and nonperformancerelated remuneration the committee believes that a director’s total remuneration
should seek to recognise his worth in the external market and to this end operates a policy of paying base salaries which are in line with the
market median as part of a total remuneration package which is upper quartile the committee believes that this is justified recognising that more
than 50 of total potential remuneration is performancerelated the committee obtains information about the external market from various surveys
including the watson wyatt high technology and executive reward surveys and the deloitte executive directors’ remuneration survey
the nature of the group’s development has meant that there has been a good deal of focus on the attainment of shortterm objectives with a high
level of variable remuneration in 2006 variable remuneration consisted of three elements annual cash bonus a conditional award under the long
term incentive plan and a final award of discretionary share options to provide potential benefits in 2009 when there would otherwise be a gap
because deferred shares under the deferred bonus plan will not vest until 2010 as described above this will reduce to two elements in 2007 both
of which are performancerelated and as a result more than half of each executive director’s remuneration is targeted to be performance linked
a shareholding guideline is in place for executive directors and certain senior managers who are required to build up a holding of shares in the
company over a period of five years the shareholdings may be built up of shares received under the company’s share option schemes andor the
long term incentive plan andor the deferred annual bonus plan and in the case of executive directors the required holding is 100 of basic salary
incentive arrangements
the remuneration committee aims to ensure that individuals are fairly rewarded for their contribution to the success of the group the various
incentive schemes that comprise the remuneration packages of executive directors and senior managers are described below
remuneration reportuk reporting arm annual report and accounts 2006 29
deferred annual bonus plan
there is a strong bonus element to executive directors’ remuneration and for 2006 a bonus of up to 125 of base salary including a personal
performance multiplier which flexes the payment by 075 to 125 could have been earned through the deferred annual bonus plan if all targets
were met there is compulsory deferral into shares of 50 of the bonus earned and an opportunity to earn an equity match of up to 21 subject
to achievement of an eps performance condition deferred shares and any matching shares earned will normally be transferred three years from
the date of award payment of bonus is subject to the achievement of us revenue and eps targets set by the remuneration committee which are
directly related to the group’s financial results and encourage the achievement of the group’s shortterm financial goals the bonuses payable to
executive directors in respect of performance during 2006 are shown in the table on page 36 and are in the range 70 to 73 of base salary
50 of which was compulsorily deferred into shares at eps growth equal to the increase in the consumer prices index “cpi” plus 4 per annum
the deferred shares will be matched on a 031 basis rising to 21 when eps growth is in excess of cpi plus 12 per annum while the deferral
can only be forfeited for gross misconduct the matching shares are subject to forfeiture for “bad leavers” for 2007 50 of bonus is dependent
on achieving the us revenue target and 50 on achieving the eps target maximum bonus is 125 of base salary depending on the personal
performance multiplier described above
existing option schemes
the grant of options under the existing share option schemes ceased once the new deferred annual bonus plan and the new employee equity
plan were approved by shareholders at the 2006 agm these plans have the facility for option grants to be made but this will be done only in
exceptional circumstances the existing option grants to executive directors remain available for exercise and vesting in accordance with the rules
of the relevant schemes in line with practice among the group’s peers in the technology sector there are generally no performance conditions
attached to the issue or exercise of discretionary options under the existing schemes except for those issued to executive directors where
performance conditions based on real eps apply share options issued to executive directors prior to their appointment to the board of the group
do not have performance conditions attached to them however discretionary options issued to executive directors after their appointment to the
board of the group do have performance conditions attached to them these discretionary options will vest after seven years but may vest after
three years from grant if the performance conditions are satisfied
the performance conditions applicable to the long term incentive plan are described in more detail below and are based on tsr rather than eps
providing the link to performance against an appropriate peer group
these performance conditions were selected having regard to the position of the group within its sector and the nature of the companies against
which it competes to attract and retain high calibre employees the committee believes that the performance conditions represent the correct
balance between being motivational and challenging
pensions
the group does not operate its own pension scheme but makes payments into a group personal pension plan which is a money purchase scheme
for executive directors the rate of group contribution is 10 of the executive’s basic salary
service agreements
executive directors have “rolling” service contracts that may be terminated by either party on one year’s notice the service contracts also terminate
when executive directors reach age 65 these agreements provide for each of the directors to provide services to the group on a fulltime basis and
contain restrictive covenants for periods of three to six months following termination of employment relating to noncompetition nonsolicitation of
the group’s customers nondealing with customers and nonsolicitation of the group’s suppliers and employees in addition each service contract
contains an express obligation of confidentiality in respect of the group’s trade secrets and confidential information and provides for the group to
own any intellectual property rights created by the directors in the course of their employment
the dates of the service contracts of each person who served as an executive director during the financial year are as follows
director date
warren east 29 january 2001
tim score 1 march 2002
tudor brown 3 april 1996
mike inglis 17 july 2002
mike muller 31 january 1996
simon segars 4 january 2005
sir robin saxby retired 1 october 2006 31 january 1996
where notice is served to terminate the appointment whether by the group or the executive director the group in its absolute discretion shall be
entitled to terminate the appointment by paying to the executive director his salary in lieu of any required period of notice 30 arm annual report and accounts 2006
remuneration reportuk reportingcontinued
nonexecutive directors
during 2006 the chairmen of the audit and remuneration committees and the senior independent director each received a total fee of £37000 per
annum and the other nonexecutive directors each received a total fee of £33000 per annum these fees were arrived at by reference to fees paid
by other companies of similar size and complexity and reflected the amount of time nonexecutive directors were expected to devote to the
group’s activities during the year which is between 10 to 15 working days a year the remuneration of the nonexecutive directors is set by the
board and the term of appointment is three years nonexecutive directors do not have service contracts are not eligible to participate in bonus or
share incentive arrangements and their service does not qualify for pension purposes or other benefits no element of their fees is performance
related share options held by lucio lanza were granted prior to the group’s acquisition of artisan and share options held by mark templeton who
resigned on 25 july 2006 were granted prior to his change of status from executive to nonexecutive director in october 2005
performance graphs
a performance graph showing the company’s total shareholder return “tsr” together with the tsr for the ftse allworld technology index from
31 december 2001 is shown below the tsr has been calculated in accordance with the directors’ remuneration report regulations 2002 the tsr
for the company’s shares was 64 over this period compared with 17 for the ftse allworld technology index for the same period
arm total shareholder return performance from 31 december 2001 to 31 december 2006
the directors consider the ftse allworld technology index to be an appropriate choice as the index contains companies from the us asia and
europe and therefore reflects the global environment in which the group operates in addition the index includes many companies that are
currently the group’s customers as well as companies which use arm technology in their end products
directors’ shareholdings in the company
the directors’ beneficial interests in the company’s ordinary shares of 005 pence which excludes interests under its share option schemes and
deferred annual bonus plan are set out below
28 march 31 december 31 december
2007 2006 2005
director number number number
warren east 302480 332480 204920
tim score 77250 147250 30000
tudor brown 1655636 1755636 1546460
mike inglis 149771 129771 10000
mike muller 1911860 1911860 1911860
simon segars 172735 172735 42000
peter cawdron 98000 98000 98000
doug dunn 48000 48000 48000
lucio lanza 1277291 1277291 1277291
kathleen o’donovan appointed 7 december 2006 –– –
philip rowley 50000 50000 24102
john scarisbrick 10800 10800 10800
jeremy scudamore 125000 125000 100000
young sohn appointed 2 april 2007 –– –
sir robin saxby retired 1 october 2006 na 19578831 21363060
mark templeton resigned 25 july 2006 na 10535552 10535552
 at date of appointment retirement or resignation
0
20
40
60
arm share price 
80
100
120
31 december 2006 31 december 2005 31 december 2004 31 december 2003 31 december 2002 31 december 2001         
ftse allworld technology arm annual report and accounts 2006 31
in addition to the interests disclosed above all the executive directors together with all the employees of the group are potential beneficiaries
of the arm holdings plc employee share ownership plan they are therefore treated as interested in all the shares held by this trust being
2882979 ordinary shares at 31 december 2006 and 5000000 ordinary shares at 31 december 2005 the executive directors also have interests
in dividend shares that could be awarded under the long term incentive plan the amount of which will depend on the extent to which the
performance criteria are satisfied and the dividends declared during the performance period there have been no changes in directors’ interests
in the company’s shares to the date of approval of the remuneration report
auditable information
the following information has been audited by the company’s auditors pricewaterhousecoopers llp  as required by schedule 7a to the companies
act 1985
interests in share options
details of discretionary options beneficially held by directors are set out below
as at as at
1 january 31 december exercise earliest
2006 granted exercised lapsed 2006 price date of expiry
director number number number number number £ exercise date
sir robin saxby 140000 – 140000 – – 1224 110302 100306
25000 ––– 25000 6155 220501 210507†
165000 – 140000 – 25000
warren east 131520 – 131520 – – 1224 110302 100306
8480 ––– 8480 1224 110302 100309
3187 ––– 3187 6155 220503 210510
20962 ––– 20962 6155 220501 210507†
62909 ––– 62909 3815 220504 220508
100000 ––– 100000 2465 190405 190409
914285 ––– 914285 04375 300106 300110
400000 ––– 400000 125 300107 300111
592417 ––– 592417 1055 040208 040212
– 573585 –– 573585 1325 010209 010213
2233760 573585 131520 – 2675825
tim score 206896 ––– 206896 2465 190405 190409
777142 ––– 777142 04375 300106 300110
320000 ––– 320000 125 300107 300111
473934 ––– 473934 1055 040208 040212
– 483019 –– 483019 1325 010209 010213
1777972 483019 –– 2260991
tudor brown 140000 – 140000 – – 1224 110302 100306
3736 ––– 3736 6155 220503 210510
21264 ––– 21264 6155 220501 210507†
2091 ––– 2091 335 140504 130511
22909 ––– 22909 335 140502 130508†
50000 ––– 50000 2465 190405 190409
731428 ––– 731428 04375 300106 300110
320000 ––– 320000 125 300107 300111
436019 ––– 436019 1055 040208 040212
– 392453 –– 392453 1325 010209 010213
1727447 392453 140000 – 1979900
mike inglis 223515 ––– 223515 21475 270503 260509†
731428 – 438856 – 292572 04375 300106 300110
288000 ––– 288000 125 300107 300111
379147 ––– 379147 1055 040208 040212
– 339623 –– 339623 1325 010209 010213
1622090 339623 438856 – 1522857 32 arm annual report and accounts 2006
remuneration reportuk reportingcontinued
as at as at
1 january 31 december exercise earliest
2006 granted exercised lapsed 2006 price date of expiry
director number number number number number £ exercise date
mike muller 140000 – 140000 – – 1224 110302 100306
3736 ––– 3736 6155 220503 210510
17615 ––– 17615 6155 220501 210507†
2091 ––– 2091 335 140504 130511
22909 ––– 22909 335 140502 130508†
50000 ––– 50000 2465 190405 190409
731428 – 731428 – – 04375 300106 300110
288000 ––– 288000 125 300107 300111
398104 ––– 398104 1055 040208 040212
– 339623 –– 339623 1325 010209 010213
1653883 339623 871428 – 1122078
simon segars 5920 – 5920 – – 1224 110302 100309
134080 – 134080 – – 1224 110302 100306
6155 ––– 6155 6155 220503 210507
6792 ––– 6792 335 140504 130511
33208 ––– 33208 335 140502 130508†
40000 ––– 40000 2465 190403 180409†
425142 – 100000 – 325142 04375 300104 290110†
224000 ––– 224000 125 300105 290111†
341232 ––– 341232 1055 040208 040212
– 316981 –– 316981 1325 010209 010213
1216529 316981 240000 – 1293510
lucio lanza 89912 ––– 89912 057 170300 160210
7498 ––– 7498 022 160501 150411
26236 ––– 26236 044 070302 060212
588134 – 588134 – – 050 090503 080413
577615 – 400000 – 177615 066 110404 100314
411421 – 411421 – – 055 110404 080414
1700816 – 1399555 – 301261
mark templeton 449561 – 449561 – – 039 180401 170410
1078947 – 1078947 – – 025 051102 041111
449561 – 309067 140494 – 047 150804 221013
170832 – 74728 96104 – 070 231204 190814
498774 –– 498774 – 1055 040208 040212
2647675 – 1912303 735372 –
 denotes share options issued under the group’s approved share option scheme
 denotes share options issued under the group’s unapproved share option scheme
 denotes share options issued under the group’s unapproved share option scheme with performance conditions attached
† denotes share options issued under the group’s unapproved share option scheme which are exercisable as follows
25 maximum from first anniversary 50 maximum from second anniversary 75 maximum from third anniversary 100 maximum on fourth anniversary
for options granted before january 2003 the performance condition is that the group must achieve average real eps growth of at least 331
ie 331 greater than the percentage over a performance period of three years from the start of the financial year in which the options were
granted the “performance period”
for options granted in 2003 and 2004 the performance conditions requiring average real eps growth of at least 331 were satisfied and 100
of the options vested on 1 february 2006 and 8 february 2007 respectively
for options granted in 2005 and 2006 under the performance condition 50 of the shares under option will vest after three years if the group
achieves average real eps growth of 125 over the performance period if average real eps growth of at least 331 is achieved over the
performance period 100 of the shares under option will vest after three years where the average real eps growth over the performance period
is between 125 and 331 the number of shares which vest after three years increases on a straightline basis arm annual report and accounts 2006 33
details of options held by directors under the group’s save as you earn option schemes are set out below
as at as at
1 january 31 december exercise
2006 granted exercised 2006 price earliest date expiry
director number number number number £ of exercise date
sir robin saxby 15771 – 15771 – 05865 010806 310107
warren east 15771 – 15771 – 05865 010806 310107
tim score 27152 –– 27152 05865 010808 310109
mike inglis 15771 – 15771 – 05865 010806 310107
mike inglis – 9109 – 9109 10264 010809 310110
options issued under this scheme are issued at a 15 discount to market value
details of options exercised by directors during the year are as follows
exercise market price on gains on
number price date of exercise exercise
director of shares £££
warren east 131520 1224 13675 18873
15771 05865 11675 9163
tudor brown 140000 1224 13628 19432
mike inglis 438856 04375 1360305 404979
15771 05865 11425 8769
mike muller 140000 1224 13628 19432
731428 04375 13628 676790
simon segars 140000 1224 13614 19231
100000 04375 13613 92380
luzio lanza 588134 050 1330286 488319
400000 066 11503 196120
411421 055 11645 252822
mark templeton 449561 039 1155869 344305
1078947 025 1155869 977385
309067 047 1155869 211979
74728 070 1155869 34066
sir robin saxby 140000 1224 1375 21140
15771 05865 11675 9163
details of options exercised by directors since the balance sheet date are as follows
exercise market price on gains on
number price date of exercise exercise
director of shares £££
mike inglis 292572 04375 13098 255211
simon segars 120000 04375 1307763 104432 34 arm annual report and accounts 2006
remuneration reportuk reportingcontinued
long term incentive plan
a long term incentive plan “ltip” was approved by shareholders at the 2003 annual general meeting conditional share awards held by directors
are as follows
market price as at as at
performance at date of 1 january conditional 31 december
period ending award 2006 award vested 2006 vesting
director 31 december award date £ number number number number date
warren east 2005 25 july 2003 0805 248447 – 248447 – february 2006
2006 3 november 2004 1005 248756 –– 248756 february 2007
2007 20 july 2005 1165 268240 –– 268240 february 2008
2008 8 may 2006 1365 – 278388 – 278388 february 2009
765443 278388 248447 795384
tim score 2005 25 july 2003 0805 211180 – 211180 – february 2006
2006 3 november 2004 1005 199005 –– 199005 february 2007
2007 20 july 2005 1165 214592 –– 214592 february 2008
2008 8 may 2006 1365 – 234432 – 234432 february 2009
624777 234432 211180 648029
tudor brown 2005 25 july 2003 0805 198758 – 198758 – february 2006
2006 3 november 2004 1005 199005 –– 199005 february 2007
2007 20 july 2005 1165 197425 –– 197425 february 2008
2008 8 may 2006 1365 – 190476 – 190476 february 2009
595188 190476 198758 586906
mike inglis 2005 25 july 2003 0805 198758 – 198758 – february 2006
2006 3 november 2004 1005 179104 –– 179104 february 2007
2007 20 july 2005 1165 171674 –– 171674 february 2008
2008 8 may 2006 1365 – 164835 – 164835 february 2009
549536 164835 198758 515613
mike muller 2005 25 july 2003 0805 198758 – 198758 – february 2006
2006 3 november 2004 1005 179104 –– 179104 february 2007
2007 20 july 2005 1165 180258 –– 180258 february 2008
2008 8 may 2006 1365 – 164835 – 164835 february 2009
558120 164835 198758 524197
simon segars 2005 25 july 2003 0805 124224 – 124224 – february 2006
2006 3 november 2004 1005 149254 –– 149254 february 2007
2007 20 july 2005 1165 154506 –– 154506 february 2008
2008 8 may 2006 1365 – 153846 – 153846 february 2009
427984 153846 124224 457606
 the performance conditions applicable to the 2003 conditional awards were satisfied to the extent of 1759 plus dividend shares as detailed below
 the performance conditions applicable to the 2004 conditional awards were not satisfied and these awards lapsed in january 2007 arm annual report and accounts 2006 35
conditional awards vest to the extent that the performance criteria are satisfied over a threeyear performance period from 1 january of the year
of award and no retesting thereafter is possible the performance conditions are based on the company’s tsr when measured against that of two
comparator groups each testing half of the shares comprised in the award the first index comprises uk companies across all sectors ftse 350
and the second comprises predominantly us companies within the hi tech sector ftse global technology index for each comparator group the
number of shares that may vest may be up to a maximum of 200 of the shares conditionally awarded if the company’s tsr ranks in the upper
decile 50 will vest in the event of median performance and between median and upper decile performance vesting will increase on a straight
line basis additional shares may vest to cover dividends paid by the company during the performance period no shares will be received for
belowmedian performance in addition no shares will vest unless the committee is satisfied that there has been a sustained improvement
in the underlying financial performance of the company
the performance conditions applicable to the conditional awards granted on 25 july 2003 were satisfied to the extent of 1759 plus dividend
shares which vested on 1 february 2006 as follows
conditional vested dividend total market value
award award shares award at vesting
director number number number number £
warren east 248447 437018 6771 443789 605550
tim score 211180 371465 5755 377220 514717
tudor brown 198758 349616 5416 355032 484441
mike inglis 198758 349616 5416 355032 484441
mike muller 198758 349616 5416 355032 484441
simon segars 124224 218510 3385 221895 302776
total 1180125 2075841 32159 2108000 2876366
the following awards over ordinary shares were made under the ltip on 8 february 2007 warren east 308594 tim score 261719 tudor brown
214844 mike inglis 187500 mike muller 183594 and simon segars 179688
deferred annual bonus plan
as described above there is a compulsory deferral of 50 of the annual bonus earned by executive directors in the year the emoluments detailed
below include the full bonus earned although only half has been settled in cash and the deferred element will be settled in shares after three
years the following awards over ordinary shares were made on 8 february 2007 in respect of the deferred portion of the 2006 bonus
warren east 108828 tim score 91645 tudor brown 74461 mike inglis 64438 mike muller 61860 and simon segars 57736
except as described above there have been no changes in directors’ interests under the group’s share option ltip or deferred annual bonus
schemes since the end of the 2006 financial year up to the date of approval of the remuneration report
the company’s register of directors’ interests contains full details of directors’ shareholdings options to subscribe for shares and conditional awards
under the ltip 
share prices
the market value of the shares of the company as at 31 december 2006 was 12575 pence the closing midprice ranged from 99 pence to
141 pence during the year 36 arm annual report and accounts 2006
remuneration reportuk reportingcontinued
directors’ emoluments
the emoluments of the executive directors of the group in respect of services to the group were paid through its whollyowned subsidiary
arm limited whilst the nonexecutive directors were paid through arm holdings plc with the exception of lucio lanza and mark templeton
who were paid through arm physical ip inc and were as follows
pension
basic bonus pension total subtotal contributions total
fees salary benefits payments subtotal contributions 2006 2005 2005 2005
director ££ £££ £ £ ££ £
executive
warren east – 380000 11931 278599 670530 31140 701670 331000 10470 341470
tim score – 320000 20154 234610 574764 26640 601404 267171 10470 277641
tudor brown – 260000 11931 190621 462552 22140 484692 246719 10470 257189
mike inglis – 225000 11931 164960 401891 19515 421406 216071 10470 226541
mike muller – 225000 11931 158862 395793 19515 415308 226287 10470 236757
simon segars – 210000 11931 147804 369735 18390 388125 228984 10470 239454
sir robin saxby – 112500 8948 – 121448 25350 146798 154775 26175 180950
total – 1732500 88757 1175456 2996713 162690 3159403 1671007 88995 1760002
nonexecutive
doug dunn 65250 –– – 65250 – 65250 33000 – 33000
peter cawdron 37000 –– – 37000 – 37000 33000 – 33000
lucio lanza 33000 –– – 33000 – 33000 30000 – 30000
kathleen o’donovan 2354 –– – 2354 – 2354 –– –
philip rowley 35728 –– – 35728 – 35728 30000 – 30000
john scarisbrick 33000 –– – 33000 – 33000 30000 – 30000
jeremy scudamore 34000 –– – 34000 – 34000 30000 – 30000
mark templeton 16500 –– – 16500 – 16500 180610 8708 189318
total 256832 –– – 256832 – 256832 366610 8708 375318
total 256832 1732500 88757 1175456 3253545 162690 3416235 2037617 97703 2135320
 m templeton’s fees are for the period up to his date of resignation on 25 july 2006 k o’donovan’s fees are for the period from appointment on 7 december 2006
 all the executive directors receive family healthcare and annual travel insurance as part of their benefits in kind in addition t score has the use of a company car and w east t brown m inglis m muller
and s segars receive a car and petrol allowance
 the bonus payments above represent the full bonus earned during 2006 according to the terms of the deferred annual bonus 50 of this bonus is paid in cash and 50 is deferred and becomes payable
in shares after three years details of the awards made in february 2007 in respect of these deferrals are detailed above
it is the company’s policy to allow executive directors to hold nonexecutive positions at other companies and to receive remuneration for their
services the board believes that experience of the operations of other companies and their boards and committees is valuable to the development
of the executive directors details of executive directors’ roles within other companies and their remuneration are as follows
warren east is a nonexecutive director of reciva limited and of de la rue holdings plc the group holds 143 of the issued share capital of
reciva limited and more details about this investment are included in note 14 on page 56 in relation to reciva limited he was awarded options on
17 february 2006 which vested monthly in equal instalments as to 1360 shares at an option price of £1650 between march and july 2006 and as
to 1080 shares at an option price of £2500 between august 2006 and january 2007 and received no other remuneration in relation to de la rue
holdings plc he joined the board in january 2007 so did not receive remuneration in 2006
tudor brown is a nonexecutive director of ant plc in this capacity he received remuneration totalling £30000 up to 31 december 2006 2005
£20000 mike inglis is a nonexecutive director of superscape group plc the group holds 812 of the issued share capital of superscape group
plc and more details about this investment are included in note 14 on page 56 in this capacity mike inglis received remuneration totalling £17019
up to 31 december 2006 and options over 13333 shares in superscape group plc vested and are exercisable until 7 january 2014 at an option
price of 33 pence tim score is a nonexecutive director of national express group plc in this capacity he received remuneration totalling £45000
up to 31 december 2006 simon segars was a nonexecutive director of plastic logic limited during 2006 and in this capacity he received
remuneration totalling £15000 up to 31 december 2006 2005 £10000
all the executive directors are accruing benefits under a money purchase pension scheme as a result of their services to the group contributions
for which were all paid during the year
jeremy scudamore chairman of the remuneration committee arm annual report and accounts 2006 37
independent auditors’ report to the shareholders of arm holdings plcifrs
arm annual report and accounts 2006 37
we have audited the group financial statements of arm holdings plc for the year ended 31 december 2006 which comprise the consolidated income
statement the consolidated balance sheet the consolidated cash flow statement the consolidated statement of change in shareholders’ equity and
the related notes these group financial statements have been prepared under the accounting policies set out therein
we have reported separately on the parent company financial statements of arm holdings plc for the year ended 31 december 2006 and on the
information in the remuneration report that is described as having been audited
respective responsibilities of directors and auditors
the directors’ responsibilities for preparing the annual report and the group financial statements in accordance with applicable law and international financial
reporting standards “ifrs” as adopted by the european union are set out in the statement of directors’ responsibilities
our responsibility is to audit the group financial statements in accordance with relevant legal and regulatory requirements and international standards
on auditing uk and ireland this report including the opinion has been prepared for and only for the company’s members as a body in accordance with
section 235 of the companies act 1985 and for no other purpose we do not in giving this opinion accept or assume responsibility for any other purpose
or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing
we report to you our opinion as to whether the group financial statements give a true and fair view and whether the group financial statements have
been properly prepared in accordance with the companies act 1985 and article 4 of the ias regulation we also report to you whether in our opinion
the information given in the directors’ report is consistent with the group financial statements
in addition we report to you if in our opinion we have not received all the information and explanations we require for our audit or if information specified
by law regarding director’s remuneration and other transactions is not disclosed
we review whether the corporate governance statement reflects the company’s compliance with the nine provisions of the combined code 2003 specified
for our review by the listing rules of the financial services authority and we report if it does not we are not required to consider whether the board’s
statements on internal control cover all risks and controls or form an opinion on the effectiveness of the group’s corporate governance procedures or its risk
and control procedures
we read other information contained in the annual report and consider whether it is consistent with the audited group financial statements the other
information comprises only arm at a glance the chairman’s statement the chief executive officer’s review of operations the financial review directors
and advisors the corporate governance statement the corporate social responsibility statement the directors’ report and that part of the remuneration
report that is unaudited we consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with
the group financial statements our responsibilities do not extend to any other information
basis of audit opinion
we conducted our audit in accordance with international standards on auditing uk and ireland issued by the auditing practices board an audit includes
examination on a test basis of evidence relevant to the amounts and disclosures in the group financial statements it also includes an assessment of the
significant estimates and judgments made by the directors in the preparation of the group financial statements and of whether the accounting policies are
appropriate to the group’s circumstances consistently applied and adequately disclosed
we planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the group financial statements are free from material misstatement whether caused by fraud or other
irregularity or error in forming our opinion we also evaluated the overall adequacy of the presentation of information in the group financial statements
opinion
in our opinion
– the group financial statements give a true and fair view in accordance with ifrs as adopted by the european union of the state of the group’s affairs
as at 31 december 2006 and of its profit and cash flows for the year then ended
– the group financial statements have been properly prepared in accordance with the companies act 1985 and article 4 of the ias regulation and
– the information given in the directors’ report is consistent with the group financial statements
pricewaterhousecoopers llp
chartered accountants and registered auditors
london
2 april 2007 2006 2005
note £000 £000
revenues
product revenues 247194 217711
service revenues 16060 14728
total revenues 2 263254 232439
cost of revenues
product costs 24156 19265
service costs 6669 7345
total cost of revenues 30825 26610
gross profit 232429 205829
operating expenses
research and development 84494 80273
sales and marketing 53180 47389
general and administrative 50127 43010
profit on disposal of availableforsale investment 5270 –
total operating expenses 182531 170672
profit from operations 49898 35157
investment income 6758 5317
profit before tax 6 56656 40474
tax 7 8068 10827
profit for the year 48588 29647
earnings per share
basic and diluted earnings 48588 29647
number of shares ‘000
basic weighted average number of shares 1366816 1369335
effect of dilutitive securities
employee incentive schemes 35145 55027
diluted weighted average number of shares 1401961 1424362
basic eps 9 36p 22p
diluted eps 9 35p 21p
all activities relate to continuing operations all the profit for the year is attributable to the equity holders of the parent the company has opted to present
its own accounts under uk gaap  the accompanying notes are an integral part of the financial statements
details of dividends paid and proposed are in notes 8 and 29 of the financial statements respectively
38 arm annual report and accounts 2006
consolidated income statementifrs
for the year ended 31 december 2006 2006 2005
note £000 £000
assets
current assets
cash and cash equivalents 10 90743 128077
financial assets shortterm investments 14 18600 23990
shortterm marketable securities 14 19151 8835
fair value of currency exchange contracts 14 439 –
accounts receivable 11 69552 55518
prepaid expenses and other assets 12 12229 12567
current tax assets 5761 –
inventories finished goods 13 1933 1490
total current assets 218408 230477
noncurrent assets
financial assets availableforsale investments 14 3855 8800
prepaid expenses and other assets 12 1328 1674
property plant and equipment 15 10296 9003
goodwill 16 428366 474338
other intangible assets 17 62913 79743
deferred tax assets 7 19090 13633
total noncurrent assets 525848 587191
total assets 744256 817668
liabilities and shareholders’ equity
current liabilities
accounts payable 1826 2221
current tax liabilities 5572 10826
accrued and other liabilities 18 36119 26519
financial liabilities fair value of currency exchange contracts 19 – 1708
deferred revenue 31485 20354
total current liabilities 75002 61628
net current assets 143406 168849
noncurrent liabilities
deferred tax liabilities 7 6050 9193
total liabilities 81052 70821
net assets 663204 746847
capital and reserves attributable to equity holders of the company
share capital 21 695 693
share premium account 449195 447091
share option reserve 61474 61474
retained earnings 163731 166656
revaluation reserve 544 2921
cumulative translation adjustment 11347 68012
total equity 663204 746847
the accompanying notes are an integral part of the financial statements the financial statements on pages 38 to 77 were approved by the board of directors
on 2 april 2007 and were signed on its behalf by
doug dunn chairman
arm annual report and accounts 2006 39
consolidated balance sheetifrs
at 31 december 2006 2006 2005
£000 £000
operating activities
profit from operations 49898 35157
depreciation and amortisation of tangible and intangible assets 26726 28608
profit on disposal of availableforsale investment 5270 –
loss on disposal of property plant and equipment 63 16
impairment of availableforsale investments – 337
compensation charge in respect of sharebased payments 17437 20863
provision for doubtful debts 932 722
provision for obsolescence of inventories 65 22
changes in working capital
accounts receivable 18986 21247
inventories 508 519
prepaid expenses and other assets 1015 61
fair value of currency exchange contracts 2147 3382
accounts payable 672 1931
deferred revenue 11071 2043
accrued and other liabilities 4723 7199
cash generated by operations before tax 84347 56107
income taxes paid 21147 14447
net cash from operating activities 63200 41660
investing activities
interest received 6636 5444
purchases of property plant and equipment 7189 5492
proceeds on disposal of property plant and equipment 31 37
purchases of other intangible assets 1370 572
purchases of availableforsale investments 165 274
proceeds on disposal of availableforsale investments 5567 96
purchase of shortterm investments 4926 599
purchase of subsidiaries net of cash acquired 17270 20304
net cash used in investing activities 18686 21664
financing activities
cash received on issue of new share capital on exercise of share options 2106 13083
proceeds received on issuance of shares from treasury 15754 838
purchase of own shares 76519 16211
dividends paid to shareholders 12367 10436
net cash used in financing activities 71026 12726
net decreaseincrease in cash and cash equivalents 26512 7270
cash and cash equivalents at beginning of the year 128077 110561
effect of foreign exchange rate changes 10822 10246
cash and cash equivalents at end of the year 90743 128077
 the aggregate cash outflow for purchase of subsidiaries in 2006 was £17241000 2005 £23247000 and net overdraft acquired was £29000 2005 net cash of £2943000
the accompanying notes are an integral part of the financial statements
40 arm annual report and accounts 2006
consolidated cash flow statementifrs
for the year ended 31 december 2006 attributable to equity holders of the company
share share cumulative
share premium option retained revaluation translation
capital account reserve earnings reserve adjustment total
£000 £000 £000 £000 £000 £000 £000
balances
at 31 december 2004 675 434026 61474 140291 5237 835 642538
dividends ––– 10436 –– 10436
movement on tax arising on share options ––– 4408 –– 4408
tax benefits on exercise of options issued
as part consideration for a business
combination ––– 6072 –– 6072
purchase of own shares ––– 16211 –– 16211
proceeds from sale of own shares ––– 838 –– 838
unrealised holding losses on availableforsale
investments net of deferred tax of £981000 –––– 2316 – 2316
currency translation adjustment ––––– 67177 67177
total incomeexpense recognised directly
in equity in 2005 ––– 24145 2316 67177 40716
shares issued on exercise of options 18 13065 –––– 13083
profit for the year ––– 29647 –– 29647
credit in respect of employee share schemes ––– 20863 –– 20863
balances
at 31 december 2005 693 447091 61474 166656 2921 68012 746847
dividends ––– 12367 –– 12367
movement on tax arising on share options ––– 4182 –– 4182
purchase of own shares ––– 18622 –– 18622
appropriation for future cancellation of shares ––– 57897 –– 57897
proceeds from sale of own shares ––– 15754 –– 15754
realised gain on availableforsale investments
transferred to profit for the year
net of tax benefit of £850000 –––– 2375 – 2375
unrealised holding losses on availableforsale
investments net of deferred tax of £477000 –––– 1090 – 1090
currency translation adjustment ––––– 79359 79359
total expense recognised directly
in equity in 2006 ––– 68950 3465 79359 151774
shares issued on exercise of options 2 2104 –––– 2106
profit for the year ––– 48588 –– 48588
credit in respect of employee share schemes ––– 17437 –– 17437
balances
at 31 december 2006 695 449195 61474 163731 544 11347 663204
 own shares held offset within retained earnings is an amount of £58245000 2005 £16315000 representing the cost of own shares held these
shares are expected to be used in part for the benefit of the group’s employees and directors to satisfy share option restricted stock units rsus and
conditional share awards in future periods own shares held include £348000 2005 £1438000 being the cost of 1201434 2005 5000000 shares
in the company held by the group’s esop  own shares also include £57897000 2005 £14877000 being the cost of 49500000 2005 12751107
shares in the company which are expected to be cancelled in 2007 refer to note 22 for further details on the movement on these balances in 2006
 revaluation reserve the group includes on its balance sheet publicly traded investments which are classified as availableforsale these are carried at
market value unrealised holding gains or losses on such securities are included net of related taxes within the revaluation reserve any unrealised gains
within this reserve are undistributable
arm annual report and accounts 2006 41
consolidated statement of changes in shareholders’ equityifrs
for the year ended 31 december 2006 1 the group and a summary of its significant accounting policies
the business of the group arm holdings plc and its subsidiary companies “arm” or “the group” design reduced instruction set computing risc
microprocessors physical ip and related technology and software and sell development systems to enhance the performance costeffectiveness and power
efficiency of highvolume embedded applications the group licenses and sells its technology and products to leading international electronics companies
which in turn manufacture market and sell microprocessors applicationspecific integrated circuits asics and applicationspecific standard processors assps
based on the group’s architecture to systems companies for incorporation into a wide variety of end products by creating a network of partners and working
with them to best utilise the group’s technology the group is establishing its architecture as a risc processor for use in many highvolume embedded
microprocessor applications including digital cellular phones modems and automotive functions and for potential use in many growing markets including
smart cards and digital video the group also licenses and sells development systems direct to systems companies and provides consulting and support
services to its licensees systems companies and other systems designers the group’s principal geographic markets are europe the us and asia pacific
incorporation and history arm is a public limited company incorporated and domiciled under the laws of england and wales the registered office of
the company is 110 fulbourn road cambridge cb1 9nj the company was formed on 16 october 1990 as a joint venture between apple computer uk
limited and acorn computers limited and operated under the name advanced risc machines holdings limited until 10 march 1998 when its name was
changed to arm holdings plc its initial public offering was on 17 april 1998
group undertakings include arm limited incorporated in the uk arm inc incorporated in the us arm kk incorporated in japan arm korea limited
incorporated in south korea arm france sas incorporated in france soisic sa incorporated in france acquired during 2006 arm belgium nv
incorporated in belgium arm germany gmbh incorporated in germany keil elektronik gmbh incorporated in germany arm norway as incorporated
in norway acquired and renamed during 2006 arm embedded technologies pvt limited incorporated in india arm physical ip asia pacific pte limited
incorporated in singapore arm taiwan limited incorporated in taiwan and arm consulting shangai co limited incorporated in pr china
basis of preparation these financial statements have been prepared in accordance with international financial reporting standards ifrs as adopted
by the eu and ifric interpretations and with those parts of the companies act 1985 applicable to companies reporting under ifrs
the financial statements have been prepared under the historical cost convention as modified by the revaluation of availableforsale investments and
derivative instruments
critical accounting estimates and judgments
the preparation of financial statements in accordance with generally accepted accounting principles requires the directors to make critical accounting
estimates and judgments that affect the amounts reported in the financial statements and accompanying notes these estimates and judgments are
continually evaluated and are based on historical experiences and other factors including expectations of future events that are believed to be reasonable
under the circumstances the resulting accounting estimates will by definition seldom equal the related actual results the estimates and assumptions that
have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below
impairment of goodwill the group tests goodwill for impairment at least annually this requires an estimation of the value in use of the cash
generating units cgus to which goodwill is allocated as discussed in detail in note 16 estimating the value in use requires the group to make an
estimate of the expected future cash flows from the cgus and also to choose a suitable discount rate in order to calculate the present values of those
cash flows
provisions for income taxes the group is subject to income taxes in numerous jurisdictions significant judgment is required in determining the
worldwide provision for income taxes there are many transactions and calculations for which the ultimate tax determination is uncertain during the
ordinary course of business the group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due
where the final tax outcome of these matters is different from the amounts that were initially recorded such differences will impact the income tax and
deferred tax provisions in the period in which such determination is made
provision for impairment of trade receivables the group assesses trade receivables for impairment which requires the directors to estimate the
likelihood of payment forfeiture by customers
legal settlements and other contingencies determining the amount to be accrued for legal settlement requires the directors to estimate the
committed future legal and settlement fees the group is expecting to incur where suits are filed against the group for infringement of patents the
directors assess the extent of any potential infringement based on legal advice and written opinions received from external counsel and then estimate
the level of accrual required
contingent consideration for an acquisition is recognised as part of the purchase consideration if the contingent conditions are expected to be satisfied
this requires the directors to estimate the acquiree’s future financial performance typically more than one year postacquisition
revenue recognition revenue from the sale of licence agreements which are designed to meet the specific requirements of each customer is
recognised on a percentageofcompletion method basis use of this method requires the directors to estimate the total project resource requirement and
also any losses on uncompleted contracts
principles of consolidation the consolidated financial statements incorporate the financial statements of the company and all its subsidiaries intragroup
transactions including sales profits receivables and payables have been eliminated on consolidation all subsidiaries use uniform accounting policies for like
transactions and other events and similar circumstances
business combinations the results of subsidiaries acquired in the year are included in the income statement from the date they are acquired on acquisition
all of the subsidiaries’ assets and liabilities that exist at the date of acquisition are recorded at their fair values reflecting their condition at that date
42 arm annual report and accounts 2006
notes to the ifrs financial statements 1 the group and a summary of its significant accounting policies continued
goodwill goodwill represents the excess of the fair value of the consideration paid on acquisition of a business over the fair value of the assets including
any intangible assets identified and liabilities acquired goodwill is not amortised but is measured at cost less impairment losses in determining the fair
value of consideration the fair value of equity issued is the market value of equity at the date of completion the fair value of share options assumed
is calculated using the blackscholes valuation model and the fair value of contingent consideration is based upon whether the directors believe any
performance conditions will be met and thus whether any further consideration will be payable
as permitted by ifrs 1 “firsttime adoption of international financial reporting standards” goodwill arising on acquisitions before 1 january 2004 date of
transition to ifrs has been frozen at the uk gaap amounts subject to being tested for impairment at that date goodwill is tested for impairment at least
annually the group performs its annual impairment review at the cashgenerating unit level at the date of transition and at the annual tests in 2005 and
2006 impairment tests showed there was no impairment with respect to goodwill
availableforsale investments publiclytraded investments are classified as availableforsale and are carried at market value unrealised holding gains
or losses on such securities are included net of related taxes directly in equity via a revaluation reserve impairment losses and realised gains and losses
of such securities are reported in earnings equity securities that are not publicly traded are also classified as availableforsale and are recorded at fair value
at 31 december 2006 and 2005 the estimated fair value of these investments approximated to cost less any permanent diminution in value based on
estimates determined by the directors
research and development expenditure all ongoing research expenditure is expensed in the period in which it is incurred where a product is technically
feasible production and sale are intended a market exists expenditure can be measured reliably and sufficient resources are available to complete the
project development costs are capitalised and amortised on a straightline basis over the estimated useful life of the respective product the group believes
its current process for developing products is essentially completed concurrently with the establishment of technological feasibility which is evidenced by a
working model accordingly development costs incurred after the establishment of technological feasibility have not been significant and therefore no costs
have been capitalised to date
where no internallygenerated intangible asset can be recognised development expenditure is recognised as an expense in the period in which it is incurred
any collaborative agreements whereby a third party agrees to partially fund the group’s research and development is recognised over the period of the
agreement as a credit within research and development costs
impairment charges the group considers at each reporting date whether there is any indication that noncurrent assets are impaired if there is such an
indication the group carries out an impairment test by measuring the assets’ recoverable amount which is the higher of the assets’ fair value less costs to
sell and their value in use if the recoverable amount is less than the carrying amount an impairment loss is recognised and the assets are written down to
their recoverable amount in addition as discussed under “goodwill” above goodwill is tested for impairment at least annually
revenue recognition the group follows the principles of ias 18 “revenue recognition” in determining appropriate revenue recognition policies in principle
therefore revenue is recognised to the extent that it is probable that the economic benefits associated with the transaction will flow into the group
revenue excluding vat comprises the value of sales of licences royalties arising from the resulting sale of licensees’ arm technologybased products
revenues from support maintenance and training consulting contracts and the sale of boards and software toolkits
revenue from standard licence products which are not modified to meet the specific requirements of each customer is recognised when the risks and
rewards of ownership of the product are transferred to the customer
many licence agreements are for products which are designed to meet the specific requirements of each customer revenue from the sale of such licences
is recognised on a percentageofcompletion basis over the period from signing of the licence to customer acceptance under the percentageofcompletion
method provisions for estimated losses on uncompleted contracts are recognised in the period in which the likelihood of such losses is determined the
percentageofcompletion is measured by monitoring progress using records of actual time incurred to date in the project compared with the total estimated
project requirement which approximates to the extent of performance
where invoicing milestones on licence arrangements are such that the receipts fall due significantly outside the period over which the customisation is
expected to be performed or significantly outside its normal payment terms for standard licence arrangements the group evaluates whether it is probable
that economic benefits associated with these milestones will flow to the group and therefore whether these receipts should initially be included in the
arrangement consideration in particular it considers
– whether there is sufficient certainty that the invoice will be raised in the expected timeframe particularly where the invoicing milestone is in some way
dependent on customer activity
– whether it has sufficient evidence that the customer considers that the group’s contractual obligations have been or will be fulfilled
– whether there is sufficient certainty that only those costs budgeted to be incurred will indeed be incurred before the customer will accept that a future
invoice may be raised and
– the extent to which previous experience with similar product groups and similar customers support the conclusions reached
where the group considers that there is insufficient evidence that it is probable that the economic benefits associated with such future milestones will flow
to the group taking into account these criteria such milestones are excluded from the arrangement consideration until there is sufficient evidence that it is
probable that the economic benefits associated with the transaction will flow into the group the group does not discount future invoicing milestones as the
effect of so doing would be immaterial
if the amount of revenue recognised exceeds the amounts invoiced to customers the excess amount is recorded as amounts recoverable on contracts
within accounts receivable
arm annual report and accounts 2006 43 1 the group and a summary of its significant accounting policies continued
where agreements involve several components the entire fee from such arrangements is allocated to each of the individual components based on each
component’s fair value where fair value is the price that is regularly charged for an item when sold separately the group uses vendorspecific objective
evidence vsoe of fair value to determine fair value of the individual components in multiplecomponent agreements vsoe is determined by reference
to licence agreements with other customers where the components are sold where fair value is the price that is regularly charged for an item when sold
separately where in substance two elements of a contract are linked and cannot be allocated to the individual components the revenue recognition
criteria are applied to the elements as if they were a single element
agreements including rights to unspecified products as opposed to unspecified upgrades and enhancements are accounted for using subscription accounting
with revenue from the arrangement being recognised on a straightline basis over the term of the arrangement or an estimate of the economic life of the
products offered if no term is specified beginning with the delivery of the first product
certain products have been codeveloped by the group and a collaborative partner with both parties retaining the right to sell licences to the product
in those cases where the group makes sales of these products and is exposed to the significant risks and benefits associated with the transaction the total
value of the licence is recorded as revenue and the amount payable to the collaborative partner is recorded as cost of sales where the collaborative partner
makes sales of these products the group records as revenue the commission it is due when informed by the collaborative partner that a sale has been
made and cash has been collected
in addition to the licence fees contracts generally contain an agreement to provide postdelivery service support in the form of support maintenance and
training which consists of the right to receive services andor unspecified product upgrades or enhancements that are offered on a whenandifavailable
basis fees for postdelivery service support which takes place after customer acceptance of delivery are generally specified in the contract revenue related
to postdelivery service support is recognised based on vsoe of fair value which is determined with reference to contractual renewal rates if no renewal
rates are specified the entire fee under the transaction is amortised and recognised on a straightline basis over the contractual postdelivery service support
period where renewal rates are specified revenue for postdelivery service support is recognised on a straightline basis over the period for which support
and maintenance is contractually agreed by the group with the licensee
the excess of licence fees and postdelivery service support invoiced over revenue recognised is recorded as deferred revenue
sales of software including development systems which are not specifically designed for a given licence such as offtheshelf software are recognised
upon delivery when the significant risks and rewards of ownership have been transferred to the customer at that time the group has no further obligations
except that where necessary the costs associated with providing pcs have been accrued services such as training that the group provides which are
not essential to the functionality of the ip are separately stated and priced in the contract and therefore accounted for separately revenue is recognised
as services are performed and it is probable that the economic benefits associated with the transaction will flow into the group
royalty revenues are earned on sales by the group’s customers of products containing arm technology royalty revenues are recognised when it is probable
that the economic benefits associated with the transaction will flow to the group and the amount of revenue can be reliably measured
revenue from consulting is recognised when the service has been provided and all obligations to the customer under the consulting agreement have been
fulfilled for larger consulting projects containing several project milestones revenue is recognised on a percentageofcompletion basis as milestones are
achieved consulting costs are recognised when incurred
as disclosed above in accordance with ias 8 “accounting policies changes in accounting estimates and errors” the group makes significant estimates
in applying its revenue recognition policies in particular as discussed in detail above estimates are made in relation to the use of the percentageof
completion accounting method which requires that the extent of progress toward completion of contracts may be anticipated with reasonable certainty
the use of the percentageofcompletion method is itself based on the assumption that at the outset of licence agreements there is an insignificant risk
that customer acceptance is not obtained the group also makes assessments based on prior experience of the extent to which future milestone receipts
represent a probable future economic benefit to the group in addition when allocating revenue to various components of arrangements involving several
components it is assumed that the fair value of each element is reflected by its price when sold separately the complexity of the estimation process and
issues related to the assumptions risks and uncertainties inherent with the application of the revenue recognition policies affect the amounts reported in
the financial statements if different assumptions were used it is possible that different amounts would be reported in the financial statements
government grants grants in respect of specific research and development projects are credited to research and development costs within the income
statement to match the projects’ related expenditure
retirement benefit costs the group contributes to defined contribution plans substantially covering all employees in europe and the us and to government
pension schemes for employees in japan south korea taiwan pr china israel and india the group contributes to these plans based upon various fixed
percentages of employee compensation and such contributions are expensed as incurred
cash and cash equivalents the group considers all highlyliquid investments with original maturity dates of three months or less to be cash equivalents
shortterm investments and shortterm marketable securities the group considers all highlyliquid investments with original maturity dates of greater
than three months but less than one year to be either shortterm investments or shortterm marketable securities any investments with a maturity date
of greater than one year from the balance sheet date are classified as long term
44 arm annual report and accounts 2006
notes to the ifrs financial statementscontinued 1 the group and a summary of its significant accounting policies continued
provision for impairment of trade receivables trade receivables are first assessed individually for impairment or collectively where the receivables are not
individually significant where there is no objective evidence of impairment for an individual receivable it is included in a group of receivables with similar
credit risk characteristics and these are collectively assessed for impairment movements in the provision for impairment of trade receivables are recorded
in the income statement
inventories inventories are stated at the lower of cost and net realisable value in general cost is determined on a firstin firstout basis and includes
transport and handling costs where necessary provision is made for obsolete slowmoving and defective inventory
property plant and equipment the cost of property plant and equipment is their purchase cost together with any incidental costs of acquisition
external costs and internal costs are capitalised to the extent they enhance the future economic benefit of the asset
depreciation is calculated so as to write off the cost of property plant and equipment less their estimated residual values which are adjusted if appropriate
at each balance sheet date on a straightline basis over the expected useful economic lives of the assets concerned the principal economic lives used for
this purpose are
freehold buildings 25 years
leasehold improvements five years or term of lease whichever is shorter
computers three to five years
fixtures and fittings five to ten years
motor vehicles four years
provision is made against the carrying value of property plant and equipment where an impairment in value is deemed to have occurred asset lives and
residual values are reviewed on an annual basis
acquired intangible assets computer software purchased patents and licences to use technology are capitalised at cost and amortised on a straightline
basis over a prudent estimate of the time that the group is expected to benefit from them which is typically three to five years costs that are directly
attributable to the development of new business application software and which are incurred during the period prior to the date that the software is placed
into operational use are capitalised external costs and internal costs are capitalised to the extent they enhance the future economic benefit of the asset
although an independent valuation is made of any intangible assets purchased as part of a business combination the directors are primarily responsible
for determining the fair value of intangible assets developed technology existing agreements and customer relationships core technology trademarks
and tradenames and order backlog are capitalised and amortised over a period of one to six years being a prudent estimate of the time that the group
is expected to benefit from them
inprocess research and development projects purchased as part of a business combination may meet the criteria set out in ifrs 3 “business combinations”
for recognition as intangible assets other than goodwill the directors track the status of inprocess research and development intangible assets such that
their amortisation commences when the assets are brought into use this typically means a writeoff period of one to five years
amortisation is calculated so as to write off the cost of intangible assets less their estimated residual values which are adjusted if appropriate at each
balance sheet date on a straightline basis over the expected useful economic lives of the assets concerned the principal economic lives used for this
purpose are
computer software three to five years
patents and licences three to five years
inprocess research and development one to five years
developed technology one to five years
existing agreements and customer relationships two to six years
core technology five years
trademarks and tradenames four to five years
order backlog one year
provision is made against the carrying value of acquired intangible assets where an impairment in value is deemed to have occurred
operating leases costs in respect of operating leases are charged on a straightline basis over the lease term even if payments are not made on such
a basis
currency translation the functional currency of each group entity is the currency of the primary economic environment in which each entity operates
the consolidated financial statements are presented in sterling which is the presentation currency of the group
transactions denominated in foreign currencies have been translated into the functional currency of each group entity at actual rates of exchange ruling
at the date of transaction monetary assets and liabilities denominated in foreign currencies have been translated at rates ruling at the balance sheet date
such exchange differences have been included in general and administrative expenses
arm annual report and accounts 2006 45 1 the group and a summary of its significant accounting policies continued
the assets and liabilities of subsidiaries denominated in foreign currencies are translated into sterling at rates of exchange ruling at the balance sheet date
income statements of overseas subsidiaries are translated at the average monthly exchange rates during the period translation differences are taken directly
to equity via the cumulative translation adjustment on disposal of a subsidiary such amounts are recycled to the income statement
goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated
at the closing rate
derivative financial instruments the group utilises currency exchange contracts to manage the exchange risk on actual transactions related to accounts
receivable denominated in a currency other than the functional currency of the business the group’s currency exchange contracts do not subject the group
to risk from exchange rate movements because the gains and losses on such contracts offset losses and gains respectively on the transactions being hedged
the currency exchange contracts and related accounts receivable are recorded at fair value at each period end fair value is estimated using the settlement
rates prevailing at the period end all recognised gains and losses resulting from the settlement of the contracts are recorded within general and administrative
expenses in the income statement the group does not enter into currency exchange contracts for the purpose of hedging anticipated transactions
embedded derivatives from time to time the group enters into contracts denominated in a currency typically us dollars that is neither the functional
currency of the group nor the functional currency of the customer or the collaborative partner where there are uninvoiced amounts on such contracts
the group carries such derivatives at fair value the resulting gain or loss is recognised in the income statement under general and administrative expenses
income taxes income taxes are computed using the liability method under this method deferred tax assets and liabilities are determined based on
temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted rates and laws that will be
in effect when the differences are expected to reverse the deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a
transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss deferred tax assets
are recognised to the extent that it is probable that future taxable profits will arise against which the temporary differences will be utilised
deferred tax is provided on temporary differences arising on investments in subsidiaries except where the timing of the reversal of the temporary difference
is controlled by the group and it is probable that the temporary difference will not reverse in the foreseeable future deferred tax assets and liabilities arising
in the same tax jurisdiction are offset
in the uk and the us the group is entitled to a tax deduction for amounts treated as compensation on exercise of certain employee share options under
each jurisdiction’s tax rules as explained under “sharebased payments” below a compensation expense is recorded in the group’s income statement over
the period from the grant date to the vesting date of the relevant options as there is a temporary difference between the accounting and tax bases
a deferred tax asset is recorded the deferred tax asset arising is calculated by comparing the estimated amount of tax deduction to be obtained in the
future based on the company’s share price at the balance sheet date with the cumulative amount of the compensation expense recorded in the income
statement if the amount of estimated future tax deduction exceeds the cumulative amount of the remuneration expense at the statutory rate the excess
is recorded directly in equity against retained earnings
as explained under “sharebased payments” below no compensation charge is recorded in respect of options granted before 7 november 2002 or in respect
of those options which have been exercised or have lapsed before 1 january 2005 nevertheless tax deductions have arisen and will continue to arise on
these options the tax effects arising in relation to these options are recorded directly in equity against retained earnings
earnings per share basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number
of ordinary shares in issue during the period excluding treasury stock and those shares held in the employee share ownership plan esop which are treated
as cancelled for diluted earnings per share the weighted number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential
ordinary shares the diluted share base for the year ended 31 december 2006 excludes incremental shares of approximately 33390000 2005 39614000
related to employee share options and rsus these shares are excluded due to their antidilutive effect as a result of the exercise price of these shares being
higher than the market price
sharebased payments the group issues equitysettled sharebased payments to certain employees in accordance with ifrs 2 “sharebased payments”
equitysettled sharebased payments are measured at fair value at the date of grant fair value is measured by use of the blackscholes pricing model
the fair value determined at the grant date of the equitysettled sharebased payments is expensed on a straightline basis over the vesting period based
on the group’s estimate of the number of shares that will eventually vest
the group operates save as you earn saye schemes in the uk and an employee share purchase plan espp in the us options under these schemes are
granted at a 15 discount to market price of the underlying shares on the date of grant the uk saye schemes are approved by the inland revenue which
stipulates that the saving period must be at least 36 months the group has recognised a compensation charge in respect of the uk saye plans and us
espps the charges for these are calculated as detailed above
the group also has an ltip on which it is also required to recognise a compensation charge under ifrs 2 calculated as detailed above
the group has applied the exemption available and has applied the provisions of ifrs 2 only to those options granted after 7 november 2002 and which
were outstanding at 31 december 2004
the sharebased payments charge is allocated to cost of sales research and development expenses sales and marketing expenses and general and
administrative expenses on the basis of headcount
46 arm annual report and accounts 2006
notes to the ifrs financial statementscontinued 1 the group and a summary of its significant accounting policies continued
employer’s taxes on share options employer’s national insurance in the uk and equivalent taxes in other jurisdictions are payable on the exercise of
certain share options in accordance with ifrs 2 this is treated as a cashsettled transaction a provision is made calculated using the fair value of the
group’s shares at the balance sheet date prorated over the vesting period of the options
employee share ownership plans the company’s esop is funded by loans from the company and the assets of which comprise shares in the company
the company recognises the assets and liabilities of the esop in its own accounts and shares held by the trust are recorded at cost as a deduction in arriving
at shareholders’ funds until such time as the shares vest unconditionally to employees
treasury shares where the company purchases its own equity share capital treasury shares the consideration paid including any directly attributable
incremental costs is deducted from equity attributable to the company’s equity holders until the shares are cancelled or reissued where such shares are
subsequently sold or reissued any consideration received net of any directly attributable incremental transaction costs and the related income tax effects
is included in equity attributable to equity holders of the company
investment income investment income relates to interest income which is accrued on a time basis by reference to the principal outstanding and at the
effective interest rate applicable
equity instruments equity instruments issued by the group are recorded at the proceeds received net of direct issue costs
dividends payable distributions to equity holders are not recognised in the income statement under ifrs but are disclosed as a component of the
movement in shareholders’ equity a liability is recorded for a dividend when the dividend is approved by the company’s shareholders interim dividends
are recognised as a distribution when paid
provisions provisions for restructuring costs and legal claims are recognised when the group has a present legal or constructive obligation as a result of
past events it is more likely than not that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated
segmental reporting the primary reporting format is based on business segments comprising the processor division the physical ip division and the
development systems division the secondary reporting format is based on geographical segments these being europe the us and asia pacific the
primary reporting format requires segmentation of the group’s revenue and result before gains or losses on the disposal of availableforsale investments
investment income and tax segment expenses are expenses that are directly attributable to a segment together with the relevant portion of other expenses
that can reasonably be allocated to the segment foreign exchange gains or losses gains or losses on the disposal of availableforsale investments
investment income and tax are not segmented the primary reporting format also requires segmentation of the group’s assets and liabilities segment
assets and liabilities include items that are directly attributable to a segment plus an allocation on a reasonable basis of shared items corporate assets
and liabilities are not included in business segments and are thus unallocated at 31 december 2006 and 2005 these comprise cash and cash equivalents
shortterm investments shortterm marketable securities taxrelated and corporate prepaid expenses and other assets and the fair value of currency
exchange contracts any current and deferred tax assets and liabilities are also not included in business segments and are thus unallocated
forthcoming accounting standards at the date of approval of these financial statements the following standards and interpretations which have not been
applied in these financial statements were in issue but not yet effective an amendment to ias 1 “presentation of financial statements capital resources”
requiring disclosure of qualitative and quantitative information about entities’ management of capital resources a new accounting standard ifrs 7 “financial
instruments disclosures” this standard replaces ias 30 “disclosures in bank financial statements” and the disclosure requirements in ias 32 “financial
instruments disclosure and presentation” and locates in one place all disclosures relating to financial instruments the new requirements incorporate many
of ias 32’s disclosures as well as additional qualitative and quantitative disclosures on the risks arising from financial instruments ifric 10 “interim financial
reporting and impairment” which addresses the interaction between the requirements of ias 34 “interim financial reporting” and the recognition of
impairment losses on goodwill in ias 36 “impairment of assets” and certain financial assets in ias 39 “financial instruments recognition and measurement”
and the effect of that interaction on subsequent interim and annual financial statements ifric 11 “ifrs 2 – group and treasury share transactions” which
clarifies how sharebased payment charges should be calculated where employees of a subsidiary receive the shares of a parent ifric 11 also addresses
the accounting for sharebased payment transactions involving two or more entities within one group and a new accounting standard ifrs 8 “operating
segments” which supersedes ias 14 “segmental reporting” under which segments were identified and reported on risk and return analysis under ifrs 8
segments are reported based on internal reporting
the directors expect that the adoption of these standards and interpretations in the future periods will have no material impact on the financial statements
when they come into effect for periods after 1 january 2007
2 segmental reporting
at 31 december 2006 the group is organised on a worldwide basis into three main business segments
processor division pd the processor division encompasses those resources that are centred around microprocessor cores including specific functions
such as graphics ip  fabric ip  embedded software and configurable digital signal processing ip 
physical ip division pipd the physical ip division is concerned with the building blocks necessary for translation of a circuit design into actual silicon
development systems division devsys the development systems division is concerned with the tools and models used to create and debug software
and systemonchip soc designs
arm annual report and accounts 2006 47 2 segmental reporting continued
following the acquisition of artisan in december 2004 the group had two reportable segments in 2005 namely pd and pipd
this was based upon the group’s internal organisation and management structure and was the primary way in which the board of directors were provided
with financial information whilst revenues were reported into four main revenue streams namely licensing royalties development systems and services
the costs operating results and balance sheets were only analysed into the two segments
in 2006 this structure and system of internal financial reporting to the board of directors was changed resulting in a third division namely devsys becoming
a separate reportable segment in 2005 the results of devsys were reported within pd but for ease of comparability have been separated out in the
comparatives below pipd consists of the business stream previously undertaken by artisan pd primarily comprises the legacy arm products and services
recent acquisitions have been allocated to the various divisions as follows axys in 2004 to devsys artisan in 2004 to pipd keg and ksi in 2005 to devsys
falanx in 2006 to pd and soisic in 2006 to pipd goodwill on each acquisition has also been allocated into these divisions except for artisan whereby this
has been allocated between pd and pipd
there are no sales between the business segments foreign exchange gains or losses gains or losses on the disposal of availableforsale investments
investment income and tax are unallocated segment assets include property plant and equipment intangible assets goodwill inventories and receivables
but exclude taxrelated and corporate assets current tax assets and deferred tax assets segment liabilities comprise operating liabilities but exclude tax
related and corporate liabilities current tax liabilities and deferred tax liabilities capital expenditure comprises additions to property plant and equipment
and other intangible assets including additions resulting from acquisitions through business combinations
primary reporting format – business segments
development
processor physical ip systems
year ended division division division unallocated group
31 december 2006 £000 £000 £000 £000 £000
revenue 180426 53996 28832 – 263254
segment profitloss before foreign exchange gains profit on disposal
of availableforsale investment investment income and tax 64727 13041 11580 – 40106
foreign exchange gains ––– 4522 4522
profit on disposal of availableforsale investment ––– 5270 5270
investment income ––– 6758 6758
profit before tax 56656
tax ––– 8068 8068
profit for the year 48588
segment assets 170819 383536 33530 – 587885
unallocated assets
– cash and cash equivalents ––– 90743 90743
– financial assets shortterm investments ––– 18600 18600
shortterm marketable securities ––– 19151 19151
fair value of currency exchange markets ––– 439 439
– taxrelated and corporate prepaid expenses and other assets ––– 2587 2587
– current tax assets ––– 5761 5761
– deferred tax assets ––– 19090 19090
total assets 744256
segment liabilities 36967 21141 11322 – 69430
unallocated liabilities
– current tax liabilities ––– 5572 5572
– deferred tax liabilities ––– 6050 6050
total liabilities 81052
other segment items
capital expenditure including acquisitions 9396 6768 3107 – 19271
depreciation 2775 1300 1210 – 5285
amortisation of other intangible assets 1870 15735 3836 – 21441
impairment of trade receivables 589 343 –– 932
other noncash expenses 23 43 62 – 128
 segment assets include £3855000 of availableforsale investments which are attributable to the processor division
 comprises gainloss on disposal of property plant and equipment and provision for obsolescence of inventories
48 arm annual report and accounts 2006
notes to the ifrs financial statementscontinued 2 segmental reporting continued
development
processor physical ip systems
year ended division division division unallocated group
31 december 2005 as restated £000 £000 £000 £000 £000
revenue 156641 50159 25639 – 232439
segment profitloss before foreign exchange losses
investment income and tax 59873 14758 7673 – 37442
foreign exchange losses ––– 2285 2285
investment income ––– 5317 5317
profit before tax 40474
tax ––– 10827 10827
profit for the year 29647
segment assets 161753 441863 37339 – 640955
unallocated assets
– cash and cash equivalents ––– 128077 128077
– financial assets shortterm investments ––– 23990 23990
shortterm marketable securities ––– 8835 8835
– taxrelated and corporate prepaid expenses and other assets ––– 2178 2178
– deferred tax assets ––– 13633 13633
total assets 817668
segment liabilities 22256 15363 11475 – 49094
unallocated liabilities
financial liabilities fair value of currency exchange contracts ––– 1708 1708
– current tax liabilities ––– 10826 10826
– deferred tax liabilities ––– 9193 9193
total liabilities 70821
other segment items
capital expenditure including acquisitions 2737 1584 11500 – 15821
depreciation of plant property and equipment 2998 1075 1826 – 5899
amortisation of other intangible assets 3561 17380 1768 – 22709
impairment of trade receivables 426 227 69 – 722
other noncash expenses 343 10 22 – 375
 segment assets include £8800000 of availableforsale investments which are attributable to the processor division
 comprises impairment of unlisted investments loss on disposal of property plant and equipment and provision for obsolescence of inventories
secondary format – geographical segments
the group manages its business segments on a global basis the operations are based in three main geographical areas the uk is the home country of the
parent the main operations in the principal territories are as follows
– europe
– united states
– asia pacific
revenue by destination segment assets capital expenditure
2006 2005 2006 2005 2006 2005
£000 £000 £000 £000 £000 £000
europe 42746 32971 372648 159675 14624 6594
united states 111194 99727 340819 637055 3552 8673
asia pacific 109314 99741 5938 7305 1095 554
263254 232439 719405 804035 19271 15821
unallocated tax assets 24851 13633
744256 817668
 destination is defined as the location of arm’s customers
arm annual report and accounts 2006 49 2 segmental reporting continued
analysis of revenue by origin
2006 2005
£000 £000
europe 198386 170505
united states 63028 59183
asia pacific 1840 2751
263254 232439
analysis of revenue by revenue stream
2006 2005
£000 £000
licensing 110548 104223
royalties 107814 87849
services 16060 14728
development systems 28832 25639
263254 232439
3 recognised income and expense
2006 2005
£000 £000
movement on tax arising on share options 4182 4408
loss on revaluation of publiclytraded availableforsale investments net of deferred tax of £477000 2005 £981000 1090 2316
foreign exchange difference on consolidation 79359 67177
total recognised lossincome recognised directly in equity for the year 76267 60453
profit for the year 48588 29647
total recognised lossincome for the year 27679 90100
all activities relate to continuing operations all of the total recognised loss for the year is attributable to the equity holders of the parent
4 key management compensation and directors’ emoluments
key management compensation
the directors are of the opinion that the key management of the group comprises the executive and nonexecutive directors of arm holdings plc together
with the board of directors of arm limited these persons have authority and responsibility for planning directing and controlling the activities of the entity
directly or indirectly at 31 december 2006 key management comprised 17 people 2005 17
the aggregate amounts of key management compensation are set out below
2006 2005
£ £
salaries and shortterm employee benefits 4169728 2420373
sharebased payments 4212981 2973424
group pension contributions to money purchase schemes 205860 124231
8588569 5518028
directors’ emoluments
the aggregate emoluments of the directors of the group are set out below
2006 2005
£ £
aggregate emoluments in respect of qualifying services 3253545 2037617
aggregate group pension contributions to money purchase schemes 162690 97703
aggregate gains on exercise of share options 3804348 –
aggregate amounts receivable under the long term incentive plan 2876366 –
10096949 2135320
detailed disclosures of directors’ emoluments are shown on page 36 details of directors’ interests in share options are shown on pages 31 and 32 which
form part of the financial statements
50 arm annual report and accounts 2006
notes to the ifrs financial statementscontinued 5 employee information
the average monthly number of persons including executive directors employed by the group during the year was
2005
2006 number
number as restated
by segment
processor division 850 703
physical ip division 417 360
development systems division 205 171
1472 1234
 refer to note 2 for the reasons of the restatement
2006 2005
number number
by activity
research and development 961 783
sales and marketing 302 286
general and administrative 209 165
1472 1234
2006 2005
£000 £000
staff costs for the above persons
wages and salaries 83007 65745
sharebased payments note 24 17437 20863
social security costs 8480 6683
other pension costs 3840 3371
112764 96662
of the total pension costs above £252000 2005 £91000 remained unpaid at the year end
6 profit before tax
the following items have been chargedcredited to the income statement in arriving at profit before tax
2006 2005
£000 £000
staff costs including sharebased payments note 5 112764 96662
cost of inventories recognised as an expense included in cost of sales 4951 4050
depreciation of property plant and equipment
– owned assets 5285 5899
amortisation of other intangible assets
– cost of sales 310 123
– research and development 9791 10052
– sales and marketing 9351 9977
– general and administrative 1989 2557
impairment of availableforsale investments – 337
profit on disposal of availableforsale investment 5270 –
loss on disposal of property plant and equipment 63 16
other operating lease rentals payable
– plant and machinery 13398 10687
– property 5402 5122
repairs and maintenance expenditure on property plant and equipment 1696 878
trade receivables impairment 932 722
amortisation of government grants 467 –
foreign exchange gainslosses 4522 2285
arm annual report and accounts 2006 51 6 profit before tax continued
services provided by the group’s auditor and its associates
during the year the group including its overseas subsidiaries obtained the following services from the group’s auditor and its associates
2006 2005
£000 £000
fees payable to the group’s auditor for the audit of the company and consolidated financial statements 320 244
fees payable to the group’s auditor and its associates for other services
– the audit of the group’s subsidiaries pursuant to legislation 222 209
– services pursuant to section 404 of the sarbanesoxley act 533 14
– other services pursuant to legislation 79 42
– tax services 861 1152
– all other services 90 113
2105 1774
in the first quarter of 2007 fees of £255000 were incurred in relation to section 404 of the sarbanesoxley act
fees payable to other major firms of accountants for nonaudit services for 2006 amount to £1466000 2005 £658000
7 tax
analysis of charge in the year
2006 2005
£000 £000
current tax 15192 16578
deferred tax 7124 5751
taxation 8068 10827
analysis of tax on items charged to equity
£000 £000
deferred tax credit on availableforsale investments 1327 981
deferred tax creditcharge on outstanding share options 399 4408
current tax benefit on share options 3783 –
deferred tax credit on tax benefits on exercise of options issued as part consideration for a business combination – 6072
the tax for the year is lower than the standard rate of corporation tax in the uk 30 the differences are explained below
2006 2005
£000 £000
profit before tax 56656 40474
profit before tax multiplied by rate of corporation tax in the uk of 30 2005 30 16997 12142
effects of
adjustments to tax in respect of prior years 1220 138
adjustments in respect of foreign tax rates 613 45
research and development tax credits 2879 1911
permanent differences – foreign exchange 4164 –
permanent differences – other 5951 1710
foreign withholding tax 2450 1444
amortisation of other intangible assets 1546 7105
timing differences in respect of sharebased payments 1415 4551
other timing differences 87 97
total taxation 8068 10827
 includes benefits resulting from restructuring following the acquisition of artisan
52 arm annual report and accounts 2006
notes to the ifrs financial statementscontinued 7 tax continued
deferred tax
deferred tax is calculated in full on temporary differences under the liability method using a tax rate relevant to each tax jurisdiction
the movement on the deferred tax account is shown below
2006 2005
£000 £000
at 1 january 4440 261
amount acquired with subsidiary undertakings 1347 3336
profit and loss credit 7124 5751
availableforsale investments 1327 981
adjustment in respect of sharebased payments 399 4408
adjustment in respect of share option benefits – 6072
transfer to current tax liabilities 757 –
exchange differences 340 881
at 31 december 13040 4440
deferred tax assets have been partially recognised in respect of tax losses and other temporary differences giving rise to deferred tax assets because
it is not probable that the unrecognised portion of these assets will be recovered the amount of deferred tax assets unrecognised at 31 december 2006
is £6049000 2005 £366000
no deferred tax is recognised on the unremitted earnings of overseas subsidiaries as the earnings are continually reinvested by the group no tax is
expected to be payable on them in the foreseeable future if the earnings were remitted tax of £10578000 would be payable
the movements in deferred tax assets and liabilities prior to offsetting of balances within the same tax jurisdiction as permitted by ias 12 “income taxes”
during the year are shown below deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an
intention to settle the balances net
deferred tax assets
amounts temporary temporary tax losses amounts
relating difference on differences and rd non relating to
to sharebased availableforsale relating to tax credits deductible share option
payments investments fixed assets carried forward reserves benefits total
£000 £000 £000 £000 £000 £000 £000
at 1 january 2006 10574 1096 5214 11988 1662 6646 34988
amount acquired with subsidiary undertakings ––– 1935 –– 1935
profit and loss chargecredit 2342 – 30 5010 1027 – 1611
availableforsale investments – 1327 –––– 1327
movement on deferred tax arising on outstanding
share options 399 ––––– 399
transfer ––– 6646 – 6646 –
exchange differences – 2620 2620
at 31 december 2006 prior to offsetting 13315 231 5244 12939 2689 – 34418
offsetting of deferred tax liabilities 15328
at 31 december 2006 after offsetting 19090
deferred tax liabilities
amounts relating
to intangible assets
arising on acquisition other total
£000 £000 £000
at 1 january 2006 29791 757 30548
amount acquired with subsidiary undertakings 3282 – 3282
movement in respect on amortisation of intangible assets 8735 – 8735
transfer to current tax liabilities – 757 757
exchange differences 2960 – 2960
at 31 december 2006 prior to offsetting 21378 – 21378
offsetting of deferred tax assets 15328
at 31 december 2006 after offsetting 6050
the deferred tax liability due after more than one year prior to offsetting is £13783000 2005 £22128000
arm annual report and accounts 2006 53 8 dividends
2006 2005
£000 £000
final 2004 paid at 042 pence per share – 5759
interim 2005 paid at 034 pence per share – 4677
final 2005 paid at 050 pence per share 6918 –
interim 2006 paid at 040 pence per share 5449 –
in addition the directors are proposing a final dividend in respect of the financial year ended 31 december 2006 of 06 pence per share which will absorb
an estimated £8002000 of shareholders’ funds it will be paid on 21 may 2007 to shareholders who are on the register of members on 4 may 2007
9 earnings per share
basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares
in issue during the year excluding those held in the esop and treasury stock which are treated as cancelled
for diluted earnings per share the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary
shares the company had two categories of dilutive potential ordinary shares during the year those being share options granted to employees and directors
where the exercise price is less than the average market price of the company’s ordinary shares during the year and the contingently issuable shares under
the company’s long term incentive plan ltip for 2006 and 2005 no shares that were allocated for awards under the ltip were included in the diluted eps
calculation as the performance criteria could not be measured until the conclusion of the performance period
reconciliations of the earnings and weighted average number of shares used in the calculations are shown on the face of the income statement
10 cash and cash equivalents
2006 2005
£000 £000
cash at bank and in hand 40477 36264
shortterm bank deposits 50266 91813
90743 128077
the effective interest rate on shortterm deposits was 47 2005 45 and these deposits have an average maturity of 38 days 2005 53 days
11 accounts receivable
2006 2005
£000 £000
amounts falling due within one year
accounts receivable 48276 37191
less provision for impairment of receivables 2556 2173
accounts receivable net 45720 35018
amounts recoverable on contracts 23832 20500
69552 55518
12 prepaid expenses and other assets
2006 2005
£000 £000
amounts falling due within one year
other receivables 2733 2259
prepayments and accrued income 9496 10308
12229 12567
within noncurrent assets is an amount of £1328000 2005 £1674000 relating to prepayments falling due after more than one year
54 arm annual report and accounts 2006
notes to the ifrs financial statementscontinued 13 inventories
2006 2005
£000 £000
finished goods 2020 1512
less provision for obsolescence of inventories 87 22
1933 1490
14 financial assets
financial assets include the following
current financial assets noncurrent financial assets
2006 2005 2006 2005
£000 £000 £000 £000
shortterm investments – uk 18372 23990 – –
shortterm investments – korea 228 – – –
listed securities
– equity securities – uk – – 1885 6995
unlisted securities
– equity securities – uk – – 50 50
– equity securities – us – – 1920 1481
– marketable securities – us 19151 8835 – –
convertible loan notes – us – – – 274
37751 32825 3855 8800
also included in current financial assets at 31 december 2006 is £439000 2005 £nil in respect of the fair value of currency exchange contracts
current financial assets
shortterm
shortterm marketable
investments securities total
£000 £000 £000
at 1 january 2006 23990 8835 32825
cash invested in shortterm investments and shortterm marketable securities 75266 56764 132030
maturity of shortterm investments and shortterm marketable securities 80656 45260 125916
revaluation surplus – 22 22
foreign exchange – 1210 1210
at 31 december 2006 18600 19151 37751
shortterm
shortterm marketable
investments securities total
£000 £000 £000
at 1 january 2005 5307 21511 26818
cash invested in shortterm investments and shortterm marketable securities 44010 – 44010
maturity of shortterm investments and shortterm marketable securities 25327 12646 37973
revaluation deficit – 30 30
at 31 december 2005 23990 8835 32825
refer to note 1 for definitions of shortterm investments and shortterm marketable securities
arm annual report and accounts 2006 55 14 financial assets continued
noncurrent financial assets
availableforsale investments
listed other total
£000 £000 £000
cost
at 1 january 2006 6995 3804 10799
additions – 165 165
disposals 3521 – 3521
revaluation deficit 1589 – 1589
at 31 december 2006 1885 3969 5854
aggregate impairment
at 1 january and 31 december 2006 – 1999 1999
net book value
at 31 december 2006 1885 1970 3855
longterm availableforsale investments
marketable securities listed other total
£000 £000 £000 £000
cost
at 1 january 2005 5438 10262 3642 19342
additions –– 274 274
disposals 5438 – 112 5550
revaluation deficit – 3267 – 3267
at 31 december 2005 – 6995 3804 10799
aggregate impairment
at 1 january 2005 –– 1669 1669
impairment charges –– 337 337
disposals –– 7 7
at 31 december 2005 –– 1999 1999
net book value at 31 december 2005 – 6995 1805 8800
listed investments the group owns an 81 holding in superscape group plc “superscape” the cost and market value of which as at 31 december 2006
were £2652000 and £1885000 respectively 2005 £2652000 and £3474000 respectively the investment was made in order to broaden the scope
of the group’s collaboration with superscape in the area of 3d technology for wireless devices at 31 december 2005 the group owned a less than 1
holding in csr plc a company that develops bluetooth solutions the cost and market value of this investment as at 31 december 2005 were £688000
and £3521000 respectively during 2006 the group divested its less than 1 holding in csr plc
other investments included in other investments are the group’s less than 1 investment in the share capital of palmchip corporation a private fabless chip
company based in california a 12 investment in the share capital of pixim inc also a private fabless chip company based in california and a 14 holding
in reciva limited an internet radio company based in the uk the group also has an investment in the preference share capital of coware inc a company
which develops systemonchip software for a wide range of applications which confers no voting rights during 2005 the group made an investment
via convertible loan notes in luminary micro inc “luminary” a private fabless semiconductor company based in austin which develops pioneering arm
architecturebased soc products in 2006 the loan notes converted to preference shares and the group made a further investment via preference shares
the group’s investment in the preference shares of luminary confers no voting rights during 2005 the group divested its less than 1 holding in zeevo inc
provisions have been made against other investments to reflect any impairment in value
56 arm annual report and accounts 2006
notes to the ifrs financial statementscontinued 14 financial assets continued
interests in group undertakings details of principal subsidiary undertakings are shown below not all subsidiaries are included as the list would be
excessive in length
proportion of issued
nominal value
country of issued shares held
name of undertaking registration principal activity 
arm limited england and wales marketing research and development 100
of riscbased microprocessors
arm inc us marketing and development of riscbased 100
microprocessors and marketing research and
development of physical ip components
arm kk japan marketing of riscbased microprocessors 100
arm korea limited south korea marketing of riscbased microprocessors 100
arm france sas france development of riscbased microprocessors 100
soisic sa acquired in 2006 france development of silicononinsulator ip 100
arm belgium nv belgium development of data engine microprocessors 100
arm norway as acquired and renamed in 2006 norway marketing research and development 100
of graphics ip
arm germany gmbh germany marketing of riscbased microprocessors 100
and development of integrated processor
modelling solutions
keil elektronik gmbh germany marketing research and development 100
of microcontroller tools
arm embedded technologies pvt ltd india marketing research and development of 100
riscbased microprocessors and physical ip
arm physical ip asia pacific pte limited singapore marketing of physical ip 100
arm taiwan limited taiwan marketing of riscbased microprocessors 999
arm consulting shanghai co ltd pr china marketing of riscbased microprocessors 100
 the company owns less than 1 of the share capital of arm limited with arm finance limited which itself is 100 owned by the company owning 999
nominees of the company hold 100 of the ordinary share capital of arm employee benefit trustee ltd a company which acts as trustee to the group’s esop 
15 property plant and equipment
fixtures
fittings
freehold leasehold computer and motor
buildings improvements equipment vehicles total
£000 £000 £000 £000 £000
cost
at 1 january 2006 190 20058 17950 4183 42381
acquisitions – 87 80 11 178
transfers to other intangible assets –– 551 – 551
additions – 1083 5088 1018 7189
disposals – 3037 3377 190 6604
exchange differences – 137 745 346 1228
at 31 december 2006 190 18054 18445 4676 41365
aggregate depreciation
at 1 january 2006 57 17868 12993 2460 33378
transfers to other intangible assets –– 385 – 385
charge for the year 7 1496 3034 748 5285
disposals – 3009 3369 132 6510
exchange differences – 89 468 142 699
at 31 december 2006 64 16266 11805 2934 31069
net book value
at 31 december 2006 126 1788 6640 1742 10296
arm annual report and accounts 2006 57 15 property plant and equipment continued
fixtures
fittings
freehold leasehold computer and motor
buildings improvements equipment vehicles total
£000 £000 £000 £000 £000
cost
at 1 january 2005 190 21405 12282 3215 37092
acquisitions –– 17 7 24
transfers – 1488 1488 ––
additions – 108 4453 931 5492
disposals – 66 720 165 951
exchange differences – 99 430 195 724
at 31 december 2005 190 20058 17950 4183 42381
aggregate depreciation
at 1 january 2005 50 16020 10106 1820 27996
transfers – 1004 1004 ––
charge for the year 7 2845 2374 673 5899
disposals – 43 722 133 898
exchange differences – 50 231 100 381
at 31 december 2005 57 17868 12993 2460 33378
net book value at 31 december 2005 133 2190 4957 1723 9003
16 goodwill
total
£000
cost and net book value
at 1 january 2005 419174
acquisition ksi 2249
acquisition keg 3466
exchange differences 49449
at 31 december 2005 474338
acquisition falanx 9383
acquisition soisic 2213
exchange differences 57568
at 31 december 2006 428366
during the fourth quarter of 2006 the group tested its balance of goodwill for impairment in accordance with ias 36 “impairment of assets” no impairment
charge was recorded as a result of this annual impairment test
goodwill is allocated to the group’s cgus according to business segment the carrying amounts of goodwill by cgu at 31 december 2006 are summarised below
development
processor physical ip systems
division division division group
£000 £000 £000 £000
goodwill relating to artisan 97440 305496 – 402936
goodwill relating to axys –– 6221 6221
goodwill relating to keg and ksi –– 5507 5507
goodwill relating to soisic – 2228 – 2228
goodwill relating to other acquisitions 11443 – 31 11474
108883 307724 11759 428366
the recoverable amount for each cgu has been measured based on a value in use calculation
58 arm annual report and accounts 2006
notes to the ifrs financial statementscontinued 16 goodwill continued
processor division pd
the processor division encompasses those resources that are centred around microprocessor cores including specific functions such as graphics ip  fabric ip 
embedded software ip and configurable digital signal processing dsp ip 
the key assumptions in the value in use calculations were
period over which the directors have projected cash flows a tenyear forecast period is used with an assumed terminal growth rate after 2016 of 3 per
annum it is considered appropriate to use a tenyear forecast period to properly reflect the period over which the benefits of the acquisition of artisan to the
processor division are expected to accrue it is expected that it will take between four and seven years from acquisition before a meaningful proportion of
arm’s larger semiconductor partners are licensing physical ip from the group with royalties being generated from these licences a further two to four years
later ie a total period of six to 11 years
forecast revenue growth revenue is forecast to grow by an amount consistent with the group’s fiveyear plan as well as analysts’ expectations these
have proved to be reliable guides in the past and the directors believe that these estimates are appropriate
revenue attributable to the benefits afforded by owning the pipd unit the directors believe that revenue will accrue to the processor division as
a result of the ownership of the physical ip division for the following reasons
– the development of faster and more powerefficient microprocessors as a result of collaboration between pd and pipd engineering teams this is expected
to generate more pd licensing deals at higher prices
– the potential for pd to win more microprocessor licensing business as a result of arm being able to offer both processor and physical ip inhouse and
– the improvement in pd operating margins as a result of being able to transfer a number of engineering tasks to the bangalore design centre acquired
with artisan
operating margins operating margins have been assumed to remain consistent with current operating margins over the period of the calculation
discount rate future cash flows are discounted in line with arm’s estimated weighted average cost of capital of approximately 10 pretax
the directors are confident that the amount of goodwill allocated to the processor division is appropriate and that the assumptions used in estimating its
fair value are appropriate whilst it is conceivable that a key assumption in the calculation could change the directors believe that no reasonably foreseeable
changes to key assumptions would result in an impairment of goodwill such is the margin by which the estimated fair value exceeds the carrying value
physical ip division pipd
the physical ip division is concerned with the building blocks necessary for translation of a circuit design into actual silicon
the key assumptions in the value in use calculations were
period over which the directors have projected cash flows a tenyear forecast period is used with an assumed terminal growth rate after 2016 of
3 per annum it is considered appropriate to use a tenyear forecast period to properly reflect the period over which the benefits of the acquisitions
of artisan and soisic are expected to accrue it is expected that it will take between four and seven years from acquisition before the majority of arm’s
larger semiconductor partners are licensing physical ip from the group with royalties being generated from these licences a further two to four years later
ie a total period of six to 11 years
forecast revenue growth revenue is forecast to grow by approximately 20 in the first five years falling to 7 by 2016 to reflect the uncertainty of
forecasting revenues in the years further in the future in assessing the appropriate valuation of artisan in 2004 the directors assumed revenue growth of
approximately 20 per annum was achievable in the artisan standalone business based on process geometry shrinks bringing more licensing opportunities
across a broader range of foundries and based on the significant increase in the usage of artisan ip in 2003 and 2004 which is yet to generate royalties
confidence in achieving revenue growth of 20 is underpinned by the expected increasing contribution from synergistic revenues in addition to the
growth potential in the standalone business licence revenues increased by 2 yearonyear in 2006 with the order backlog at the end of the year being
approximately 20 up on the level at the beginning of the year royalty revenue growth was 26 during 2006 a significant proportion of engineering
resource was deployed to accelerate the technology portfolio rather than working on the conversion of order backlog into shortterm revenue the directors
believe that this investment in the technology portfolio means a revenue growth of 20 is achievable
operating margins operating margins are assumed to increase gradually over time with growth to the low40s by 2013 in 2006 pipd’s operating margin
was 28 reflecting both flatter licensing revenues and additional rd investment in order to accelerate the development of leading edge products this is
expected to increase significantly in future years as licence revenues from leading edge products gather pace and royalties increase at effectively 100
margins costs are expected to grow broadly in line with licence revenue growth
this timescale is consistent with arm’s experience in developing the processor licensing and royalty model arm has signed approximately 465 processor
licences over the last 16 years with less than half of these yielding royalties thus far as royalty revenues are a function of cumulative licensing royalty
growth gathers momentum as the licensing base grows – arm processor royalties have increased from 38 million in 2002 to 164 million in 2006
arm annual report and accounts 2006 59 16 goodwill continued
discount rate future cash flows are discounted in line with estimated weighted average cost of capital for the physical ip business of approximately
10 pretax
the directors are confident that the amount of goodwill allocated to the physical ip division is appropriate and that the assumptions used in estimating its
fair value are appropriate whilst it is conceivable that a key assumption in the calculation could change the directors believe that no reasonably foreseeable
changes to key assumptions would result in an impairment of goodwill such is the margin by which the estimated fair value exceeds the carrying value
development systems division
the development systems division is concerned with the tools and models used to create and debug software and systemonchip soc designs
the key assumptions in the value in use calculations were
period over which the directors have projected cash flows a fiveyear forecast period is used with an assumed terminal growth rate after 2011 of 3
per annum it is considered appropriate to use a fiveyear forecast period to properly reflect the weighted average period over which the benefits of the
acquisitions of axys keg and ksi are expected to accrue
forecast revenue growth revenue is forecast to grow by an amount consistent with the group’s fiveyear plan as well as analysts’ expectations
these have proved to be reliable guides in the past and the directors believe that these estimates are appropriate
operating margins operating margins are assumed to grow by an amount consistent with the group’s fiveyear plan
discount rate future cash flows are discounted in line with estimated weighted average cost of capital for the development systems division of
approximately 10 pretax
the directors are confident that the amount of goodwill allocated to the development systems division is appropriate and that the assumptions used
in estimating its fair value are appropriate whilst it is conceivable that a key assumption in the calculation could change the directors believe that no
reasonably foreseeable changes to key assumptions would result in an impairment of goodwill such is the margin by which the estimated fair value
exceeds the carrying value
17 other intangible assets
existing
inprocess agreements
patents and research and developed and customer core order
software licences development technology relationships technology trademarks backlog total
£000 £000 £000 £000 £000 £000 £000 £000 £000
cost
at 1 january 2006 36530 14102 4365 23477 46941 13455 4225 1864 144959
acquisitions falanx 2–– 4267 990 ––– 5259
acquisitions soisic ––– 4283 –––– 4283
acquisitions powerescape–– 992 ––––– 992
additions 1370 ––––––– 1370
transfers from ppe 551 ––––––– 551
disposals 29774 ––––––– 29774
exchange differences 222 – 589 2518 5239 1653 518 229 10968
at 31 december 2006 8457 14102 4768 29509 42692 11802 3707 1635 116672
aggregate amortisation
at 1 january 2006 32717 12984 694 5420 7976 2749 812 1864 65216
charge for the year 1610 494 947 6009 8940 2515 926 – 21441
transfers from ppe 385 ––––––– 385
disposals 29774 ––––––– 29774
exchange differences 155 – 138 948 1390 493 156 229 3509
at 31 december 2006 4783 13478 1503 10481 15526 4771 1582 1635 53759
net book value
at 31 december 2006 3674 624 3265 19028 27166 7031 2125 – 62913
60 arm annual report and accounts 2006
notes to the ifrs financial statementscontinued 17 other intangible assets continued
existing
inprocess agreements
patents and research and developed and customer core order
software licences development technology relationships technology trademarks backlog total
£000 £000 £000 £000 £000 £000 £000 £000 £000
cost
at 1 january 2005 35796 13060 3903 18540 37692 12031 2694 1667 125383
acquisitions ksi –––– 482 – 1175 – 1657
acquisitions keg ––– 2744 4290 ––– 7034
additions 572 1042 –––––– 1614
exchange differences 162 – 462 2193 4477 1424 356 197 9271
at 31 december 2005 36530 14102 4365 23477 46941 13455 4225 1864 144959
aggregate amortisation
at 1 january 2005 30775 10065 28 192 176 53 21 36 41346
charge for the year 1851 2919 633 4924 7369 2543 747 1723 22709
exchange differences 91 – 33 304 431 153 44 105 1161
at 31 december 2005 32717 12984 694 5420 7976 2749 812 1864 65216
net book value
at 31 december 2005 3813 1118 3671 18057 38965 10706 3413 – 79743
refer to note 23 for the methods and significant assumptions applied in estimating the fair value of other intangible assets acquired as part of business
combinations
included within the net book value of other intangible assets at 31 december 2006 are significant amounts relating to intangibles that were acquired with
artisan in 2004 £8363000 2005 £14354000 relates to the carrying value of developed technology £21850000 2005 £31171000 relates to the
carrying value of existing agreements and customer relationships and £7030000 2005 £10705000 relates to the carrying value of core technology
at 31 december 2006 these items have remaining useful economic lives of two years four years and three years respectively
18 accrued and other liabilities
2006 2005
£000 £000
accruals 26181 20782
other taxation and social security 1446 1359
other payables 8492 4378
36119 26519
19 financial liabilities
2006 2005
£000 £000
fair value of currency exchange contracts – 1708
refer to note 20 for further details on this item
20 financial instruments
financial risk factors
the group’s operations expose it to a variety of financial risks that include currency risk interest rate risk price risk credit risk and liquidity risk the group
has no derivative financial instruments to manage interest rate fluctuations in place at the year end since it has no loan financing and as such no hedge
accounting is applied
given the size of the group the directors have not delegated the responsibility for monitoring financial risk management to a subcommittee of the board
the policies set by the board of directors are implemented by the group’s finance department the department has a policy and procedures manual that
sets out specific guidelines to manage currency risk interest rate risk price risk credit risk and liquidity risk and also sets out circumstances where it would
be appropriate to use financial instruments to manage these
arm annual report and accounts 2006 61 20 financial instruments continued
currency risk the group’s earnings and liquidity are affected by fluctuations in foreign currency exchange rates principally in respect of the us dollar
reflecting the fact that most of its revenues and cash receipts are denominated in us dollars while a significant proportion of its costs are settled in sterling
the group seeks to use currency exchange contracts and currency options to manage the us dollarsterling risk as appropriate by monitoring the timing
and value of anticipated us dollar receipts which tend to arise from lowvolume highvalue licence deals and royalty receipts in comparison with its
requirement to settle certain expenses in us dollars the group reviews the resulting exposure on a regular basis and hedges this exposure using currency
exchange contracts and currency options for the sale of us dollars as appropriate such contracts are entered into with the objective of matching their
maturity with projected us dollar cash receipts as the timing of large cash receipts cannot be predicted with certainty the group enters into currency
exchange contracts which allow exercise between two dates typically between three and four months from the invoice date in those cases where
customers settle debts before the expiry of the currency exchange contract the group evaluates whether money market rates available for us dollar
investments exceed those for sterling investments it then seeks to maximise its returns by remitting us dollars against currency exchange contracts
at the beginning or end of the exercise period depending on the prevailing money market rates for us dollars and sterling at the time
at 31 december 2006 the group had outstanding currency exchange contracts to sell 29000000 2005 36000000 and potential exercisable currency
options of 60000000 2005 76000000 the group had 91063000 2005 59987000 of accounts receivable denominated in us dollars at that date
and us dollar cash cash equivalents shortterm investments and shortterm marketable securities balances of 111186000 2005 121427000 thus
56 2005 38 of the group’s us dollar current assets were not hedged by matching currency exchange contracts and currency options at the year end
the group does not qualify for hedge accounting and all movements in the fair value of derivative foreign exchange instruments are recorded in the income
statement offsetting the foreign exchange movements on the accounts receivable cash cash equivalents shortterm investments and shortterm marketable
securities balances being hedged
in addition certain customers remit royalties and licence fees in other currencies primarily the euro the group is also required to settle certain expenses in
euros primarily in its french belgian and german subsidiaries and as the net amounts involved are not considered significant the group does not take out
euro currency exchange contracts
interest rate risk at 31 december 2006 the group had £128494000 2005 £160902000 of interestbearing assets at 31 december 2006 68 2005
77 of interestbearing assets comprising cash equivalents shortterm investments and shortterm marketable securities are at fixed rates and are therefore
exposed to fair value interest rate risk floating rate cash earns interest based on relevant national libid equivalents and is therefore exposed to cash flow
interest rate risk the proportion of funds held in fixed rather than floating rate deposits is determined in accordance with the “liquidity policy” below
other financial assets such as availableforsale investments are not directly exposed to interest rate risk
price risk the group is exposed to equity securities price risk on availableforsale investments as there can be no guarantee that there will be a future
market for securities which are generally unlisted at the time of investment or that the value of such investments will rise the directors evaluate each
investment opportunity on its merits before committing arm’s funds the board of directors reviews holdings in such companies on a regular basis to
determine whether continued investment is in the best interests of the group funds for such ventures are strictly limited in order that the financial effect
of any potential decline of the value of investments will not be substantial in the context of the group’s financial results
credit risk the group has no significant concentrations of credit risk the group has implemented policies that require appropriate credit checks on potential
customers before sales commence financial instrument counterparties are subject to preapproval by the board of directors and such approval is limited to
financial institutions with an aaa rating the amount of exposure to any individual counterparty is subject to a limit which is reassessed annually by the
board of directors
liquidity risk the group’s policy is to maintain balances of cash cash equivalents shortterm investments and shortterm marketable securities such that
highly liquid resources exceed the group’s projected cash outflows at all times
use of financial instruments
external borrowings at 31 december 2006 the group owed £nil 2005 £nil extending beyond one year from the balance sheet date the group had
no undrawn committed borrowing facilities at 31 december 2006 2005 £nil or during the financial year
numerical disclosures numerical disclosures are set out in the tables below these balances are as of 31 december in each year
assets liabilities
2006 2005 2006 2005
£000 £000 £000 £000
at 31 december
shortterm investments 18600 23990 – –
shortterm marketable securities 19151 8835 – –
fair value of currency exchange contracts 439 – – 1708
availableforsale investments 3855 8800 – –
embedded derivatives included in accrued and other liabilities – – 1620 722
42045 41625 1620 2430
shortterm investments the carrying amount approximates to fair value because of the shortterm maturity of these instruments being greater than three
months but less than one year
62 arm annual report and accounts 2006
notes to the ifrs financial statementscontinued 20 financial instruments continued
shortterm marketable securities there is a readily available market for these investments unrealised gains and losses on these investments are
recognised directly in equity via the revaluation reserve the group recognises an impairment charge when the decline in fair value below cost is judged
to be other than temporary at 31 december 2006 the fair value is £22000 more than 2005 £30000 less than cost with a corresponding amount being
credited 2005 charged to equity as the decline is judged to be temporary
fair value of currency exchange contracts the fair value of currency exchange contracts is estimated using the settlement rates the estimation of the fair
value of the asset in respect of currency exchange contracts is £439000 at 31 december 2006 2005 liability of £1708000 the increase in 2006 is due
to the value and relative exchange rates of contracts outstanding compared to 2005 the resulting gain or loss on the movement of the fair value of currency
exchange contracts is recognised in the income statement under general and administrative expenses as shown below
2006 2005
£000 £000
gainloss in income statement 2147 3382
availableforsale investments investments in unlisted companies those companies in which the group has invested are earlystage development
enterprises which are generating value for shareholders through research and development activities and most do not currently report profits the directors
do not consider it possible to estimate with precision the fair value of the group’s investments in unlisted companies carrying value at 31 december 2006
£1970000 as they are by definition not traded on an organised market and are unique in their activities however based on recent fundraising
transactions by these companies and where possible following review of relevant financial information prepared by the companies the directors are
of the opinion that the fair value of these investments approximates to carrying value
availableforsale investments investments in listed companies the fair value of listed investments is determined with reference to prices quoted
on the london stock exchange at 31 december 2006 on this basis the fair value of the group’s listed investments is £1885000 at 31 december 2006
2005 £6995000
embedded derivatives in accordance with ias 39 “financial instruments recognition and measurement” the group has reviewed all its contracts for
embedded derivatives that are required to be separately accounted for if they do not meet certain requirements set out in the standard from time to
time the group enters into contracts denominated in a currency typically us dollars that is neither the functional currency of the group nor the functional
currency of the customer or the collaborative partner where there are uninvoiced amounts on such contracts the group carries such derivatives at fair
value the resulting gain or loss is recognised in the income statement under general and administrative expenses as shown below
2006 2005
£000 £000
lossgain in income statement 898 2101
hedge of net investment in foreign entity
the group where required invests profits in the subsidiary in which they were earned the group does not hedge any foreign net asset investment using
foreign currency loans as there is currently no requirement for external borrowings
fair value of other financial assets and liabilities
2006 2005
book fair book fair
value value value value
£000 £000 £000 £000
primary financial instruments held or issued to finance the group’s operations
trade and other payables excluding embedded derivatives of £1620000
2005 £722000 36325 36325 28097 28097
trade and other receivables 83109 83109 69759 69759
cash and cash equivalents 90743 90743 128077 128077
137527 137527 169739 169739
trade and other payables the carrying amount approximates to fair value as this is the amount which would be payable if the liabilities had crystallized
at the balance sheet date any current tax liabilities are not included in this category
trade and other receivables the carrying amount approximates to fair value as this is the amount which would be receivable if the assets had crystallized
at the balance sheet date any current tax assets are not included in this category
cash and cashequivalents the carrying amount approximates to fair value because of the shortterm maturity of these instruments being no greater than
three months
financial instruments held for trading purposes
the group does not trade in financial instruments
arm annual report and accounts 2006 63 21 calledup share capital
2006 2005
£000 £000
authorised
2200000000 ordinary shares of 005 pence each 2005 2200000000 1100 1100
2006 2005
number of value number of value
shares 000 £000 shares 000 £000
issued and fully paid
at 1 january 1386103 693 1350787 675
allotted under employee incentive schemes 3805 2 35316 18
at 31 december 1389908 695 1386103 693
22 own shares held
own shares held for
future cancellation treasury stock esop total
£000 £000 £000 £000
at 1 january 2006 – 14877 1438 16315
purchase of own shares – 18622 – 18622
appropriation for future cancellation of shares 57897 –– 57897
issuance of shares – 33499 1090 34589
at 31 december 2006 57897 – 348 58245
during the year £76519000 2005 £16211000 of shares were repurchased representing 636 million 2005 139 million shares share repurchase
transactions in respect of 49500000 shares carried out between 19 may 2006 and 31 december 2006 took place at a time when arm holdings plc
company only had no distributable reserves and accordingly such shares have not been properly acquired in accordance with the companies act 1985
and are not available for reissue or cancellation arm holdings plc intends to make an application to the court in due course to cancel these shares pursuant
to a special resolution to be proposed at the 2007 agm at 31 december 2006 a total of 495 million shares were held for future cancellation and 12
million within the esop  these shares have a nominal value of 005 pence and represent 36 of calledup share capital at 31 december 2006
23 acquisitions
falanx microsystems as
on 30 may 2006 the group purchased the entire share capital of falanx microsystems as “falanx” a graphics ip company incorporated in norway for
total consideration of £134 million comprising £133 million cash consideration and £01 million of related acquisition expenses this purchase has been
accounted for as an acquisition
falanx develops graphics accelerator ip and software for semiconductor systemonchip soc vendors that deliver highquality multimedia images without
compromising performance power consumption or system cost the acquisition fits the arm strategy of enabling users to create socs seamlessly in their
design process the mali™ graphics processor unit gpu is a combination of hardware and software that enables industryleading 3d graphics and video
on mobile phones portable media players settop boxes handheld gaming devices and automotive systems providing the group with full control over the
development of its future 3d graphics solutions for the reasons given above combined with the ability to hire the entire workforce of falanx and synergistic
benefits that may arise the group paid a premium on the falanx acquisition giving rise to goodwill
from the date of acquisition to 31 december 2006 the acquisition contributed £nil to revenue and incurred a loss of £15 million before both interest and
tax the acquisition did not make a material contribution to the group’s postacquisition net operating cash flows tax paid and capital expenditure
all intangible assets were recognised at their respective fair values the residual excess over the net assets acquired is recognised as goodwill in the financial
statements
the accounting for the falanx acquisition has been determined on a provisional basis at 31 december 2006 because the fair values assigned to the
acquiree’s identifiable assets and liabilities have been determined only provisionally any adjustments to these provisional values as a result of completing
work on the fair values of assets and liabilities acquired will be recognised within 12 months of the acquisition date and will be recognised as if they had
occurred as at the date of acquisition
64 arm annual report and accounts 2006
notes to the ifrs financial statementscontinued 23 acquisitions continued
carrying value provisional
preacquisition fair value
£000 £000
cash and cash equivalents 24 24
receivables 219 219
property plant and equipment 60 60
other intangible assets 2 5259
payables 319 319
deferred revenue 287 287
tax
– deferred tax asset 543 543
– deferred tax liability – 1472
net assets acquired 242 4027
goodwill 9383
consideration 13410
consideration satisfied by
cash consideration paid 13280
expenses 130
13410
the outflow of cash and cash equivalents on the acquisition of falanx is calculated as follows
£000
cash consideration paid 13280
expenses paid 130
cash acquired 24
net cash outflow 13386
the intangible assets acquired as part of the acquisition of falanx can be analysed as follows
£000
computer software 2
developed technology 4267
customer relationships 990
total 5259
the methods and significant assumptions involved in valuing these identifiable intangible assets are described below
developed technology developed technology of £43 million comprises internallydeveloped software and hardware technologies falanx employs
a number of unique pieces of software that have been internally developed allowing them to be highly bespoke and continually adapted internally
developed hardware technologies comprise the mali family of graphics processors which are controlled by falanx through numerous patents at the date
of acquisition both internallydeveloped software and hardware technologies were complete and had reached technological feasibility any costs incurred
in the future will relate to ongoing maintenance of the technologies and will be expensed as incurred to estimate the fair value of the internallydeveloped
software the replacement cost approach was used with a posttax discount rate of 149 to estimate the fair value of the internallydeveloped hardware
a discounted cash flow method specifically the income approach was used with a posttax discount rate of 154 developed technologies are being
amortised over an estimated useful life of three to five years
customer relationships the customer base of £10 million represented the fair value of existing customer contracts to estimate their fair value a
discounted cash flow method specifically the income approach was used with reference to the terms of the contracts and management’s estimates of
the level of revenue which will be generated from the customer relationships a posttax discount rate of 149 was used for the valuation customer
relationships are being amortised over an estimated useful life of three years
falanx made a loss after tax for the year ended 31 december 2005 of £05 million and for the period from 1 january 2006 until acquisition made a loss
after tax of £04 million the results of the group would not have been significantly different had the acquisition of falanx occurred on 1 january 2006
arm annual report and accounts 2006 65 23 acquisitions continued
soisic sa acquisition
on 30 october 2006 the group purchased the entire share capital of soisic sa “soisic” a silicononinsulator soi ip company incorporated in france for
total consideration of £58 million comprising £31 million cash consideration £24 million contingent consideration and £03 million of related acquisition
expenses this purchase has been accounted for as an acquisition
with this acquisition the group is making an investment in new technologies related to physical ip to enhance its leadership position in providing customers
access to the higher performance and lower power offered by soi process technologies soisic develops a similar set of products to the physical ip division
specifically standard cells static random access memory sram compilers and inputoutput io cells however based on soi design rules and process
models integrating this capability with arm’s widelyused physical ip opens the possibility for soc designers to access soi technology which currently
is used only in full custom designs such as highperformance microprocessors
the group is investing in this area to be at the forefront of the design technologies needed to exploit the potential advantages of soi as its usage grows
in mobile home and enterprise soc and asic applications for the reasons given above combined with the ability to hire the entire workforce of soisic and
synergistic benefits that may arise the group paid a premium on the soisic acquisition giving rise to goodwill
from the date of acquisition to 31 december 2006 the acquisition contributed £nil million to revenue and incurred a loss of £02 million before both interest
and tax the acquisition did not make a material contribution to the group’s postacquisition net operating cash flows tax paid and capital expenditure
all intangible assets were recognised at their respective fair values the residual excess over the net assets acquired is recognised as goodwill in the financial
statements
the accounting for the soisic acquisition has been determined on a provisional basis at 31 december 2006 because the fair values assigned to the acquiree’s
identifiable assets and liabilities have been determined only provisionally any adjustments to these provisional values as a result of completing work on the
fair values of assets and liabilities acquired will be recognised within 12 months of the acquisition date and will be recognised as if they had occurred as at
the date of acquisition
carrying value provisional
preacquisition fair value
£000 £000
receivables 273 273
property plant and equipment 117 117
other intangible assets – 4283
payables 1415 1415
tax
– current tax asset 303 303
– deferred tax asset – 1392
– deferred tax liability – 1413
net liabilities assumedassets acquired 722 3540
goodwill 2213
consideration 5753
consideration satisfied by
cash consideration paid including net debt of £22000 1843
retentions 1268
contingent cash consideration 2342
expenses 300
5753
 retentions represent consideration held back to cover possible future liabilities
 the contingent consideration will be determined based on soisic’s future revenue in the first 15 years postacquisition
the outflow of cash and cash equivalents on the acquisition of soisic is calculated as follows
£000
cash consideration paid excluding net debt of £22000 1821
expenses paid 300
bank overdraft acquired 53
net cash outflow 2174
66 arm annual report and accounts 2006
notes to the ifrs financial statementscontinued 23 acquisitions continued
the intangible assets acquired as part of the acquisition of soisic can be analysed as follows
£000
developed technology 4283
total 4283
the methods and significant assumptions involved in valuing these identifiable intangible assets are described below
developed technology developed technology of £43 million represents primarily soi wafers from 16nm up to 65nm at the date of acquisition the
technology was complete and had reached technological feasibility any costs incurred in the future will relate to the ongoing maintenance of the technology
and will be expensed as incurred to estimate the fair value of the technology a discounted cash flow method specifically the excess profit method was
used with a posttax discount rate of 30 developed technology is being amortised over an estimated useful life of five years
soisic made a loss after tax for the year ended 31 march 2006 of £26 million and for the period from 1 april 2006 until acquisition made a loss after tax
of £15 million the results of the group would not have been significantly different had the acquisition of soisic occurred on 1 january 2006
powerescape inc
on 21 june 2006 the group purchased certain assets of powerescape inc a private company incorporated in the us for total consideration of £06 million
comprising £05 million cash consideration and £01 million of related acquisition expenses
the powerescape team which has been integrated into the group’s development system division will focus on adding innovative profiling and analysis
features to the group’s portfolio of marketleading development tools
from the date of acquisition to 31 december 2006 the acquisition did not make a material contribution to revenue profit before interest nor profit before
tax the acquisition did not make a material contribution to the group’s postacquisition net operating cash flows tax paid and capital expenditure
all intangible assets were recognised at their respective fair values no goodwill has been recognised on this acquisition
the accounting for the powerescape acquisition has been determined on a provisional basis at 31 december 2006 because the fair values assigned to the
acquiree’s identifiable assets and liabilities have been determined only provisionally any adjustments to these provisional values as a result of completing
work on the fair values of assets and liabilities acquired will be recognised within 12 months of the acquisition date and will be recognised as if they had
occurred as at the date of acquisition
carrying value provisional
preacquisition fair value
£000 £000
property plant and equipment 11
other intangible assets – 992
tax
– deferred tax liability – 397
net assets acquired 1 596
goodwill –
consideration 596
consideration satisfied by
cash consideration paid 540
expenses 56
596
the outflow of cash and cash equivalents on the acquisition of powerescape is calculated as follows
£000
cash consideration paid 540
expenses paid 56
net cash outflow 596
the intangible assets acquired as part of the acquisition of powerescape can be analysed as follows
£000
inprocess research and development 992
total 992
arm annual report and accounts 2006 67 23 acquisitions continued
the methods and significant assumptions involved in valuing these identifiable intangible assets are described below
inprocess research and development inprocess research and development of £10 million reflects certain research projects that had not yet reached
technological feasibility and commercial viability the fair value assigned to inprocess research and development was estimated using the discounted cash
flow method with a posttax discount rate of approximately 20
as part of the purchase agreement the results of powerescape for the year ended 31 december 2005 and for the period from 1 january 2006 until
acquisition are not disclosable in this annual report the results of the group would not have been significantly different had the acquisition of powerescape
occurred on 1 january 2006
keil elektronik gmbh and keil software inc acquisitions
on 27 october 2005 the group purchased the entire share capital of keil elektronik gmbh “keg” a leading provider of software development tools
for the microcontroller mcu market and incorporated in germany for total consideration £74 million on the same day the group purchased the entire
share capital of keil software inc “ksi” also a leading provider of software development tools for the mcu market and incorporated in the us for total
consideration of £34 million these purchases have been accounted for as acquisitions
the group has identified the mcu market as a critical growth area for the group’s future business and with this acquisition the group will be able to
accelerate progress in that market by offering a more complete solution as the mcu applications shift from 816bit to 32bit solutions the combination of
the arm cortexm3 processor which is ideally suited for microcontroller applications the realview
®
highperformance compiler and keil’s complementary
mcu tools for arm will enable new generations of arm mcu solutions for the reasons given above the group paid a premium on both the keil
®
acquisitions
giving rise to goodwill
from the date of acquisition to 31 december 2005 the acquisitions contributed £09 million to revenue and £06 million to both profit before interest
and profit before tax the acquisition did not make a material contribution to the group’s postacquisition net operating cash flows tax paid and capital
expenditure
all intangible assets were recognised at their respective fair values the residual excess over the net assets acquired is recognised as goodwill in the financial
statements
keg acquisition
carrying value final
preacquisition fair value
£000 £000
cash and cash equivalents 2911 2911
receivables 488 488
inventories 60 60
property plant and equipment 12 12
other intangible assets – 7034
payables 2341 2303
deferred revenue 108 –
tax
– current tax liability 1570 1570
– deferred tax liability – 2673
net liabilitiesassets acquired 548 3959
goodwill 3466
consideration 7425
consideration satisfied by
cash consideration paid 4397
retentions 1477
contingent cash consideration 1288
expenses 263
7425
 retentions represent consideration held back to cover possible future liabilities
 the contingent consideration will be determined based on keg’s future revenue in the first two years postacquisition
the outflow of cash and cash equivalents on the acquisition of keg is calculated as follows
£000
cash consideration paid 4397
expenses paid 263
cash acquired 2911
net cash outflow 1749
68 arm annual report and accounts 2006
notes to the ifrs financial statementscontinued 23 acquisitions continued
the intangible assets acquired as part of the acquisition of keg can be analysed as follows
£000
developed technology 2744
customer relationships 4290
total 7034
the methods and significant assumptions involved in valuing these identifiable intangible assets are described below
developed technology developed technology of £27 million related to software development tools for the mcu market consisting of 816 and 32bit
technology at the date of acquisition the technology was complete and had reached technological feasibility any costs incurred in the future will relate
to the ongoing maintenance of the technology and will be expensed as incurred to estimate the fair value of technology the relief from royalty method
within an income approach was used with a posttax discount rate of 11 with a specific surcharge of 5 for both the 8 and 16bit technology and 34
for the 32bit technology
to derive the royalty cash flows the revenues from each identified technology were used all developed technologies are being amortised over an
estimated useful life of one to five years
customer relationships the customer base of £43 million represented the fair value of existing customer relationships and contracts these have been
divided into different customer groups direct company customers and dealers to estimate the fair value of the customer base the multiperiod excess
earnings method has been applied with the valuation based on the planned free cash flows resulting from existing customer relationships as of the
valuation date direct company customers and dealers are being amortised over their estimated useful lives of two and three years respectively
keg made a profit after tax for the year ended 31 december 2004 of £10 million and for the period from 1 january 2005 until acquisition a profit after
tax of £10 million the results of the group would not have been significantly different had the acquisition of keg occurred on 1 january 2005
in 2006 £11 million was paid by the group in respect of retentions
ksi acquisition
carrying value final
preacquisition fair value
£000 £000
cash and cash equivalents 32 32
receivables 174 174
inventories 36 36
plant property and equipment – 13
other intangible assets – 1657
payables 57 81
deferred revenue 74 –
tax
– deferred tax liabilities – 663
net assets acquired 111 1168
goodwill 2249
consideration 3417
consideration satisfied by
cash consideration paid 2415
retentions 373
contingent cash consideration 497
expenses 132
3417
 retentions represent consideration held back to cover possible future liabilities
 the contingent consideration will be determined based on ksi’s future revenue in the first two years postacquisition
the outflow of cash and cash equivalents on the acquisition of ksi is calculated as follows
£000
cash consideration paid 2415
expenses paid 132
cash acquired 32
net cash outflow 2515
arm annual report and accounts 2006 69 23 acquisitions continued
the intangible assets acquired as part of the acquisition of ksi can be analysed as follows
£000
customer relationships 482
tradenames 1175
total 1657
the methods and significant assumptions involved in valuing these identifiable intangible assets are described below
tradenames tradenames of £12 million represented the trade names and internet domain names legally held by keil software inc to estimate the fair
value of these tradenames the relief from royalty method within an income approach was applied with a posttax discount rate of 145 to derive the
royalty cash flows the revenues from ksi and keg were used all tradenames are being amortised over an estimated useful life of five years
customer relationships the customer base of £05 million represented the fair value of existing customer relationships and contracts these have been
divided into different customer groups direct customers and distributors to estimate the fair value of the customer base the multiperiod excess earnings
method has been applied with the valuation based on the planned free cash flows resulting from existing customer relationships as of the valuation date
direct company customers and distributors are being amortised over their estimated useful lives of two and three years respectively
ksi made a loss after tax for the year ended 31 december 2004 of £95000 and for the period from 1 january 2005 until acquisition a loss after tax of
£40000 the results of the group would not have been significantly different had the acquisition of ksi occurred on 1 january 2005
24 sharebased payments
the group has several share option schemes in current operation whereby options over shares in the company can be granted to employees and directors
the different schemes are described below but all options are granted with a fixed exercise price equal to the market price of the shares under option at
the date of grant except for those options within the saye schemes which are issued at a 15 discount furthermore from 2006 the company has begun
issuing rsus to employees instead of options as approved at the 2006 agm rsus are actual share awards on vesting rather than options to buy shares at a
fixed exercise price whilst the company reserves the right to award options to employees going forward the majority of awards to employees will be in rsus
under the uk inland revenue executive approved share option plan the “executive scheme” the company may grant options to employees meeting
certain eligibility requirements options under the executive scheme are exercisable between three and ten years after their issue after which time the
options expire
under the company’s unapproved scheme the “unapproved scheme” for which it has not sought approval from the uk inland revenue options are
exercisable one to seven years after their issue after which time the options expire the company also operates the us iso scheme which is substantially
the same as the unapproved scheme the main difference being that the options are exercisable one to five years after their issue under both of these
schemes options are exercisable as follows 25 maximum on first anniversary 50 maximum on second anniversary 75 maximum on third anniversary
100 maximum on fourth anniversary various options to directors under the unapproved scheme have certain performance criteria attached which if met
are exerciseable after three years otherwise they will become exerciseable after seven years
there are further schemes for our french and belgian employees the “french scheme” and the “belgian scheme” in the french scheme options are
exercisable between four and seven years after their issue whilst in the belgian scheme options are exercisable from 1 january following the third
anniversary after their issue up to seven years from issue
the main rsu awards to employees in all jurisdictions other than france vest similarly to the unapproved scheme above namely 25 on each anniversary
over four years rsu awards to our french employees vest 50 after two years and then a further 25 after three and four years
the fair value of our rsus and ltip awards is based on the share price at the date of grant discounted for any dividends that won’t be earned during the
vesting period
upon the acquisition of artisan in 2004 the company assumed the share schemes of artisan existing at acquisition the schemes remained substantially
the same as prior to the acquisition other than the options became options to purchase shares in arm holdings plc instead of artisan components inc
the number and value of options were amended in line with the conversion ratio as detailed in the merger agreement the schemes assumed were the
“1993 plan” the “1997 plan” the “2000 plan” the “2003 plan” the “director plan” the “executive plan” and the “nd00 plan”
70 arm annual report and accounts 2006
notes to the ifrs financial statementscontinued 24 sharebased payments continued
under each plan there are multiple vesting templates and vesting periods the majority of the options were already vested upon acquisition and the most
common template was 25 vesting after one year and then 625 vesting each quarter thereafter until 100 vest after four years some options vest on
a monthly basis and some vest over five years all options lapse ten years from the date of grant
the company also offers savingsrelated share option schemes for all employees and executive directors of the company the number of options granted
is related to the value of savings made by the employee the period of savings is three or five years except for employees of arm inc where the period
is two years the option price is currently set at 85 of the market share price prior to the grant and the right to exercise normally only arises for a six
month period once the savings have been completed except for arm inc where the right to exercise normally only arises for a threemonth period once
the savings have been completed
the fair value of options granted was estimated on the date of grant using the blackscholes option pricing model the following assumptions for each
option grant during 2006 and 2005 were as follows
grant date 1 feb 2006 1 feb 2006 1 feb 2006 1 feb 2006 1 feb 2006
scheme performance unapproved iso french belgian
share price at grant date £1325 £1325 £1325 £1325 £1325
exercise price £1325 £1325 £1325 £1325 £1325
number of employees 6 44 29 12
shares under option 2445284 2313098 1068269 85000 22500
vesting period years 3 14 14 4 39
expected volatility 40 40 40 40 40
expected life years 4 25 14 54
risk free rate 40 40 40 40 40
dividend yield 07 07 07 07 07
fair value per option £046 £033£051 £023£046 £051 £046
grant date 4 may 2006 4 may 2006 4 may 2006 1 feb 2006 20 jun 2006
scheme unapproved iso french belgian saye
share price at grant date £136 £136 £136 £1325 £12075
exercise price £136 £136 £136 £1325 £10264
number of employees 47 28 32 298
shares under option 350333 294500 13250 22500 2249806
vesting period years 14 14 4 39 25
expected volatility 40 40 40 40 40
expected life years 25 14 54 25
risk free rate 40 40 40 40 40
dividend yield 07 07 07 07 07
fair value per option £033£053 £023£047 £053 £046 £038£053
grant date 1 sep 2006 1 sep 2006 1 sep 2006 20 nov 2006
scheme unapproved iso belgian unapproved
share price at grant date £11875 £11875 £11875 £116
exercise price £11875 £11875 £11875 £116
number of employees 16 828
shares under option 119750 77500 5000 20000
vesting period years 14 14 33 14
expected volatility 40 40 40 40
expected life years 25 14 4 25
risk free rate 45 45 45 50
dividend yield 07 07 07 07
fair value per option £030£047 £021£042 £042 £029£047
grant date 4 feb 2005 4 feb 2005 4 feb 2005 4 feb 2005 4 feb 2005
scheme performance approved unapproved iso french
share price at grant date £1055 £1055 £1055 £1055 £1055
exercise price £1055 £1055 £1055 £1055 £1055
number of employees 6 175 500 435 29
shares under option 3119627 840249 9794828 8540500 423772
vesting period years 33 14 14 4
expected volatility 50 50 50 50 50
expected life years 44 25 14 5
risk free rate 40 40 40 40 40
dividend yield 07 07 07 07 07
fair value per option £043 £043 £031£048 £022£043 £048
arm annual report and accounts 2006 71 24 sharebased payments continued
grant date 4 feb 2005 27 apr 2005 27 apr 2005 27 apr 2005 26 jul 2005
scheme belgian unapproved iso belgian unapproved
share price at grant date £1055 £1005 £1005 £1005 £1185
exercise price £1055 £1005 £1005 £1005 £1185
number of employees 29 37 10 1 67
shares under option 347650 199000 130000 5000 590000
vesting period years 39 14 14 37 14
expected volatility 50 50 50 50 50
expected life years 4 25 14 4 25
risk free rate 40 40 40 40 40
dividend yield 07 07 07 07 07
fair value per option £043 £030£046 £021£041 £041 £035£054
grant date 26 jul 2005 26 jul 2005 26 jul 2005 31 oct 2005 31 oct 2005
scheme iso french belgian unapproved iso
share price at grant date £1185 £1185 £1185 £10425 £10425
exercise price £1185 £1185 £1185 £10425 £10425
number of employees 28 21 82 22
shares under option 504760 18250 2500 831636 228250
vesting period years 14 4 34 14 14
expected volatility 50 50 50 40 40
expected life years 14 54 25 14
risk free rate 40 40 40 40 40
dividend yield 07 07 07 07 07
fair value per option £025£049 £054 £049 £026£040 £018£036
grant date 31 oct 2005 31 oct 2005 20 jun 2005
scheme french belgian saye
share price at grant date £10425 £10425 £107
exercise price £10425 £10425 £09095
number of employees 41 272
shares under option 14000 2500 1535108
vesting period years 4 32 25
expected volatility 40 40 50
expected life years 54 25
risk free rate 40 40 40
dividend yield 07 07 07
fair value per option £040 £036 £038£054
the fair value of rsus granted was estimated on the date of grant using the blackscholes option pricing model as rsus are share awards with no exercise
price all awards have been deemed to have an exercise price of £00000001 in the blackscholes model the following assumptions for each rsu grant
during 2006 were as follows
grant date 8 may 2006 8 may 2006 1 sep 2006 1 sep 2006 20 nov 2006
scheme rsu french rsu rsu french rsu rsu
share price at grant date £1365 £1365 £11875 £11875 £116
number of employees 1167 28 108 2 152
shares awarded 6282180 164292 623402 2852 890676
vesting period years 14 24 14 24 14
expected volatility 40 40 40 40 40
expected life years 14 24 14 24 14
risk free rate 40 40 45 45 50
dividend yield 07 07 07 07 07
fair value per award £1327£1355 £1327£1346 £1155£1179 £1155£1171 £1128£1152
72 arm annual report and accounts 2006
notes to the ifrs financial statementscontinued 24 sharebased payments continued
grant date 20 nov 2006
scheme french rsu
share price at grant date £116
number of employees 18
shares awarded 189445
vesting period years 24
expected volatility 40
expected life years 24
risk free rate 50
dividend yield 07
fair value per award £1128£1144
the expected volatility was primarily based upon historical volatility adjusted for past onetime events that are not expected to reoccur the expected life is
the expected period to exercise
a reconciliation of option and rsu movements over the year to 31 december 2006 is shown below note that rsus do not have an exercise price and thus
only a reconciliation of the number of awards has been shown and not of their weighted average exercise price
2006 2005
options weighted average rsus options weighted average
number exercise price number number exercise price
outstanding at 1 january 143023990 £1014 – 164019815 £0870
granted 9064290 £1250 8152847 27127630 £1051
forfeited 8491783 £1499 259207 11012172 £1103
expired 1016500 £3350 – 15000 £6155
exercised 30656261 £0583 – 37096283 £0374
outstanding at 31 december 111923736 £1093 7893640 143023990 £1014
exercisable at 31 december 74533736 £1118 – 64431089 £122
shares options were regularly exercised during the year the average share price in 2006 was £122 2005 £113
the following options over ordinary shares and rsu awards were in existence at 31 december 2006
2006 2005
weighted weighted weighted weighted
average average average average
exercise remaining exercise remaining
number price life in years number price life in years
exercise price £ outstanding £ expected contractual oustanding £ expected contractual
000 rsus 7893640 – 196 196 ––––
002 – 040 15662942 025 097 424 22988380 026 097 531
0405 – 050 21310841 045 132 413 33861103 045 136 523
051 – 09475 17465042 071 110 596 26183870 068 256 649
1005 – 1224 25943761 107 284 437 31257471 109 223 480
125 – 7738 31541150 218 245 352 28733166 250 246 377
total 111923736 109 191 431 143023990 101 193 509
25 capital and other financial commitments
2006 2005
£000 £000
contracts placed for future capital expenditure not provided in the financial statements 525 1371
arm annual report and accounts 2006 73 26 operating lease commitments – minimum lease payments
at 31 december 2006 the group had commitments under noncancellable operating leases as follows
2006 2005
land and land and
buildings other total buildings other total
£000 £000 £000 £000 £000 £000
commitments under noncancellable operating
leases expiring
within one year 5209 11564 16773 4787 1569 6356
later than one year and less than five years 12253 14520 26773 12588 110 12698
after five years 9107 15 9122 11378 – 11378
at 31 december 2006 26569 26099 52668 28753 1679 30432
27 financial contingencies
legal claims in may 2002 nazomi communications inc “nazomi” filed suit against arm alleging wilful infringement of nazomi’s us patent no 6332215
“‘215 patent” arm answered nazomi’s complaint in july 2002 denying infringement arm moved for summary judgment and a ruling that the technology
does not infringe nazomi’s patent the united states district court for the northern district of california granted arm’s motion and nazomi appealed the
district court’s ruling in september 2004 the court of appeals for the federal circuit heard the appeal and issued its decision in april 2005 because in the
opinion of the court of appeals for the federal circuit the district court did not construe the disputed claim term in sufficient detail for appellate review the
court of appeals for the federal circuit remanded the dispute back to the district court for further analysis a supplementary “markman” hearing was held in
october 2005 to decide the construction of a fundamental term in the ‘215 patent and a decision on claim construction was delivered on 6 september 2006
the decision emphatically supports arm’s construction of the relevant term and consequently strongly supports arm’s noninfringement arguments in
december 2006 arm filed a renewed motion for summary judgment and a ruling that the accused technology does not infringe the ‘215 patent on 17
january 2007 nazomi filed a response to arm’s renewed motion for summary judgment in which they stipulated that based on the claim construction
delivered by the district court the arm technology accused in the suit does not infringe the ‘215 patent but also objected to the claim construction
delivered by the district court and indicated their intention to appeal the claim construction to the court of appeals for the federal circuit on 30 january
2007 the district court granted arm’s motion for summary judgment furthermore on 13 february 2007 nazomi filed notice of appeal to the court of
appeals for the federal circuit based on independent legal advice arm is confident that the court of appeals will uphold the claim construction ruling
delivered by the district court in september 2006
in october 2005 technology properties limited inc “tpl” filed suit in the united states district court for the eastern district of texas marshall division
against certain companies in the fujitsu matsushita nec and toshiba groups of companies alleging infringement of tpl’s us patents nos 5809336
5784584 and 6598148 the “litigation” all of the defendants are licensees of various arm technologies it was revealed as part of the preliminary
infringement contentions in the litigation filed in july 2006 that certain arm technology is alleged to infringe a single claim in us patent no 5784584
the “584 patent” in september 2006 arm filed a motion to intervene in the litigation and that motion has been granted arm is now a defendant party
in the litigation the claim construction or “markman” hearing is scheduled for may 2007 and the trial date is scheduled for november 2007 based on
legal advice and written opinions received from external counsel arm is confident that the accused arm technology does not infringe any of the claims of
the 584 patent or that the patent is invalid arm has voluntarily joined as a party to the litigation to proactively defend its technology against illconceived
and false infringement allegations and fully expects to prove the case for noninfringement or invalidity in the course of the litigation
arm does not expect any significant liability in respect of these claims except in relation to legal costs for which £10 million has been accrued
at 31 december 2006
guarantees it is common industry practice for licensors of technology to offer to indemnify their licensees for loss suffered by the licensee in the event that
the technology licensed is held to infringe the intellectual property of a third party consistent with such practice the group provides such indemnification
to its licensees but subject in all cases to a limitation of liability the obligation for the group to indemnify its licensees is subject to certain provisos and is
usually contingent upon a third party bringing an action against the licensee alleging that the technology licensed by the group to the licensee infringes such
third party’s intellectual property rights the indemnification obligations typically survive any termination of the licence and will continue in perpetuity
the group does not provide for any such guarantees unless it has received notification from the other party that they are likely to invoke the guarantee
the provision is made if both of the following conditions are met i information available prior to the issuance of the financial statements indicates that
it is probable that a liability had been incurred at the date of the financial statements and ii the amount of the liability can be reasonably estimated
any such provision is based upon the directors’ estimate of the expected costs of any such claim
contingent consideration acquisitionrelated contingent consideration is disclosed in note 23
74 arm annual report and accounts 2006
notes to the ifrs financial statementscontinued 28 related party transactions
during the year the group paid royalty fees of £124000 2005 £33000 and made crosslicence payments of £nil 2005 £26000 to superscape group plc
“superscape” a company in which mike inglis an executive director of the group is a nonexecutive director amounts owed to superscape at
31 december 2006 and 2005 were £nil in addition in 2006 the group received royalty fees of £19000 2005 £2000 and licence fees of £nil
2005 £11000 from superscape £17000 was owed by superscape at 31 december 2006 2005 £nil
also in 2006 the group received licence fees of £3085000 2005 £321000 support and maintenance income of £37000 2005 £37000 and evaluation
tools fees of £82000 2005 £17000 from csr plc a company in which john scarisbrick a nonexecutive of the group is an executive director amounts
owed by csr at 31 december 2006 were £14000 2005 £nil
during 2006 the group received funding for soi technology development of £319000 from soi tec silicon on insulator technologies sa “soitec”
soitec is an soi ip company in which doug dunn group chairman is a nonexecutive director £383000 is owed by soitec at 31 december 2006
there were no other related party transactions during 2006 or 2005 which require disclosure
key management compensation is disclosed in note 4
29 postbalance sheet events
after the year end the directors declared payment of a final dividend in respect of 2006 of 06 pence per share subject to shareholder approval the final
dividend will be paid on 21 may 2007 to shareholders on the register on 4 may 2007 the final dividend has not been recognised as a distribution during
the year ended 31 december 2006
following the year end the uk government announced a cut of 2 in the uk corporation tax rates for large businesses with effect from 1 april 2008
although not material an adjustment to the group’s deferred tax assets will be required in 2007
30 summary of significant differences between us gaap and ifrs
goodwill under both ifrs and us gaap  goodwill is not subject to amortisation but is tested at least annually for impairment as permitted by ifrs 1
the group’s goodwill under ifrs has been frozen at the amount recorded under uk gaap as at 1 january 2004 under us gaap  following the provisions of
sfas 142 “goodwill and other intangible assets” the carrying value of goodwill was frozen at the amount recorded under previous us gaap as at 1 january
2002 under both previous us gaap and uk gaap  goodwill was amortised over its useful economic life thus while ongoing accounting policies in respect
of goodwill are similar under us gaap and ifrs the difference in the dates of transition means that different amounts of goodwill are recorded
under us gaap  certain costs to be incurred on restructuring on business combination are treated as a fair value adjustment in the balance sheet acquired
under ifrs these costs are expensed postacquisition additionally under us gaap  tax benefits arising from the exercise of options issued as part of
the consideration for a business combination become a deduction to goodwill only to the extent that those benefits do not exceed the fair value of the
consideration relating to those options at the appropriate tax rate any excess tax benefits are a deduction to equity under ifrs the full tax benefit is
a deduction to equity
where provisional assessments of the fair values of assets and liabilities acquired on acquisition are refined adjustments to fair values are recorded as prior
year adjustments to goodwill under ifrs under us gaap  such revisions are recorded as amendments to goodwill in the subsequent year
recognition and amortisation of intangibles the group has taken advantage of the exemption under ifrs 1 not to apply ifrs retrospectively to business
combinations occurring before 1 january 2004 this means that for business combinations occurring before this date the previously reported uk gaap
treatment has continued to be followed under previous uk gaap  intangible assets were recognised separately from goodwill only where they could be sold
separately without disposing of a business of the entity this separability criterion does not apply under either ifrs or us gaap  thus a number of intangible
assets which are required to be recognised separately from goodwill under both ifrs 3 and sfas 142 were subsumed within goodwill under uk gaap  under
both us gaap and ifrs such intangible assets are amortised over their useful economic lives except in relation to inprocess research and development
see below there is no difference in accounting policy for intangible assets recognised as a result of business combinations entered into after 1 january 2004
inprocess research and development under ifrs inprocess research and development projects purchased as part of a business combination may meet
the criteria set out in ias 38 “intangible assets” for recognition as intangible assets other than goodwill and are amortised over their useful economic lives
commencing when the asset is brought into use under us gaap  inprocess research and development is immediately writtenoff to the income statement
this accounting policy difference gives rise to an associated difference in deferred tax
valuation of consideration on business combination under both ifrs and us gaap  the fair value of consideration in a business combination includes the
fair value of both equity issued and any share options granted as part of that combination under ifrs any equity issued is valued at the fair value as of the
date of completion whilst under us gaap  the equity is valued at the date the terms of the combination were agreed to and announced for options under
us gaap  the fair value is based upon the total number of options granted both vested and unvested whilst under ifrs the fair value only includes those
that have vested together with a prorata value for partially vested options furthermore where there is contingent consideration for an acquisition under
ifrs this is recognised as part of the purchase consideration if the contingent conditions are expected to be satisfied whilst under us gaap it is only
recognised if the conditions have actually been met other than to the extent necessary to eliminate any potential negative goodwill under us gaap 
arm annual report and accounts 2006 75 30 summary of significant differences between us gaap and ifrs continued
deferred compensation under us gaap  the intrinsic value of unvested share options issued by an acquirer as part of a business combination in exchange
for unvested share options of the acquiree is recorded as a debit balance within shareholders’ funds this amount is charged to the income statement over
the vesting period of the share options in accordance with fin 28 under ifrs no such adjustment to shareholders’ funds is made on acquisition following
the adoption of fas no 123 revised 2004 fas 123r “sharebased payment” the unamortised balance has been transferred to additional paidin capital
compensation charge in respect of sharebased payments the group issues equitysettled sharebased payments to certain employees in accordance
with ifrs 2 equitysettled sharebased payments are measured at fair value at the date of grant using the blackscholes pricing model the fair value
determined at the grant date of the equitysettled sharebased payments is expensed on a straightline basis over the vesting period based on the group’s
estimate of the number of shares that will eventually vest under us gaap  the group is required effective as of 1 january 2006 to adopt fas123r
fas123r requires the group to expense sharebased payments including employee share options based on their fair value the group has elected to
utilise the “modified prospective” method of adoption such that compensation cost is recognised beginning with the effective date i based on the
requirements of fas123r for all sharebased payments granted after the effective date and ii based on the requirements of fas123r for all awards
granted to employees prior to the effective date of fas123r that remain unvested on the effective date
some awards made by the group are liabilityclassified awards under fas123r as either i there is an obligation to settle a fixed monetary amount in
a variable number of shares or ii the award is indexed to a factor other than performance market or service condition the fair value of these awards
is remeasured at each period end until the award has vested once the award has vested or for i above when number of shares becomes fixed the award
becomes equityclassified
in 2005 under us gaap  the group had elected to use the intrinsic valuebased method to account for all its employee sharebased compensation plans
under the recognition and measurement principles of apb opinion no 25 “accounting for stock issued to employees” and related interpretations thus no
compensation expense was recorded in 2005 where the exercise price of the option was equal to the share price on the date of grant
in 2005 under us gaap  the group recognised a compensation charge in respect of the uk saye plans the compensation charge was calculated as the
difference between the market price of the shares at the date of grant and the exercise price of the option and was recorded on a straightline basis over
the savings period in addition certain options attracted a charge under variable plan accounting under us gaap  under ifrs this charge is calculated in the
same manner as other sharebased payments as detailed above
in 2005 under us gaap  the group followed variable plan accounting for the ltip grants measuring compensation expense as the difference between the
exercise price and the fair market value of the shares at each period end over the vesting period of the options increases in fair market value of the shares
resulted in a charge and decreases in fair market value of the shares resulted in a credit subject to the cumulative amount previously expensed under ifrs
this charge is calculated in the same manner as other sharebased payments as detailed above
deferred tax on uk and us share options in the us and the uk the group is entitled to a tax deduction for the amount treated as employee compensation
under us and uk tax rules on exercise of certain employee share options the compensation is equivalent to the difference between the option exercise
price and the fair market value of the shares at the date of exercise
under ifrs deferred tax assets are recognised and are calculated by comparing the estimated amount of tax deduction to be obtained in the future based
on the group’s share price at the balance sheet date with the cumulative amount of the compensation expense recorded in the income statement if the
amount of estimated future tax deduction exceeds the cumulative amount of the remuneration expense at the statutory tax rate the excess is recorded
directly in equity against the profit and loss reserve in accordance with the transitional provisions of ifrs 2 no compensation charge is recorded in
respect of options granted before 7 november 2002 or in respect of those options which have been exercised or have lapsed before 31 december 2004
nevertheless tax deductions have arisen and will continue to arise on these options the tax effects arising in relation to these options are recorded directly
in equity against retained earnings
under us gaap  deferred tax assets are recognised by multiplying the compensation expense recorded by the prevailing tax rate in the relevant tax
jurisdiction where on exercise of the relevant option the tax benefit obtained exceeds the deferred tax asset in relation to the relevant options the
excess is recorded in additional paidin capital where the tax benefit is less than the deferred tax asset the writedown of the deferred tax asset is
recorded against additional paidin capital to the extent of previous excess tax benefits recorded in this account with any remainder recorded in the
income statement
employer taxes on share options under ifrs employer’s taxes that are payable on the exercise of share options are provided for over the vesting period
of the options under us gaap  such taxes are accounted for when the options are exercised
accrued legal costs under ifrs future legal fees that the group is expecting to incur on current cases are accrued when the obligating event giving rise
to the legal costs has occurred under us gaap  such costs are charged to the income statement in the period in which the costs are incurred
76 arm annual report and accounts 2006
notes to the ifrs financial statementscontinued 30 summary of significant differences between us gaap and ifrs continued
a reconciliation of ifrs profit to us gaap net income
2006 2005
£000 £000
profit for the financial year as reported under ifrs 48588 29647
adjustments for
amortisation of intangibles 914 548
writeoff of inprocess research and development 595 335
deduct us gaap compensation charge in respect of ltip – 3814
deduct us gaap compensation charge in respect of saye schemes – 417
deduct us gaap deferred stockbased compensation re acquisition – 5496
deduct us gaap compensation charge in respect of all sharebased payments 21787 –
add ifrs compensation charge in respect of all sharebased payments 17437 20863
employer’s taxes on share options 8 3
utilisation of restructuring provision – 1368
provision for legal costs net of tax 715 –
foreign exchange on contingent consideration 104 40
tax on uk and us share options 2204 370
tax difference on amortisation of intangibles 378 248
tax difference on sharebased payments 2569 91
net income as reported under us gaap 45163 41880
b reconciliation of shareholders’ equity from ifrs to us gaap
2006 2005
£000 £000
shareholders’ funds as reported under ifrs 663204 746847
adjustments for
employer’s taxes on share options 38 30
utilisation of restructuring provision 1368 1368
provision for legal costs net of tax 715 –
liabilityclassified share awards 2416 –
cumulative difference on amortisation of goodwill 2713 2713
cumulative difference on amortisation of intangibles 1355 441
cumulative writeoff of inprocess research and development 4692 4097
cumulative difference on deferred tax 642 263
valuation of equity consideration on acquisition 82435 82435
valuation of option consideration on acquisition 17476 17476
deferred compensation on acquisition 9579 9579
deferred tax on sharebased payments 8911 8775
portion of tax benefit arising on exercise of options issued on acquisition taken to goodwill under us gaap 4844 4844
foreign exchange on valuation of intangible assets and deferred tax 1358 9872
foreign exchange on valuation of contingent consideration 61 40
shareholders’ equity as reported under us gaap 574647 649050
c reconciliation of goodwill from ifrs to us gaap
2006 2005
£000 £000
goodwill as reported under ifrs 428366 474338
adjustments for
amendments to provisional fair values 1235 1248
cumulative difference on amortisation of goodwill 2713 2713
cumulative writeoff of inprocess research and development 150 150
separately identifiable intangible assets 302 302
deferred tax on capitalised inprocess research and development 1570 1570
portion of tax benefit arising on exercise of options issued on acquisition taken to goodwill under us gaap 4248 4248
valuation of equity consideration on acquisition 82435 82435
valuation of option consideration on acquisition 17476 17476
deferred compensation on acquisition 9579 9579
contingent consideration 3117 1785
foreign exchange on revaluation of goodwill 854 10134
goodwill as reported under us gaap 349243 385572
arm annual report and accounts 2006 77 the following selected financial data should be read in conjunction with and is qualified in its entirety by reference to the financial statements of
arm holdings plc “the company” expressed in sterling set forth on pages 86 to 114 of this report
selected consolidated financial data – us gaap
2002 2003 2004 2005 2006
£000 £000 £000 £000 £000
revenues 150922 128070 152897 232439 263254
cost of revenues 13185 11022 11799 27847 30877
operating expenses 96456 99785 109587 156675 187357
income from operations 41281 17263 31511 47917 45020
interest 4373 4801 6944 5317 6758
profit on disposal of availableforsale security –––– 5270
minority interest 232 105 –– –
income before income tax and cumulative effect of
change in accounting policy 45422 21959 38455 53234 57048
provision for income taxes 13785 8943 10478 11354 9438
net income before cumulative effect of change in
accounting policy 31637 13016 27977 41880 47610
cumulative effect of change in accounting policy –––– 2447
net income 31637 13016 27977 41880 45163
diluted earnings per common share 31p 13p 27p 29p 32p
research and development as a percentage of revenues 313 376 330 265 287
capital expenditure £15616 £3605 £5036 £6064 £8559
cash cash equivalents shortterm investments
and marketable securities £130304 £159786 £142817 £160902 £128494
shareholders’ equity £172470 £188075 £552327 £649050 £574647
total assets £205744 £222997 £637937 £716093 £652703
employees at year end number 721 740 1171 1324 1659
78 arm annual report and accounts 2006
selected consolidated financial dataus gaap the following discussion should be read in conjunction with the consolidated financial statements and notes thereto the matters addressed in this
operating and financial review and prospects with the exception of the historical information presented contain forwardlooking statements involving
risks and uncertainties
overview arm designs the technology that lies at the heart of advanced digital products from wireless networking and consumer entertainment solutions
to imaging automotive security and storage devices arm’s comprehensive product offering includes 1632bit risc microprocessors data engines graphics
processors digital libraries embedded memories peripherals software and development tools as well as analog functions and highspeed connectivity
products the company licenses this technology to semiconductor companies which in turn manufacture market and sell microprocessors and related
products arm has developed an innovative intellectual propertycentred and marketdriven business model in which it neither manufactures nor sells the
products incorporating arm technology but concentrates on the research and development design and support of the arm architecture and supporting
development tools and software combined with the company’s broad partner community they provide a total system solution that offers a fast reliable
path to market for leading electronics companies
market conditions 2006 was another year of healthy growth approximately 10 for the semiconductor industry as a whole although it began to show
signs of slowing by the end of the year looking into 2007 we expect the industry to continue to be impacted by the inventory correction in the first half at
least but we believe that the effect on arm will be attenuated and we expect to exceed the industry growth rate in 2007 as we have done in past years
this is underpinned by a healthy technology portfolio of processor and physical ip  comprising both new and mature products
the company has remained both profitable and cash generative before investing activities on operating profits of £450 million cash inflows from
operating activities were £661 million cash returned to shareholders through dividends and share buybacks of £889 million and a yearend cash
cash equivalents shortterm investments and marketable securities balance of £1285 million
the table below sets forth for the periods indicated the percentage of total revenues represented by certain items reflected in the company’s consolidated
statements of income
year ended 31 december
2004 2005 2006
 
revenues
product revenues 907 937 939
service revenues 93 63 61
total revenues 1000 1000 1000
cost of revenues
product costs 44 94 91
service costs 33 26 26
total cost of revenues 77 120 117
gross profit 923 880 883
operating expenses
research and development 330 265 287
sales and marketing 158 156 168
general and administrative 202 177 185
inprocess research and development 23 01 02
amortization of intangibles purchased through business combination 04 75 70
total operating expenses 717 674 712
income from operations 206 206 171
interest 45 23 26
profit on disposal of availableforsale security –– 20
income before income tax and cumulative effect of change in accounting policy 251 229 217
provision for income taxes 68 49 36
net income before cumulative effect of change in accounting policy 183 180 181
cumulative effect of change in accounting policy net of tax –– 09
net income 183 180 172
arm annual report and accounts 2006 79
operating and financial review and prospectsus gaap total revenues total revenues were £2633 million an increase of 13 from £2324 million in 2005 which was an increase of 52 from £1529 million in
2004 dollar revenues were 4836 million in 2006 an increase of 16 from 4187 million in 2005 which was an increase of 54 from 2724 million in
2004 the actual average dollar exchange rate in 2006 was 184 compared with 180 in 2005 this had the effect of reducing total reported revenues by
approximately £51 million the figures for 2004 do not include revenues for the artisan business acquired in december 2004 now the physical ip division
if these were included dollar revenues increased by 18 in 2005 from the pro forma 3555 million in 2004 of the combined arm and artisan businesses
product revenues product revenues consist of license fees sales of development systems and royalties product revenues for 2004 2005 and 2006 were
£1387 million £2177 million and £2472 million representing 91 94 and 94 of total revenues respectively
license revenues increased from £594 million in 2004 to £1042 million in 2005 and increased further to £1106 million in 2006 representing approximately
39 45 and 42 of total revenues in 2004 2005 and 2006 respectively
processor division pd dollar license revenues have grown by 19 and 12 in 2005 and 2006 respectively the portfolio of licensable products comprises
a rich mix of proven arm technology such as the arm7 arm9 and arm11 families of products and newer technology in the cortex family of products
three cortex products became available for general licensing during 2006
65 new licenses were signed in 2006 compared to 71 in 2005 and 64 in 2004 arm11 accounted for 22 of pd license revenues in 2006 compared to
21 in 2005 and 17 in 2004 revenues from cortex family products accounted for 26 of pd license revenues in 2006 compared to 16 in 2005 cortex
products started generating revenue in 2005 23 companies became new arm partners in 2006 bringing the total number of semiconductor partners to
188 at the end of 2006 this total number of semiconductor partners was net of those companies that have signed licenses with arm in the past but have
since been acquired by other companies or who no longer have access to arm technology for other reasons
having licensed cortex family products to lead partners prior to 2006 the current portfolio of three cortex family products became available for more general
licensing as the year progressed during 2006 13 cortex family licenses were signed bringing the accumulated total of cortex family licenses to 23 signed
by 18 semiconductor companies
in addition 2006 continued to be a year of strong licensing of the arm11 family of products in the year arm signed 15 arm11 family licenses bringing
the total number to 52 from 36 semiconductor companies 2006 signified a shift in arm11 family licensing activity from the traditional firstmover mobile
companies with the majority of licenses being taken for applications outside of the mobile segment
as part of the cortex family licensing in 2006 arm signed a lead partner agreement with a semiconductor company for the nextgeneration cortex
microprocessor this product is expected to become available for mainstream licensing in 2008
license revenues from noncore products covering items such as platforms peripherals embedded trace modules embedded software data engines
models and subsystems were £109 million in 2006 compared to £111 million in 2005 and £105 million in 2004 representing approximately 14
of processor license revenues in 2006 16 in 2005 and 18 in 2004
in 2006 arm maintained progress in achieving the longterm strategic goal of providing arm’s physical ip to leading integrated device manufacturer idm
and fabless semiconductor companies and continued to sign synergistic licenses that have been enabled by the combination of arm and artisan synergistic
deals include in management’s determination both instances of physical ip being licensed to arm partners and instances of contracts being won against the
competition due to both processor and physical ip being available from arm
licensing momentum for arm’s 65nm physical ip products grew with 12 new licenses signed in 2006 by the end of 2006 arm had signed a total of 25
65nm licenses with 10 companies and had signed seven licenses for physical ip with four foundries at the most advanced process of 45nm arm’s physical
ip division pipd reported license revenues of £349 million in 2006 representing approximately 31 of total license revenues
during 2006 the combination of arm and artisan has continued to provide benefits other than synergistic license revenues in addition to the benefits
to the cortex range of processors including the development of the new 12 track advantage libraries in 65nm enabling higher performance and the
highperformance arm1176jzfs implementation the combination has enabled the development of lowerpower processors with lower leakage a new
compact arm11 mpcore dual processor delivering greater performance at lower power and development work on 45nm physical ip which will influence
and optimize the design of future processors
80 arm annual report and accounts 2006
operating and financial review and prospectsus gaapcontinued revenues from the sale of development systems increased from £197 million in 2004 to £256 million in 2005 to £288 million in 2006 representing
approximately 13 11 and 11 of total revenues in 2004 2005 and 2006 respectively this growth has been generated by working with customers on
longerterm relationships for the supply of realview
®
developer tools for software development continued momentum behind the realview create tools
for esl customers and a healthy market place for tools to support the broad portfolio of arm microprocessors development systems has entered into
more multiyear contracts for larger product volumes which improves the visibility of business going forward and builds a good customer base from which
to drive new innovation
royalties are either set as a percentage of the licensee’s average selling price asp per chip or less frequently as a fixed amount and are recognized when
the company receives notification from the customer of product sales in effect this means that it is normally in the quarter following the shipments that
data is received and so royalty data for a year reflects actual shipments made from the beginning of october of the previous year to the end of september
of the current year as the penetration of arm technologybased chips grows across a wide range of endmarket applications the range of asps gets wider
the average royalty rate arr earned by arm in any one reporting period is dependent on the mix of the asps of the chips shipped in that period in 2006
significant unit volume growth was driven by products which incorporate chips with lower asps including ultra low cost handsets smartcards microcontrollers
and bluetooth chips as a result the arr in 2006 was 67 cents compared to 79 cents in 2005 unit volume growth more than compensated for this reduction
in arr and dollar royalty revenues grew by 25 yearonyear
royalties increased from £596 million in 2004 to £878 million in 2005 and increased further to £1078 million in 2006 representing 39 38 and 41
of total revenues in 2004 2005 and 2006 respectively royalty revenues in 2006 comprised £887 million from pd and £191 million from pipd pd volume
shipments increased from 1272 million units in 2004 to 1662 million in 2005 with the increase in volumes coming from all market segments total unit
shipments in 2006 of 2450 million represented an increase of 47 compared to 2005 unit shipments in the mobile segment grew by 50 yearonyear
and in the nonmobile segments by 42 growth in the nonmobile segments was achieved across a broad range of product applications including
smartcards microcontrollers automotive connectivity devices hard disk drives and many others
the company expects royalty revenues to grow yearonyear although they may be subject to significant fluctuations from quarter to quarter the total
number of partners shipping arm technologybased products at the end of 2006 was 76 after taking into account corporate activity within the arm
partnership 29 companies are paying royalties for physical ip products at the end of the year pipd royalties have grown in 2006 demonstrating the
increased widespread use of arm physical ip in chip designs
service revenues service revenues consist of design consulting services and revenues from support maintenance and training service revenues increased
from £142 million in 2004 to £147 million in 2005 and further to £161 million in 2006 representing 9 6 and 6 of total revenues in 2004 2005
and 2006 respectively services revenues in us dollars being the primary currency of revenues generated grew from 251 million in 2004 to 265 million
in 2005 and 291 million in 2006
geographic analysis operating in a global environment the geographic destinations of the company’s revenues fluctuate from period to period depending
upon the country in which its customers are located the pattern of revenues in 2006 was 42 of revenues coming from the us 16 from japan 26 from
asia pacific excluding japan and 16 from europe in 2005 revenues from the us represented 43 japan 18 asia pacific excluding japan 25 and
europe 14 in 2004 revenues from the us represented 51 japan 21 asia pacific excluding japan 12 and europe 16
product costs product costs are limited to variable costs of production such as the costs of manufacture of development systems amortization of our third
party technology licenses crosslicense payments to collaborative partners and time of engineers on pipd projects product costs were £67 million in 2004
£218 million in 2005 and £242 million in 2006 representing 4 9 and 9 of total revenues in 2004 2005 and 2006 respectively the large increase
in product costs in 2005 was as a result of the pipd direct costs of revenue namely the associated engineering time spent on revenuebearing projects
approximately twothirds of total product cost of sales were made up of development systems costs in 2004 with the balance comprising additional costs
related to the costs of thirdparty licenses and crosslicense payments to collaborative partners in 2005 and 2006 the proportion of development systems
costs fell to approximately a quarter pipd direct costs approximately twothirds and the balance thirdparty licenses and crosslicense payments product
gross margin in 2006 was 90 compared to 90 in 2005 and 95 in 2004 included within product costs in 2005 and 2006 are £25 million of deferred
stockbased compensation relating to options assumed on the artisan acquisition and £11 million of fas 123r stockbased compensation following the
adoption of this standard in 2006 the company does not currently expect a significant increase in product costs in 2007
arm annual report and accounts 2006 81 service costs service costs include the costs of support and maintenance services to licensees of arm technology as well as the costs directly attributable to
consulting work performed for third parties cost of services increased from £51 million in 2004 to £61 million in 2005 and £67 million in 2006 the gross
margins earned on service revenues were approximately 64 in 2004 59 in 2005 and 58 in 2006 whilst services revenues remained relatively flat
in 2004 and 2005 costs have increased as the business invests more into the engineering departments a proportion of which is allocated to services costs
the margin in 2006 was slightly lower primarily due to us dollar foreign exchange rates having a greater impact on revenues than costs
research and development costs research and development costs increased from £504 million in 2004 to £616 million in 2005 to £755 million in 2006
representing 33 27 and 29 of total revenues in 2004 2005 and 2006 respectively costs in 2006 included £106 million of sharebased compensation
charges in accordance with fas 123r and in 2004 and 2005 included £03 million and £16 million of deferred sharebased compensation respectively
in accordance with previously applicable standards excluding these charges rd costs were 33 26 and 25 of total revenues in 2004 2005 and
2006 respectively continued investment in research and development remains an essential part of the company’s strategy since the development of new
products to license is key to its ongoing success
total engineering headcount increased from 739 at the end of 2004 to 846 at the end of 2005 with the increases coming from organic growth predominantly
in india but in all locations around the world as well as from the keil acquisitions engineering headcount at the end of 2006 was 1083 with the increases
again coming predominantly from organic growth in india but also from the falanx and soisic acquisitions staff costs increased in line with these headcount
figures but bonuses payable on the achievement of financial performance targets were paid in 2004 and 2006 with only a negligible amount payable in 2005
sales and marketing sales and marketing expenditure increased from £242 million in 2004 to £362 million in 2005 and was £442 million in 2006
representing 16 of total revenues in 2004 16 in 2005 and 17 in 2006 costs in 2006 included £37 million of fas 123r compensation charge and
in 2004 and 2005 included £02 million and £21 million of deferred stockbased compensation the proportion of sales and marketing costs to revenue in
2004 2005 and 2006 excluding these charges were 16 15 and 15 respectively headcount in this area increased from 282 at the end of 2004 to 297
at the end of 2005 and was 337 at the end of 2006 as the company increases its technological portfolio further investment has been made to strengthen
customer support and aftersales service staff bonuses fluctuated in each year as shown above
general and administrative general and administrative headcount at 31 december 2006 was 239 up from 181 at the end of 2005 and 150 at the end
of 2004 the increases yearonyear have partly come from the acquisitions but also organic growth to strengthen the infrastructure of the company as
it continually expands staff bonuses fluctuated in each year as shown above general and administrative costs were £308 million in 2004 £411 million
in 2005 and £486 million in 2006 representing 20 18 and 18 of total revenues respectively excluding £04 million and £35 million of deferred
stockbased compensation in 2004 and 2005 and £29 million of fas 123r compensation costs in 2006 ga costs were 20 16 and 17 of total
revenues in 2004 2005 and 2006 respectively
litigation costs were £51 million in 2004 £04 million in 2005 and £08 million in 2006 fluctuations arising largely as a result of annual variations in the
amount of legal expenses relating to patent protection cases and other similar costs £45 million of these costs in 2004 related to a technology license
agreement signed in the year
expense in relation to provisions for doubtful debts and writeoffs were £09 million in 2006 £05 million in 2005 and a release of £03 million in 2004
unrealized future foreign exchange losses on certain committed but not yet invoiced future revenue streams of £09 million 2005 gains of £21 million 2004
losses of £07 million were recorded in accordance with sfas 133 there was a loss on foreign exchange of £15 million and £23 million in 2004 and 2005
respectively and a gain of £36 million in 2006 mainly as a result of the revaluation of an intragroup dollar loan see “foreign currency fluctuations” below
other increases in 2006 over 2005 include additional recruitment and training costs for the net increase of 335 employees in the company in the year
increased it costs to continually develop the arm internal network as the number of offices and people grow and increased administrative costs relating
to sarbanesoxley compliance work
inprocess research and development during 2004 the company purchased axys design automation inc and artisan components inc now arm inc
those intangible assets that were still in development known as inprocess research and development were charged directly to the income statement
amounting to £04 million and £32 million for axys and artisan respectively a further £03 million of artisan inprocess research and development was
charged to the income statement in 2005 as the final valuation of intangibles was completed in 2006 the company acquired certain assets of powerescape
resulting in £06 million of inprocess research and development being charged to the income statement all acquired inprocess research and development
from the axys artisan and powerescape acquisitions are progressing as expected with some still incomplete as at 31 december 2006
82 arm annual report and accounts 2006
operating and financial review and prospectsus gaapcontinued amortization of intangible assets various licenses to use third party technology have been signed over the past several years with their values being
capitalized and amortized over the useful economic period that the company is expected to gain benefit from them generally between three and five years
licenses totaling £59 million were purchased during 2001 to 2005 with amortization of these licenses amounting to £04 million in 2006 2005 £05 million
2004 £05 million at 31 december 2006 the net book value of these assets was £06 million which will be amortized over the next three years
following the outofcourt settlement of the company’s litigation against picoturbo inc in december 2001 picoturbo assigned its intellectual property rights
to the company for a payment of £75 million this has been amortized over four years and £15 million was charged to the income statement in 2002 and
£20 million in 2003 2004 and 2005 the asset was fully writtendown in 2005 and thus there was no further amortization charge in 2006 the company
also purchased a patent for £07 million in 2002 which is being amortized over five years the amortization charge was £01 million in 2004 2005 and 2006
during 2003 the company purchased adelante technologies nv now arm belgium nv included with the assets purchased were £03 million of intangible
assets comprising developed technology and customer relationships which are being amortized over five years and two years respectively the amortization
charge for the assets during 2005 and 2004 was £01 million in each year but was less than £01 million in 2006
during 2004 the company purchased axys design automation inc and artisan components inc now arm inc intangibles acquired and capitalized as part
of these business combinations including developed and core technology customer relationships and trademarks totaled £19 million and £709 million
respectively and are being amortized over five years and between one and six years respectively see note 6 for further details the total charge during
2004 was £01 million and £03 million for axys and artisan respectively during 2005 was £04 million and £165 million and during 2006 was £04 million
and £146 million respectively
during 2005 the company purchased keil elektronik gmbh and keil software inc intangibles acquired and capitalized consisted of developed technology
customer relationships and tradenames and totaled £87 million these are being amortized between two and five years and the amortization totaled
£04 million during 2005 and £25 million in 2006
during 2006 the company purchased falanx microsystems as a graphics ip company in norway intangibles acquired and capitalized consisted of developed
technology and customer relationships and totaled £53 million these are being amortized over three to five years and the charge in 2006 was £07 million
the company also purchased soisic sa an ip company based in france and the us intangibles acquired and capitalized were all developed technology and
totaled £43 million this is being amortized over five years with £01 million being charged in 2006
interest interest receivable decreased from £69 million in 2004 to £53 million in 2005 but increased in 2006 to £68 million the growth in interest in 2006
was due to higher average cash balances and increasing interest rates the fall in 2005 was a result of the cash outflow at the end of 2004 for the acquisition
of artisan the company invested cash balances over periods of up to one year during 2006 although most were for periods less than six months
profit on disposal of availableforsale security in 2006 the company disposed of its investment in csr plc for cash proceeds of £56 million and realized
a profit of £53 million the company made no profit or loss on its disposal of a minority investment in zeevo inc in 2005
income before income tax and cumulative effect of change in accounting policy income before income tax was £385 million in 2004 £532 million in
2005 and £570 million in 2006 representing 25 23 and 22 of total revenues respectively the primary reason for the fall in margin in 2005 was due
to acquisitionrelated charges inprocess research and development of £03 million and £174 million of business combination intangible amortization and
deferred stockbased compensation of £104 million the margin fell again in 2006 due to fas 123r sharebased compensation charges of £183 million
intangible amortization relating to business combinations of £190 million increased investment throughout the business in additional headcount as well as
the negative impact of foreign exchange with the weakening of the us dollar in the year
tax charge the company’s effective tax rates were 272 in 2004 213 in 2005 and 165 in 2006 the effective tax rate in 2004 was lower than the
blended tax rates from the relevant tax jurisdictions due to additional costs being allowable for research and development tax credits additional deferred tax
credits arising from employee share options and some of the noncash accounting charges being claimed in 2004 it fell further in 2005 primarily as a result
of benefits arising from the structuring of the artisan acquisition as well as increased benefits of research and development tax credits it fell further in 2006
due to a nonrecurring tax credit arising from a taxdeductible foreign exchange loss and continued benefits from the structuring of the artisan acquisition
cumulative effect of change in accounting policy on 1 january 2006 the company adopted fas 123r as detailed in the accounting for sharebased
payments section of the significant accounting policies in note 1 the transitional rules detailed in fas 123r require the company to make a remeasurement
adjustment for compensation cost for liability awards that has been recognized in the current year as a cumulative effect of change in accounting policy
in the income statement the charge in the year net of tax was £2447000
arm annual report and accounts 2006 83 liquidity and capital resources the company’s operating activities provided net cash of £465 million £472 million and £661 million in 2004 2005 and
2006 respectively
accounts receivable increased by £14 million in 2004 £212 million in 2005 and a further £190 million in 2006 this is partly due to the overall increasing
revenues earned in the periods leading up to the end of the respective years but largely to do with timing of invoicing in the respective periods in the final
week of 2006 there was significantly more invoicing to customers than in the final week of 2005 resulting in a large increase in receivables despite this
increase days’ sales outstanding improved from 54 at 31 december 2005 to 43 at 31 december 2006 included within accounts receivable are amounts
recoverable on contracts as discussed within deferred revenue below prepaid expenses increased by £34 million in 2004 and fell by £14 million in 2005
and a further £05 million in 2006 this increase in 2004 was due to a technology license agreement signed in the year under which amounts representing
prepaid royalties will be released over the next several years the fall in 2005 and 2006 reflected this amortization there were no other significant
movements within prepaid expenses and other current assets
accounts payable increased in 2004 by £12 million but fell by £19 million in 2005 and a further £07 million in 2006 this is purely related to the timing
of receipt of supplier invoices in the respective years accrued liabilities increased by £28 million in 2004 fell by £56 million in 2005 and increased again
by £21 million in 2006 the increase in 2004 was as a result of provisions for staff costs and further payments on a technology license agreement signed
in the year these fell in 2005 as payments on the technology license agreement were made and accrued employee compensation was lower in 2005 than
in 2004 similarly the main increase in 2006 was as a result of increased staff bonus and commission provisions following a record bookings quarter in the
final quarter of 2006
at 31 december 2006 the company recorded approximately £315 million of deferred revenues which represented cash or receivables scheduled to be
recognized as revenues in varying amounts after 31 december 2006 at 31 december 2005 the company recorded approximately £204 million of deferred
revenues deferred revenues are an element of customer backlog and represent amounts invoiced to customers not yet recognized as revenues in the
income statement similarly the company recorded £238 million of amounts recoverable on contracts “aroc” at 31 december 2006 compared to
£205 million at 31 december 2005 aroc represents amounts that have been recognized as revenue in the income statement but are yet to be invoiced
to customers both deferred revenue and aroc fluctuate due to the maturity profile of arm’s products and invoicing milestones within contracts
the company believes that given its current level of business it has sufficient working capital for the foreseeable future
cash flow from operations has been used to fund the working capital requirements of the company as well as capital expenditure cash outflows from
capital expenditure in 2006 was £86 million compared with £61 million in 2005 and £53 million in 2004 capital expenditure increased in 2005 and
2006 with staff levels increasing and general operational assets being replaced
in 2004 the company acquired the entire share capitals of axys design automation inc and artisan components inc for total consideration of £69 million
and £4817 million respectively with cash consideration comprising £69 million and £1223 million respectively cash acquired with these businesses
amounted to £827 million
in 2005 the company made final payments relating to acquisition costs for artisan of £144 million as well as £17 million of contingent consideration from
the axys acquisition as a result of performance conditions being achieved a further £43 million net of cash acquired was paid for the acquisitions of keil
elektronik gmbh and keil software inc
in 2006 the company acquired both falanx microsystems as and soisic sa for cash consideration paid in the year of £134 million and £21 million
respectively further payments of £13 million for soisic were made in early 2007 and additional amounts will become payable on the achievement of
various postacquisition financial milestones additionally in 2006 a further £11 million was paid for keil acquired in 2005 and £06 million for certain
assets of powerescape
the company envisages making further strategic investments in the future in situations where the company can broaden its product portfolio where it can
obtain skilled engineering resources and where the potential for furthering arm corebased design wins is improved significantly
in 2004 the company invested a total of £02 million in two small unlisted companies zeevo inc and reciva limited giving a minority holding of less than
3 in both companies the investment in zeevo inc was sold in 2005 in 2005 £03 million was invested via convertible loan notes in luminary micro inc
a small unlisted company a further £02 million was invested in luminary in 2006
the company sold its investment in csr plc in 2006 for £56 million
84 arm annual report and accounts 2006
operating and financial review and prospectsus gaapcontinued during 2005 the company initiated a share buyback program to supplement dividends in returning surplus funds to shareholders and this was continued in
2006 during 2005 the company bought back over 139 million shares at a total cost of £162 million during 2006 the company bought back 636 million
shares at a total cost of £765 million dividends totalling £124 million were also paid to shareholders during the year 2005 £104 million 2004 £90 million
see the companies act 1985 section of the significant accounting policies within note 1 for further information on the share buybacks and dividends paid in
2006 share option exercises in 2006 gave rise to £179 million cash inflow to the company compared to £139 million in 2005 and £13 million in 2004
cash cash equivalents short and longterm investments and marketable securities’ balances at 31 december 2006 were £1285 million compared to
£1609 million at 31 december 2005 and £1428 million at 31 december 2004
foreign currency fluctuations the company’s earnings and liquidity are affected by fluctuations in foreign currency exchange rates principally the us dollar
rate reflecting the fact that most of the company’s revenues and cash receipts are denominated in us dollars while a high proportion of its costs are in sterling
the company reduces this us dollarsterling risk where possible by currency hedging due to the high value and timing of receipts on individual licenses and
the requirement to settle certain expenses in us dollars the company reviews its foreign exchange exposure on a transactionbytransaction basis it then
hedges this exposure using forward contracts for the sale of us dollars which are negotiated with major uk clearing banks the average size of each forward
contract was 51 million in 2004 43 million in 2005 and 39 million in 2006 the company also uses currency options as a further translation instrument
for limited proportions of its dollar exposure the fair values of the financial instruments outstanding at 31 december 2004 2005 and 2006 are disclosed
in note 15 to the financial statements the settlement period of the forward contracts outstanding at 31 december 2006 is between 9 january 2007 and
22 march 2007 the settlement period of the option contracts outstanding at 31 december 2006 is between 16 january 2007 and 18 december 2007
quantitative and qualitative information on market risk during the preceding fiscal year the company was exposed to foreign currency exchange risk
inherent in its sales commitments anticipated sales anticipated purchases and assets and liabilities denominated in currencies other than sterling arm
transacts business in approximately eight foreign currencies worldwide of which the most significant to the company’s operations were the us dollar the
indian rupee the euro and the japanese yen for 2006 for most currencies the company is a net receiver of foreign currencies predominantly us dollars
and therefore benefits from a weaker sterling and is adversely affected by a stronger sterling relative to those foreign currencies the company has
performed a sensitivity analysis at 31 december 2006 2005 and 2004 using a modeling technique that measures the changes in the fair values arising
from a hypothetical 10 adverse movement in the levels of foreign currency exchange rates relative to sterling with all other variables held constant
the analysis covers all of the company’s foreign currency contracts offset by the underlying exposures the foreign currency exchange rates used were based
on market rates in effect at 31 december 2006 2005 and 2004 the sensitivity analysis indicated that a hypothetical 10 adverse movement in foreign
currency exchange rates would result in a loss in the fair values of arm’s foreign exchange derivative financial instruments net of exposures of £89 million
at 31 december 2006 2005 £39 million 2004 £86 million
risk factors the company operates in the intensely competitive semiconductor industry which is characterized by price erosion rapid technological change
short product life cycles cyclical market patterns and heightened foreign and domestic competition the company believes that its future operating results
will continue to be subject to quarterly variations based upon a wide variety of factors these include the timing of entering into agreements with new
licensees the mixture of license fees royalties and fees from services the introduction of new technology by the company the timing of orders from and
shipments to systems companies of arm corebased microprocessors from the company’s semiconductor partners and sudden technological change in the
microprocessor industry
other risks include the reliance on semiconductor partners dependence upon systems companies patent protection attraction and retention of employees
management of growth competition and vulnerability to general economic conditions risk factors are more fully discussed in the company’s annual report
on form 20f
arm annual report and accounts 2006 85 2004 2005 2006
£000 £000 £000
revenues
product revenues 138732 217711 247194
service revenues 14165 14728 16060
total revenues 152897 232439 263254
cost of revenues
product costs 6735 21754 24156
service costs 5064 6093 6721
total cost of revenues 11799 27847 30877
gross profit 141098 204592 232377
operating expenses
research and development 50433 61633 75498
sales and marketing 24157 36234 44198
general and administrative 30809 41082 48643
inprocess research and development 3612 335 595
amortization of intangibles purchased through business combination 576 17391 18423
total operating expenses 109587 156675 187357
income from operations 31511 47917 45020
interest 6944 5317 6758
profit on disposal of availableforsale security –– 5270
income before income tax and cumulative effect of change in accounting policy 38455 53234 57048
provision for income taxes 10478 11354 9438
net income before cumulative effect of change in accounting policy 27977 41880 47610
cumulative effect of change in accounting policy net of tax –– 2447
net income 27977 41880 45163
basic earnings before cumulative effect of change in accounting policy per common share 27p 31p 35p
basic earnings after cumulative effect of change in accounting policy per common share 27p 31p 33p
diluted earnings before cumulative effect of change in accounting policy per common share 27p 29p 34p
diluted earnings after cumulative effect of change in accounting policy per common share 27p 29p 32p
all activities relate to continuing operations
the accompanying notes are an integral part of the financial statements
consolidated statements of comprehensive incomeus gaap
for the years ended 31 december
2004 2005 2006
£000 £000 £000
net income 27977 41880 45163
realized gain on availableforsale security net of tax –– 2375
unrealized holding gainslosses on availableforsale securities net of tax 4196 2316 1090
currency translation adjustment 421 58561 68128
total comprehensive incomeloss 31752 98125 26430
86 arm annual report and accounts 2006
consolidated statements of incomeus gaap
for the years ended 31 december 2005 2006
£000 £000
assets
current assets
cash and cash equivalents 128077 90743
shortterm investments 23990 18600
marketable securities 8835 19151
accounts receivable net of allowances for doubtful debts of £2556000 2005 £2173000 see footnote 10 55518 69552
inventory finished goods 1490 1933
income taxes receivable – 5761
prepaid expenses and other assets 12567 12668
total current assets 230477 218408
deferred income taxes 4422 9872
prepaid expenses and other assets 1674 1328
property and equipment net 12803 13970
goodwill 385572 349243
other intangible assets 72345 56027
investments 8800 3855
total assets 716093 652703
liabilities and shareholders’ equity
current liabilities
accounts payable 2221 1826
income taxes payable 10826 5572
personnel taxes 1329 1408
accrued liabilities see footnote 11 25024 33021
deferred revenue 20354 31485
total current liabilities 59754 73312
deferred income taxes 7289 4744
total liabilities 67043 78056
contingencies and commitments see footnote 13
shareholders’ equity
ordinary shares £00005 par value 2200000000 authorized 2005 2200000000
1389907834 issued 2005 1386102680 693 695
additional paidin capital 425252 446005
deferred compensation 4404 –
treasury stock at cost 50701434 ordinary shares 2005 17751107 16315 58245
retained earnings 183913 197874
accumulated other comprehensive income
unrealized holding gain on availableforsale securities net of tax asset of £231000 2005 tax liability of £1096000 3859 394
cumulative translation adjustment 56052 12076
total shareholders’ equity 649050 574647
total liabilities and shareholders’ equity 716093 652703
the accompanying notes are an integral part of the financial statements
arm annual report and accounts 2006 87
consolidated balance sheetsus gaap
at 31 december 2004 2005 2006
£000 £000 £000
cash flows from operating activities
net income 27977 41880 45163
adjustments to reconcile net income to net cash provided by operating activities
depreciation and amortization of tangible and intangible assets 13124 28060 25812
writeoff inprocess research and development 3612 335 595
profit on disposal of availableforsale security –– 5270
stock option compensation 960 9727 21788
deferred income taxes 1281 – –
excess tax benefits from sharebased compensation –– 3682
provision for doubtful accounts 321 722 932
provision for slowmoving inventories – 22 65
accounts receivable converted to trade investments 112 – –
amount written off investments – 337 –
other 20 16 63
changes in operating assets and liabilities
accounts receivable 1358 21247 18986
inventory 34 519 508
prepaid expenses and other current assets 3370 1446 454
accounts payable 1176 1931 672
income taxes payable 158 3093 12758
deferred revenue 3013 2043 11071
accrued liabilities and other creditors 2771 5569 2056
personnel taxes 76 963 71
net cash provided by operating activities 46479 47180 66052
cash flows from investing activities
purchase of equipment 3933 5956 7476
purchase of leasehold improvements 1397 108 1083
sale of equipment 23 37 31
purchase of patent and licenses 65 – –
purchase of investments 50 274 165
sale of investments availableforsale securities – 96 5567
purchasematurity of shortterm investments 24677 569 4926
purchase of subsidiaries and businesses net of cash acquired 77899 20304 17270
net cash used in investing activities 58644 27078 25322
cash flows from financing activities
cash received on issue of new share capital on exercise of share options 1311 13083 2106
proceeds received on issuance of shares from treasury stock 2 838 15754
expenses of issuing share capital 360 – –
excess tax benefits from sharebased compensation –– 3682
purchase of own shares – 16211 76519
payment of dividends 8975 10436 12367
net cash used in financing activities 8022 12726 67344
effect of foreign exchange on cash and cash equivalents 26 10140 10720
net increasedecrease in cash and cash equivalents 20161 17516 37334
cash and cash equivalents at beginning of the period 130722 110561 128077
cash and cash equivalents at end of the period 110561 128077 90743
supplemental disclosure of cash flow information
cash paid for income taxes 11601 14447 21147
cash received on interest 7233 5444 6636
the accompanying notes are an integral part of the financial statements
88 arm annual report and accounts 2006
consolidated statements of cash flowsus gaap
for the years ended 31 december accumulated other
comprehensive income
additional unrealized cumulative
ordinary shares paidin deferred treasury retained holding translation
amount capital compensation stock earnings gain adjustment total
number £000 £000 £000 £000 £000 £000 £000 £000
balances 31 december 2003 1023345650 512 63321 2499 7569 134419 1979 2088 188075
shares issued on exercise of options 3041914 1 1310 ––––– 1311
shares issued on acquisition 324399411 162 272238 ––––– 272400
share issue costs 3094 ––––– 3094
issuance of options in relation
to acquisition of artisan – 78950 9579 –––– 69371
net income –––– 27977 –– 27977
dividends –––– 8975 –– 8975
tax effect of disqualfying dispositions – 515 ––––– 515
deferred compensation arising
on share schemes – 965 965 –––––
amortization of deferred compensation –– 960 –––– 960
issuance of shares from treasury – 72 – 84 ––– 12
accumulated other comprehensive income
unrealized holding gains on availableforsale
securities net of tax charge of £1631000 ––––– 4196 – 4196
currency translation adjustment –––––– 421 421
balances 31 december 2004 1350786975 675 414133 12083 7485 153421 6175 2509 552327
shares issued on exercise of options 35315705 18 13065 ––––– 13083
net income –––– 41880 –– 41880
dividends –––– 10436 –– 10436
tax effect of disqualifying dispositions – 370 ––––– 370
deferred compensation arising
on share schemes – 3290 3290 –––––
tax benefits on exercise of options
issued as part consideration for a
business combination – 1227 ––––– 1227
amortization of deferred compensation –– 9727 –––– 9727
reversal of unearned compensation – 1242 1242 –––––
issuance of shares from treasury – 5591 – 7381 952 –– 838
purchase of own shares ––– 16211 ––– 16211
accumulated other comprehensive income
unrealized holding losses on availableforsale
securities net of tax benefit of £981000 ––––– 2316 – 2316
currency translation adjustment –––––– 58561 58561
balances 31 december 2005 1386102680 693 425252 4404 16315 183913 3859 56052 649050
shares issued on exercise of options 3805154 2 2104 ––––– 2106
net income –––– 45163 –– 45163
dividends –––– 12367 –– 12367
tax effect of option exercises – 3682 ––––– 3682
netting of deferred compensation – 4404 4404 –––––
amortization of deferred compensation – 19371 ––––– 19371
issuance of shares from treasury ––– 34589 18835 –– 15754
purchase of own shares ––– 76519 ––– 76519
accumulated other comprehensive income
realized gain on availableforsale
security net of tax benefit of £850000 ––––– 2375 – 2375
unrealized holding losses on availableforsale
securities net of tax benefit of £477000 ––––– 1090 – 1090
currency translation adjustment –––––– 68128 68128
balances 31 december 2006 1389907834 695 446005 – 58245 197874 394 12076 574647
 the amount of shareholders’ equity available for distribution to shareholders is the amount of profits determined under uk gaap in the statutory accounts of the parent company at 31 december 2006 this
company did not have any distributable profits in february 2007 dividends were paid up to the company from subsidiary undertakings unaudited interim accounts prepared to 22 february 2007 showed
the company having distributable profits on that date of £90735000
 fas 123r requires that deferred stockbased compensation on the date of adoption be netted against additional paidin capital
the accompanying notes are an integral part of the financial statements
arm annual report and accounts 2006 89
consolidated statements of changes in shareholders’ equityus gaap 1 the company and a summary of its significant accounting policies
the business of the company arm holdings plc and its subsidiary companies “arm” or “the company” design reduced instruction set computing risc
microprocessors physical ip and related technology and software and sell development systems to enhance the performance costeffectiveness and
powerefficiency of highvolume embedded applications the company licenses and sells its technology and products to leading international electronics
companies which in turn manufacture market and sell microprocessors applicationspecific integrated circuits asics and applicationspecific standard
processors assps based on the company’s architecture to systems companies for incorporation into a wide variety of end products by creating a network
of partners and working with them to best utilize the company’s technology the company is establishing its architecture as a risc processor for use in many
highvolume embedded microprocessor applications including digital cellular phones modems and automotive functions and for potential use in many
growing markets including smart cards and digital video the company also licenses and sells development systems products direct to systems companies
and provides consulting and support services to its licensees systems companies and other systems designers the company’s principal geographic markets
are europe the us and asia pacific
incorporation and history arm is a public limited company incorporated under the laws of england and wales the company was formed on 16 october
1990 as a joint venture between apple computer uk limited and acorn computers limited and operated under the name advanced risc machines
holdings limited until 10 march 1998 when its name was changed to arm holdings plc its initial public offering was on 17 april 1998
group undertakings include arm limited incorporated in the uk arm inc incorporated in the us arm kk incorporated in japan arm korea limited
incorporated in south korea arm france sas incorporated in france soisic sa incorporated in france acquired during 2006 arm belgium nv
incorporated in belgium arm germany gmbh incorporated in germany keil elektronik gmbh incorporated in germany arm norway as incorporated
in norway acquired and renamed during 2006 arm embedded technologies pvt limited incorporated in india arm physical ip asia pacific pte limited
incorporated in singapore arm taiwan limited incorporated in taiwan and arm consulting shanghai co limited incorporated in pr china all entities
are 100 owned
basis of preparation the accompanying consolidated financial statements have been prepared under the historical cost convention and in accordance with
accounting principles generally accepted in the united states us gaap the company maintains its accounting records and prepares its financial statements
in uk sterling
use of estimates the preparation of financial statements in conformity with us gaap requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes actual results could differ from these estimates
principles of consolidation the consolidated financial statements incorporate the financial statements of the company and all its subsidiaries intragroup
transactions including sales profits receivables and payables have been eliminated on consolidation the results of subsidiaries acquired in the year are
included in the income statement from the date they are acquired on acquisition all of the subsidiaries’ assets and liabilities that exist at the date of
acquisition are recorded at their fair values reflecting their condition at that date
investments publicly traded investments are classed as availableforsale in accordance with statement of financial accounting standards sfas no115
“accounting for certain investments in debt and equity securities” and are carried at fair value unrealized holding gains or losses on such securities are
included net of related taxes in other comprehensive income otherthantemporary impairment losses and realized gains and losses of such securities are
reported in earnings equity securities that are not publicly traded are recorded at cost less permanent diminution in value at 31 december 2006 and 2005
the estimated fair value of these investments approximated their recorded basis based on estimates determined by management
in 2005 the company made an investment by way of convertible loan notes in luminary micro inc which have now converted into preference shares –
further investment in 2006 has been made in luminary micro inc by way of preference shares
intangible assets purchased patents and licenses to use technology are capitalized and amortized on a straightline basis over a prudent estimate of the
time that the company is expected to benefit from them
although an independent valuation is made of any intangible assets purchased as part of a business combination management is primarily responsible for
determining the fair value of intangible assets such assets are capitalized and amortized over a period of one to six years being a prudent estimate of the
time that the company is expected to benefit from them with the exception of inprocess research and development which is written off immediately
90 arm annual report and accounts 2006
notes to the financial statementsus gaap 1 the company and a summary of its significant accounting policies continued
goodwill goodwill represents the excess of the fair value of the consideration paid on acquisition of a business over the fair value of the assets including
any intangible assets identified and liabilities acquired
prior to 2002 purchased goodwill was capitalized and amortized on a straightline basis over a prudent estimate of the time that the company was expected
to benefit from it upon adoption of sfas 142 on 1 january 2002 the company ceased amortizing goodwill the value of goodwill carried forward at the
end of 2001 has been frozen at £2274000 this goodwill together with goodwill arising on acquisitions since 2002 is tested for impairment at least annually
an annual impairment review in 2006 determined primarily with reference to cash flow forecasts that there was no indication of impairment with respect
to goodwill the estimates of future cash flows involve considerable management judgment and are based on assumptions about expected future operating
performance the actual cash flows could differ from management’s estimates due to changes in business conditions operating performance and economic
conditions
in accordance with sfas 131 “disclosures about segments of an enterprise and related information” the company has identified its operating segments
based on the information used by the chief operating decision maker in monitoring the business for the purposes of assessing the carrying value of
goodwill for impairment goodwill has been allocated to reporting units based on the nature and extent of discrete information available to management
the company believes that for arm each operating segment consists of a single reporting unit goodwill has been allocated to the three reporting units
as shown in note 9
impairment charges the company reviews goodwill for impairment annually or more frequently if events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable it also reviews longlived assets and identifiable intangibles for impairment if an event occurs that
indicates that the carrying amount may not be recoverable if the sum of the expected future cash flows undiscounted and without interest charges of
the longlived assets is less than the carrying amount of such assets an impairment loss would be recognized and the assets would be written down
to their estimated fair value
revenue recognition revenue consists of license fees received under the terms of license agreements with customers to enable them to use the
company’s intellectual property “ip” which is customized to each customer’s manufacturing process the company receives royalties on sales by the
company’s customers of products containing arm technology it also supplies offtheshelf software tools boughtin boards and toolkits training and
consultancy services
the company primarily earns revenues from licensing its ip to leading electronics companies which in turn manufacture market and sell microprocessors
asics and assps based on the company’s architecture to systems companies for incorporation into a wide variety of end products the company’s ip consists
of software and related documentation which enables a customer to design and manufacture microprocessors and related technology and software most
licenses are designed to meet the specific requirements of each customer and are generally not time limited in their application in general the time
between the signing of a license and final validation of the customer’s arm technologycompliant product is between six and 15 months upgrades or
modifications to the licensed ip are not provided following validation of the customer’s arm technologycompliant product the company has no further
obligations under the license agreement
in accordance with sop 811 “accounting for performance of constructiontype and certain production type contracts” when license agreements include
deliverables that require “significant production modification or customization” contract accounting is applied revenues from license fees are recognized
based on the percentageofcompletion method over the period from signing of the license to validation of the customer’s armcompliant product and the
completion of all outstanding obligations the amount of revenue recognized is based on the total license fees under the license agreement or that portion
of the total license fees which is determined to be fixed or determinable in arrangements involving extended payment terms and the percentageof
completion achieved those amounts that are not deemed fixed or determinable at the outset of the arrangement are recognized as the payments become
due where an arrangement is for multiple elements each requiring significant production modification or customization the company evaluates whether
the bifurcation criteria of sop 811 are met and if so the total arrangement fee is allocated accordingly the percentageofcompletion is measured by
monitoring progress using records of actual time incurred to date in the project compared with the total estimated project requirement revenues are
recognized only when collectability is probable estimates of total project requirements are based on prior experience of customization delivery and
validation of the same or similar technology and are reviewed and updated regularly by management under the percentageofcompletion method
provisions for estimated losses on uncompleted contracts are recognized in the period in which the likelihood of such losses is determined
agreements that include rights to unspecified products as opposed to unspecified upgrades and enhancements are accounted for using subscription
accounting revenue from the arrangement being recognized over the term of the arrangement or an estimate of the economic life of the products
offered if no term is specified beginning with the delivery of the first product
arm annual report and accounts 2006 91 1 the company and a summary of its significant accounting policies continued
in accordance with sop 972 “software revenue recognition” where agreements involve multiple elements that do not require “significant production
modification or customization” the company recognizes license revenue when a signed contract or other persuasive evidence of an arrangement exists
the product has been shipped or electronically delivered the license fee is fixed or determinable and collection of the resulting receivable is probable
where agreements include multiple elements the revenue recognition criteria for each element are typically met within the same accounting period
ie on delivery of the elements if an element is undelivered at a period end the company determines whether it has sufficient vendor specific objective
evidence “vsoe” of fair value in order to make an allocation amongst the elements for the majority of its products and services with the exception of
postcontract support “pcs” certain development systems products and certain services undertaken by the company the company does not believe it has
sufficient vsoe of fair value to make such allocations accordingly no revenue is recognized on an arrangement where deliverables other than pcs and the
aforementioned development systems products and services remain undelivered
license fees are considered fixed or determinable if they are not dependent on customers completing specific milestones and they are not subject to
extended payment terms ie the payment terms do not extend over a substantial period when compared to the payment terms in similar license
arrangements and when compared with the licensed products’ life cycle if all the fees in an arrangement are deemed to be fixed or determinable the
company recognizes revenue when all other revenue recognition criteria have been met the excess of revenue recognized in respect of such fees over
fees invoiced is recorded as an accrued revenue asset where an arrangement includes fees that are not deemed fixed or determinable revenue from
the arrangement is recognized as the payments become due and the excess of fees invoiced over revenue recognized in respect of such fees is recorded
as a deferred revenue liability
pcs consists of the right to receive services andor unspecified product upgradesenhancements that are offered on a whenandifavailable basis pcs
is generally priced separately from the initial licensing fee in a contract and revenue is allocated to pcs based on vsoe of fair value vsoe of fair value is
determined with reference to contractual renewal rates if no renewal rates are specified the entire fee under the arrangement is amortized and recognized
ratably over the contractual pcs period where renewal rates are specified pcs revenue is recognized ratably over the term of the pcs arrangement
certain products have been codeveloped by the company and a collaborative partner with both parties retaining the right to sell licenses to the product
in those cases where the company makes sales of these products and considers itself to be the principal under eitf 9919 “reporting revenue gross as
a principal versus net as an agent” the total value of the license is recorded as revenue and the amount payable to the collaborative partner is recorded
as cost of sales where the collaborative partner makes sales of these products the company records as revenue the commission it is due when informed
by the collaborative partner that a sale has been made and cash has been collected
sales of boards and toolkits are recognized upon delivery while some arrangements with distributors provide very limited rights of return the company’s
history is that actual returns are negligible and accordingly no provisions are deemed necessary
services such as consulting and training are typically sold in standalone arrangements where they are sold in conjunction with other deliverables and they
are not considered essential to the functionality of those other deliverables they are accounted for separately based on vsoe if vsoe has been established
revenue for these services is recognized as the services are performed and collectability is probable if vsoe for the services does not exist or the services
are deemed to be essential to the functionality of the other deliverables in the arrangement the entire arrangement fee is recognized as the services are
performed the excess of fees invoiced over revenue recognized in respect of such fees is recorded as a deferred revenue liability
revenues from consulting projects which are typically of a short duration are recognized when the service has been provided and all obligations to the
customer under the consulting agreement have been fulfilled for longer term and more complex consulting projects typically containing several project
milestones where significant modification to arm corebased ip is required revenues are recognized on a percentageofcompletion basis as milestones
are achieved this method approximates to percentageofcompletion based on labor inputs
royalty revenues are earned on sales by the company’s customers of products containing arm technology revenues are recognized when the company
receives notification from the customer of product sales or receives payment of any fixed royalties notification is typically received in the quarter following
shipment of product by the customer
where the company enters into more than one agreement with the same customer in the same short time frame an assessment is made to establish
whether the group of agreements is so closely related that they effectively form a single multipleelement arrangement the factors considered in making
this assessment include but are not limited to
– whether the different elements are closely interrelated or interdependent in terms of design technology or function
– whether the fee for one or more of the agreements is subject to a refund or forfeiture or other concession if one of the other contracts is not
completed satisfactorily
– whether one or more elements in one agreement are essential to the functionality of an element in another agreement
– whether payment terms under one agreement coincide with performance criteria of another agreement and
– whether the negotiations are conducted jointly with two or more parties to do what in essence is a single project
92 arm annual report and accounts 2006
notes to the financial statementsus gaapcontinued 1 the company and a summary of its significant accounting policies continued
research and development all ongoing research and development expenditure is expensed in the period in which it is incurred costs include salaries
of engineers and associated staff relevant eda tools costs and other directly related expenditure such as contractors as well as an allocation of facilities
costs the facilities costs for each office are allocated according to the proportion of employees in engineering functions within these offices any collaborative
agreements whereby a third party agrees to partially fund the company’s research and development is recognized over the period of the agreement as
a credit within research and development costs
grants grants in respect of specific research and development projects are receivable from the european commission a european organization which funds
certain research and development activities on application to it for the purposes of furthering research and development activities within the european
union the company retains significant rights to ip developed under projects which are funded under these arrangements grants received are typically
intended to cover 50 of expected project costs grant income is recognized over the period of the project in line with the costs incurred unconditional
undertakings have been received from the european commission to provide the funding and there is no obligation to refund any amounts already received
amounts receivable under these arrangements in the year ended 31 december 2006 were £467000 2005 £nil 2004 £338000 and were netted against
related research and development costs
pension costs the company contributes to defined contribution plans substantially covering all employees in europe and the us and to government pension
schemes for employees in japan south korea taiwan pr china and israel the company contributes to these plans based upon various fixed percentages
of employee compensation and such contributions are expensed as incurred the amount of contributions expensed by the company for the years ended
31 december 2004 2005 and 2006 were £2067000 £3371000 and £3840000 respectively
loss contingencies the company accrues an estimated loss contingency when it is probable that an asset has been impaired or a liability has been incurred
and the amount of the loss can be reasonably estimated
fair value of financial instruments the company’s financial instruments consist principally of cash and cash equivalents shortterm investments and
marketable securities accounts receivable and foreign currency exchange contracts the company believes all of the financial instruments’ carrying values
approximate to fair value due to their nature and respective durations
cash equivalents the company considers all highly liquid investments with original maturity dates of three months or less to be cash equivalents
shortterm investments and marketable securities the company considers all highly liquid investments with original maturity dates of greater than
three months but less than one year to be either shortterm investments when invested on deposit with major clearing banks or shortterm marketable
securities when custodied with major financial institutions any investments with a maturity date of greater than one year are classified as longterm
marketable securities
allowance for doubtful debts allowance is made for doubtful debts following reviews of individual customer circumstances by management
inventory inventory is stated at the lower of cost and net realizable value in general cost is determined on a firstinfirstout basis and includes transport
and handling costs where necessary provision is made for obsolete slowmoving and defective inventory
property and equipment the cost of property and equipment is their purchase cost together with any incidental costs of acquisition costs that are directly
attributable to the development of new business application software and which are incurred during the period prior to the date that the software is placed
into operational use are capitalized external costs and internal costs are capitalized to the extent they enhance the future economic benefit of the business
depreciation is calculated so as to write off the cost of property and equipment less their estimated residual values on a straightline basis over the
expected useful economic lives of the assets concerned the principal economic lives used for this purpose are
freehold buildings 25 years
leasehold improvements five years or term of lease whichever is shorter
computers and software three to five years
fixtures and fittings five to ten years
motor vehicles four years
provision is made against the carrying value of property and equipment where an impairment in value is deemed to have occurred
arm annual report and accounts 2006 93 1 the company and a summary of its significant accounting policies continued
operating leases costs in respect of operating leases are charged on a straightline basis over the lease term
currency translation the company’s functional currency is the currency of the primary economic environment in which the company operates
the assets and liabilities of subsidiaries denominated in foreign currencies are translated into sterling at rates of exchange ruling at the balance sheet date
statements of income of overseas subsidiaries are translated at the monthly exchange rates during the year translation differences are taken to the
cumulative translation adjustment
the company utilizes forward exchange contracts and currency options to manage the exchange risk on actual transactions related to accounts receivable
denominated in a currency other than the functional currency of the business the company’s forward exchange contracts do not subject the company to risk
from exchange rate movements because the gains and losses on such contracts offset losses and gains respectively on the transactions being hedged
because the company does not meet the criteria for hedge accounting the forward and option contracts and the related accounts receivable are recorded at
fair value at each period end all recognized gains and losses resulting from the settlement of the contracts are recorded within general and administrative
costs in the income statement the fair value of derivative instruments are disclosed within either prepaid expenses and other assets or accrued liabilities on
the balance sheet and within net cash provided by operating activities in the cash flow statement the company does not enter into foreign exchange
contracts for the purpose of hedging anticipated transactions
other transactions denominated in foreign currencies have been translated into sterling at actual rates of exchange ruling at the date of transaction
monetary assets and liabilities denominated in foreign currencies have been translated at rates ruling at the balance sheet date exchange differences have
been included in general and administrative costs
from time to time the company enters into contracts denominated in a currency typically us dollars that is neither the functional currency of the company
nor the functional currency of the customer in accordance with sfas 133 “accounting for derivative instruments and hedging activities” where there are
unpaid amounts on such contracts the company carries such derivatives at fair value the resulting gain or loss is recognized in the income statement under
general and administrative costs for the year ended 31 december 2006 the loss on exchange is £898000 2005 gain of £2101000 2004 loss of £732000
income taxes income taxes are computed using the liability method under this method deferred income tax assets and liabilities are determined based on
temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be
in effect when the differences are expected to reverse valuation allowances are established against deferred tax assets where it is more likely than not that
some portion or all of the asset will not be realized
the company applies the “with and without” approach with respect to the allocation of net operating losses and other reliefs due to sharebased compensation
costs under this approach a benefit is recorded in additional paidin capital only to the extent that the amount of available net operating losses generated for
operations can be offset against the current year taxable income
earnings per share basic earnings per common share is computed based on the weighted average number of ordinary shares diluted earnings per
common share is computed by including potential common shares where the effect of their inclusion would be dilutive the diluted share base for the
year ended 31 december 2006 excludes incremental shares of approximately 33390000 2005 39614000 2004 38143000 related to employee stock
options these shares are excluded due to their antidilutive effect as a result of the exercise price of these shares being higher than the market price
the ordinary equivalent shares for share options were determined using the treasury stock method
accounting for sharebased payments on 1 january 2006 the company adopted fasb statement no 123 revised 2004 “sharebased payment”
“fas 123r” under fas 123r sharebased compensation cost is measured at the grant date based on the estimated fair value of the award and
is recognized as an expense over the employee’s requisite service period the fair value of these awards is calculated using appropriate valuation techniques
some awards made by the company are liabilityclassified awards under fas 123r as i there is an obligation to settle a fixed monetary amount in a
variable number of shares or ii the awards are indexed to a factor other than performance market or service condition the fair value of these awards
is remeasured at each period end until the award has vested once the award has vested or for i above when number of shares becomes fixed the award
becomes equityclassified the transitional rules detailed in fas 123r require the company to make a remeasurement adjustment for compensation cost for
liability awards that has been recognized in the current year as a cumulative effect of change in accounting policy in the income statement
the company adopted the provisions of fas 123r using a modified prospective application accordingly prior periods have not been revised for comparative
purposes the valuation provisions of fas 123r apply to new awards and to awards that are outstanding on the effective date which are subsequently
modified or cancelled estimated compensation expense for awards outstanding at the effective date will be recognized over the remaining service period
using the compensation cost calculated for pro forma disclosure purposes under fasb statement no 123 “accounting for stockbased compensation”
fas 123
94 arm annual report and accounts 2006
notes to the financial statementsus gaapcontinued 1 the company and a summary of its significant accounting policies continued
on 10 november 2005 the fasb issued fasb staff position no fas 123r3 “transition election related to accounting for tax effects of sharebased
payment awards” the company has elected to adopt the alternative transition method provided in this fasb staff position for calculating the tax effects
of sharebased compensation pursuant to fas 123r the alternative transition method includes a simplified method to establish the beginning balance of
the additional paidin capital pool apic pool related to the tax effects of employee sharebased compensation which is available to absorb tax deficiencies
which could be recognized subsequent to the adoption of fas 123r
for a summary of all the company’s sharebased award schemes please refer to the shareholders’ equity section in footnote 12
the company uses the blackscholes option pricing model to estimate the fair value of sharebased payments this model is consistent with that used for
the company’s pro forma information required under fas 123 the determination of the fair value using this model is affected by the share price at grant
as well as a number of other assumptions including expected volatility expected life riskfree interest rate and expected dividends
the company used the historical price of the company’s stock for the expected volatility assumption including some adjustments for nonrecurring onetime
events consistent with the guidance in fas 123r and the securities and exchange commission’s staff accounting bulletin no 107 adjustments were made
as the company’s assessment of future stock price trends were more representative of historical data excluding these events rather than including them
the expected life of options is based on known vesting dates and historical exercise patterns for the different schemes the riskfree interest rate is based
on observed interest rates appropriate for the terms of the share options the dividend yield assumption is based on our last declared dividend and
expected payouts
the fair value of our restricted stock units and ltip awards is based on the share price at date of grant discounted for any dividends that won’t be earned
during the vesting period
the per share fair values of share options granted have been estimated with the following weighted average assumptions
options rsusltip awards
2004 2005 2006 2004 2005 2006
expected life in years 334 307 311 300 300 257
volatility 90 50 40 85 50 40
riskfree interest rate 405 400 401 45 400 413
dividend yield 051 070 070 070 070 070
weighted average fair value £ 074 038 043 101 117 131
the following table presents details of the total stockbased compensation expense that is included in each functional line item of the company’s consolidated
statements of income for the years ended 31 december note that the 2004 and 2005 comparable income statements have been reanalyzed to absorb the
stockbased compensation expenses into the functional line items rather than as a separate line as reported in the income statements in those years
2004 2005 2006
£000 £000 £000
cost of revenues – 2489 1098
research and development costs 300 1582 10609
sales and marketing costs 222 2132 3658
general and administrative costs 438 3524 2927
cumulative effect of change in accounting policy –– 3496
sharebased payment expense 960 9727 21788
tax benefit for sharebased payment compensation expense – 1799 4181
sharebased payment expense net of tax 960 7928 17607
 the amounts included in 2006 reflect the adoption of fas 123r in accordance with the modified prospective transition method the company’s consolidated statements of income for 2005 and 2004 have
not been restated to reflect and do not include the impact of fas 123r
 the cumulative effect of change in accounting policy arises as a remeasurement adjustment for liabilityclassified awards on cumulative sharebased compensation for earlier years on adoption of fas 123r
included within tax benefits above is £1049000 relating to this cumulative effect of change in accounting policy
the adoption of fas 123r will continue to have a significant adverse impact on the company’s reported results of operations although it should not have a
material impact on its overall financial position the amount of unearned stockbased compensation currently estimated to be expensed in the period from
2007 to 2011 related to unvested sharebased payment awards at 31 december 2006 is £195 million of this amount £118 million is estimated to be
expensed in 2007 £56 million in 2008 £17 million in 2009 and £04 million in 2010 the weighted average period over which the unearned sharebased
compensation is expected to be recognized is approximately 10 years if there are any cancellations or accelerated vestings the company may be required
to accelerate or cancel some of the remaining compensation expense the sharebased compensation expense in future periods will be more than stated
above to the extent that the company grants additional options or awards after the balance sheet date furthermore the estimated future compensation
charge may be affected by any change to the fair value of liabilityclassified awards
arm annual report and accounts 2006 95 1 the company and a summary of its significant accounting policies continued
in accordance with the requirements of the disclosureonly alternative of fas 123 the following table illustrates the effect on net income and earnings per
share for 2005 and 2004 had the company applied the fair value recognition provisions of fas 123 instead of the guidelines provided by apb 25
2004 2005
£000 £000
net income
as reported 27977 41880
deduct total stockbased compensation expense determined under fair valuebased method for all awards
net of related tax effects 12546 20120
add back total stockbased compensation expense determined under the intrinsic valuebased method for all awards
net of related tax effects 960 7928
pro forma net income 16391 29688
basic earnings per common share pence
as reported 27p 31p
pro forma 16p 22p
diluted earnings per common share pence
as reported 27p 29p
pro forma 16p 21p
treasury stock treasury stock represents the cost of shares in the company held by the company the employee benefit trust esop and the quest
during 2006 to supplement the payment of dividends to shareholders the company continued its rolling share buyback programme under the shareholder
authority conferred at the 2005 annual general meeting the quantum and frequency of share repurchases is not predetermined and will take into account
prevailing market conditions the short to mediumterm cash needs of the business and the level of employee sharebased remuneration going forward
in 2006 a total of 63600000 2005 13868000 shares were repurchased from the market at a cost of £76519000 2005 £16211000 at 31 december
2006 there were 49500000 2005 12751107 shares in the company still held from these purchases with a market value of £62246000 2005 £15429000
whilst shares repurchased from the market have been used to satisfy some employee share option exercises all those shares held at the end of 2006 are
expected to be canceled in 2007 see the companies act 1985 section below for further information on these share buybacks and need for subsequent cancellation
the esop was set up on 16 april 1998 to facilitate the recruitment retention and motivation of employees under the company’s long term incentive plan
7771416 shares could be awarded from shares already issued within the esop and treasury stock held by the company the number of unearned shares
within the esop at 31 december 2006 was 1201434 2005 5000000 with a market value of £1511000 2005 £6050000
all costs relating to the schemes are recognized in the income statement as they accrue and the esop has waived the right to receive dividends of over and
above 001 pence per share on all shares held for the purpose of earnings per share calculations the shares are treated as canceled until such time as they
vest unconditionally
the company also has a quest which was established to acquire new shares in the company for the benefit of employees and directors of the company
following the final allocations in 2005 the quest held no further shares in the company and is in the process of being woundup
employer’s taxes on share options employer’s national insurance in the uk and equivalent taxes in other jurisdictions are payable on the exercise of
certain share options issued to employees in certain tax jurisdictions in accordance with eitf 0016 no provision has been made for the employer’s taxes
on these share options these amounts are recognized in the consolidated income statement when payable
recently issued accounting standards in july 2006 the fasb issued fasb interpretation fin no 48 “accounting for uncertainty in income taxes—an
interpretation of fasb statement no 109” fin 48 this interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s
financial statements fin 48 requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination
by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements it also provides guidance on the recognition
measurement and classification of income tax uncertainties along with any related interest and penalties fin 48 will also require significant additional
disclosures this interpretation will be effective for fiscal years beginning after 15 december 2006 we will implement this interpretation in the first quarter
of 2007 on a prospective basis we are currently evaluating the potential impact this interpretation will have on our financial position and results of operations
96 arm annual report and accounts 2006
notes to the financial statementsus gaapcontinued 1 the company and a summary of its significant accounting policies continued
in september 2006 the fasb issued sfas no 157 “fair value measurements” sfas 157 which provides guidance on how to measure assets and liabilities
that use fair value sfas 157 will apply whenever another us gaap standard requires or permits assets or liabilities to be measured at fair value but does
not expand the use of fair value to any new circumstances sfas 157 will be effective for financial statements issued for fiscal years beginning after
15 november 2007 we are currently evaluating the potential impact this standard may have on our financial position and results of operations but do
not believe the impact of the adoption will be material
in september 2006 the sec staff issued staff accounting bulletin sab no 108 “considering the effects of prior year misstatements when quantifying
misstatements in current year financial statements” sab 108 sab 108 was issued in order to eliminate the diversity of practice in how public companies
quantify misstatements of financial statements including misstatements that were not material to prior years’ financial statements we have applied the
provisions of sab 108 in connection with the preparation of our annual financial statements for the year ended 31 december 2006 and the impact on our
financial position and results of operations was not material
in september 2006 the fasb issued sfas no 158 “employers’ accounting for defined benefit pension and other postretirement plans an amendment of
fasb statements no 87 88 106 and 132r” sfas 158 part of this statement was effective as of 31 december 2006 and requires companies that have
defined benefit pension plans and other postretirement benefit plans to recognize the funded status of those plans on the balance sheet on a prospective
basis from the effective date the funded status of these plans is determined as of the plans’ measurement dates and represents the difference between the
amount of the obligations owed to participants under each plan including the effects of future salary increases for defined benefit plans and the fair value
of each plan’s assets dedicated to paying those obligations to record the funded status of those plans unrecognized prior service costs and net actuarial
losses experienced by the plans will be recorded in the other comprehensive income oci section of shareholders’ equity on the balance sheet this does
not have a material impact on our financial position
on 12 september 2006 the eitf issued the statement eitf 062 “accounting for sabbatical leave and other similar benefits” this becomes effective for
financial statements issued for fiscal years beginning after 15 december 2006 the eitf was issued to clarify the issue of when to make accruals for the
provision of sabbaticals by the company we are currently evaluating the potential impact this standard may have on our financial position and results of
operations but do not believe the impact of the adoption will be material other than the adjustment for cumulative effect of change in accounting policy
in february 2007 the fasb issued sfas no 159 “the fair value option for financial assets and financial liabilities – including an amendment of fasb
statement no115” fas 159 under this standard entities will now be permitted to measure many financial instruments and certain other assets and
liabilities at fair value on an instrumentbyinstrument basis the fair value option the fair value option represents a significant step in the evolution
of financial reporting because it considerably expands the ability of entities to select the measurement attribute for certain assets and liabilities fas 159
is effective for fiscal years beginning after 15 november 2007 we are currently evaluating the impact this standard may have on our financial position
and results of operations
companies act 1985 these financial statements do not comprise statutory accounts within the meaning of section 240 of the companies act 1985 of great
britain the “companies act” the company’s statutory accounts which are its primary financial statements are prepared in accordance with international
financial reporting standards ifrss for consolidated accounts and accounting principles generally accepted in the united kingdom uk gaap for arm
holdings plc company only accounts they are prepared in compliance with the companies act and are presented in pounds sterling statutory accounts
upon which the auditors gave unqualified reports under section 235 of the companies act and which did not contain statements under subsections 2372
and 3 of the companies act for the years ended 31 december 2004 and 2005 have been and those for the year ended 31 december 2006 will be
delivered to the registrar of companies for england and wales dividends are required to be declared in sterling out of profits available for that purpose
as determined in accordance with uk gaap and the companies act
substantially the whole of the company’s distributable reserves are generated in arm limited a subsidiary within the arm holdings plc group the amount
of distributable reserves in arm limited at 31 december 2006 was £166 million however it came to the attention of the directors in february 2007 that
the distributable reserves of arm holdings plc company only which are required to fund both the share buyback programme and dividends had been fully
utilized by 19 may 2006 although sufficient distributable reserves were available in arm limited accordingly 495 million of the shares acquired by the
company in 2006 and a further 62 million shares acquired in early 2007 were acquired at a time when arm holdings plc had insufficient distributable
reserves had the board been aware of the shortfall in distributable reserves in arm holdings plc at the relevant time it would have arranged for the
payment of a dividend to arm holdings plc from arm limited to cover the shortfall
as a result of the shortfall in distributable reserves the relevant shares have not been properly acquired under the applicable statutory requirements and
so arm holdings plc is unable to reissue such shares or cancel them arm holdings plc has been advised that this matter should be resolved by cancelling
the relevant shares by court order
a similar issue has arisen in relation to the interim dividend for 2006 which was paid to shareholders on 6 october 2006 at that time arm holdings plc did
not have sufficient distributable reserves to make such a payment being approximately £55 million in aggregate although sufficient distributable reserves
were available in arm limited this amounts to a technical breach of the statutory requirements
a dividend from arm limited to arm holdings plc via an intermediary holding company was paid on 21 february 2007 and the directors have filed with the
registrar of companies accounts for arm holdings plc as at 22 february 2007 reflecting such dividend this resolves the position regarding arm holdings plc’s
distributable reserves with regard to the final dividend for 2006 and the company’s share buyback programme
arm annual report and accounts 2006 97 2 related party transactions
during the year the company paid royalties of £124000 2005 £33000 2004 £411000 and made crosslicense payments of £nil 2005 £26000
2004 £14000 to superscape group plc “superscape” a company in which mike inglis is a nonexecutive director £nil 2005 £nil was owed to
superscape at 31 december 2006 in addition in 2006 the company received royalty fees of £19000 2005 £2000 2004 £6000 and license fees
of £nil 2005 £11000 2004 £nil £17000 was owed by superscape at 31 december 2006 2005 £nil
also during 2006 the company received license fees of £3085000 2005 £321000 2004 £209000 support and maintenance income of £37000
2005 £37000 2004 £37000 and evaluation tools fees of £82000 2005 £17000 2004 £nil from csr plc a company in which john scarisbrick
is an executive director £14000 was owed by csr at 31 december 2006 2005 £nil
during 2006 the company received funding for soi technology development of £319000 from soi tec silicon on insulator technologies sa “soitec”
soitec is an soi ip company in which doug dunn company chairman is a nonexecutive director £383000 is owed by soitec at 31 december 2006
3 income taxes
income before income tax is analyzed as follows
year ended 31 december
2004 2005 2006
£000 £000 £000
united kingdom 34569 47930 19886
foreign 3886 5304 37162
38455 53234 57048
the provision for income taxes consisted of
year ended 31 december
2004 2005 2006
£000 £000 £000
current
united kingdom 10619 15519 9958
foreign 1490 1430 6138
total current 12109 16949 16096
deferred
united kingdom 1171 1241 5476
foreign 460 4354 1182
total deferred 1631 5595 6658
total provision for income taxes 10478 11354 9438
included in the income tax payable is a current tax benefit of £3682000 2005 £370000 2004 £826000 and a deferred tax credit of £nil
2005 £6072000 2004 £311000 in relation to employee stock options such benefits are reflected as additional paidin capital
also included in the provision for income taxes is utilization of the deferred tax liability in relation to acquired intangibles of £6264000 2005 £6921000
2004 £188000
total income tax expense differs from the amounts computed by applying the uk statutory income tax rate of 30 for 2006 2005 and 2004 to income
before income tax as a result of the following
year ended 31 december
2004 2005 2006
£000 £000 £000
uk statutory rate 30 2005 30 2004 30 11537 15970 17114
research and development tax credits 1651 1911 2879
permanent differences – foreign exchange –– 4164
permanent differences – other 1828 616 3856
amortization of intangibles 188 1730 1467
differences in statutory rates of foreign countries 231 45 613
foreign withholding tax – 1444 2450
other net 1279 1758 1627
10478 11354 9438
 the permanent difference on foreign exchange is net of valuation allowance charge of £3394000 in 2006
 permanent differences comprise permanent adjustments and benefits resulting from restructuring following the acquisition of artisan
other net comprises prior year adjustments timing differences and deferred tax adjustments
98 arm annual report and accounts 2006
notes to the financial statementsus gaapcontinued 3 income taxes continued
significant components of the deferred tax assetsliabilities are as follows
at 31 december
2005 2006
£000 £000
stock compensation charge 553 5016
fixed asset temporary differences 5214 5244
temporary difference on availableforsale securities 1096 231
nondeductible accruals and reserves 1662 1766
amounts relating to intangible assets arising on acquisition 28323 20074
losses carried forward 10995 12816
rd tax credits carried forward 8494 6178
total deferred tax assetsliabilities 2501 11177
valuation allowance 366 6049
net deferred tax assetsliabilities 2867 5128
disclosed on the balance sheet within
at 31 december
2005 2006
£000 £000
assets 4422 9872
liabilities 7289 4744
net deferred tax assetsliabilities 2867 5128
included in the amount of £20074000 2005 £28323000 relating to intangible assets on acquisition is £13178000 2005 £20925000 relating to liabilities
that are expected to accrue after more than one year all deferred tax assets of £25202000 2005 £26213000 are expected to accrue after more than
one year
uk income taxes have not been provided at 31 december 2006 on unremitted earnings of approximately £31809000 2005 £14958000 2004 £5670000
of subsidiaries located outside the uk as such earnings are considered to be permanently invested if these earnings were to be remitted without offsetting
tax credits in the uk taxes would be approximately £10578000 2005 £2379000 2004 £1122000 the valuation allowance relates to net operating loss
carryforwards of certain subsidiaries where management believes it is more likely than not such amounts will not be realized none of the loss carryforwards
expires before 2018 the future use of the net operating losses carried forward in arm inc may be restricted in the event of a purchase by a third party
whereby the level of losses to be utilized on an annual basis would be limited to 4 of the market value of arm inc at the date of the transaction
as at 31 december 2006 the company had federal net operating losses of £17520000 and a deferred tax asset thereon of £5957000 these losses
begin to expire in 2019
the company also had state net operating losses of £2814000 and a deferred tax asset of £151000 which begin to expire in 2013
in addition to the net operating losses the company also had unutilized federal rd tax credits of £3626000 which will begin to expire in 2012 and
unutilized state rd tax credits of £2552000 which have no expiration date
as a result of fas 123r the company’s deferred tax assets at 31 december 2006 do not include £1909000 of excess tax benefits from employee share
option exercises that are a component of the company’s research and development and net operating loss carryovers equity will be increased by £1909000
if and when such excess tax benefits are ultimately realized
arm annual report and accounts 2006 99 4 earnings per share
year ended 31 december 2004
income shares per share
£ number amount
net income 27977000
basic eps
income available to common stockholders 27977000 1026889882 27p
effect of dilutive securities
stock options 22878223
diluted eps
income available to common stockholders plus assumed conversion 27977000 1049768105 27p
year ended 31 december 2005
income shares per share
£ number amount
net income 41880000
basic eps
income available to common stockholders 41880000 1369335202 31p
effect of dilutive securities
stock options 57701294
diluted eps
income available to common stockholders plus assumed conversion 41880000 1427036496 29p
year ended 31 december 2006
income shares per share
£ number amount
basic eps
net income before cumulative effect of change in accounting policy 47610000 1366816499 35p
cumulative effect of change in accounting policy 2447000 02p
net income after cumulative effect of change in accounting policy 45163000 33p
effect of dilutive securities
stock options 37934830
diluted eps
net income before cumulative effect of change in accounting policy 47610000 1404751329 34p
cumulative effect of change in accounting policy 2447000 02p
net income after cumulative effect of change in accounting policy 45163000 32p
5 business risks and credit concentration
the company operates in the intensely competitive semiconductor industry which has been characterized by price erosion rapid technological change short
product life cycles cyclical market patterns and heightened foreign and domestic competition significant technological changes in the industry could affect
operating results
financial instruments that potentially subject the company to concentrations of credit risk comprise principally cash cash equivalents short and longterm
investments and marketable securities and accounts receivable the company generally does not require collateral on accounts receivable as many of the
company’s customers are large wellestablished companies the company has not experienced any significant losses related to individual customers or
groups of customers in any particular industry or geographic area
the company markets and sells to a relatively small number of customers with individually large value transactions at 31 december 2004 2005 and 2006
no customers accounted for more than 10 of accounts receivable
at 31 december 2005 and 2006 the company’s cash cash equivalents shortterm investments and marketable securities were deposited with major
clearing banks and building societies in the uk and us in the form of money market deposits and corporate bonds for varying periods up to two years
100 arm annual report and accounts 2006
notes to the financial statementsus gaapcontinued 6 acquisitions
falanx microsystems as
on 30 may 2006 the company purchased the entire share capital of falanx microsystems as “falanx” a graphics ip company incorporated in norway
for total consideration of 251 million £134 million comprising 249 million cash consideration and 02 million of related acquisition expenses
falanx develops graphics accelerator ip and software for semiconductor systemonchip soc vendors that deliver highquality multimedia images without
compromising performance power consumption or system cost the acquisition fits the arm strategy of enabling users to create socs seamlessly in their
design process the mali graphics processor unit gpu is a combination of hardware and software that enables industryleading 3d graphics and video
on mobile phones portable media players settop boxes handheld gaming devices and automotive systems providing the company with full control
over the development of its future 3d graphics solutions
the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the
acquisition date
the operating results for falanx have been included in these financial statements for the period from 30 may 2006 to 31 december 2006 the acquisition
was accounted for under sfas 141
the following table sets out the provisional fair values of the assets acquired and liabilities assumed at the date of acquisition
fair value to company
£000
assets
cash and cash equivalents 24
accounts receivable net 118
other debtors 101
deferred tax asset 543
property and equipment net 62
total assets acquired 848
liabilities
accounts payable and other creditors 238
accrued liabilities and deferred revenue 368
total liabilities assumed 606
net assets acquired 242
the intangible assets recognized apart from goodwill represented contractual or other legal rights of falanx and those intangible assets of falanx that
could be clearly identified these intangibles were identified and valued through interviews and analysis of data provided by falanx concerning development
projects their stage of development the time and resources needed to complete them and if applicable their expected income generating ability
there were no other contractual or other legal rights of falanx clearly identifiable by management other than those identified below the allocation
of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed was as follows
useful estimated life years £000
fair value of net assets acquired 242
intangible assets acquired
developed technology 3 – 5 4267
customer relationships 3 990
deferred tax liability 1472
goodwill 9383
purchase price 13410
if the acquisition of falanx had occurred on 1 january 2006 net income for the company would have been £08 million lower than reported including the
additional amortization of intangibles
arm annual report and accounts 2006 101 6 acquisitions continued
soisic sa
on 30 october 2006 the company purchased the entire share capital of soisic sa “soisic” a silicononinsulator soi ip company incorporated in france
for consideration of 151 million £34 million comprising 147 million cash consideration and 104 million of related acquisition expenses
with this acquisition the company is making an investment in new technologies related to physical ip to enhance its leadership position in providing
customers access to the higher performance and lower power offered by soi process technologies soisic develops a similar set of products to the arm
physical ip division specifically standard cells static random access memory sram compilers and inputoutput io cells however based on soi design
rules and process models integrating this capability with arm’s widelyused physical ip opens the possibility for systemonchip soc designers to access
soi technology which currently is used only in full custom designs such as highperformance microprocessors
the company is investing in this area to be at the forefront of the design technologies needed to exploit the potential advantages of soi as its usage grows
in mobile home and enterprise soc and asic applications
the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the
acquisition date a further 18 million is potentially payable on the achievement of various postacquisition financial milestones and will be accrued when
the milestones have been achieved other than as noted below whereby a small portion of this contingent consideration has been accrued at acquisition
the operating results for soisic have been included in these financial statements for the period from 30 october 2006 to 31 december 2006 the acquisition
was accounted for under sfas 141
the following table sets out the provisional fair values of the assets acquired and liabilities assumed at the date of acquisition
fair value to company
£000
assets
accounts receivable net 165
other debtors 411
deferred tax asset 1392
property and equipment net 117
total assets acquired 2085
liabilities
cash overdraft 53
accounts payable and other creditors 949
accrued liabilities 413
total liabilities assumed 1415
net assets acquired 670
the intangible assets recognized represented those intangible assets of soisic that could be clearly identified these intangibles were identified and valued
through interviews and analysis of data provided by soisic concerning development projects their stage of development the time and resources needed to
complete them and if applicable their expected income generating ability there were no other contractual or other legal rights of soisic clearly identifiable
by management other than those identified below the allocation of the purchase price to the tangible and identifiable intangible assets acquired and
liabilities assumed was as follows
useful estimated life years £000
fair value of net assets acquired 670
intangible assets acquired
developed technology 5 4283
deferred tax liability 1413
purchase price 3540
the purchase price above includes £01 million of contingent consideration whilst the company does not normally accrue this payable until earned in line
with sfas 141 it has been accrued to reduce any potential negative goodwill to nil
if the acquisition of soisic had occurred on 1 january 2006 net income for the company would have been £25 million lower than reported including the
additional amortization of intangibles
102 arm annual report and accounts 2006
notes to the financial statementsus gaapcontinued 6 acquisitions continued
powerescape inc
on 21 june 2006 the company purchased certain assets of powerescape inc a private company incorporated in the us for total consideration of 11 million
£06 million comprising 10 million cash consideration and 01 million of related acquisition expenses
the powerescape team which has been integrated into the company’s development systems division will focus on adding innovative profiling and analysis
features to the company’s portfolio of marketleading development tools
the company has allocated £595000 of the purchase price to inprocess research and development which reflects certain research projects that have
not yet reached technological feasibility and commercial viability or had no alternative future use at the time of the acquisition inprocess research and
development has been writtenoff immediately to the income statement
keil elektronik gmbh and keil software inc
on 27 october 2005 the company purchased the entire share capital of keil elektronik gmbh keg a company incorporated in germany for total consideration
of 109 million £61 million comprising 104 million cash consideration and 05 million of related acquisition expenses on the same day the company
purchased the entire share capital of keil software inc ksi a us company for total consideration of 52 million £29 million comprising 50 million cash
consideration and 02 million of related acquisition expenses
the company has identified the mcu market as a critical growth area for the company’s future business and with this acquisition the company will be able
to accelerate progress in that market by offering a more complete solution as the mcu applications shift from 816bit to 32bit solutions the combination
of the arm cortexm3 processor which is ideally suited for microcontroller applications the realview highperformance compiler and keil’s complementary
mcu tools for arm will enable new generations of arm mcu solutions
the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the
acquisition date a further 23 million for keg and 10 million for ksi was potentially payable on the achievement of various postacquisition financial
milestones the financial milestones relating to the first year postacquisition were achieved in 2006 and are accrued at the year end further potential
payments relating to the second year postacquisition will be accrued when payable keil is a leading independent provider of software development
tools for the microcontoller mcu market
the acquisition was accounted for under sfas 141 the operating results for keil have been included in these financial statements for the period 27 october
2005 to 31 december 2005 in the 2005 comparatives and for the entire year in 2006
the following table sets out the provisional fair values of the assets acquired and liabilities assumed at the date of acquisition as reported in the
2005 annual report
keg ksi
fair value to company £000 £000
assets
cash and cash equivalents 2911 32
accounts receivable net 477 169
inventories 60 36
other debtors 11 5
property and equipment net 12 –
total assets acquired 3471 242
liabilities
accounts payable and other creditors 1593 19
accrued liabilities and deferred revenue 2280 62
total liabilities assumed 3873 81
net liabilities assumedassets acquired 402 161
arm annual report and accounts 2006 103 6 acquisitions continued
the intangible assets recognized apart from goodwill represented contractual or other legal rights of keil and those intangible assets of keil that could be
clearly identified these intangibles were identified and valued through interviews and analysis of data provided by keil concerning development projects
their stage of development the time and resources needed to complete them and if applicable their expected income generating ability there were no
other contractual or other legal rights of keil clearly identifiable by management other than those identified below the allocation of the purchase price to
the tangible and identifiable intangible assets acquired and liabilities assumed was as follows
keg ksi
useful estimated life years £000 £000
fair value of net liabilities assumedassets acquired 402 161
intangible assets acquired
customer relationships 2 – 3 4290 482
developed technology 1 – 5 2744 –
trade names 5– 1175
deferred tax liability 2673 663
goodwill 2178 1764
purchase price 6137 2919
keg made a profit after tax for the year ended 31 december 2004 of £10 million and for the period from 1 january 2005 until acquisition a profit after
tax of £10 million ksi made a loss after tax for the year ended 31 december 2004 of £95000 and for the period from 1 january 2005 until acquisition
a loss after tax of £40000 the results of the company would not have been significantly different had the acquisition of keg and ksi occurred on the
1 january 2005
during 2006 a further 11 million and 04 million consideration became payable for keg and ksi respectively following the achievement of various
postacquisition financial milestones with a corresponding increase to total consideration and goodwill in addition the provisional fair values in respect of
keg’s income tax liabilities were finalized resulting in an increase in the net assets acquired by £11 million due to this change in fair value an additional
£11 million of consideration was paid as both consideration and net assets were increased by the same amount there was no corresponding change
to goodwill
axys design automation inc
on 16 august 2004 the company purchased the entire share capital of axys design automation inc a us company for total consideration of 125 million
£69 million comprising 116 million cash consideration and 09 million of related acquisition expenses the purchase price was allocated to the tangible
and intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the acquisition date a further 3 million was potentially
payable on the achievement of various postacquisition financial milestones these were achieved during 2005 and were accrued and paid during the year
axys is a provider of fast accurate integrated processor and system modeling and simulation solutions and adds electronic system level expertise to arm’s
design tools portfolio
the acquisition was accounted for under sfas 141 the operating results for axys have been included in these financial statements for the period 16 august
2004 to 31 december 2004 in the 2004 comparatives and for the entire year in 2005 and 2006
the following table sets out the provisional fair values of the assets acquired and liabilities assumed at the date of acquisition as reported in the
2004 annual report
fair value to company
£000
assets
cash and cash equivalents 107
accounts receivable net 270
other debtors 74
deferred tax asset 710
property and equipment net 50
total assets acquired 1211
liabilities
accounts payable and other creditors 17
accrued liabilities and deferred revenue 729
total liabilities assumed 746
net assets acquired 465
104 arm annual report and accounts 2006
notes to the financial statementsus gaapcontinued 6 acquisitions continued
the intangible assets recognized apart from goodwill represented contractual or other legal rights of axys and those intangible assets of axys that could be
clearly identified these intangibles were identified and valued through interviews and analysis of data provided by axys concerning development projects
their stage of development the time and resources needed to complete them and if applicable their expected income generating ability there were no
other contractual or other legal rights of axys clearly identifiable by management other than those identified below the allocation of the purchase price
as at 31 december 2004 to the tangible and identifiable intangible assets acquired and liabilities assumed was as follows
useful estimated life years £000
fair value of net assets acquired 465
intangible assets acquired
developed technology 5 1379
customer relationships 5 425
trademarks 5 96
inprocess research and development 383
deferred tax liability 760
goodwill 4914
purchase price 6902
axys’ profit after tax for the year ended 31 december 2003 was £002 million and for the period from 1 january 2004 until acquisition was a loss of £09 million
as noted above a further 3 million consideration was paid during 2005 following the achievement of various postacquisition financial milestones
as a result total consideration and resultant goodwill increased by £1690000 during that year
artisan components inc
on 23 december 2004 the company acquired the entire share capital of artisan components inc a leading provider of physical ip components for the
design and manufacture of complex systemonchip soc integrated circuits the acquisition enables the combined company to deliver one of the industry’s
broadest portfolios of soc intellectual property to their extensive combined customer base with highly complementary sales channels combining arm’s
channel to more than 170 silicon manufacturers with artisan’s channel to more than 2000 companies it better positions the combined company to benefit
from growth opportunities across multiple industries as system design complexity increases and strengthens the links between the key aspects of soc
development enabling the combined company to deliver solutions that are further optimized for power and performance
the acquisition was accounted for under sfas 141 the operating results for artisan have been included in these financial statements for the period
23 december 2004 to 31 december 2004 in the 2004 comparatives and for the entire year in 2005 and 2006
the total consideration paid was 9269 million £4817 million comprising cash of 2354 million £1223 million 324399411 ordinary shares in the
company with a fair value of 5242 million £2724 million approximately 904 million share options issued to existing artisan employees with fair
value of 1519 million £790 million and related direct acquisition fees of 154 million £80 million including legal valuation and accounting fees
the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the
acquisition date these provisional fair values were subsequently amended during 2005 as noted below
the shares issued in the acquisition were valued in accordance with emerging issues take force issue no 9912 eitf 9912 “determination of the
measurement date for the market price of acquirer securities issued in a purchase business combination” in accordance with eitf 9912 the company
established the first date on which the number of the company shares and the amount of other consideration became fixed as of 23 august 2004
accordingly the company valued the transaction using the average closing price of the company’s ordinary shares two days before and after 23 august
2004 or 1616 per share the assumed options to acquire ordinary shares were valued using the blackscholes valuation model with volatility of
between 80 and 94 an average riskfree interest rate of 45 an estimated life of between zero and six years and dividend yield of 07
arm annual report and accounts 2006 105 6 acquisitions continued
the following table sets out the provisional fair values of the assets acquired and liabilities assumed at the date of acquisition as reported in the 2004
annual report
fair value to company
£000
assets
cash cash equivalents and marketable securities 82567
accounts receivable net 15078
prepaid expenses and other assets 3225
deferred tax asset 15446
property and equipment net 2509
total assets acquired 118825
liabilities
accounts payable and other creditors 3674
accrued and other liabilities 13245
deferred revenue 6545
total liabilities assumed 23464
net assets acquired 95361
the intangible assets recognized apart from goodwill represented contractual or other legal rights of artisan and those intangible assets of artisan that
could be clearly identified these intangibles were identified and valued through interviews and analysis of data provided by artisan concerning development
projects their stage of development the time and resources needed to complete them and if applicable their expected incomegenerating ability there
were no other contractual or other legal rights of artisan clearly identifiable by management other than those identified below the provisional allocation
of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed was as follows
useful estimated life years £000
fair value of net assets acquired 95361
intangible assets acquired
developed technology 4 – 5 18177
patentscore technology 5 – 7 11719
existing agreements and customer relationships 3 – 8 36354
trademarkstradenames 4 – 5 2500
order backlog 0 – 1 1354
inprocess research and development 3229
deferred stockbased compensation 9579
deferred tax liability 28042
goodwill 331432
purchase price 481663
developed technology developed technology of £182 million and patents and core technology of £117 million included intellectual property components
for use in soc integrated circuits and consisted of the following embedded memory standard cell inputoutput components and analog and mixedsignal
products in addition developed technology included a combination of processes patents patent applications core modular architecture and trade secrets
that are the buildings blocks of the technology at the date of acquisition the developed technology was complete and had reached technological feasibility
any costs incurred in the future will relate to the ongoing maintenance of the developed technology and will be expensed as incurred to estimate the
fair value of the developed technology an income approach was used with a discount rate of 14 for existing technology and 16 for patents and core
technology which included an analysis of future cash flows and the risks associated with achieving such cash flows all developed technologies are being
amortized over the estimated useful lives of four to five years
existing agreements and customer relationships and order backlog the customer base of £364 million and order backlog of £14 million represented
the fair value of existing customer relationships and contracts royalty arrangements and support and maintenance agreements to estimate the fair value
of the customer base and order backlog a cost approach replacement value was used the customer base and order backlog are being amortized over
their estimated useful lives of three to six years for customer base and one year for order backlog
trademarks and tradenames the fair value assigned to trademarks and tradenames including the company name artisan was estimated using the income
approach which discounts the present value of attributable cash flows at a discount rate of 16
inprocess research and development development projects that had reached technological feasibility were classified as developed technology and
the value assigned to developed technology was capitalized expensed inprocess research and development of £32 million reflected certain research
projects that had not yet reached technological feasibility and commercial viability or had no alternative future use at the time of the acquisition the
fair value assigned to inprocess research and development was estimated using the income approach which discounts to present value the cash flows
attributable to the technology once it has reached technological feasibility using a discount rate of 19 inprocess research and development has been
writtenoff immediately to the income statement
106 arm annual report and accounts 2006
notes to the financial statementsus gaapcontinued 6 acquisitions continued
goodwill of £3314 million represented the excess of the purchase price over the fair value of the net tangible and intangible sets acquired as stated
the acquisition enables the combined company to deliver one of the industry’s broadest portfolios of soc intellectual property to their extensive combined
customer base and it better positions the combined company to benefit from growth opportunities across multiple industries as system design complexity
increases these combined with the ability to hire the entire artisan work force were significant contributing factors to the establishment of the purchase
price resulting in the recognition of a significant amount of goodwill in accordance with sfas 142 the company is not amortizing goodwill relating to the
acquisition it is being carried at cost and the company tests it for impairment annually and whenever events indicate that an impairment may have occurred
the pro forma results of the company for 2004 had the acquisition occurred on 1 january 2004 and for the prior year had the acquisition occurred
on 1 january 2003 would have been
2003 2004
unaudited unaudited
£000 £000
revenues 173277 197852
income from operations 3730 15973
net income 1650 16365
diluted earnings per ordinary share 01p 12p
net income has been reduced in these pro forma results in relation to reduced interest income as a result of the cash portion of the acquisition
consideration amortization of intangibles acquired and amortization of deferred compensation
during 2005 the provisional fair values were finalized resulting in an increase in the net assets acquired of 29 million £15 million with a corresponding
decrease to goodwill the principal adjustments were an increase to the deferred tax asset representing deductions arising on exercise of options issued
in a business combination in accordance with eitf0023 of £48 million an increase in intangible assets acquired including inprocess research and
development but net of deferred tax of £08 million a reduction in deferred tax assets relating to carried forward losses of £14 million and additional
provisions for unaccrued costs of £27 million
7 investments and marketable securities
listed unlisted total
investments investments investments
£000 £000 £000
cost
at 1 january 2006 2010 1805 3815
additions – 165 165
disposal 296 – 296
at 31 december 2006 1714 1970 3684
aggregate movements in fair value
at 1 january 2006 4985 – 4985
unrealized holding losses 1589 – 1589
disposal 3225 – 3225
at 31 december 2006 171 – 171
carrying value
at 31 december 2006 1885 1970 3855
at 31 december 2005 6995 1805 8800
listed investments comprise an investment in superscape group plc the fair value of which at 31 december 2006 is £1885000 2005 £3474000
2004 £8795000 in 2006 the company disposed of its investment in csr plc for £56 million resulting in a profit of £53 million that was recognized
in the 2006 income statement the fair value of this investment at 31 december 2005 was £3521000 2004 £1467000
in 2005 the company invested £274000 in luminary micro inc an unlisted company and made a further investment of £165000 in the company in 2006
at 31 december 2006 the company had £19151000 2005 £8835000 of shortterm marketable securities these represent both the fair market value
and amortized cost of these securities
arm annual report and accounts 2006 107 8 property and equipment
at 31 december
2005 2006
£000 £000
owned buildings 190 190
leasehold improvements 20058 18054
computers 17944 18445
software 36530 8457
fixtures fittings and motor vehicles 4176 4676
78898 49822
less accumulated depreciation 66095 35852
property and equipment net 12803 13970
depreciation charged to income for the years ended 31 december 2004 2005 and 2006 was £9927000 £7750000 and £6895000 respectively
the net book value of software at 31 december 2006 was £3674000 2005 £3813000 with depreciation charged in 2006 on software of £1610000
2005 £1851000 2004 £4395000
9 intangible assets
existing
agreements 
developed customer core order
goodwill patents licenses technology relationships technology trademarks backlog total
£000 £000 £000 £000 £000 £000 £000 £000 £000
cost
at 1 january 2006 388892 8196 5906 23644 47076 13455 4225 1864 493258
additions falanx 9383 –– 4267 990 ––– 14640
additions soisic ––– 4283 –––– 4283
additions keg 635 ––––––– 635
additions ksi 209 ––––––– 209
exchange differences 46556 –– 2518 5239 1653 518 229 56713
at 31 december 2006 352563 8196 5906 29676 42827 11802 3707 1635 456312
aggregate amortization
at 1 january 2006 3320 8014 4970 5501 8111 2749 812 1864 35341
charge for the year – 137 357 6042 8940 2515 926 – 18917
exchange differences ––– 948 1390 493 156 229 3216
at 31 december 2006 3320 8151 5327 10595 15661 4771 1582 1635 51042
net book value
at 31 december 2006 349243 45 579 19081 27166 7031 2125 – 405270
at 31 december 2005 385572 182 936 18143 38965 10706 3413 – 457917
amortization charged to income for the years ended 31 december 2004 2005 and 2006 was £3197000 £20310000 and £18917000 respectively
licenses to use technology are being amortized over periods of three to five years the amortization periods for licenses have been determined according
to their estimated useful economic life
patents are being amortized over four to five years developed and core technology the main ip of the company existent at acquisition and generating
revenue over five years and customer relationships relationships with customers which were generating revenue at acquisition over two to six years
being the periods over which the company is expected to derive benefit from them
the estimated amortization expense of intangible assets in each of the next five years is set forth below
£000
2007 18879
2008 17469
2009 10989
2010 7645
2011 1045
108 arm annual report and accounts 2006
notes to the financial statementsus gaapcontinued 9 intangible assets continued
until the adoption of sfas 142 on 1 january 2002 see footnote 1 goodwill was being amortized on a straightline basis over periods of up to three years
determined in each case by reference to employee turnover rates in the industry and the individual technology acquired with the acquisitions in accordance
with sfas 142 goodwill is no longer amortized and is tested for impairment at least annually
the split of goodwill by segment is shown below additions in the year relating to keil and falanx have been allocated to the development systems and
processor divisions respectively the foreign exchange difference arises as goodwill on artisan axys and ksi is denominated in us dollars and thus is subject
to revaluation at the periodend rates changes in the carrying amount for the year are as follows
development systems
processor division physical ip division division total
£000 £000 £000 £000
balance at 1 january 2006 113358 259197 13017 385572
additions keg –– 635 635
additions ksi –– 209 209
additions falanx 9383 –– 9383
exchange differences 13645 31836 1075 46556
balance at 31 december 2006 109096 227361 12786 349243
10 accounts receivable
included within accounts receivable at 31 december 2006 are £238 million 2005 £205 million of amounts recoverable on contracts
11 accrued liabilities
included within accrued liabilities at 31 december 2006 are £88 million 2005 £07 million for staff costs and £32 million 2005 £18 million representing
unpaid consideration for acquisitions
12 shareholders’ equity
share options the board is authorized to issue options to acquire ordinary shares in the company up to a maximum of 10 of the issued ordinary share
capital in any fiveyear period options issued prior to the listing of the company are excluded from this calculation the exercise of options or vesting
of share awards will be satisfied either out of newlyissued share capital or from shares held by the company as treasury stock or within the esop 
treasury stock is purchased from the market and the quantum and timing of these purchases is at the discretion of the directors and based on the
share price and shortterm cash requirements of the company
under the uk inland revenue executive approved share option plan the “executive scheme” the company may grant options to employees meeting
certain eligibility requirements options under the executive scheme are exercisable between three and ten years after their issue after which time the
options expire
under the company’s unapproved scheme the “unapproved scheme” for which it has not sought approval from the uk inland revenue options are
exercisable one to seven years after their issue after which time the options expire the company also operates the us iso scheme which is substantially
the same as the unapproved scheme the main difference being that the options are exercisable one to five years after their issue under both of these
schemes options are exercisable as follows 25 maximum on first anniversary 50 maximum on second anniversary 75 maximum on third anniversary
100 maximum on fourth anniversary various options to directors under the unapproved scheme have certain performance criteria attached which if met
are exerciseable after three years otherwise they will become exerciseable after seven years
there are further schemes for our french and belgian employees the “french scheme” and the “belgian scheme” in the french scheme options are
exercisable between four and seven years after their issue whilst in the belgian scheme options are exercisable from 1 january following the third
anniversary after their issue up to seven years from issue
from 2006 the company has begun issuing restricted stock units “rsus” to employees instead of options as approved at the 2006 agm rsus are actual
share awards on vesting rather than options to buy shares at a fixed exercise price the main rsu awards to employees in all jurisdictions other than
france vest similarly to the unapproved scheme above namely 25 on the each anniversary over four years rsu awards to our french employees vest
50 after two years and then a further 25 after three and four years whilst the company reserves the right to award options to employees going
forward the majority of awards to employees will be in rsus
arm annual report and accounts 2006 109 12 shareholders’ equity continued
additionally from 2006 the company has started the new deferred annual bonus plan “dab” under the dab which is for directors and selected senior
management within the company participants are required to defer 50 of any related annual bonus into shares on a compulsory basis these shares will
be deferred for three years and then a further matching award will be made depending on the achievement of an eps performance condition over that
time the company also operates the long term incentive plan “ltip” also for directors and selected senior management whereby share awards are
made and vest depending on the company’s tsr performance compared to two comparator groups over the threeyear performance period
upon the acquisition of artisan in 2004 the company assumed the share schemes of artisan existing at acquisition the schemes remained substantially
the same as prior to the acquisition other than the options became options to purchase shares in arm holdings plc instead of artisan components inc
the number and value of options were amended in line with the conversion ratio as detailed in the merger agreement the schemes assumed were the
“1993 plan” the “1997 plan” the “2000 plan” the “2003 plan” the “director plan” the “executive plan” and the “nd00 plan”
under each plan there are multiple vesting templates and vesting periods the majority of the options were already vested upon acquisition and the most
common template was 25 vesting after one year and then 625 vesting each quarter thereafter until 100 vest after four years some options vest on
a monthly basis and some vest over five years all options lapse ten years from the date of grant
in 1998 the company set up two savingsrelated share option schemes for all employees and executive directors of the company the number of options
granted is related to the value of savings made by the employee the period of savings is three or five years except for employees of arm inc where the
period is two years the option price is currently set at 85 of the market share price prior to the grant and the right to exercise normally only arises for a
sixmonth period once the savings have been completed except for arm inc where the right to exercise normally only arises for a threemonth period once
the savings have been completed the company set up further savingsrelated option schemes in each year up to and including 2006 for all employees and
executive directors of the company which have the same characteristics as those schemes set up in 1998
activity under all share schemes is detailed below including weighted average exercise prices for share options and weighted average grantdate fair values
for share awards
outstanding options outstanding rsusltip awards
weighted average weighted average
options exercise price awards grantdate fair value
number £ number £
balances 31 december 2003 65491080 1455 2572646 0805
granted in year 16934076 1226 2597114 1005
assumed on acquisition of artisan 90414815 0434 ––
lapsed in year 5770196 1914 166036 0805
exercised in year 3049960 0431 ––
balances 31 december 2004 164019815 0870 5003724 0909
granted in year 27127630 1051 3543455 1165
lapsed in year 11027172 1110 786298 0987
exercised in year 37096283 0374 ––
balances 31 december 2005 143023990 1014 7760881 1018
granted in year 9064290 1250 10589718 1310
additional awards earned based on performance conditions –– 1672009 0805
lapsed in year 9508283 1697 558985 1255
options exercisedawards vested in year 30656261 0583 3798567 0805
balances 31 december 2006 111923736 1093 15665056 1236
the total number of options exerciseable at 31 december 2006 was 74533736 2005 64431089 2004 69624728
the weighted average grantdate fair value of options granted during 2006 was £043 2005 £038 2004 £074 included within these are options within
the saye scheme which have an exercise price that was 85 of the market price at date of grant the weighted average grantdate fair value of these saye
options granted during 2006 was £044 2005 £040 2004 £073 the weightedaverage exercise price of these saye options granted during 2006 was
£10264 2005 £09095 2004 £09435
the total pretax intrinsic value of options exercised and ltip awards made in 2006 was £216 million and £52 million respectively this intrinsic value
represents the difference between the fair market value of the company’s shares on the date of exercise and the exercise price of each option the total fair
value of ltip awards that vested in 2006 was £17 million based on the closing price of the company’s shares on 31 december 2006 of £12575 per share
the total pretax intrinsic value of all outstanding options rsus and ltip awards was £673 million the total pretax intrinsic value of all exerciseable options
at 31 december 2006 was £392 million
the total cash received on the exercise of options in the year was £179 million the total tax benefits realized from the exercise of options and share
awards in the year was £90 million
110 arm annual report and accounts 2006
notes to the financial statementsus gaapcontinued 12 shareholders’ equity continued
the following options over ordinary shares were in existence at 31 december
options outstanding options exercisable
2006 number weighted average weighted average number weighted average weighted average
exercise price £ outstanding remaining life years exercise price £ outstanding remaining life years exercise price £
0026 – 040 15662942 424 025 15662942 424 025
0405 – 050 21310841 413 045 19649705 401 045
051 – 09475 17465042 596 071 9678857 648 066
1005 – 1224 25943761 437 107 9884878 403 109
125 – 7738 31541150 352 218 19657354 255 272
total 111923736 431 109 74533736 400 112
there were also 7893640 rsus and 7771416 ltip awards outstanding at 31 december 2006 with a weighted average remaining life of 151 years
rsus and ltip awards have no exercise price and all were unvested at 31 december 2006
13 commitments and contingencies
the company leases its office facilities which expire at various dates through 2018 and certain equipment including eda design tools which expire
at various dates through 2009 under noncancelable operating lease agreements
future minimum lease commitments at 31 december 2006 are as follows
operating leases
years ending 31 december £000
2007 16773
2008 15619
2009 6526
2010 2445
2011 2183
thereafter 9122
total minimum lease payments 52668
rental expense under operating leases totaled £12627000 £15809000 and £18800000 for the years ended 31 december 2004 2005 and 2006 respectively
in may 2002 nazomi communications inc “nazomi” filed suit against arm alleging willful infringement of nazomi’s us patent no 6332215 “’215 patent”
arm answered nazomi’s complaint in july 2002 denying infringement arm moved for summary judgment and a ruling that the technology does not
infringe nazomi’s patent the united states district court for the northern district of california granted arm’s motion and nazomi appealed the district
court’s ruling in september 2004 the court of appeals for the federal circuit heard the appeal and issued its decision in april 2005 because in the opinion
of the court of appeals for the federal circuit the district court did not construe the disputed claim term in sufficient detail for appellate review the court of
appeals for the federal circuit remanded the dispute back to the district court for further analysis a supplementary “markman” hearing was held in october
2005 to decide the construction of a fundamental term in the ‘215 patent and a decision on claim construction was delivered on 6 september 2006 the
decision emphatically supports arm’s construction of the relevant term and consequently strongly supports arm’s noninfringement arguments in december
2006 arm filed a renewed motion for summary judgment and a ruling that the accused technology does not infringe the ‘215 patent on 17 january 2007
nazomi filed a response to arm’s renewed motion for summary judgment in which they stipulated that based on the claim construction delivered by the
district court the arm technology accused in the suit does not infringe the ‘215 patent but also objected to the claim construction delivered by the district
court and indicated their intention to appeal the claim construction to the court of appeals for the federal circuit on 30 january 2007 the district court
granted arm’s motion for summary judgment furthermore on 13 february 2007 nazomi filed notice of appeal to the court of appeals for the federal
circuit based on independent legal advice arm is confident that the court of appeals will uphold the claim construction ruling delivered by the district court
in september 2006
in october 2005 technology properties limited inc “tpl” filed suit in the united states district court for the eastern district of texas marshall division
against certain companies in the fujitsu matsushita nec and toshiba groups of companies alleging infringement of tpl’s us patents nos 5809336
5784584 and 6598148 the “litigation” all of the defendants are licensees of various arm technologies it was revealed as part of the preliminary
infringement contentions in the litigation filed in july 2006 that certain arm technology is alleged to infringe a single claim in us patent no 5784584 the
“’584 patent” in september 2006 arm filed a motion to intervene in the litigation and that motion has been granted arm is now a defendant party in the
litigation the claim construction or “markman” hearing is scheduled for may 2007 and the trial date is scheduled for november 2007 based on legal
advice and written opinions received from external counsel arm is confident that the accused arm technology does not infringe any of the claims of the
‘584 patent or that the patent is invalid arm has voluntarily joined as a party to the litigation to proactively defend its technology against ill conceived and
false infringement allegations and fully expects to prove the case for noninfringement or invalidity in the course of the litigation
arm does not expect any significant liability in respect of these claims
arm annual report and accounts 2006 111 13 commitments and contingencies continued
guarantees it is common industry practice for licensors of technology to offer to indemnify their licensees for loss suffered by the licensee in the event that
the technology licensed is held to infringe the intellectual property of a third party consistent with such practice the company provides such indemnification
to its licensees but subject in all cases to a limitation of liability the obligation for the company to indemnify its licensees is subject to certain provisos and
is usually contingent upon a third party bringing an action against the licensee alleging that the technology licensed by the company to the licensee infringes
such third party’s intellectual property rights the indemnification obligations typically survive any termination of the license and will continue in perpetuity
the company does not provide for any such guarantees unless it has received notification from the other party that they are likely to invoke the guarantee
the provision is made if both of the following conditions are met i information available prior to the issuance of the financial statements indicates that it
is probable that a liability had been incurred at the date of the financial statements and ii the amount of the liability can be reasonably estimated any
such provision is based upon the directors’ estimate of the expected costs of any such claim
there was no provision for such guarantees at either 31 december 2006 or 31 december 2005
at 31 december 2006 arm had provided in aggregate £11 million 2005 £08 million in relation to claims being the expected future costs to be incurred
at 31 december 2006 the company had outstanding capital commitments of £525000 2005 £1371000
14 geographic and segment information
at 31 december 2006 the company is organized on a worldwide basis into three business segments namely the processor division “pd” the physical ip
division “pipd” and the development systems division “devsys” in 2004 the directors were of the opinion the company only had one class of business
and then following the acquisition of artisan in december 2004 the company had two reportable segments in 2005 namely pd and pipd
this was based upon the company’s internal organization and management structure and was the primary way in which the chief operating decision maker
“codm” and the rest of the board were provided with financial information whilst revenues were reported into four main revenue streams namely
licensing royalties development systems and services the costs operating results and balance sheets were only analyzed into the two segments
in 2006 this structure and system of internal financial reporting to the codm and board was changed resulting in a third division namely devsys becoming
a separate reportable segment in previous years the results of devsys were reported within pd but for ease of comparability have been separated out in
the comparatives below pipd consists of the business stream previously undertaken by artisan pd primarily comprises the legacy arm products and services
recent acquisitions have been allocated to the various divisions as follows axys in 2004 to devsys artisan in 2004 to pipd keg and ksi in 2005 to devsys
falanx in 2006 to pd and soisic in 2006 to pipd goodwill on each acquisition has also been allocated into these divisions except for artisan whereby this
has been allocated between pd and pipd
the following analysis is of revenues operating costs interest income income before income tax depreciation and amortization capital expenditure
total assets and liabilities net assets and goodwill of each segment and of the company in total
year ended 31 december 2006
processor physical ip development
division division systems division unallocated total
£000 £000 £000 £000 £000
revenues 180426 53996 28832 – 263254
operating costs 115196 66593 40967 4522 218234
interest income ––– 6758 6758
profit on disposal of availableforsale security ––– 5270 5270
incomeloss before income tax 65230 12597 12135 16550 57048
cumulative effect of change in accounting policy 2028 979 489 – 3496
depreciation and amortization 4678 16352 5377 – 26407
capital expenditure 4077 2368 2114 – 8559
total assets 157350 314586 33614 147153 652703
total liabilities 37308 19589 10843 10316 78056
net assets 120042 294997 22771 136837 574647
goodwill 109096 227361 12786 – 349243
112 arm annual report and accounts 2006
notes to the financial statementsus gaapcontinued 14 geographic and segment information continued
year ended 31 december 2005
processor physical ip development
division division systems division unallocated total
£000 £000 £000 £000 £000
revenues 156641 50159 25639 – 232439
operating costs 87357 64012 30868 2285 184522
interest income ––– 5317 5317
incomeloss before income tax 69284 13853 5229 3032 53234
depreciation and amortization 6632 18245 3518 – 28395
capital expenditure 2737 1584 1743 – 6064
total assets 161885 349769 36068 168371 716093
total liabilities 22226 20115 12168 12534 67043
net assets 139659 329654 23900 155837 649050
goodwill 113358 259197 13017 – 385572
year ended 31 december 2004
processor physical ip development
division division systems division unallocated total
£000 £000 £000 £000 £000
revenues 132983 195 19719 – 152897
operating costs 88627 4070 27218 1471 121386
interest income ––– 6944 6944
incomeloss before income tax 44356 3875 7499 5473 38455
depreciation and amortization 9671 3586 3479 – 16736
capital expenditure 3525 – 1511 – 5036
total assets 146539 321080 18496 151822 637937
total liabilities 35207 38212 5846 6345 85610
net assets 111332 282868 12650 145477 552327
goodwill 101702 232002 6712 – 340416
unallocated operating costs are foreign exchange revaluation on monetary items including cash and cash equivalents unallocated assets and liabilities
include cash and cash equivalents shortterm investments and marketable securities some deferred tax balances current tax and vat there are no
intersegment revenues the results of each segment have been prepared using consistent accounting policies with those of the company as a whole
the following analysis is of revenues by geographic segment and origin and longlived assets excluding deferred tax assets by group companies
in each territory
year ended 31 december
2004 2005 2006
£000 £000 £000
revenues by market destination
europe 23837 32971 42746
us 77457 99727 111194
japan 32754 42270 40303
asia pacific excluding japan 18849 57471 69011
total revenues 152897 232439 263254
the company’s exports from the uk were £138078000 £172592000 and £195868000 for the years ended 31 december 2004 2005 and 2006 respectively
year ended 31 december
2004 2005 2006
£000 £000 £000
revenues by origin
europe 141974 170505 198386
us 6384 59183 63028
asia pacific 4539 2751 1840
total revenues 152897 232439 263254
arm annual report and accounts 2006 113 14 geographic and segment information continued
at 31 december
2005 2006
£000 £000
longlived assets excluding deferred tax assets
europe 17550 13045
us 3268 3614
asia pacific 785 1166
total longlived assets 21603 17825
in 2006 2005 and 2004 no single customer accounted for more than 10 of total revenues
15 fair values of financial instruments
the following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate
that value
cash and cash equivalents shortterm investments and accounts receivable the carrying amount approximates fair value because of the short maturity
of those instruments
marketable securities the carrying amount approximates fair value because these instruments are markedtomarket
foreign currency forward contracts the fair value of foreign currency contracts and embedded derivatives are estimated using the settlement rates
prevailing at the period end
the estimated fair values of the company’s financial instruments are as follows
at 31 december
2005 2006
carrying fair carrying fair
amount value amount value
£000 £000 £000 £000
cash and cash equivalents 128077 128077 90743 90743
shortterm investments 23990 23990 18600 18600
marketable securities 8835 8835 19151 19151
accounts receivable 55518 55518 69552 69552
foreign currency contracts 1708 1708 439 439
embedded derivatives 722 722 1620 1620
16 valuation and qualifying accounts
charged acquired with
balance at credited to subsidiary foreign balance at
1 january income statement undertaking reclassification exchange 31 december
£000 £000 £000 £000 £000 £000
2006 – allowance for doubtful debts 2173 932 – 377 172 2556
2005 – allowance for doubtful debts 1451 547 27 – 148 2173
2004 – allowance for doubtful debts 1115 321 657 –– 1451
2006 – valuation allowance against deferred tax assets 366 3394 2289 –– 6049
2005 – valuation allowance against deferred tax assets 254 112 ––– 366
2004 – valuation allowance against deferred tax assets 503 249 ––– 254
17 post balance sheet events
at the 2007 annual general meeting of the company a final dividend of 06 pence per share total cost £8002000 will be proposed in respect of the 2006
financial year and if approved will be paid on 21 may 2007 to shareholders on the register at 4 may 2007
following the year end the uk government announced a cut of 2 in the uk corporation tax rates for large businesses with effect from 1 april 2008
although not material an adjustment to the company’s deferred tax assets will be required in 2007
114 arm annual report and accounts 2006
operating and financial review and prospectsus gaapcontinued arm annual report and accounts 2006 115
to the board of directors and shareholders of arm holdings plc
in our opinion the accompanying consolidated balance sheets and the related consolidated statements of income consolidated statements of comprehensive
income changes in shareholders’ equity and cash flows present fairly in all material respects the financial position of arm holdings plc and its subsidiaries
at 31 december 2006 and 2005 and the results of their operations and their cash flows for each of the three years in the period ended 31 december 2006
in conformity with accounting principles generally accepted in the united states of america these financial statements are the responsibility of the company’s
management our responsibility is to express an opinion on these financial statements based on our audits we conducted our audits of these statements
in accordance with auditing standards generally accepted in the united states of america those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement an audit of financial statements includes examining
on a test basis evidence supporting the amounts and disclosures in the financial statements assessing the accounting principles used and significant estimates
made by management and evaluating the overall financial statement presentation we believe that our audits provide a reasonable basis for our opinion
as discussed in footnote 1 to the consolidated financial statements the company changed the manner in which it accounts for sharebased compensation
in 2006
pricewaterhousecoopers llp chartered accountants
london england
2 april 2007
report of independent registered public accounting firmus gaap
arm annual report and accounts 2006 115 116 arm annual report and accounts 2006
2006 2005
notes £000 £000
fixed assets
investments 4 512490 495053
current assets
debtors 5 10039 9
cash at bank and in hand 123 613
10162 622
creditors amounts falling due within one year 6 96429 22604
net current liabilities 86267 21982
total assets less current liabilities 426223 473071
net assets 426223 473071
capital and reserves
calledup share capital 7 695 693
share premium account 8 97616 95512
option reserve 8 61474 61474
other reserve 8 267418 267418
profit and loss account 8 980 47974
equity shareholders’ funds 9 426223 473071
the financial statements on pages 116 to 122 were approved by the board of directors on 2 april 2007 and were signed on its behalf by
doug dunn chairman
company balance sheetuk gaap
at 31 december 2006 arm annual report and accounts 2006 117
1 principal accounting policies
the financial statements have been prepared in accordance with the companies act 1985 and applicable accounting standards in the uk a summary of the
more important accounting policies which have been consistently applied and reviewed by the board of directors in accordance with financial reporting
standard frs 18 “accounting policies” is set out below
basis of accounting the financial statements are prepared in accordance with the historical cost convention
investments in subsidiaries investments in subsidiaries are initially recorded at cost where an acquisition satisfied the provisions of sections 131 to 134
of the companies act 1985 for merger relief the investment is stated at the nominal value of shares issued plus the fair value of any other consideration
cash flow statement the company has taken advantage of the exemption in frs 1 revised 1996 “cash flow statements” which provides that where
a company is a member of a group and a consolidated cash flow statement is published the company does not have to prepare a cash flow statement
foreign currency transactions denominated in foreign currencies have been translated into sterling at actual rates of exchange ruling at the date of the
transaction monetary assets and liabilities denominated in foreign currencies have been translated at rates ruling at the balance sheet date exchange
differences have been included in operating profit
taxation current tax is provided at amounts expected to be paid using the tax rates and laws that have been enacted or substantively enacted by the
balance sheet date
financial instruments the company does not have any financial instruments other than intercompany payables and receivables and cash due to the
shortterm nature of these balances the company considers the fair value of these items to equal the carrying value
share schemes the group’s employee share ownership plan esop and qualifying employee share ownership trust quest are separately administered
trusts which are funded by loans the esop and loans and gifts the quest from the group and the assets of which comprise shares in the company in
accordance with uitf 38 “accounting for esop trusts” the company recognises the assets and liabilities of the esop and the quest in its own accounts and
shares held by the trusts are recorded at cost as a deduction in arriving at shareholders’ funds until such time as the shares vest unconditionally to employees
the company issues equitysettled sharebased payments including an ltip  to certain employees of subsidiary undertakings in accordance with frs 20
equitysettled sharebased payments are measured at fair value at the date of grant fair value is measured by use of the blackscholes pricing model
the fair value determined at the grant date of the equitysettled sharebased payments is expensed in the accounts of the subsidiary companies on a
straightline basis over the vesting period based on the company’s estimate of the number of shares that will eventually vest
the company operates save as you earn saye schemes in the uk and an employee share purchase plan espp in the us options under these schemes are
granted at a 15 discount to market price of the underlying shares on the date of grant the uk saye schemes are approved by the inland revenue which
stipulates that the saving period must be at least 36 months the company’s subsidiaries have recognised a compensation charge in respect of the uk saye
plans and us espps the charges for these are calculated as detailed above
the company has taken advantage of the exemption available and has applied the provisions of frs 20 only to those options granted after 7 november
2002 and which were outstanding at 31 december 2004 the company does not have any employees and as such all sharebased compensation has been
recorded as capital contributions to subsidiaries
treasury shares the company has a share buyback programme under which the company purchases its own shares and holds them as treasury shares
these shares will be used to satisfy employee share option exercises and other share awards in accordance with uitf 38 the company recognises these
shares at cost as a deduction in arriving at shareholders’ funds
2 profit for the financial year
as permitted by section 230 of the companies act 1985 the parent company’s profit and loss account has not been included in these financial statements
the parent company’s profit after taxation including dividends receivable and before dividends payable was £6741000 2005 £19908000 apart from
six directors who have contracts of service with arm limited the company has no employees all emoluments of these directors are paid by arm limited
and are disclosed in the remuneration report within these financial statements
notes to the financial statementsuk gaap
arm annual report and accounts 2006 117 118 arm annual report and accounts 2006
notes to the financial statementsuk gaapcontinued
3 dividends paid and proposed
2006 2005
£000 £000
final dividend paid of 05 pence per ordinary share in respect of 2005 2005 042 pence in respect of 2004 6918 5673
interim dividend paid of 04 pence 2005 034 pence per ordinary share 5449 4763
12367 10436
the esop trust has waived its right to receive dividends of over 001 pence per share and the quest has waived its right to receive any dividends as such
dividends will not be payable on the 1201434 shares currently held within esop  the quest had no shares remaining at the balance sheet date also
49500000 were held as treasury stock by arm holdings plc at 31 december 2006 and the company has waived its right to dividends on these shares
the directors have recommended the payment of a final dividend of 06 pence per share in respect of 2006 total cost of £8002000 bringing the total
dividend payable in respect of 2006 including the interim of 04 pence per share to 10 pence per share this will be paid to shareholders after approval
by the shareholders at the 2007 agm
the directors have been advised that the 2006 interim dividend of 04 pence per share was paid at a time when the company had insufficient distributable
reserves at the 2007 agm a resolution will be proposed rectifying the position and approving the release of shareholders from any liability to repay or
reimburse the company in respect of such payment
4 fixed asset investments
the cost and net book value of interests in group undertakings held by the company was £512490000 at 31 december 2006 and £495053000 at
31 december 2005 the company took advantage of merger relief in 2004 and did not record the premium on the issue of shares for the acquisition
of artisan components inc now arm inc and thus did not record the premium within the value of the investment in the company balance sheet
at that time
investments
in subsidiary
undertakings
£000
cost and net book value
at 1 january 2006 495053
capital contributions arising from frs 20 charges 17437
at 31 december 2006 512490
where options over the company’s shares have been issued to the employees of subsidiary undertakings the fair value of employee services performed
equal to the frs 20 charge has been recorded as a capital contribution
interests in group undertakings details of subsidiary undertakings are as follows
proportion of
nominal value
country of description of issued
name of undertaking registration of shares held shares held
arm limited england and wales ordinary £1 shares less than 001
arm finance uk limited england and wales ordinary 1 shares 100
arm quest trustees limited england and wales ordinary £1 shares 100
the principal activity of arm limited is the marketing research and development of riscbased microprocessors the remaining shares in arm limited
are held by arm finance uk limited the principal activity of arm finance uk limited is as an intermediate holding company arm quest trustees limited
is the trustee company of the company’s quest
nominees of the company hold 100 of the ordinary share capital of arm employee benefit trustee ltd a company which acts as trustee to the
group’s esop 
5 debtors
2006 2005
£000 £000
amounts owed from group undertakings 10014 –
corporation tax 25 –
prepayments and accrued income – 9
10039 9 arm annual report and accounts 2006 119
6 creditors amounts falling due within one year
2006 2005
£000 £000
amounts owed to group undertakings 96058 22234
corporation tax – 47
accruals and deferred income 371 323
96429 22604
7 calledup share capital
2006 2005
company £000 £000
authorised
2200000000 ordinary shares of 005 pence each 2005 2200000000 1100 1100
allotted calledup and fully paid
1389907834 ordinary shares of 005 pence each 2005 1386102680 695 693
3805154 ordinary shares of 005 pence each were issued in the year for cash consideration of £2106000 as a result of the exercise of employee share
options at various times during the year
share options the company had the following options outstanding over ordinary shares of 005 pence at 31 december 2006
weighted
average
range of exercise
number of exercise prices price latest date
year of grant options ££ of exercise
executive scheme 1997 260000 0026 0026 4 march 2007
1998 301000 01125 – 05275 01666 15 october 2008
1999 2013097 1224 – 426 13236 15 november 2009
2000 378973 6136 – 7738 65234 21 may 2010
2001 570136 284 – 375 33862 5 november 2011
2002 828994 2465 2465 18 april 2012
2003 1058248 04375 04375 29 january 2013
2004 929501 10575 – 125 12493 22 july 2014
2005 633254 1055 1055 3 february 2015
6973203 16434
unapproved scheme 2000 2223097 6136 – 7738 62213 12 october 2007
2001 2991949 284 – 443 34671 5 november 2008
2002 3445056 0425 – 3145 23818 7 november 2009
2003 8459896 04375 – 11475 04519 4 november 2010
2004 8135146 09475 – 125 12357 21 october 2011
2005 10271280 1005 – 1185 10602 30 october 2012
2006 2786181 116 – 136 13225 19 november 2013
38312605 15921
unapproved performance scheme 2001 62909 3815 3815 22 may 2008
2002 630411 21475 – 2465 23524 27 may 2009
2003 2715427 04375 04375 30 january 2010
2004 1616000 125 125 30 january 2011
2005 2620853 1055 1055 4 february 2012
2006 2445284 1325 1325 1 february 2013
10090884 10837
us iso scheme 2002 1054450 0425 – 3145 23917 7 november 2007
2003 1787473 04375 – 11475 04440 4 november 2008
2004 2153139 09475 – 125 12111 21 october 2009
2005 6392686 1005 – 1185 10638 30 october 2010
2006 1048182 11875 – 136 13247 31 august 2011
12435930 11348 120 arm annual report and accounts 2006
notes to the financial statementsuk gaapcontinued
7 calledup share capital continued
weighted
average
range of exercise
number of exercise prices price latest date
year of grant options ££ of exercise
french scheme 2000 56250 633 633 12 october 2007
2001 124500 335 – 443 34962 5 november 2008
2002 134250 1505 – 3145 24799 14 august 2009
2003 575900 04375 – 11475 04415 4 november 2010
2004 353504 09475 – 125 12409 21 october 2011
2005 436886 10425 – 1185 10601 30 october 2012
2006 98250 1325 – 136 13297 3 may 2013
1779540 13548
belgian scheme 2003 230600 11475 11475 4 november 2010
2004 353700 125 125 29 january 2011
2005 331200 1055 1055 3 february 2012
2006 27500 11875 – 1325 13000 31 august 2013
943000 11579
1993 plan 1997 112390 014 014 27 may 2007
1998 398992 015 – 049 02690 17 december 2008
1999 796933 016 – 037 02116 15 november 2009
2000 1583984 020 – 058 03358 29 november 2010
2001 4392654 024 – 046 02589 30 december 2011
2002 4164574 027 – 060 04193 30 december 2012
2003 1137984 048 – 050 04984 27 february 2013
12587511 03396
2000 plan 2001 5025044 022 – 028 02233 27 september 2011
2002 558426 024 – 027 02571 29 august 2012
5583470 02267
2003 plan 2003 6067744 047 – 066 05125 22 october 2013
2004 10319286 055 – 107 07162 15 december 2014
16387030 06408
director plan 2000 89912 057 057 16 february 2010
2001 7498 022 022 15 april 2011
2002 26236 044 044 6 february 2012
123646 05212
nd00 plan 2000 191905 019 019 19 october 2010
2001 118506 037 037 13 august 2011
2002 152247 037 037 2 july 2012
2003 995341 051 051 18 february 2013
1457999 04419
saye 2002 10878 182537 182537 31 december 2007
2003 927254 05865 05865 31 december 2008
2004 301031 09435 09435 31 december 2009
2005 1791586 09095 09095 31 december 2010
2006 2218169 10264 10264 31 december 2011
5248918 09057
total 111923736
under the uk inland revenue executive approved share option plan the “executive scheme” the company may grant options to directors and employees
meeting certain eligibility requirements options under the executive scheme are exercisable between three and ten years after their issue after which time
the options expire arm annual report and accounts 2006 121
7 calledup share capital continued
under the company’s unapproved scheme the “unapproved scheme” for which it has not sought approval from the uk inland revenue options are
exercisable one to seven years after their issue after which time the options expire the company also operates the us iso scheme which is substantially
the same as the unapproved scheme the main difference being that the options are exercisable one to five years after their issue under both of these
schemes options are exercisable as follows 25 maximum on first anniversary 50 maximum on second anniversary 75 maximum on third anniversary
100 maximum on fourth anniversary various options to directors under the unapproved scheme have certain performance criteria attached which if met
are exerciseable after three years otherwise they will become exerciseable after seven years
there are further schemes for our french and belgian employees the “french scheme” and the “belgian scheme” in the french scheme options are
exercisable between four and seven years after their issue whilst in the belgian scheme options are exercisable from 1 january following the third
anniversary after their issue up to seven years from issue
from 2006 the company has begun issuing restricted stock units “rsus” to employees instead of options as approved at the 2006 agm rsus are actual
share awards on vesting rather than options to buy shares at a fixed exercise price the main rsu awards to employees in all jurisdictions other than
france vest similarly to the unapproved scheme above namely 25 on the each anniversary over four years rsu awards to our french employees vest
50 after two years and then a further 25 after three and four years whilst the company reserves the right to award options to employees going
forward the majority of awards to employees will be in rsus at 31 december 2006 7893640 share awards remained outstanding under the rsu scheme
additionally from 2006 the company has started the new deferred annual bonus plan “dab” under the dab which is for directors and selected senior
management within the company participants are required to defer 50 of any related annual bonus into shares on a compulsory basis these shares will
be deferred for three years and then a further matching award will be made depending on the achievement of an eps performance condition over that
time the company also operates the long term incentive plan “ltip” also for directors and selected senior management whereby share awards are made
and vest depending on the company’s tsr performance compared to two comparator groups over the threeyear performance period
upon the acquisition of artisan in 2004 the company assumed the share schemes of artisan existing at acquisition the schemes remained substantially
the same as prior to the acquisition other than the options became options to purchase shares in arm holdings plc instead of artisan components inc
the number and value of options were amended in line with the conversion ratio as detailed in the merger agreement the schemes assumed were the
“1993 plan” the “2000 plan” the “2003 plan” the “director plan” and the “nd00 plan”
under each plan there are multiple vesting templates and vesting periods the majority of the options were already vested upon acquisition and the most
common template was 25 vesting after one year and then 625 vesting each quarter thereafter until 100 vest after four years some options vest
on a monthly basis and some vest over five years all options lapse ten years from the date of grant
the group also operates savingsrelated share option schemes for all employees and executive directors of the group “saye” the number of options
granted is related to the value of savings made by the employee the period of savings is either three or five years except under the us scheme where
the period is two years the option price is normally 85 of the market share price at grant and the right to exercise normally only arises for a sixmonth
period once the savings have been completed except for the us scheme where the right to exercise only arises for a threemonth period
under the group’s long term incentive plan a further 7771416 shares could be awarded to the extent that the performance criteria are satisfied over
a threeyear period as detailed in the remuneration report these shares will be awarded from shares already issued within the esop and treasury stock
for disclosures relating to the grants in the year and fair value assumptions reconciliations of opening to closing option balances and related items please
refer to note 24 in the ifrs accounts within these financial statements
8 share premium account and reserves
share
premium option other profit and
account reserve reserve loss account
£000 £000 £000 £000
at 1 january 2006 95512 61474 267418 47974
premium on exercise of share options 2104 –––
purchase of treasury shares ––– 18622
appropriation for future cancellation of shares ––– 57897
proceeds on issue of treasury shares on exercise of share options ––– 15754
credit in respect of frs 20 employee share scheme charges ––– 17437
loss for the financial year ––– 5626
at 31 december 2006 97616 61474 267418 980
the company has taken advantage of merger relief and not recorded the premium on the issue of shares for the acquisition of artisan components inc
now arm inc the option reserve represents the fair value of options granted on the acquisition of artisan components inc in 2004 the other reserve
represents the unrealised profit on the intragroup sale of investments 122 arm annual report and accounts 2006
8 share premium account and reserves continued
during 2006 to supplement the payment of dividends to shareholders the company continued its rolling share buyback programme under the shareholder
authority conferred at the 2005 annual general meeting the quantum and frequency of share repurchases is not predetermined and will take into account
prevailing market conditions the short to mediumterm cash needs of the business and the level of employee sharebased remuneration going forward
in 2006 a total of 63600000 2005 13868000 shares were repurchased from the market at a cost of £76519000 2005 £16211000 at 31 december
2006 there were 49500000 2005 12751107 shares in the company still held from these purchases with a market value of £62246000 2005 £15429000
share repurchase transactions in respect of 49500000 shares carried out between 19 may 2006 and 31 december 2006 took place at a time when the
company had no distributable reserves and accordingly such shares have not been properly acquired in accordance with the companies act 1985 and are not
available for reissue or cancellation the company intends to make an application to the court in due course to cancel these shares pursuant to a special
resolution to be proposed at the 2007 agm
offset within the profit and loss account is an amount of £58245000 2005 £16315000 representing the cost of own shares held with the esop and
treasury shares this comprises £348000 2005 £1438000 being the cost of 1201434 2005 5000000 shares held within the esop and £57897000
2005 £14877000 being the cost of 49500000 2005 12751107 shares held for future cancellation
the company considers the share premium account option reserve and other reserve as nondistributable within the profit and loss account is £50029000
of credits in respect of frs 20 employee share scheme charges in respect of services performed by employees of subsidiary undertakings and recorded as a
capital contribution the company also considers these credits as nondistributable as such the entire profit and loss account is considered nondistributable
in february 2007 dividends from subsidiaries within the arm holdings plc group have been declared and paid up to the company resulting in sufficient
distributable profits for the 2006 final dividend and continued share buybacks
9 reconciliation of movements in shareholders’ funds
2006 2005
£000 £000
profit attributable to shareholders 6741 19908
equity dividends 12367 10436
5626 9472
new share capital issued 2106 13083
unrealised profit on intragroup sale – 267418
purchase of treasury shares 18622 16211
appropriation for future cancellation of shares 57897 –
proceeds on issue of treasury shares on exercise of share options 15754 838
credit in respect of frs 20 employee share scheme charges recorded as capital contributions 17437 20863
net reduction inaddition to shareholders’ funds 46848 295463
opening shareholders’ funds 473071 177608
closing shareholders’ funds 426223 473071
10 capital commitments
the company had no capital commitments at 31 december 2006 and 2005
11 financial commitments and contingencies
at 31 december 2006 and 2005 the company had no annual commitments under noncancellable operating leases
12 related party transactions
the company has taken advantage of the exemption from disclosure available to parent companies under frs 8 “related party disclosures” where
transactions and balances between group entities have been eliminated on consolidation
13 post balance sheet events
on 21 february 2007 the company received dividends of £150 million from subsidiary undertakings these have created sufficient distributable reserves
in the company for the 2006 final dividend and continued share buybacks
notes to the financial statementsuk gaapcontinued independent auditors’ report to the shareholders of arm holdings plcuk gaap
we have audited the parent company financial statements of arm holdings plc for the year ended 31 december 2006 which comprises the company
balance sheet and the related notes these parent company financial statements have been prepared under the accounting policies set out therein
we have also audited the information in the directors’ remuneration report that is described as having been audited
we have reported separately on the group financial statements of arm holdings plc for the year ended 31 december 2006
respective responsibilities of directors and auditors
the directors’ responsibilities for preparing the annual report the directors’ remuneration report and the parent company financial statements in accordance
with applicable law and united kingdom accounting standards united kingdom generally accepted accounting practice are set out in the statement of
directors’ responsibilities
our responsibility is to audit the parent company financial statements and the part of the directors’ remuneration report to be audited in accordance with
relevant legal and regulatory requirements and international standards on auditing uk and ireland this report including the opinion has been prepared
for and only for the company’s members as a body in accordance with section 235 of the companies act 1985 and for no other purpose we do not
in giving this opinion accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands
it may come save where expressly agreed by our prior consent in writing
we report to you our opinion as to whether the parent company financial statements give a true and fair view and whether the parent company financial
statements and the part of the directors’ remuneration report to be audited have been properly prepared in accordance with the companies act 1985
we also report to you whether in our opinion the information given in the directors’ report is consistent with the parent company financial statements
the information given in the directors’ report includes that specific information presented in the chairman’s statement and the chief executive officer’s
business review that is cross referred from the review of business section of the directors’ report
in addition we report to you if in our opinion the company has not kept proper accounting records if we have not received all the information and
explanations we require for our audit or if information specified by law regarding directors’ remuneration and other transactions is not disclosed
we read other information contained in the annual report and consider whether it is consistent with the audited parent company financial statements
the other information comprises only arm at a glance the chairman’s statement the chief executive officer’s review of operations the financial review
directors and advisors the corporate governance statement the corporate social responsibility statement the directors’ report and that part of the
remuneration report that is unaudited we consider the implications for our report if we become aware of any apparent misstatements or material
inconsistencies with the parent company financial statements our responsibilities do not extend to any other information
basis of audit opinion
we conducted our audit in accordance with international standards on auditing uk and ireland issued by the auditing practices board an audit includes
examination on a test basis of evidence relevant to the amounts and disclosures in the parent company financial statements and the part of the directors’
remuneration report to be audited it also includes an assessment of the significant estimates and judgments made by the directors in the preparation of
the parent company financial statements and of whether the accounting policies are appropriate to the company’s circumstances consistently applied and
adequately disclosed
we planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the parent company financial statements and the part of the directors’ remuneration report to be
audited are free from material misstatement whether caused by fraud or other irregularity or error in forming our opinion we also evaluated the overall
adequacy of the presentation of information in the parent company financial statements and the part of the directors’ remuneration report to be audited
opinion
in our opinion
– the parent company financial statements give a true and fair view in accordance with united kingdom generally accepted accounting practice of the state
of the company’s affairs as at 31 december 2006
– the parent company financial statements and the part of the directors’ remuneration report to be audited have been properly prepared in accordance with
the companies act 1985 and
– the information given in the directors’ report is consistent with the parent company financial statements
pricewaterhousecoopers llp
chartered accountants and registered auditors
london
2 april 2007
arm annual report and accounts 2006 123 124 arm annual report and accounts 2006
shareholder information
arm holdings plc
secretary and registered office
patricia alsop
110 fulbourn road
cambridge cb1 9nj
united kingdom
registered number
2548782
auditors
pricewaterhousecoopers llp
1 embankment place
london wc2n 6rh
united kingdom
stockbrokers
morgan stanley  co international limited
25 cabot square
canary wharf
london e14 4qa
united kingdom
ubs limited
2 finsbury avenue
london ec2m 2pp
united kingdom
registrars
lloyds tsb registrars
the causeway
worthing
west sussex bn99 6da
united kingdom
tel 44 0870 600 3984
depositary
the bank of new york
101 barclays street
new york
new york 10286
united states of america
legal advisers
uk law
linklaters
one silk street
london ec2y 8hq
united kingdom
us law
davis polk  wardwell
99 gresham street
london ec2v 7ng
united kingdom arm annual report and accounts 2006 125 arm annual report and accounts 2006 125
group directory
arm holdings plc
110 fulbourn road
cambridge cb1 9nj
united kingdom
tel 44 0 1223 400400
fax 44 0 1223 400410
arm limited
liberty house
moorbridge road
maidenhead
berkshire sl6 8lt
united kingdom
tel 44 0 1628 427700
fax 44 0 1628 427701
rockingham court
rockingham street
sheffield s1 4eb
united kingdom
tel 44 0 114 8000
fax 44 0 114 8001
blackburn design centre
belthorn house
walker road
blackburn bb1 2qe
united kingdom
tel 44 0 1254 893900
fax 44 0 1254 893901
arm belgium
geldenaaksebaan 329
1st fl
3001 leuvenheverlee
belgium
tel 32 16 391 411
fax 32 16 406 076
arm france
12 avenue des prés
montigny le bretonneux
78059 saint quentin en
yvelines cedex
france
tel 33 1 30 79 05 10
fax 33 1 30 79 05 11
les cardoulines b2
route des doline
sophia antipolis
06560 valbonne
france
tel 33 4 92 96 88 60
fax 33 4 92 96 88 79
miniparc polytec
60 rue des berges
38000 grenoble
france
tel 33 4 56 38 47 00
fax 33 4 56 38 47 01
arm germany
lehrerwirthstrasse 4
d81829 munich
germany
tel 49 89 928 6150
fax 49 89 928 61519
keil elektronik gmbh
bretonischer ring 15
d85630 grasbrunn
germany
tel 49 89 456 0400
fax 49 89 468 162
kaiser strasse 100
tpc 111c
d52134 herzogenrath
germany
tel 49 24 079 0860
fax 49 24 079 08611
arm israel
23 hataaas st
44425 kfar saba
israel
tel 972 9 7678040
extension 201
fax 972 9 7677020
arm norway
nedre bakklandet 60
7014 trondheim
norway
tel 47 4000 5757
fax 47 7351 3181
arm physical ip inc and
arm inc
141 caspian court
sunnyvale ca 940891013
united states
tel 1 408 734 5600
fax 1 408 734 5050
1250 capital of texas highway
building 3 suite 560
austin tx 78746
united states
tel 1 512 327 9249
fax 1 512 314 1078
8000 regency parkway
suite 660
cary nc 27518
united states
5 east street
franklin ma 02038
united states
tel 1 508 520 1905
fax 1 508 520 1907
1 jenner drive suite 260
irvine ca 92618
united states
tel 1 949 341 1900
fax 1 949 341 1901
crystal glen center
39555 orchard hill place
suite 600
novi mi 48375
united states
tel 1 248 374 5055
fax 1 248 374 5056
264b north broadway
suite 204a
salem nh 03079
united states
tel 1 603 896 6322
fax 1 603 896 6324
9645 scranton road
suite 140
san diego ca 92121
united states
tel 1 858 455 7570
fax 1 858 457 5578
1501 10th street
suite 110
plano tx 75074
united states
tel 1 972 312 1107
fax 1 972 312 1159
204 chandler court sw
suite 290
olympia wa 98502
united states
tel 1 972 312 1107
fax 1 972 312 1159
arm kk
dainiueno building 8f
3718 shinyokohama
kohokuku yokohamashi
kanagawa 2220033
japan
tel 81 45 477 5260
fax 81 45 477 5261
arm korea limited
room 1115
hyundai building
94 soonaedong
boondangku
sungnam
kyunggido 463020
korea
tel 82 31 712 8234
fax 82 31 713 8225
arm taiwan limited
10f3 no 17 lane 91
sec 1 nei hu rd
taipei 114
taiwan
tel 886 2 2627 1681
fax 886 2 2627 1682
arm consulting
shanghai co ltd
room 809 building b
far east international plaza
no 317 xianxia road
shanghai 200051
pr china
tel 86 21 62351296
fax 86 21 62351207
room 905 silver tech tower
no 38 hai dian avenue
hai dian district
beijing 100080
pr china
tel 86 10 82603570
fax 86 10 82603573
arm embedded technologies
pvt limited
level iii block b
salarpuria hall mark
marthahallisarjapur outer ring road
bangalore 560 087
india
tel 91 80 4138 4000
fax 91 80 4112 7403
arm physical ip asia pacific
pte ltd
700 lorong 1 toa payoh
3007 trellis towers
singapore 319773
tel 65 6728 0950
fax 65 6728 7901
designed and produced by 85four
directors’ photographs by bob wheeler
illustrations by wwwjaceycom
printed by st ives westerham press environmentally accredited printers iso 14001
printed on hello silk which is made from virgin wood fibre from sawmill residues forest thinnings
and sustainable forests in austria and from pulp which is totally chlorinefree tcf and elemental
chlorinefree ecf it is recyclable and biodegradable arm holdings plc
110 fulbourn road
cambridge cb1 9nj
united kingdom
telephone 44 01223 400400
facsimile 44 01223 400410
further information available at
wwwarmcom
t h e a r c h i t e c t u r e f o r t h e d i g i t a l w o r l d
®
arm holdings plc annual report and accounts 2006


Summary:
 arm has for some years defined itself as being the architecture
for the digital world and in last year’s report i wrote that we were
well on the way to achieving that what progress have we made
during 2006
a large number of products in everyday use from personal organisers
to cars and from televisions to washing machines are already likely
to have arm ip intellectual property embedded within them we are
at the point in the digital revolution where intelligent microelectronics
have made their way out of the workplace – where they have
been transforming technology for a number of years – into people’s
everyday lives
our products our ip enable companies to design and market their
electronic devices more quickly and more economically and what is
most important to end consumers to make them more “intelligent”
secure and reliable in my view we are still only part way through the
digital revolution and we do not really know when we will reach the
end therein lie the opportunities for arm by enabling innovative
products to be designed and brought to market our architecture
ensures that the digital revolution will continue to transform our lives
the digital world
advances in technology particularly over the past 20 years have made
people’s lives more productive and saved them time – man’s most
finite and therefore most valuable commodity people in the developed
world for example work approximately 17 fewer hours than they
did in 1950 work itself tends to be more rewarding because many
routine tasks have been taken over by technology and a huge number
of laboursaving devices at home have removed much of the time
consuming drudgery traditionally associated with housework the digital
world not only provides access to hitherto unprecedented levels of
communication information creation storage and retrieval but also
makes life that little bit easier
the widespread use of arm processors and technology in mobile
telephony and digital communications is well known but they
are increasingly permeating other aspects of our everyday lives
electronics have for example driven more than 90 of the innovation
in the automotive industry features which only a few years ago were
exclusive to luxury cars are now commonplace midrange vehicles now
incorporate up to 70 embedded processors which have improved safety
added convenience and increased functionality our microprocessors
improve braking systems by enabling the wheels to “talk” to one
another airbags to “read” the size and weight of the person they
are there to protect engines to start at one turn of the key no matter
arm annual report and accounts 2006 7
business reviewchief executive officer’s review of operations business reviewchief executive officer’s review of operationscontinued
how cold the weather car interiors quickly to reach a comfortable
temperature and sound systems to entertain passengers while gps
global positioning systems help find the way perhaps most important
however in a world in which car use is growing exponentially
technology has enabled manufacturers to reduce fuel consumption
by as much as 40 and as a result to reduce pollution safety and
environmental regulations will undoubtedly continue to become more
onerous for manufacturers and the need to replace expensive
mechanical parts in vehicles with more economical electromechanical
and electronic systems will increase the performance and power
consumption characteristics of our processors together with the
unparalleled scope of the design environment we facilitate for the
automotive manufacturers and their semiconductor suppliers means
that the automotive industry continues to be an exciting growth market
for arm technology
there is however more to the digital world than making life easier
and more enjoyable for those who live in developed countries
advanced technology is playing a leading role in fuelling growth in the
developing world its contribution to education one of the principal
means of lifting people out of poverty is immense equally it contributes
to saving lives worldwide by making it possible to predict accurately
natural disasters such as earthquakes and tsunamis and plays an
important role in drug research and delivery
technology will continue to evolve arm’s digital architects are a vital
part of that evolution – they create products that are and will continue
to be fundamental to the implementation of the digital world
our role in the industry
in any industry progress comes at a cost in the digital world this is
because of the significantly increased complexity of the underlying
technology while consumers you and i will be prepared to pay
some premium for new intelligence in a product they will not pay
significantly more as a result manufacturers – and their suppliers –
are under huge pressure to find less expensive ways to produce ever
more intelligent devices this is where arm comes into the picture
our technology makes it easier and more cost effective for companies
to design and make advanced digital products our role is not only to
innovate but also to take structural cost out of the process we enable
the retail cost of electronic devices to be reduced through our licensing
business model semiconductor companies can effectively share the cost
of the design of our products they can use our microprocessors at a
fraction of the cost of inhouse design this process applies across our
technology portfolio of microprocessors the brains of a digital device
and physical and fabric ip the bricks and mortar in the future it will
also apply to other new products including graphics security and digital
signal processing technology
8 arm annual report and accounts 2006
we estimate that in 2006 15 billion people a quarter of
the world’s estimated 6 billion population bought an arm
powered product the ip we sell to our customers enables end users to operate their
devices for long periods without recharging to connect people more
easily to one another and to access information whenever and wherever
they want to i believe it is true to say that without arm ip  which
balances power with performance and cost consumer electronics
would not have reached the point they are at today
when we our customers and the other companies which play a part in
bringing digital electronics to the market “get it right” consumers barely
notice that there is a digital revolution taking place products quickly
become “musthaves” because of the impact they have on peoples’
lives it is hard to believe that mp3 players were conceived as recently
as 1991 that the allinone blackberry wireless device was introduced
only seven years ago and that flatscreen televisions were first available
to the public as recently as 1997 digital cameras have become so
commonplace that kodak stopped selling film cameras in north america
and western europe in 2004
the opportunity
the semiconductor industry in which arm operates is huge – in 2006
it was worth approximately 260 billion of which ip was approximately
16 billion we occupy a leading position in the semiconductor market
and expect not only to benefit from the overall growth of the ip
industry but also to continue to expand our market share by continuing
to bring industryleading technology to the market we have already
built a consistently successful business by establishing the world’s
leading microprocessor technology in digital electronic products – now
we are on our way to achieving the same result with physical ip  which
we believe is the next wave of opportunity for optimising structural
costs in the semiconductor industry
our future success lies however in more than simply seizing the
opportunity to licence technology to our partners a bigger opportunity
lies in the ubiquity of our technologies in digital products used by
consumers we estimate that in 2006 15 billion people a quarter
of the world’s estimated 6 billion population bought an arm powered
product approximately 90 of the mobile phones manufactured
today contain at least one arm product our goal is for our technology
to penetrate the billions of other products – from washing machines
to printers and from cars to exercise bicycles – that are bought by the
other threequarters of the world’s population the more people who
use our technology in their daily lives the more benefit we will accrue
from the royalty revenue stream which forms the cornerstone of our
business model and strategy
during 2006 we implemented and delivered the highest quality
technology to our partners the industry and end consumers i am
confident that we have a bright future as we continue to benefit from
the digital revolution we are indeed well on the way to becoming
the architecture for the digital world
warren east chief executive officer
arm annual report and accounts 2006 9 business reviewfinancial reviewifrs
2006 was another year of consistent execution and significant
investment in our business and we are encouraged to have grown
revenues and maintained operating margins despite the weakened
dollar as well as seeing volumes of arm powered products growing
47 yearonyear to 245 billion units
performance
certain revenue key performance indicators appear on page 3
other cost and profit indicators are discussed as part of this review
revenues
total revenues for the year ended 31 december 2006 amounted to
£2633 million 2005 £2324 million in us dollar terms revenues
grew from 4187 million in 2005 to 4836 million in 2006 an
increase of 16 the actual average dollar exchange rate for arm
in 2006 was 184 compared with 180 in 2005 which had
the effect of reducing total reported revenues by approximately
£52 million based on 2005 rates
total licensing revenues in 2006 were £1106 million being 42
of total revenues compared with £1043 million or 45 of total
revenues in 2005 in us dollars total licensing revenues in 2006
were 2025 million compared with 1870 million in 2005 an
increase of 8
royalty revenues in 2006 were £1078 million representing 41
of total revenues in the year compared with £878 million or 38
of total revenues in 2005 total royalty revenues in us dollars in
2006 were 1990 million up 25 from 1587 million in 2005
sales of development systems in 2006 were up 13 to £288 million
being 11 of total revenues compared with £256 million or 11
of total revenues in 2005 service revenues which include consulting
services and revenues from support maintenance and training were
up 10 to £161 million in 2006 representing 6 of total revenues
compared with £147 million or 6 of total revenues in 2005
royalty revenues and unit shipments
total royalty revenues for 2006 were £1078 million comprising
£887 million from the processor division “pd” and £191 million from
the physical ip division “pipd” royalties in pd came from record unit
shipments of 245 billion compared with £725 million and 167 billion
units in 2005 dollar royalty revenues earned in pd were 1641 million
up 25 on 2005 compared with the increase in yearonyear unit
shipments of 47 unit volume growth more than compensated for
the lower average royalty rates and as all royalty revenue is earned
effectively at 100 margin represents incremental returns on the
development cost of the arm technology on which the royalty is earned arm continued to benefit from significant growth in the mobile
segment which includes mobile handsets bluetooth devices and
portable media players such as the apple ipod which accounted
for 66 of the units shipped by the arm partnership we also saw
significant growth across a myriad of applications outside the mobile
segment including smartcards microcontrollers automotive connectivity
devices hard disk drives and many others total nonmobile shipments
which at 838 million units in 2006 were higher than total shipments
into all applications as recently as 2003 illustrates arm’s increasing
penetration across the full range of consumer electronics products
the total number of partners shipping arm technologybased products
at the end of 2006 was 76 after taking into account corporate activity
within the arm partnership 29 companies were paying royalties for
physical ip products at the end of the year strong momentum in pipd
royalties continued with a 26 growth in both total and underlying
royalties sales of the 130nm and 90nm process nodes continued to
be the fastestgrowing segments for pipd although more than half of
royalties received in 2006 came from older geometries the growth in
royalties within pipd demonstrates the increasing penetration of arm
physical ip in chip designs
gross margin
gross margins for the year to 31 december 2006 were 883
compared with 886 in 2005 cost of sales in 2006 includes
compensation charges in respect of sharebased payments of
£10 million 2005 £13 million excluding compensation charges
in respect of sharebased payments gross margins for the year
to 31 december 2006 were 887 2005 891
operating expenses
over the past several years arm has acquired various companies
with significant values of intangible assets other than goodwill being
recognised these amounts are amortised over the expected useful lives
of the assets acquired with the cost recorded against research
and development sales and marketing or general and administrative
expenses as appropriate in order to aid comparability these costs
have been separately identified as “acquisitionrelated charges” in the
narrative below in addition the issuance of arm share options to the
employees of artisan on acquisition as well as to the ongoing share
based compensation to employees of the group gives rise to significant
noncash sharebased compensation charges these are also separately
identified in the narrative below
total operating expenses in the year to 31 december 2006 were
£1825 million compared with £1707 million in 2005 with the increase
primarily attributable to the increase in average headcount from
1234 in 2005 to 1472 in 2006 operating expenses in 2006 include
acquisitionrelated charges relating to amortisation of intangibles of
£193 million 2005 £179 million other acquisitionrelated charges
of £11 million 2005 £nil and compensation charges in respect of
sharebased payments and related payroll taxes of £164 million 2005
£203 million excluding acquisitionrelated charges and compensation
charges in respect of sharebased payments and related payroll taxes
total operating expenses in 2006 were £1457 million in 2005
compared with £1325 million in 2005
research and development expenses in 2006 were £845 million
representing 32 of revenues this compares with £803 million or 35
of revenues in 2005 average headcount in this area increased from
arm annual report and accounts 2006 11 business reviewfinancial reviewifrscontinued
12 arm annual report and accounts 2006
selected financial dataifrs
2006 2005 2004 2003 2002
£000 £000 £000 £000 £000
revenues 263254 232439 152897 128070 150922
cost of revenues 30825 26610 12240 11022 13185
gross profit 232429 205829 140657 117048 137737
total net operating expenses 182531 170672 112328 98609 96608
profit from operations 49898 35157 28329 18439 41129
investment income 6758 5317 6944 4801 4373
profit before tax 56656 40474 35273 23240 45502
tax 8068 10827 9398 7977 13031
profit after tax 48588 29647 25875 15263 32471
equity minority interest ––– 105 232
profit for the year 48588 29647 25875 15158 32239
dividends paid 12367 10436 8975 ––
capital expenditure 8559 6064 5036 3605 15616
research and development expenditure 84494 80273 54674 48131 48674
cash short and longterm investments 128494 160902 142817 159786 130304
shareholders’ funds 663204 746847 642538 180435 172140
employees at end of year number 1659 1324 1171 740 721
 figures for the years 2003 and 2002 are shown under uk gaap and are not comparable with 2004 to 2006 prepared under ifrs
 figures for 2004 have been restated from uk gaap to ifrs 783 in 2005 to 961 in 2006 research and development expenses
in 2006 include total acquisitionrelated charges of £106 million
2005 £81 million and compensation charges in respect of
sharebased payments and related payroll taxes of £101 million
2005 £123 million excluding acquisitionrelated charges and
compensation charges in respect of sharebased payments and related
payroll taxes research and development expenses in 2006 were
£638 million and £599 million in 2005 representing 24 and 26
of revenues respectively
sales and marketing costs in 2006 were £532 million or 20 of
revenues compared with £474 million or 20 of revenues in 2005
average headcount in this area increased from 286 in 2005 to 302 in
2006 sales and marketing costs in 2006 include total acquisitionrelated
charges of £91 million 2005 £91 million and compensation charges
in respect of sharebased payments and related payroll taxes of
£35 million 2005 £43 million excluding acquisitionrelated charges and
compensation charges in respect of sharebased payments and related
payroll taxes sales and marketing costs in 2006 were £406 million
and £340 million in 2005 representing 15 of revenues in both years
general and administrative expenses in 2006 were £501 million or
19 of revenues compared with £430 million or 19 of revenues
in 2005 average headcount in this area increased from 165 in 2005 to
209 in 2006 general and administrative expenses in 2006 include total
acquisitionrelated charges of £07 million 2005 £07 million and
compensation charges in respect of sharebased payments and related
payroll taxes of £28 million 2005 £36 million excluding acquisition
related charges and compensation charges in respect of sharebased
payments and related payroll taxes general and administrative
expenses in 2006 were £466 million compared with £387 million
in 2005 representing 18 and 17 of revenues respectively
additionally in 2006 the group sold its investment in csr plc resulting
in a profit of £53 million
operating margin
the operating margin in 2006 was 190 compared with 151 in
2005 the operating margin in 2006 excluding acquisitionrelated
charges of £204 million and compensation charges in respect of
sharebased payments and related payroll taxes of £174 million
was 333 compared with 321 before acquisitionrelated charges
of £179 million and compensation charges in respect of sharebased
payments of £215 million in 2005
earnings and taxation
profit before income tax in 2006 was £567 million compared with
£405 million in 2005 profit before income tax in 2006 excluding
acquisitionrelated charges of £204 million and compensation charges
in respect of sharebased payments and related payroll taxes of
£174 million was £945 million or 359 of revenues this compares
with £799 million before acquisitionrelated charges of £179 million
and compensation charges in respect of sharebased payments of
£215 million or 344 of revenues in 2005
arm annual report and accounts 2006 13 14 arm annual report and accounts 2006
business reviewfinancial reviewifrscontinued
the group’s effective taxation rate in 2006 was 142 compared with
268 in 2005 this reduction was primarily due to a nonrecurring tax
credit in the year arising from a taxdeductible foreign exchange loss
fullydiluted earnings per share in 2006 were 35 pence compared
with 21 pence in 2005 earnings per fully diluted share in 2006 before
acquisitionrelated charges of £204 million compensation charges
in respect of sharebased payments and related payroll taxes of
£174 million and related estimated tax adjustments thereon of
£92 million were 55 pence compared with 42 pence before
acquisitionrelated charges of £179 million compensation charges
in respect of sharebased payments of £215 million and related
estimated tax adjustments thereon of £89 million in 2005
balance sheet and cash flow
goodwill at 31 december 2006 was £4284 million compared with
£4744 million at 31 december 2005 the decrease in goodwill in 2006
is primarily due to foreign exchange movements given the weakening
of the us dollar against sterling from 172 at 31 december 2005 to
196 at the end of 2006 goodwill arising on the falanx acquisition
amounted to £94 million and on soisic to £22 million goodwill is not
amortised under ifrs but is subject to impairment review on at least
an annual basis the review performed in 2006 concluded that no
impairment was required
other intangible assets at 31 december 2006 were £629 million
compared with £797 million at 31 december 2005 the movement
in other intangible assets in 2006 reflects the amortisation in the year
of the intangible assets arising on acquisitions of £193 million the
addition of £105 million arising on the acquisitions of falanx and soisic
and certain assets of powerescape during the year and the revaluation
of the currency denominated intangibles predominantly those in us
dollars the other intangible assets will be amortised through the
income statement over their estimated useful lives to the group
accounts receivable at 31 december 2006 were £696 million compared
with £555 million at 31 december 2005 the allowance against
receivables was £26 million at 31 december 2006 compared with
£22 million at 31 december 2005 deferred revenues were £315 million
at 31 december 2006 compared with £204 million at the end of 2005
resources available
the consolidated cash cash equivalents shortterm investments and
marketable securities balance was £1285 million at 31 december 2006
compared with £1609 million at 31 december 2005 this reduction is
as a result of the continued share buyback programme and payment
of dividends see below as well as the acquisitions of falanx and
soisic excluding these outflows the group generated £737 million
of cash in the year 2005 £650 million arm annual report and accounts 2006 15
interest receivable
interest receivable was £68 million for the year to 31 december 2006
compared with £53 million in 2005
returns to shareholders
dividends
the directors recommend payment of a final dividend in respect of 2006
of 06 pence per share which taken together with the interim dividend
of 04 pence per share paid in october 2006 gives a total dividend
in respect of 2006 of 10 pence per share an increase of 19 over the
084 pence per share in 2005 subject to shareholder approval the final
dividend will be paid on 21 may 2007 to shareholders on the register
on 4 may 2007
total dividends actually paid in 2006 amounted to £124 million
2005 £104 million
share buyback programme
in 2006 the group continued its rolling sharebuyback programme
to supplement dividends in returning surplus funds to shareholders
during the year the company bought back 636 million shares
2005 139 million at a total cost of £765 million 2005 £162 million
since introducing dividend payments in 2004 and commencing the
company’s share buyback programme in july 2005 £125 million has
been returned to shareholders and 775 million shares 56 of issued
share capital have been bought back this has contributed to a net
reduction in the average fully diluted shares in issue from 1424 million
in 2005 to 1402 million in 2006 this programme will continue during
2007 and beyond
capital structure
the authorised share capital of the company is 2200000000 ordinary
shares of 005 pence each 2005 2200000000 the issued share
capital at 31 december 2006 was 1389907834 ordinary shares
of 005 pence each 2005 1386102680 as a result of the buyback
programme the company held 49500000 of its own shares at
31 december 2006 2005 12751107
treasury policies and objectives and liquidity
the group has established treasury policies aimed both at mitigating
the impact of foreign exchange fluctuations on reported profits and
cash flows and at ensuring appropriate returns are earned on the
group’s cash resources
with more than 95 of group revenues earned in us dollars and
approximately 45 of group costs being incurred in us dollars the
group has a significant exposure to movements in the exchange rate
between the us dollar and sterling this exposure is partially mitigated
by an ongoing hedging programme involving forward contracts and
lowrisk option contracts where appropriate business reviewfinancial reviewifrscontinued
principal risks and uncertainties
in line with the guidance for the preparation of an operating and
financial review certain risk factors faced by the group are identified
below a more detailed description is included in the group’s annual
report on form 20f details of the group’s internal control and risk
management procedures are included in the corporate governance
report on pages 20 to 23
arm’s quarterly results may fluctuate significantly and be
unpredictable which could adversely affect the market price
of arm ordinary shares
arm has experienced and may in the future experience significant
quarterly fluctuations in its results of operations quarterly results
may fluctuate because of a variety of factors such factors include
– the timing of entering into agreements with new licencees
– the mixture of licence fees royalties revenues from the sale of
development systems and fees from services
– the introduction of new technology by us our licencees or
our competition
– the timing of orders from and shipments to systems
companies of arm technologybased microprocessors from
our semiconductor partners
– sudden technological or other changes in the microprocessor
industry and
– new litigation or developments in current litigation
in future periods arm’s operating results may not meet the expectations
of public market analysts or investors in such an event the market price
of our shares could be materially adversely affected
general economic conditions may reduce arm’s revenues and harm
arm’s business
arm is subject to risks arising from adverse changes in global economic
conditions because of economic uncertainties in many of our key
markets many industries may delay or reduce technology purchases
and investments the impact of this on arm is difficult to predict
but if businesses defer licensing our technology require less services
or development tools or if consumers defer purchases of new products
which incorporate arm’s technology revenue could decline a decline
in revenue would have an adverse effect on the results of operations
and could have an adverse effect on arm’s financial condition
arm competes in the intensely competitive semiconductor market
the semiconductor market is intensely competitive and characterised
by rapid technological change arm cannot give assurance that it will
have the financial resources technical expertise or marketing or support
capabilities to compete successfully in the future
competition is based on a variety of factors including price performance
product quality software availability marketing and distribution capability
customer support name recognition and financial strength further
given arm’s reliance on our semiconductor partners its competitive
position is dependent on their competitive position in addition arm’s
16 arm annual report and accounts 2006 semiconductor partners do not license arm’s architecture exclusively
and several of them also design develop manufacture and market
microprocessors based on their own architectures or on other
nonarm architectures
arm may not operate systems which comply fully with the
requirements of the sarbanesoxley act
attestation under section 404 of the sarbanesoxley act as at
31 december 2006 has been successfuly completed full details appear
in the group’s annual report on form 20f there can be no guarantee
however that in future the detailed testing of internal controls required
as part of the attestation process will not identify significant control
deficiencies or material weaknesses that impact on the auditors’ opinion
on internal controls over financial reporting andor require disclosure
on form 20f for future years
other risks include arm’s inability to manage the significant changes
in the number of its employees and the size of its operations in the
united states dependence on semiconductor partners and systems
companies availability of development tools systems software and
operating systems compatible with arm’s architecture dependence on
a small number of customers and products arm’s inability to develop
new products on a timely basis unanticipated costs due to products that
could have technical difficulties or undetected design errors the arm
architecture not being continued to be accepted by the market risks
associated with any strategic investments or acquisitions dependence
on senior management personnel and on hiring and retaining qualified
engineers exposure from international operations litigation and threats
of litigation and protection of arm’s intellectual property unavailability
of debt financing or additional equity funding to satisfy future capital
needs adverse effects resulting from changes in stock option accounting
rules adversely impacting arm’s reported operating results and its
competitiveness in the marketplace
tim score chief financial officer
arm annual report and accounts 2006 17