Annual report and accounts 2008

The directors present their annual report and audited financial statements for the year ended 31 December 2008.

Principal activities and review of business

The principal activities of the Group and its subsidiaries are the licensing, marketing, research and development of RISC-based microprocessors, physical IP and associated systems IP and tools. 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; Shin-Yokohama, 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; Leuven-Heverlee, Belgium; Aachen and Grasbrunn, Germany; Trondheim, Norway; Sentjernej, Slovenia; Lund, Sweden; Austin, Texas, Olympia, Washington and San Jose, California in the US and Bangalore, India. More information about the business and key performance indicators are set out in the business review comprising the Chairman’s statement on pages 2 and 3, the Chief Executive Officer’s review of operations on pages 5 to 8, the financial review on pages 11 to 15 and the corporate responsibility report on pages 26 and 27.

Future developments

The Group’s stated objective is to establish a global standard for its RISC architecture, physical IP and other products in the embedded microprocessor and semiconductor markets. The directors believe that, in order 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 third-party tools and software vendors to ensure that their products will operate with the Group’s products. As a result of its position in its industry, the Group is presented with many opportunities to acquire complementary technology or resources and it intends to continue to make appropriate acquisitions from time to time.

Going concern

After dividend payments of £26.4 million and spending £40.3 million on the share buyback programme in 2008, the Group grew its cash, cash equivalents, short-term investments and marketable securities balance to £78.8 million at the end of 2008 from £51.3 million at the start of the year. After reviewing the 2009 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 2008 of 1.32 pence per share which, subject to approval at the Annual General Meeting (AGM) on 14 May 2009, will be paid on 20 May 2009 to shareholders on the register on 1 May 2009. This final dividend, combined with the interim dividend of 0.88 pence per share paid during the year, makes a total of 2.2 pence per share for the year, an increase of 10% on the total dividend of 2.0 pence per share for 2007.

Share buyback programme

In accordance with the rolling authority given by shareholders at the 2007 AGM, 41.2 million shares (representing 3.1% of the issued share capital) of 0.05 pence each were bought back by the Company in 2008 (2007: 94.5 million shares) at a total cost of £40.3 million (2007: £128.6 million). In 2009 to date, no shares have been bought back, but the buyback programme remains in place and may be used during the year, if appropriate.

Research and development (R&D)

R&D 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 Michigan University. Key areas of product development for 2009 include the development of further energy efficient, high-performance engines for both data and control applications such as ARM cores based on symmetric multiprocessor and superscalar technology. The Group is investing in future physical IP development including low-power, low-leakage technologies for both bulk CMOS (complementary metal oxide semiconductor) and SOI (silicon on insulator) processes to ensure leadership in this market. In addition, the Group will deliver development tools, graphics processors and fabric IP to enable its customers to design and programme systems-on-chip (SoCs).

The Group incurred R&D expenses of £87.6 million in 2008, representing 29.3% of revenues, compared with £84.0 million in 2007. R&D 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 53.

Donations

During the year the Group made donations for charitable purposes of £42,290 (2007: £41,214). The total amounts given for each such purpose were:

Donations
Local charities	£14,435
Promotion of education	£1,300
Wider understanding of science, maths and information technology	£18.250
Medical research	£1,005
Relief of poverty	£4,047
Other	£3,253

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. The Group does not make any political donations.

Directors in the year

The following served as directors of the Company during the year ended 31 December 2008:

Doug Dunn OBE (Chairman)
Warren East (Chief Executive Officer)
Tim Score (Chief Financial Officer)
Tudor Brown (President from 1 July 2008, previously Chief Operating Officer)
Mike Muller (Chief Technology Officer)
Mike Inglis (General Manager, Processor Division from 1 July 2008, previously EVP Sales and Marketing)
Simon Segars (General Manager, Physical IP Division)
Lucio Lanza (independent non-executive director)
Kathleen O’Donovan (independent non-executive director and financial expert)
Philip Rowley (independent non-executive director and financial expert)
John Scarisbrick (independent non-executive director)
Jeremy Scudamore (senior independent non-executive director)
Young Sohn (independent non-executive director)

(See pages 18 and 19 for the directors’ biographies.)

Election and re-election of directors

In accordance with Article 79 of the Group’s articles of association, Mike Inglis will retire by rotation at the Company’s AGM and will seek re-election at that meeting.

Directors’ shareholdings in the Company

The interests of the directors in the Company’s ordinary shares of 0.05 pence, all of which were beneficially held, are disclosed in the remuneration report on page 36.

The additional information required for shareholders as a result of the implementation of the EU Takeovers Directive is set out below:

Share capital

As at 31 December 2008, ARM’s share capital comprised a single class of ordinary shares of 0.05 pence each and there were 1,344,055,696 ordinary shares in issue (2007: 1,344,055,696) of which 91,160,488 ordinary shares were held in treasury (2007: 65,201,176). The rights attached to treasury shares are restricted in accordance with the Companies Acts. The rights attached to ordinary shares are as follows:

On a show of hands at a general meeting, every shareholder present in person (or, in the case of a corporation, present at the meeting by way of a representative) and entitled to vote shall have one vote and every proxy present who has been duly appointed by a shareholder entitled to vote on the resolution has one vote;
On a poll, every shareholder present in person (or in the case of a corporation, present at the meeting by way of a representative) or by proxy and entitled to vote shall have one vote for every ordinary share held;
Shareholders are entitled to a dividend where declared or paid out of profits available for such purposes; and
Shareholders are entitled to participate in a return of capital on a winding-up.

The notice of the AGM specifies deadlines for exercising voting rights and appointing a proxy or proxies to vote in relation to resolutions to be passed at the AGM. All proxy votes are counted and the numbers for, against or withheld in relation to each resolution are announced at the AGM and published on ARM’s website after the meeting.

There are no restrictions on the transfer of ordinary shares in ARM other than:

Restrictions that may from time to time be imposed by laws and regulations (for example, those relating to market abuse and insider dealing);
Restrictions that may be imposed pursuant to the Listing Rules of the Financial Services Authority under which certain employees of ARM require the approval of the Company to deal in shares;
Restrictions on the transfer of shares that may be imposed under article 61.2 of ARM’s articles of association or under Part 22 of the Companies Act 2006, in either case following a failure to supply information required to be disclosed following service of a request under section 793 of the Companies Act 2006; and
Restrictions on transfer of shares held under certain of the Company’s employee share plans while they remain subject to the plan.

Substantial shareholdings

The directors are aware of the following substantial interests in the issued share capital of the Company as at 20 March 2009:

Percentage of issued
ordinary share capital

Substantial shareholdings
Janus Capital Corporation	13.30%
Thornburg Investment Management	10.17%
Capital Group Companies	9.03%
Fidelity Investments	5.12%
Invesco	4.99%
Wellington Management Company	4.98%
Legal and General Investment Management	3.96%

Save for the above, the Company has not been notified, as at 20 March 2009, of any material interest of 3% or more or any non-material interest exceeding 10% of the issued share capital of the Company.

Appointment of directors

ARM shareholders may by ordinary resolution appoint any person to be a director. ARM must have not less than two and no more than 16 directors holding office at all times. ARM may by ordinary resolution from time to time vary the minimum and/or maximum number of directors.

At each AGM, any director who was elected or last re-elected at or before the AGM held in the third calendar year before the then current calendar year must retire by rotation. A retiring director is eligible for re-election unless the directors have agreed otherwise.

The directors may appoint a director to fill a casual vacancy or as an additional director to hold office until the next AGM, who shall then be eligible for election.

Articles of association

ARM’s articles of association may be amended only by a special resolution at a general meeting of shareholders.

Directors’ authority

The directors are responsible for the management of the business of ARM and may exercise all powers of ARM subject to applicable legislation and regulation and the memorandum and articles of association.

At the 2008 AGM, the directors were given authority to buy back a maximum number of 127,208,000 ordinary shares at a minimum price of 0.05 pence each. The maximum price was an amount equal to 105% of the average of the closing mid market prices of ARM’s ordinary shares as derived from the London Stock Exchange Daily Official List for the five business days immediately preceding the day on which such ordinary shares are contracted to be purchased. This authority will expire at the earlier of the conclusion of the 2009 AGM or 14 August 2009.

Accordingly, resolution 9 will be proposed as a special resolution at the 2009 AGM to give ARM authority to acquire up to 126,012,000 ordinary shares following expiry of the current authority. The directors will use this authority only after careful consideration, taking into account market conditions prevailing at the time, other investment opportunities, appropriate gearing levels and the overall position of ARM. In particular, this authority will be exercised only if the directors believe that it is in the best interests of shareholders generally and will increase earnings per share.

Resolution 7 to be proposed at the 2009 AGM will authorise the directors generally to allot up to £210,020 in nominal amount of ordinary shares, and in addition will authorise the directors to allot up to a further £210,020 in nominal amount of ordinary shares in connection with a “rights issue” (as defined in resolution 7). Further, resolution 8 will authorise the directors to allot ordinary shares (or sell treasury shares) for cash (i) otherwise than in connection with a “pre-emptive offer” (as defined in resolution 8) up to an aggregate nominal amount of £33,600, or (ii) in connection with a pre-emptive offer up to an aggregate nominal amount of £210,020, or (iii) in connection with a rights issue up to a further nominal amount of £210,020, in each case as if section 89(1) of the Companies Act 1985 did not apply to such allotment (or sale). The period of authorisation will in each case expire at the earlier of the conclusion of the 2010 AGM or on 13 August 2010.

Change of control

All of ARM’s equity-based plans contain provisions relating to a change of control. Outstanding awards and options would normally vest and become exercisable on a change of control, subject to the satisfaction of any performance conditions at that time.

There are no significant agreements to which ARM is a party that take effect, alter or terminate upon a change of control.

Disabled persons

The Group has a strong demand for highly qualified staff and 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 decision-making 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 the month of 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 2008 were equivalent to 25 days’ purchases for the Group (2007: ten days) and nil days for the Company in both years.

Financial instruments

The Group’s financial risk management and policies and exposure to risks in relation to financial instruments are detailed in note 1c.

Essential contracts

There are no parties with whom the Group has contractual or other arrangements which are essential to the business of the Group.

Annual General Meeting (AGM)

The AGM will be held at 110 Fulbourn Road, Cambridge, CB1 9NJ, UK, on 14 May 2009 at 2.30pm. 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 and on the website after the AGM. Shareholders are invited to submit written questions in advance of the meeting. Questions should be sent to The Company Secretary, ARM Holdings plc, 110 Fulbourn Road, Cambridge CB1 9NJ, UK.

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 2009 which will be made available to all shareholders together with a proxy card.

Statement of directors’ responsibilities

The directors are responsible for preparing the annual report, the directors’ remuneration report and the Group and the parent company financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, and the parent company financial statements and the directors’ remuneration report in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). The Group and parent company financial statements are required by law to give a true and fair view of the state of affairs of the Company and the Group 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 then apply them consistently;
Make judgements and estimates that are reasonable and prudent;
State that the Group financial statements comply with IFRSs as adopted by the European Union, and with regard to the parent company financial statements, that applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
Prepare the Group and parent company financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business, in which case there should be supporting assumptions or qualifications as necessary.

The directors confirm that they have complied with the above requirements in preparing the financial statements.

The directors are also required by the Disclosure and Transparency Rules of the Financial Services Authority to include a report containing a fair view of the business and a description of the principal risks and uncertainties facing the Company and the Group. These are set out in the financial review on pages 11 to 15.

The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the Group financial statements comply with the Companies Act 1985 and Article 4 of the IAS Regulation and the parent company financial statements and the directors’ remuneration report comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Directors’ statement pursuant to the Disclosure and Transparency Rules

Each of the directors whose names and functions are described in the biographies on pages 18 and 19 confirm that to the best of each person’s knowledge and belief:

The financial statements, prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the Group; and
The directors’ report and the financial review on pages 11 to 15 include a fair review of the development and performance of the business and the position of the Company and the Group, together with a description of the principal risks and uncertainties that they face.

The directors are responsible for ensuring the maintenance and integrity of the Group’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Disclosure of information to auditors

In the case of each of the persons who are directors at the time when the report is approved, the following applies:

So far as each director is aware, there is no relevant audit information of which the Group’s auditors are unaware.
Each director has taken all the 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 Group’s auditors are aware of that information

By order of the board