Item 1. Business
General
MIPS Technologies, Inc. is a leading provider of industry-standard processor architectures and cores for home entertainment, networking, mobile and embedded applications. The MIPS architecture powers some of the world’s most popular electronic products. Our technology is broadly used in products such as digital televisions, set-top boxes, Blu-ray players, broadband customer premises equipment (CPE), WiFi access points and routers, networking infrastructure and portable/mobile communications and entertainment products. Our customers are global semiconductor companies and system original equipment manufacturers (system OEMs). We offer our customers high-performance, easy-to-use functionality at a fraction of the cost and time to market that internal development would require. Our customers pay us license fees for architectural, product and patent rights, as well as royalties based on processor unit shipments.
Our business model is based on the licensing of embedded processor intellectual property (IP) in the form of architectures and, implementations and patents. Embedded processor IP requires considerable development effort in order to create a product, but once created, it can be licensed for use to multiple parties and distributed electronically. We license our IP products for prices that generally range from tens of thousand dollars to millions of dollars, depending on the technology involved and the specifics of the license. Once our IP has been incorporated into our licensees’ products and those products begin shipping-which may take several months to several years-we receive royalties from our licensees.
We have developed standards for both 32-bit and 64-bit computing. We license our industry-standard MIPS32 and MIPS64 instruction-set architectures (ISAs), application specific extensions (ASEs), core designs and other related IP to semiconductor companies and system OEMs. Together with our architecture licenses, we offer a broad variety of embedded processors that scale across multiple markets in standard, custom, semi-custom and application-specific products. Fifty-six licensees paid royalties in fiscal 2012 on shipments of more than 708 million units. Since calendar year 2000, more than 3.6 billion MIPS-Based Systems on Chips (SoCs) have been shipped by MIPS licensees.
The markets and applications that benefit from the MIPS architecture continue to expand. As transistor density increases and as per unit manufacturing costs continue to drop, more and more high-volume markets are moving to 32-bit or 64-bit processing power. While our products serve a broad cross-section of these markets, we will continue to focus on and target high-growth and high-volume markets where the cost or performance advantages of our products have significant value.
Industry Background
Since the acceptance of the fabless business model for semiconductor providers, companies have been able to leverage standards in foundry processes, electronic design automation (EDA), tools and intellectual property to enable a worldwide industry of hundreds of companies designing, developing and supplying SoC solutions. Continuing rapid advances in semiconductor technology have enabled the integration of very large numbers of transistors on a single integrated circuit (IC) silicon chip. The same capability enables lower cost, lower power, and higher performance per function in those chips. During the 1990s and continuing in the 2000s, the state of silicon technology reached the point where truly powerful computers could be integrated as embedded microprocessors that could be built at a manufacturing cost of well under a dollar. It is now cost-effective for system OEMs to embed these processors into a wider range of electronic products and systems, offering new generations of products. The availability of low-cost, high-performance processors and the development of SoC technology have contributed to the emergence and rapid growth of the market for embedded systems, particularly for home entertainment, networking, mobile and embedded products.
Today, the market for embedded processors is much larger than the personal computer market in terms of processor unit volumes. A very large portion of this market consists of 4-bit, 8-bit, 16-bit and 32-bit microcontrollers (MCUs) embedded primarily into low-cost automotive and consumer products such as home appliances, industrial controls, networks, smart meters, engine controls and other applications. The growing need for performance is opening more and more of the embedded processor market to 32-bit and 64-bit embedded processors. The use of these advanced processors provides a material advantage to system builders. The market for processors with licensed 32-bit and 64-bit central processing unit (CPU) cores has grown from less than 50 million chips in 1997 to almost ten billion chips at the end of calendar year 2011 and is expected to reach 15 billion chips by 2015, according to The Linley Group.
Digital consumer and business products that incorporate low-power and high-performance processors can offer advanced functionality such as realistic 3D graphics rendering, digital audio and video, communications and high-speed signal processing. Examples include digital TVs, set-top boxes, Blu-ray players and recorders, broadband access devices such as cable modems, Passive Optical Networks (PONs), Digital Subscriber Lines (DSL) modems, Voice-over IP (VoIP) enabled devices, mobile handsets, media tablets, PC modems, processor-based smart cards, digital cameras and 802.11 wireless networking devices. To meet the demands of the digital consumer and business products markets, system OEMs rely on semiconductor companies to design and deliver critical components within demanding price and performance parameters. In order to supply products for these markets, semiconductor suppliers are increasingly combining their own IP into SoCs with IP from third-party suppliers, such as our IP, in the form of processor cores and other functional blocks.
The MIPS Ecosystem
Processors are unlike many other kinds of semiconductors, such as memories, which interface with other components in a highly standardized manner. Each processor architecture has its own unique language called an instruction set. The specifics of the architecture and its instruction set have a major impact on the cost, performance and power consumption of the end product, and require a range of supporting third party products and know-how.
Only a few processor architectures are used widely enough to generate broad third party support to create a de facto standard, and the MIPS architecture is one of these. The system developer has access through third parties to a broad array of software and engineering development tools such as compilers, debuggers and in-circuit emulation testers, middleware, application platforms and reference designs. The collective effect of this collateral work is what we call the “ecosystem.” The availability of this supportive technology is an incentive for anyone building a new system to stay with the standard. Such ecosystems serve as barriers to entry for anyone attempting to create new standards for processor architectures in the embedded market. To further support the development of the MIPS Ecosystem, our open source MIPS Developer Community website provides resources for developers working on Android and Linux applications and other MIPS-Based products.
The MIPS Ecosystem is comprised of over 112 companies, including Mentor Graphics, Green Hills Software, Carbon Design Systems, Imperas and others, providing hundreds of hardware/software development tools, real-time operating systems (RTOS), middleware and compatible hardware IP in support of the MIPS architecture. Popular operating systems that are compatible with the MIPS architecture include Android, MontaVista Linux, Express Logic’s ThreadX, Mentor Graphics’ Nucleus, Wind River’s VxWorks and eCosCentric eCos Pro. We continue to enable development of the Android ecosystem for MIPS, including tools and applications, with over 20 partner companies providing products that support Android on the MIPS architecture, including the Myriad Dalvik Turbo engine.
Customers
Over 130 companies have executed license agreements for MIPS products to develop and sell MIPS-Based silicon solutions. Traditionally, we have two major types of licensees: architecture licensees that license design rights and independently develop their own MIPS-compatible cores, and implementation licensees that license processor core implementations from MIPS. These cores are normally inserted directly into our customers’ own SoCs, which contain other elements of their system.
In fiscal 2012, we began to evaluate various opportunities to monetize our patent portfolio. In June 2012, Broadcom signed a license agreement with us that included the rights to use our patent portfolio as well as providing them an extension on existing architecture and core licenses for our products (“Broadcom License”). The Broadcom License represents the first tangible results from our strategic efforts around patent monetization and we continue to evaluate all of our options in this area.
Through MIPS Technologies’ flexible approach to licensing architectural IP, our licensees are able to design optimized semiconductor products for multiple segments of the embedded market, broadening their reach beyond markets addressed by processor cores designed and licensed by MIPS. Architecture licensees may also license our processor core implementations to fill gaps in their product families.
Products
MIPS develops and licenses our processor designs in two forms. We generate both high-level description language representations of our cores called synthesizable, or “soft,” cores, and process-optimized or “hard” cores, which are silicon process specific implementations expressed in an electronic data format that can be used almost directly to create masks used in the production process. Synthesizable cores are more flexible. Customers can specify a number of configuration options on synthesizable cores, such as the size of the included memory, and have control over which silicon technology is targeted with the final product. This allows synthesizable core customers flexibility in sourcing production of their chips from competing foundries.
“Hard” cores have the advantage that most of the work required to gain a precise expectation of the actual results in terms of size, speed, and power has been completed by MIPS Technologies or one of our design service providers. The benefit may be faster time-to-market with less risk and lower development cost. Any particular “hard” core can be used in one technology from one foundry only, and configuration parameters have been predetermined by MIPS.
As mentioned below under “Intellectual Property”, we have a substantial patent portfolio, and in fiscal 2012 we began to evaluate various opportunities to monetize such portfolio. In June 2012, Broadcom signed a license agreement with us that included the rights to use our patent portfolio as well as providing them an extension on existing architecture and core licenses for our products. We continue to evaluate all of our options in patent monetization including potentially seeking additional patent license opportunities.
Designs. We provide flexible, modular processor and related core designs that meet a range of performance, power and cost needs, and enable our licensees to provide both standardized and customized semiconductor products more quickly to system OEMs. These designs include:
MIPS32 M14K and M14Kc Cores. The M14K cores are based on the microMIPS instruction set architecture, designed to provide high levels of system performance for extremely cost-sensitive embedded applications such as 32-bit microcontrollers (MCUs), home entertainment, personal entertainment and home networking. Since they began shipping in March 2010, M14K cores have been licensed to 13 companies, including Microchip Technology, Nationz Technology, Dialog Semiconductor, PMC-Sierra, Mobile Devices, Inc. and others.
MIPS32 4K Cores. The 4K, 4KSd, 4KE and M4K processor cores are high-performance, low-power, compact 32-bit core designs for custom SoC applications. All of these core designs are available in synthesizable formats and are designed for easy integration with a wide variety of custom logic and peripherals. The 4K cores have been licensed to 99 companies including Zoran (acquired by CSR), Qualcomm Atheros, Lantiq, Microchip Technology, Realtek, Renesas Electronics, MStar and others. These cores are broadly utilized in SoCs shipping today, as either the main processor or as subsystem controllers in SoCs using multiple processor cores.
MIPS32 24K Cores. The 24K core family started shipping in fiscal 2004 and is designed to be scalable to future generations of silicon process technology. The 24KE core leverages the high-performance 24K microarchitecture and efficiently adds Digital Signal Processing (DSP) functionality. This significantly reduces overall SoC die area, cost and power consumption as well as system complexity when compared to a system solution employing both a MIPS core and a DSP core. The 24K and 24KE cores have been licensed to 67 companies, including Qualcomm Atheros, Broadcom, BroadLight (acquired by Broadcom), Cisco Systems, Entropic Communications, Lantiq, Ralink (a Mediatek Company), Realtek, Sigma Designs, Renesas Electronics, Toshiba and others.
MIPS32 34K Cores. In September 2005, we started shipping the 34K core family, which provides both DSP and multi-threading (MT) ASEs. The 34K core family’s MT capabilities allow the user to take advantage of the fact that embedded systems run multiple program tasks or threads of execution in parallel, and that system performance limitations from memory access timing can be improved by efficiently switching tasks from one that is waiting for data to another that is ready to execute. The 34K family has been licensed by 27 companies, including Altair Semiconductor, Axis Communications, Broadcom, Mobileye, MStar, PMC-Sierra, Sigma Designs and others.
MIPS32 74K Cores. In May 2007, we introduced the 74K core family as the industry’s first fully synthesizable processors to surpass 1GHz using industry standard libraries and EDA flows. The 74K core family is based on MIPS Technologies’ superscalar microarchitecture with out-of-order instruction dispatch. To-date, the 74K family has been licensed by 26 companies, including Broadcom, Lantiq, MStar, Realtek, Renesas Electronics, Sigma Designs and others.
MIPS32 1004K Cores. In April 2008, we introduced the 1004K Coherent Processing System (CPS) as the industry’s first multi-threaded multiprocessor IP core. Incorporating multi-threading in each core in a coherent multicore architecture enables the 1004K CPS to surpass the performance of multicore systems based on single-threaded processor cores. This performance boost essentially is “free” in both hardware and software, as the additional hardware threads in the cores are minimal in size relative to a typical SoC design, and multi-threading makes use of the same Symmetric Multiprocessing (SMP) versions of operating systems and software programming models as coherent multicore platforms. The 1004K cores have been licensed by 17 companies, including Mobileye, MStar, PMC-Sierra, Realtek, Sigma Designs, ViXS and others.
MIPS32 1074K Cores. In September 2010, we introduced the 1074K Coherent Processing System (CPS), our latest coherent multiprocessor IP offering. The 1074K CPS enables easy implementation of very high-performance multicore systems, a high level of flexibility in configuration for specific features, and the ability to migrate a design across foundries, process nodes, and geometries. The 1074K cores have been licensed by 6 companies, including Silicon Integrated Systems (SiS), Realtek and others.
The Aptiv Generation of Cores. In May 2012, we announced the Aptiv Generation of microprocessor cores including the proAptiv, interAptiv, and microAptiv families. These microprocessor cores offer three distinct performance levels for applications across MIPS’ target market segments. The proAptiv core provides leading high-end CPU performance/power efficiency, targeting connected consumer electronics devices. The multi-threaded interAptiv core delivers leading performance efficiency in its class, targeting applications with tight power and cost constraints. The microAptiv core provides a high level of efficiency with DSP acceleration and security for cost-sensitive MCU/embedded processor designs.
MIPS32 and MIPS64 Architectures. The MIPS32 and MIPS64 architectures have been the foundation of the MIPS embedded processor environment for many years. As such, they provide a reliable, widely-used target for software and other collateral products. MIPS Technologies maintains the architectural standard and evolves it in a manner consistent with advancing needs, while assuring both backward compatibility and the flexibility to innovate with the architecture in the future. This maintains both the current software and tools investment for MIPS and our customers, while providing the opportunity to build for advanced needs. There are 18 active licenses for the MIPS32 and MIPS64 architectures with companies including Broadcom, Cavium Networks, Ingenic Semiconductor, Loongson Technology, NetLogic Microsystems (acquired by Broadcom), Renesas Electronics, Sony, Toshiba and The Institute of Computing Technology of the Chinese Academy of Sciences (ICT).
microMIPS Instruction Set Architecture. The microMIPS instruction set architecture (ISA) was introduced to the market in November 2009, and is the basis for MIPS Technologies’ M14K cores which began shipping in March 2010. The microMIPS ISA was developed specifically to provide a high level of code compression without any loss in MIPS32 performance, a major requirement and advantage for microcontroller and embedded system SoC developers to reduce cost. microMIPS maintains 98% of MIPS32 performance while reducing code size by up to 35%, translating to significant silicon cost savings. The microMIPS ISA is backward-compatible, enabling reuse of optimized MIPS microarchitecture.
Application Specific Extensions. ASEs provide design flexibility for our application-specific products and are licensed to our architecture licensees as additional features to use in designing processors. ASEs may also be incorporated into MIPS cores to provide extended capability for code compression, 3D graphics, security, DSP math functions, microcontroller and multi-threading applications.
We also perform development work in a broad range of areas that highlight the competitive strengths of our product offerings. Examples of this work include development and improvement of the Linux kernel for the range of MIPS architectures, including MIPS32, MIPS64 and microMIPS. MIPS Technologies contributes to the open source community, offering optimizations and updates to the MIPS Linux kernel available for download at www.linux-mips.org. Support for Linux distributions is also available from our partners including MontaVista Software and Wind River (wholly-owned subsidiaries of Cavium Networks and Intel respectively). Mentor Graphics, in partnership with MIPS Technologies, provides releases and support of the Sourcery CodeBench software development toolchain for the MIPS architecture, including microMIPS. MIPS Technologies provides our customers with a comprehensive set of tools for SoC development and pre-silicon software test and validation, including the MIPS Navigator™ debug system, MIPS Navigator ICS (Integrated Component Suite) software development utilities and system engineering boards.
Internally and with partners, MIPS is actively optimizing and developing solutions for the Android operating system. Android on MIPS source code is available for developers to download from developer.mips.com. MIPS is also a member of the Open Handset Alliance, a community of companies promoting and contributing to development of Android.
Markets and Applications
The primary markets addressed by our actual and potential customers include:
Home Entertainment Products. Together with our existing semiconductor licensees, we license our products into solutions for a wide variety of sophisticated, high-volume home entertainment products.
Set-Top Boxes. Set-top boxes (STBs) provide the interface between signals transmitted in either digital or analog formats over the air, over cables, from satellites or via the Internet. As consumers increasingly seek high-definition content and better access to higher bandwidth networks, STB performance demands are increasing. As such, STBs are becoming sophisticated interactive, rich multimedia devices with features such as high-definition, video-on-demand, digital video recording and internet video access. This drives performance requirements, as well as multiple connectivity standards such as Ethernet, MOCA (Media over Coax), wireless networking, HDMI and wireless HD interfaces. MIPS-Based silicon is included in systems by Motorola, Pace, Pioneer, TiVo, Cisco and others. Our licensees in this market include ALi Corp., Broadcom, Cisco, Entropic, Huaya, Novatek, Motorola, Realtek, Renesas Electronics, Sigma Designs, Sunplus and Toshiba.
Digital Television. Most new digital televisions now have the ability to display HD content, and higher end models are becoming “smarter,” giving consumers more access to internet-based video, music and pictures. As with set-top boxes, the SoCs used in digital televisions utilize high-performance 32-bit processors. MIPS Technologies’ licensees such as MStar, Renesas Electronics, Sigma Designs, Silicon Integrated Systems and Toshiba provide SoCs to companies including LG, Philips, Samsung, Sharp, Sony, Toshiba, Vizio, Panasonic and other digital television OEMs.
Digital Cameras. Digital Still Cameras (DSCs) and Digital Video Cameras (DVCs) perform many computations beyond just compressing a captured image. These include scene analysis, red eye removal, facial detection, and other intelligent image processing that requires a significant amount of processing power. HD video capture is also now becoming standard on most cameras, and this also requires a significant amount of processing power. MIPS Technologies’ cores are used widely in DSCs and DVCs to address these needs. The menu graphics, font rendering, USB interface and battery charge monitoring all also draw on MIPS’ processor offerings. Licensees in this market include Megachips, Sony, Toshiba and Zoran (acquired by CSR).
Networking Products. MIPS Technologies’ cores have long been used in networking applications from residential/SOHO/SMB to infrastructure and enterprise/data center. Our performance-efficient multicore processors, application-specific engines for multi-threading and DSP, and 64-bit processing capabilities enable SoC suppliers to improve performance, power consumption and cost. Leading-edge technology and a large and entrenched networking ecosystem contribute to MIPS Technologies’ strength in this space.
Broadband Customer Premises Equipment (CPE) and Home Networking. The MIPS architecture is used in a variety of equipment from DSL/cable/PON modems and termination units, to residential/SMB gateways and routers, VoIP terminals, and WiFi and femtocell access points. Such systems continue to evolve to include more functionality and performance with strict cost targets and power envelopes. MIPS processors are designed to deliver the performance efficiency needed for CPE and home networking applications. MIPS’ licensees also leverage the multi-threading technology and DSP accelerators found in MIPS cores to create highly integrated and efficient SoCs. Licensees in this market include Broadcom, Ikanos, Lantiq, Qualcomm Atheros and Texas Instruments.
Infrastructure Equipment. The MIPS architecture is used widely in communications processors for networking infrastructure equipment such as core/metro/access routers and switches, 3G/4G basestations and mobile backhaul equipment. MIPS’ customers in this market include 64-bit architecture licensees such as Cavium Networks and Broadcom, as well as 32-bit core licensees such as PMC-Sierra. MIPS’ licensees supply SoCs to OEMs including Alcatel-Lucent, Cisco Systems, Huawei, Nokia Siemens Networks, Juniper Networks, ZTE, and others.
Enterprise and Data Center. The MIPS architecture is used broadly in enterprise applications such as routers, switches, firewalls, and unified threat management security appliances - largely through multicore processors developed by MIPS64 architecture licensees such as Cavium Networks and Broadcom. In the high-end storage market, PMC-Sierra has been successful in increasing the performance of its SoCs for RAID through the use of multi-threading technology available in MIPS cores. The low-power server application space is an emerging area for MIPS with architectural licensees including the Institute of Computing Technology of the Chinese Academy of Sciences (ICT) and Loongson Technology, creating SoCs for computing applications including servers and supercomputers.
Mobile Products. MIPS Technologies and its licensees are bringing the high-performance, low-power MIPS architecture to mobile devices such as handsets, media tablets, PC modems, portable media players and netbooks.
Mobile Handsets and Media Tablets. Mobile handsets and media tablets represent an area of growth for MIPS Technologies due to the overall growth expected for these market segments, as well as increasing penetration by MIPS. According to recent reports from ABI Research, the smartphone market is projected to grow at a CAGR of 15.4% between 2012 and 2017, and the media tablet market is projected to grow at a CAGR of 19% for the same period. There are several entry points for MIPS in handsets and tablets, including the applications processor, baseband processor, touchscreen controller and wireless connectivity processors for WiFi, Bluetooth, GPS, and Near Field Communication (NFC). Leveraging MIPS Technologies’ investments into the Android platform, MIPS has multiple customers shipping applications processors in smartphones and tablets, including Actions Semiconductor and Ingenic Semiconductor. Mobile devices based on these companies’ SoCs are shipping worldwide through numerous OEMs including Ingenic based tablets from Philips Electronics. MIPS also has a presence in baseband processors for mobile devices and PC modems through customers such as Broadcom, Altair Semiconductor and Sequans Communications.
Computing for other types of mobile devices, such as portable media players and netbooks, is being addressed by MIPS licensees such as Actions Semiconductor, Ingenic Semiconductor and Loongson Technology Corp.
Embedded Products. MIPS also provides embedded products in the following markets:
Automotive Driver Assistance, Navigation and Infotainment Products. These applications provide a new level of visual information, from sources such as global positioning systems (GPS), with mapping and routing, traffic congestion and other useful information for travelers. Other products provide advanced driver assistance for accident prevention and mitigation, with functionality such as forward collision warning, lane departure warning, and headway monitoring/warning. Sophisticated displays require substantial processing power as well as fast GPS lock time to render the display in real-time. Driver assistance applications require real-time responsiveness and reliability that will help reduce accidents and make roads safer. Companies such as Broadcom, Mobileye, Renesas Electronics, and Toshiba are supplying MIPS-Based chips for these types of automotive applications.
Microcontrollers. 32-bit microcontrollers (MCUs) are increasingly becoming important alternatives to 8-bit and 16-bit MCUs. MCUs are moving to standard 32-bit processor IP for support of embedded peripherals such as USB, LCD controllers, audio codecs with on board flash and RAM memory blocks. Industrial control, office automation, home appliances, automotive, peripheral controllers for consumer electronics and smart cards are markets addressed by standard off-the-shelf and ASSP (application-specific standard product) MCU products. Some of our licensees serving this market include Microchip Technology, Maxim, Mobile Devices, Inc., Toshiba and Zoran (acquired by CSR).
Research and Development
We believe that our future competitive position will depend in large part on our ability to develop new and enhanced processors and related technology solutions in a timely and cost-effective manner. We believe that these capabilities are necessary to meet the evolving and rapidly changing needs of semiconductor companies and system OEMs in our target markets. To this end, we have assembled a team of highly-skilled engineers who possess significant experience in the design and development of complex processors. We use this base of experience, and the technologies that we have developed, to enhance our product offerings and value propositions, and to develop a broader line of products that are optimized for various applications. Our strategy is to use a modular approach that emphasizes re-usable, licensable IP blocks. We believe that increased flexibility and modularity will allow our licensees to provide high-performance, cost-effective and low-power customized products more quickly to their customers.
Our research and development expenses were $35.9 million in fiscal 2012, $27.7 million in fiscal 2011 and $24.3 million in fiscal 2010. As of June 30, 2012, our engineering staff involved in engineering design services and research and development activities totaled 100 employees. As business conditions dictate, we adjust the level of technical personnel for our engineering activities and supplement them with a varying number of consultants and third-party service providers. Our consultants and third-party service providers are located in North America, Europe and Asia. We conduct the majority of our research and development activities in our Sunnyvale, California headquarters. We also have design teams in other locations in the United States and Asia.
Sales and Marketing
We reach our customers through different sales channels, consisting of:
Direct Sales. We have an internal sales force that calls directly on potential licensees worldwide. Our sales force consists of both direct sales personnel and “systems architects” who provide technical pre-sale assistance to our customers and potential customers. Most of MIPS’ licenses are generated from this sales force.
Sales Agents. From time to time we employ representatives in certain areas where specialized account knowledge or cultural skills are critical to success. Sales from Sales Agents do not constitute a material portion of our revenues.
Indirect Distribution Channels. We have expanded our reach into applications and markets with unique needs by adding indirect distribution channels. These distribution channels include ASIC development companies such as K-micro and Open-Silicon, and design services companies including Avnet ASIC Israel, CMSC Inc., eSilicon, ETRI, Tata Elxsi and Wipro Technologies. Sales from indirect channels do not constitute a material portion of our revenues.
In addition to these sales channels, we track the use of products based on MIPS IP by a variety of system OEMs in the embedded market. We participate in various sales and technical efforts directed to system OEMs, and our strategic marketing organization is focused on building value and brand awareness of MIPS among system OEMs. These efforts may result in direct license agreements from these OEMs, or in the OEMs expressing a preference or requirement for MIPS-Based SoC solutions from their semiconductor suppliers.
We generally license our IP products on a non-exclusive and worldwide basis to semiconductor companies who, in turn, sell products incorporating these technologies to system OEMs. Although the precise terms of our contracts vary, they typically incorporate technology license fees for developed, or currently available, technology or engineering services that relate to technology under development. These fees may be payable up-front or upon the achievement of certain milestones such as provision of deliverables by us or production of semiconductor products by the licensee. Each of these types of contracts is a non-exclusive license for the underlying intellectual property. While we may be required to perform certain services to render the intellectual property suitable for license under an engineering service contract, we continue to own the intellectual property that we develop. We also have the right to license to other licensees the intellectual property developed under engineering service agreements. Our processor contracts generally provide for annual maintenance fees and for the payment of royalties to us based on a percentage of the net revenue earned by the licensee from the sale of products incorporating our technology or, in some cases, based on unit sales of such products.
In fiscal 2012, we had one customer Broadcom, which individually accounted for more than 10% of our revenue. In fiscal 2011 we had two customers, Broadcom and Cavium, and in fiscal 2010, we had one customer, Broadcom, which accounted for more than 10% of our revenue. For further discussion, please see “Revenue” under Part II, Item 7 “Management’s Discussion and Analysis of Financial Conditions and Results of Operations.”
Backlog
Historically MIPS has not reported backlog because we believe that backlog is not a meaningful measure for understanding our historical business or revenues. In addition, royalties have generally accounted for a substantial portion of our revenue. Since royalty payments and the related revenue are generally based on licensee sales, with no guaranteed minimums, our royalty revenue does not factor into backlog calculations. Similarly, from time to time, we have license agreements in place under which we may receive future revenue if our customer achieves certain of their own milestones. Insofar as many factors including market conditions and customer product success determine the milestone achievement, we do not believe these potential future payments should be characterized as backlog.
Intellectual Property
Our patents, copyrights, trademarks, trade secrets and other intellectual property rights are critical to our success, and we rely on a combination of patent, trademark, copyright and trade secret laws to protect our proprietary rights. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, results of operation and financial condition.
Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy or otherwise use our technologies, including the marketing and sale of unauthorized MIPS-compatible clones in particular geographies. We intend to vigorously protect our intellectual property rights. There can be no assurance that we will be able to enforce our rights or prevent other parties from designing and marketing such unauthorized MIPS-compatible products.
We own approximately 565 patent properties (patents and applications) worldwide on various aspects of our technology. There can be no assurance that patents will be issued from any patent applications we submit, that any patents we hold will not be challenged, invalidated or circumvented or that any claims allowed from our patents will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us. In addition, patent rights which we have obtained will expire from time to time, with expiration dates ranging from 2012 to after 2028. We are not able to predict the extent to which third parties may use information contained in expired patents to successfully compete against us.
We also rely on unpatented trade secrets to protect our proprietary technology. No assurance can be given that others will not independently develop or otherwise acquire the same or substantially equivalent technologies or otherwise gain access to our proprietary technology or disclose such technology or that we can ultimately protect our rights to such unpatented proprietary technology. In addition, no assurance can be given that third parties will not obtain patent rights to such unpatented trade secrets, which patent rights could be used to assert infringement claims against us.
We also use licensing agreements, and employee and third party nondisclosure and assignment agreements, to limit access to and distribution of our proprietary information and to obtain ownership of technology prepared on a work-for-hire or other basis. There can be no assurance that the steps we have taken to protect our intellectual property rights will be adequate to deter misappropriation of such rights or that we will be able to detect unauthorized uses and take immediate or effective steps to enforce our rights. There can also be no assurance that the steps we have taken to obtain ownership of contributed intellectual property will be sufficient to assure our ownership of all proprietary rights.
From time to time we may wish to negotiate rights to third party intellectual property. There can be no assurance that we will be able to negotiate commercially attractive intellectual property licensing arrangements with third parties in the future.
MIPS' designs, architectures and extensions are subject to patent, trade secret, copyright and trademark protection. MIPS, MIPS-3D, MIPS16e, SmartMIPS, MIPS32, MIPS64, MIPS-Based, MIPS-Verified, MIPS logo, 4K, 4Kc, 4Km, 4Kp, 4KE, 4KEc, 4KEm, 4KEp, 4KSd, M14K, M14Kc, M4K, 24K, 24Kc, 24Kf, 24KE, 24KEc, 24KEf, 34K, 34Kc, 34Kf, 74K, 74Kc, 74Kf, 1004K, 1004Kc, 1004Kf, 1074K, 1074Kc, 1074Kf, microMIPS, CorExtend, Aptiv, microAptiv, interAptiv, and proAptiv are among the trademarks or registered trademarks of MIPS Technologies, Inc. in the United States and other countries.
Competition
The market for embedded processors and cores is highly competitive and characterized by rapidly changing technological needs and capabilities. We believe that the principal competitive factors in the SoC markets are software compatibility, manufacturing and licensing cost, performance, functionality, customizability and power consumption. Our customers seek a range of products that provide multiple price performance points to allow them to offer their own rich product lines.
Our processors and cores compete with those of ARM Holdings plc, Tensilica Incorporated, ARC processor solutions from Synopsys, and PowerPC, a product family developed and marketed by AMCC, IBM Corporation, LSI and Freescale Semiconductor. We also compete against certain semiconductor manufacturers, whose product lines include processors for embedded and non-embedded applications, including x86 processors from Advanced Micro Devices, Inc. and Intel Corporation. In addition, we may face competition from the producers of clones that implement part of the MIPS architecture, including early-developed portions of the MIPS architecture that are no longer subject to patent protection in particular geographies.
To remain competitive, we must continue to differentiate designs from those that are available or under development by the internal design groups of semiconductor companies, including our current and prospective licensees.
Employees
As of June 30, 2012, we had 161 employees. Of this total, 100 were involved in engineering design services and in research and development, 38 were in sales and marketing and 23 were general and administrative employees. Our future success will depend in part on our ability to attract, retain and motivate highly qualified technical and management personnel who are in great demand in the semiconductor industry.
Available Information
Our Internet website is located at http://www.mips.com. We make available free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission( SEC). Other than the information expressly set forth in this annual report, the information contained, or referred to, on our website is not a part of this annual report.
Additional Information
MIPS Technologies, Inc. was incorporated in Delaware in June 1992. Our predecessor, MIPS Computer Systems, Inc., was founded in 1984 and was acquired by Silicon Graphics in 1992. We were separated from the business of Silicon Graphics, effective June 1, 1998. Our principal executive office is located at 955 East Arques Avenue, Sunnyvale, California 94085, and our telephone number at that address is (408) 530-5000. Our website address is www.mips.com. References to “MIPS,” “we,” “us,” “management,” “our,” or the “Company” means MIPS Technologies, Inc. and our consolidated subsidiaries.
For financial information regarding revenue derived from our international licensees, and assets outside the United States, see “Note 17 Operating and Geographic Segment Information” under Notes to Consolidated Financial Statements.
Executive Officers of the Registrant
Our executive officers and their ages as of June 30, 2012, were as follows:
Sandeep Vij has served as our Chief Executive Officer and our President since January 2010. He has more than 20 years of senior-level management and marketing experience in the semiconductor industry. Prior to assuming his current position, Mr. Vij served as Vice President and General Manager of the Broadband and Consumer Division of Cavium Networks from February 2009 to January 2010 and VP of Strategic Markets and Business Development of Cavium Networks from May 2008 through February 2009. From 1996 to April 2008, Mr. Vij was on the executive staff of Xilinx Inc., a digital programmable logic manufacturer. From 2007 to 2008 he served as VP of Worldwide Marketing, Services and Support at Xilinx. From 2001 to 2007, he served as VP of Worldwide Marketing at Xilinx. From 1997 to 2001, he served as VP and GM, General Products Division at Xilinx where he held profit and loss responsibility for their high-volume Field Programmable Gate Array (FPGA) products. Mr. Vij worked at Altera Corp. in a variety of marketing and management roles. Mr. Vij serves on the board of directors of Coherent, Inc., a laser and photonics company.
William Slater has served as our Vice President, Chief Financial Officer and Treasurer since November 2011. He has more than 25 years of experience in financial management and operations at high-growth organizations. Prior to assuming his current position, Mr. Slater was Chief Financial Officer of Saba Software, Inc., a provider of enterprise software and cloud solutions from December 2008 to November 2011. Prior to that, from August 2000 to September 2008, Mr. Slater was Executive Vice President and Chief Financial Officer at Symmetricom, a provider of precise time and frequency technology. From August 1991 to November 1999, Mr. Slater served as Executive Vice President and CFO at Computer Curriculum Corporation, an educational software publisher and division of Viacom, where he oversaw strategies, business models, and infrastructure. Mr. Slater has also served as Vice President, Financial Planning, at Simon & Schuster, and Vice President and Controller, Professional Products Group, for Revlon.
Brad Holtzinger has served as our Vice President, Worldwide Sales since October 2005. Mr. Holtzinger served as Vice President of Sales for the Americas region from July 2004 to October 2005 and as Director of Sales for the Americas from May 2003 to July 2004. Mr. Holtzinger joined us in December 2001 and served as the Director of Systems Solutions until May 2003.
Ravikrishna Cherukuri has served as our Vice President, Engineering since March 10, 2010. He has more than 20 years of senior-level management and engineering experience in the semiconductor industry. Prior to assuming his current position, Mr. Cherukuri was Co-founder and VP of Engineering of Sonoa Systems, an infrastructure provider of analytics, management and governance solutions for cloud services and Application Programming Interfaces (APIs) from July 2004 to July 2008. Prior to that, from May 1998 to May 2004, Mr. Cherukuri was on the founding team and managed Application Specific Integrated Circuit (ASIC) and hardware development for Siara Systems, acquired by Redback Networks. Mr. Cherukuri was a key designer of AMD’s K6 microprocessor and also led the K7 chipset (irongate) development effort from May 1991 to May 1998. Earlier in his career, Mr. Cherukuri held engineering position with HCL Infosystems, working on architecture and implementation of the company’s flagship Magnum multiprocessor platform.
Gideon Intrater has served as Vice President of Marketing since November 2011. Prior to assuming his current position, Mr. Intrater was MIPS’ Vice President of Product Marketing and Applications from December 2010 to November 2011. Prior to that, Mr. Intrater was Vice President of Architecture for Symwave, a privately-held supplier of high-performance analog/mixed signal semiconductor solutions for consumer devices from October 2008 to December 2010. Prior to that, from June 1998 to August 2008, Mr. Intrater held various management positions at MIPS Technologies, including Vice President of Solutions Architecture. From August 1987 to June 1998, Mr. Intrater held positions of increasing responsibility at National Semiconductor Corporation, including Director of the Core Technology Business Unit.
Gail Shulman has served as General Counsel since February 2009. Ms. Shulman joined MIPS in November of 1999 and has held various positions in the Legal Department, including serving as Associate General Counsel and Assistant Corporate Secretary prior to her appointment as General Counsel. Prior to that, she was the senior corporate lawyer for Axil Computer (a subsidiary of Hyundai Electronics) and had worked for Thelen, Reid, Brown, Raysman & Steiner.
Dave Singhal has served as our Vice President, Corporate Development and Strategy since February 2011. He has more than 20 years experience with both early-stage and established companies. From July 2005 to February 2011, Mr. Singhal was Director in the Corporate Development Technology Group of Cisco, responsible for strategy, incubation, and investment in areas related to video, mobile, and consumer devices and Director of Engineering in the Chief Architects Office, Service Provider Group. From 2001 to 2005, Mr. Singhal was an consultant to a number of early-stage companies in the areas of video processing and networking. Prior to that, from 1998 to 2001, Mr. Singhal was the CEO of Luxxon Corporation, a pioneer in multimedia transcoding gateways for the 3G cellular infrastructure market. Mr. Singhal held engineering roles at Neomagic Corporation, Trident Microsystems, Cirrus Logic and Advanced Micro Devices from 1985 to 1998.
There are no family relationships between any of our executive officers.
Item 1A.
Item 1A. Risk Factors
Our success is subject to numerous risks and uncertainties, including those discussed below. These factors could hinder our growth, cause us to sustain losses or have other adverse effects on us, which could individually or collectively cause our stock price to decline. The following list is not exhaustive and you should carefully consider these risks and uncertainties before investing in our common stock.
The success of our business depends on sustaining or growing our license and contract revenue. License and contract revenue consists of technology license fees paid for access to our developed technology (and in some cases, our patents), associated maintenance agreements and engineering service fees related to technology under development. Our ability to secure the licenses from which our contract revenues are derived depends on our customers, including semiconductor companies and digital consumer, mobile, wireless, connectivity and business product manufacturers, adopting our technology and using it in the products they sell. As compared to the prior year, our license and contract revenue decreased by 9% in fiscal 2010. However, our license and contract revenue increased by 12% in fiscal 2011 and 35% in fiscal 2012 as compared to prior year. The fiscal 2012 increase was due to the Broadcom License.
Changes in the size and nature of the license agreements that we enter into in a given period could cause our operating results to differ significantly from one period to another. We license our embedded processor intellectual property in the form of both architectures and specific processor cores. Our license agreements include both limited and unlimited uses of our products; however, all licenses contain a limitation on the number of years that a license is valid and only cover those products specifically licensed and available at the time of the license. Under unlimited use license agreements, customers typically pay a larger fixed, up-front fee for the unlimited use of (i) one or more of our MIPS-developed cores or (ii) our architecture to develop their own MIPS-compatible cores during the term of the agreement. Architecture license agreements are not as common as core license agreements. The company currently has 13 active architecture customers.
In addition, in June 2012 we entered into the Broadcom License that included Broadcom’s rights to use our patent portfolio as well as providing them an extension on existing architecture and core licenses for our products. However, no assurance can be given that we will be able to enter into future license agreements related to our patent portfolio or that we will be successful in our strategic efforts around patent monetization.
We recognize all license revenues under limited and unlimited use license agreements upon execution of the agreement, provided all revenue recognition criteria have been met. License revenue from unlimited use license agreements was 51% in fiscal 2010, 61% in fiscal 2011 and 86% in fiscal 2012 of our total license and contract revenue. Additionally, in the fourth quarter of fiscal 2012, license revenue from unlimited use license agreements was 94% of our total license and contract revenue.
The revenue recognized by a license-based business can vary significantly from period, depending on the number and size of the license deals closed during the quarter. As a result, it is difficult to predict the level of licensing activity in future periods. Our licensees are not obligated to license new or future generations of our products, so past license and contract revenue may not be indicative of the amount of such revenue in any future period. In addition, consolidation, merger and acquisition activity involving our customers and potential customers may limit our ability to enter into new license agreements, as such activity reduces the number of potential licensees for our products. If we cannot maintain or grow our contract revenue or if our customers do not adopt our technology and obtain corresponding licenses, our results of operations will be adversely affected.
We compete against much larger companies in the microprocessor IP market that have larger market share and broader lines of products. Some of our competitors, including Intel Corporation and ARM Holdings plc, have significant financial resources enabling them to market their products aggressively and to target our customers with special incentives. As long as Intel and ARM remain in their dominant position, we may be negatively impacted by their business practices, product mix and product introduction schedules, marketing strategies and exclusivity clauses with customers. In addition, Intel and ARM have substantially greater financial resources than we do and, accordingly, spend substantially greater amounts on research and development and marketing than we do. We expect Intel and ARM to maintain their dominant market positions and to continue to invest heavily in marketing, research and development and in other technology companies. To the extent our competitors develop microprocessor products using more advanced process technologies or introduce competitive new products into the market before we do, our financial condition and operating results will be adversely impacted.
We may not be successful in our strategic efforts around patent monetization. Our future success depends in part on our ability to monetize our patents. In the fourth quarter of fiscal 2012, we entered into a license agreement with Broadcom Corporation, pursuant to which we licensed our patents and received a license fee of $26.5 million. We have historically not licensed our patent portfolio in connection with our licensing business model, and it is difficult to predict if we will be able to enter into future license agreements for our patent portfolio. If we do not enter into future patent license agreements, and we are not otherwise successful in alternative patent monetization strategies, our financial condition, revenue and results of operations could be adversely impacted in the future. In addition, our ability (or inability) to successfully conclude patent license agreements in any given quarter may have a significant impact on our quarterly revenue. Furthermore, no assurance can be given that we will be able to enter into future license agreements related to our patent portfolio or that we will be successful in our strategic efforts around patent monetization.
Our royalty revenue may be adversely affected by a number of factors. Our royalty revenue may be adversely affected by a number of factors, including certain contractual provisions in our license agreements and consolidation activity in our customer base. A number of our license agreements have provisions that allow a customer to pay a lower contractual royalty rate based on volume of customer products shipped or the passage of time. In addition, consolidation activity in our customer base may also negatively impact our royalties. For example, one of our customers was recently acquired by one of our largest customers, and the acquiring customer has historically paid a lower royalty rate than the acquired customer. In these situations, the combined entity will often seek to pay us royalties based on the lower royalty rate. Furthermore, a combined entity will likely reach a volume-based royalty reduction (if applicable to such customer) at a faster pace, due to the higher number of units shipped by the combined entity. Similar consolidation events in the future in our customer base would likely have an adverse effect on our royalties. Further, our royalty revenue can be affected by the average prices at which our customers sell their products as some royalties are based on the revenue recognized by our customers.
Since a substantial portion of our revenue is derived from a few significant customers, the loss of a key customer or any significant delay in our customers’ product development plans could seriously impact our revenue and harm our business. In addition, if we are unable to continue to sell existing and new products to our key customers or to attract new significant customers, our future operating results could be adversely affected. We have derived a substantial portion of our past revenue from sales to and royalties from a relatively small number of customers. As a result, the loss of any significant customer could materially and adversely affect our financial condition and results of operations.
Revenue from our five largest customers represented approximately 63% and 43% of our net revenue in the fiscal years ended June 30, 2012 and 2011, respectively. We expect that our largest customers will continue to account for a substantial portion of our net revenue for the foreseeable future.
In addition, consolidation, merger and acquisition activity involving our customers may increase our reliance on our largest customers. Our largest customers, and their respective contributions to our net revenue, have varied from time to time and will probably continue to vary.
We may not be able to maintain or increase revenue from certain of our key customers for a variety of reasons, including the following:
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our agreements with our customers typically do not provide for minimum royalties;
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many of our customers have pre-existing or concurrent relationships with our current or potential competitors that may affect the customers’ decisions to purchase our products; and
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some of our customers face intense competition from other manufacturers that do not use our products.
The loss of a key customer, a reduction in the contractual royalty rate of a customer based on volume or the passage of time, a reduction in royalty units used by any key customer, a significant delay in our customers’ product development plans or our inability to attract new significant customers could adversely impact our revenue and our results of operations.
Our financial results could be negatively impacted by economic conditions. The markets served by the Company, and those of our customers, can be highly cyclical, and our financial results, both our royalty revenue and our ability to secure new contracts, could be impacted by consumer spending in the U.S. and global economies. In addition, from time to time, the semiconductor industry has experienced significant downturns and our prospects and results are influenced in a significant way by conditions in this industry. Royalty revenues depend significantly on worldwide economic conditions, including business and consumer spending, and license and contract revenues depend on the willingness of our potential customers to invest in new products, and both our royalty revenue and our license and contract revenue may be impacted by weak economic conditions in consumer spending and infrastructure spending. Some of the factors that could influence the levels of consumer and infrastructure spending include continuing increases in fuel and other energy costs, conditions in the real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence, the threat of sovereign default and other macroeconomic factors affecting consumer spending behavior. In addition, recent economic volatility could lead to a number of follow-on effects on our business, including insolvency issues with our customers or suppliers. These and other economic factors could have a material adverse effect on demand for our products and services, and on our financial condition and operating results.
Our financial results are subject to significant fluctuations that could adversely affect our stock price. Our financial results may vary significantly due to a number of factors. In addition, our revenue components are difficult to predict and may fluctuate significantly from period to period. Because our revenues are somewhat independent of our expenses in any particular period, it is difficult to accurately forecast our operating results. Our operating expenses are based, in part, on anticipated future revenue and a very high percentage of our expenses are fixed in the short term. As a result, if our revenue is below expectations in any quarter, the adverse effect may be magnified by our inability to adjust spending in a timely manner to compensate for the revenue shortfall. Therefore, we believe that quarter-to-quarter comparisons of our revenue and operating results may not be a good indication of our future performance. It is possible that in some future periods our results of operations may be below the expectations of securities analysts and investors. In that event, the price of our common stock may fall.
Factors that could cause our revenue and operating results to vary from quarter to quarter include:
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our ability to identify attractive licensing opportunities and then enter into new licensing agreements (which may include licensing agreements related to our patent portfolio) on terms that are acceptable to us;
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our ability to successfully conclude licensing agreements of any significant value in a given quarter;
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the financial terms and delivery schedules of our contractual arrangements with our licensees, which may provide for significant up-front payments, payments based on the achievement of certain milestones or extended payment terms;
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the demand for products that incorporate our technology;
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our ability to develop, introduce and market new intellectual property;
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the establishment or loss of licensing relationships with semiconductor companies or digital consumer, mobile, wireless, connectivity and business product manufacturers;
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consolidation, merger and acquisition activity of our customer base, or customers developing competing products internally, which may cause delays or loss of sales;
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the amount and timing of royalty payments;
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the timing of new products and product enhancements by us and our competitors;
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changes in development schedules, research and development expenditure levels and product support by us and semiconductor companies and digital consumer, mobile, wireless, connectivity and business product manufacturers; and
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changes in economic and market conditions.
Our ability to achieve design wins may be limited unless we are able to develop enhancements and new generations of our intellectual property. Our future success depends, in part, on our ability to develop enhancements and new generations of our processors, cores or other intellectual property that satisfy the requirements of specific product applications and introduce these new technologies to the marketplace in a timely manner. If our development efforts are not successful or are significantly delayed, or if the characteristics of our IP product offerings and related designs are not compatible with the requirements of specific product applications, our ability to achieve design wins may be limited. Our failure to achieve a significant number of design wins would adversely affect our business, results of operations and financial condition.
Technical innovations of the type critical to our success are inherently complex and involve several risks, including:
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our ability to anticipate and timely respond to changes in the requirements of semiconductor companies, and system original equipment manufacturers, or system OEMs, of digital consumer, mobile, wireless, connectivity and business products;
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our ability to anticipate and timely respond to changes in semiconductor manufacturing processes;
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changing customer preferences in the digital consumer, mobile, wireless, connectivity and business products markets;
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the emergence of new standards in the semiconductor industry and for digital consumer, mobile, wireless, connectivity and business products;
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the development of platforms, such as Android, by third parties and the selection of preferred solutions for such platforms;
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the significant investment in a potential product that is often required before commercial viability is determined; and
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the introduction by our competitors of products embodying new technologies or features.
Our failure to adequately address these risks could render our existing IP product offerings and related designs obsolete and adversely affect our business, results of operations and financial condition. In addition, we cannot assure you that we will have the financial and other resources necessary to develop IP product offerings and related designs in the future, or that any enhancements or new generations of the technology that we develop will generate revenue sufficient to cover or in excess of the costs of development.
Our stock price is volatile. The market price of our common stock has fluctuated substantially in the past and is likely to continue to be highly volatile and subject to wide fluctuations. From January 1, 2008 through June 30, 2012 our common stock has traded at prices as low as $1.00 and as high as $18.19 per share. Fluctuations have occurred and may continue to occur in response to various factors, many of which we cannot control.
In addition, the market prices of securities of Internet-related, semiconductor and other technology companies have been and remain volatile. The market prices of securities of many technology companies have fluctuated significantly for reasons frequently unrelated to the operating performance of the specific companies. If our operating results do not meet the expectations of securities analysts or investors, who may derive their expectations by extrapolating data from recent historical operating results, the market price of our common stock will likely decline. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid.
Due to the nature of our compensation programs, some of our executive officers sell shares of our common stock each quarter or otherwise periodically (including pursuant to Rule 10b5-1 stock trading plans). Sales of shares by our executive officers may not be indicative of their respective opinions of our performance at the time of sale or of our potential future performance. Nevertheless, the market price of our stock may be affected by sales of shares by our executive officers.
If we do not succeed in the market for mobile products, our revenue growth may be adversely impacted. We believe that our future success depends in part on our ability to develop software, processor cores or other intellectual property that satisfies the requirements of developers, chip suppliers and manufacturers in the market for mobile products, such as handsets, tablet computers, portable media players and netbooks. If our development efforts for mobile products are not successful or if our IP product offerings and related designs are not widely adopted, our ability to achieve design wins in this market may be limited, and this may in turn adversely affect our medium to long term revenue growth. In addition, the proliferation of the Android platform (and other mobile-related technologies) beyond the market for mobile handsets may increase our reliance on such technologies in attempting to achieve design wins in other markets, including the market for digital consumer products. Further, with our focus on the mobile products market we are, to some extent, foregoing other uses of our research and development and marketing resources, and if this focus is not successful we may fail to capitalize on opportunities available in other markets.
If we do not succeed on key platforms, including Android, our ability to compete and grow may be adversely impacted. Our future success may depend, in part, on our ability to develop software, processor cores or other intellectual property that satisfies the requirements of key platforms, such as Android. If our development efforts are not successful or are significantly delayed, or if the characteristics of our IP product offerings and related designs are not compatible with the requirements of key platforms, our ability to achieve design wins may be limited. In addition, the proliferation of the Android platform and Android-based applications beyond the market for mobile handsets may increase our reliance on Android-related technology in attempting to achieve design wins in the market for digital consumer products, including high-end digital televisions. Competition for the development of technologies for the Android platform is rapidly developing and remains intense.
Our ability to remain competitive may be adversely affected if platform owners select competing technologies as preferred solutions for such platforms. To date, most owners have not favored any particular technology for products based on their platform. However, a decision by a platform owner to standardize on a technology offering provided by a competitor may affect the decisions of potential licensees when considering technology offerings provided by MIPS.
If we fail to achieve a significant number of design wins with respect to platforms like Android, our medium to longer term revenue growth may be adversely impacted. Furthermore, even if we are successful in developing technologies based on Android or other key platforms, those platforms and our technology offerings for such platforms may not be widely adopted in the industry, which may also limit our growth opportunities.
As international business is a significant component of our revenue, we are increasingly exposed to various legal, business, political and economic risks associated with our international operations. For our fiscal years 2012, 2011 and 2010, 38%, 54% and 59%, respectively, of our net revenue was derived from sales to customers outside the United States. We have sales and operations in China as well as sales offices in Germany, Japan, Israel, Korea and Taiwan.
We intend to continue our international business activities. International operations are subject to many inherent risks, including but not limited to:
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changes in tax laws, trade protection measures and import or export licensing requirements;
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potential difficulties in protecting our intellectual property rights;
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fluctuations in foreign currency exchange rates;
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restrictions, or taxes, on transfers of funds between entities or facilities in different countries;
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changes in a given country’s political, regulatory or economic conditions;
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burdens of complying with a variety of foreign laws;
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difficulties in staffing and managing international operations; and
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difficulties in collecting receivables from foreign entities or delayed revenue recognition.
Any of the factors described above may have a material adverse effect on our ability to increase or maintain our foreign sales. Economic conditions in our primary overseas markets, particularly in Asia, may negatively impact the demand for our products abroad. All of our international sales to date have been denominated in U.S. dollars. Accordingly, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets or require us to assume the risk of denominating certain sales in foreign currencies. These factors could impact our business to a greater degree if we further expand our international business activities.
We rely on third-party technologies for the development of our products and if we were unable to use such technologies in the future, our ability to remain competitive could be harmed. We rely on third parties for technologies that are integrated into our products. If we are unable to continue to use or license these technologies on reasonable terms, or if these technologies fail to operate properly, we may not be able to secure alternatives in a timely manner and our ability to remain competitive would be harmed. In addition, if we are unable to successfully license technology from third parties to develop future products, we may not be able to develop such products in a timely manner or at all.
We rely on the efforts of third parties to enhance our technology offerings and our ecosystem, and an inability to develop or maintain relationships with these parties would harm our ability to remain competitive. We have developed relationships with third parties, including software developers, development tools providers, and third party IP suppliers, pursuant to which these parties provide operating systems, tool support, reference designs and other services that support the MIPS-based ecosystem for our licensees. We believe that these relationships enhance the attractiveness of our technology and improve our ability to achieve design wins. If we are unable to develop or maintain these relationships, or if a product is discontinued by an existing ecosystem partner, our ability to achieve design wins in the future may be limited and our ability to remain competitive would be harmed. In addition, the inability to maintain an attractive MIPS-based ecosystem could adversely affect our business, results of operations and financial condition.
Our business depends on royalties from the sale of products incorporating our technology, and we have limited visibility as to the timing and amount of such sales. Our receipt of royalties from our licenses depends on our licensees incorporating our technology into their products, bringing those products to market, and the success of those products in the market. In the case of our semiconductor licensees, the amount of such sales is further dependent upon the sale of the products by their customers into which our licensees’ products are incorporated. Thus, our ability to achieve design wins and enter into licensing agreements does not assure us of future royalty revenue. Any royalties that we are eligible to receive are based on the sales of products incorporating the semiconductors or other products of our licensees, and as a result we do not have direct access to information that will help us anticipate the timing and amount of future royalties. Factors that negatively affect our licensees and their customers could adversely affect our business. The success of our direct and indirect customers is subject to a number of factors, including:
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the competition these companies face and the market acceptance of their products;
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the engineering, marketing and management capabilities of these companies and technical challenges unrelated to our technology that they face in developing their products; and
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their financial and other resources.
Because we do not control the business practices of our licensees and their customers, we have little influence on the degree to which our licensees promote our technology and we do not set the prices at which products incorporating our technology are sold. Further, the royalty revenues we report in any given quarter represent licensee and customer shipments one quarter in arrears, and we have very little visibility into our licensees’ and customers’ shipping of products incorporating our technology.
We rely on our licensees to correctly report to us the number or dollar value of products incorporating our technology that they have sold, as these sales are the basis for the royalty payments that they make to us. We have the right under our licensing agreements to perform a royalty audit of the licensee’s sales so that we can verify the accuracy of their reporting, and if we determine that there has been an over-reported or under-reported amount of royalty, we account for the results when they are identified.
We may be subject to litigation and other legal claims that could adversely affect our financial results. From time to time, we are subject to litigation and other legal claims incidental to our business. In addition, it is standard practice for us to include some form of indemnification of our licensees in our core and architecture license agreements, and from time to time we respond to claims by our licensees with respect to these obligations. It is possible that we could suffer unfavorable outcomes from litigation or other legal claims, including those made with respect to indemnification obligations, that are currently pending or that may arise in the future. Any such unfavorable outcome could materially adversely affect our financial condition or results of operations.
We depend on our key personnel to succeed. Our success depends to a significant extent on the continued contributions of our key management, technical, sales and marketing personnel, many of whom are highly skilled and difficult to replace. If we are unable to attract, retain and motivate such personnel in sufficient numbers and on a timely basis, we may experience difficulty in implementing our current business and product plans. In that event, we may be unable to successfully meet competitive challenges or to exploit potential market opportunities, which could adversely affect our business and results of operations. In addition, we cannot assume that we will retain our other key officers and employees. Competition for qualified personnel, particularly those with significant experience in the semiconductor and processor design industries, remains intense.
On August 4, 2011, our former Chief Financial Officer, Maury Austin, informed the Company that he intended to retire as an employee of the Company effective at such time as the company appointed a successor Chief Financial Officer. On October 27, 2011, the Company announced that the Board of Directors had appointed William Slater as the new Chief Financial Officer of the Company, effective November 10, 2011.
On September 30, 2011, Arthur Swift resigned as the Company’s Vice President of Marketing and Business Development. In connection with Mr. Swift's resignation, the Company has named Gideon Intrater as the new Vice President of Marketing.
We may be subject to claims of infringement. Significant litigation regarding intellectual property rights exists in our industry. As we grow our business and expand into new markets that other companies are developing in, the risk that our technology may infringe upon the intellectual property rights of others increases. In addition, it is standard practice for us to include some form of indemnification of our licensees in our core and architecture license agreements. We cannot be certain that third parties will not make a claim of infringement against us, our licensees, or our licensees’ customers in connection with the use of our technology. For example, we have been notified by ten licensees of a potential infringement claim by Biax Corporation asserting two US patents, allegedly involving MIPS products. A number of these licensees have requested indemnification from MIPS. We are currently reviewing these claims, but to date, we have not incurred any losses in respect of such claims. However, there can be no assurance that we will not incur future liabilities in connection with such claims, or that the amount of such liabilities will not be material.
Any claims, even those without merit, could be time consuming to defend, result in costly litigation and/or require us to enter into royalty or licensing agreements. These royalty or licensing agreements, if required, may not be available on acceptable terms to us or at all. A successful claim of infringement against us or one of our licensees in connection with its use of our technology could adversely affect our business.
From time to time, we receive communications from third parties asserting patent or other rights allegedly covering our products and technologies. Based upon our evaluation, we may take no action or we may seek to obtain a license, redesign an accused product or technology, initiate a formal proceeding with the appropriate agency (e.g., the U.S. Patent and Trademark Office) and/or initiate litigation. There can be no assurance in any given case that a license will be available on terms we consider reasonable or that litigation can be avoided if we desire to do so. If litigation does ensue, the adverse third party will likely seek damages (potentially including treble damages) and may seek an injunction against the sale of our products that incorporate allegedly infringing intellectual property or against the operation of our business as presently conducted, which could result in our having to stop the sale of some of our products or to increase the costs of selling some of our products. Such lawsuits could also damage our reputation. The award of damages, including material royalty payments, or the entry of an injunction against the sale of some or all of our products, could have a material adverse affect on us. Even if we were to initiate litigation, such action could be extremely expensive and time-consuming and could have a material adverse effect on us. We cannot assure you that litigation related to our intellectual property rights or the intellectual property rights of others can always be avoided or successfully concluded.
Even if we were to prevail, any litigation or claim for indemnification could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations, which could have a material adverse effect on us.
If we do not compete effectively in the market for SoC intellectual property cores and related designs, our business will be adversely affected. Competition in the market for SoC intellectual property and related designs is intense. Our products compete with those of other designers and developers of IP product offerings, as well as those of semiconductor manufacturers whose product lines include digital, analog and/or mixed signal designs for embedded and non-embedded applications. In addition, we may face competition from the producers of unauthorized clones of our processor and other technology designs. The market for embedded processors in particular has recently faced downward pricing pressures on products. We cannot assure you that we will be able to compete successfully or that competitive pressure will not materially and adversely affect our business, results of operations and financial condition.
In order to be successful in marketing our products to semiconductor companies, we must differentiate our intellectual property cores and related designs from those available or under development by the internal design groups of these companies, including some of our current and prospective licensees. Many of these internal design groups have substantial engineering and design resources and are part of larger organizations with substantial financial and marketing resources. These internal design groups may develop products that compete with ours.
Some of our existing competitors, as well as a number of potential new competitors, have longer operating histories, greater brand recognition, and larger customer bases, as well as greater financial and marketing resources. This may allow them to respond more quickly than we can to new or emerging technologies and changes in customer requirements. It may also allow them to devote greater resources than we can to the development and promotion of their technologies and products.
As a result of one or more of these risks, our operating costs could increase substantially, our flexibility in operating our business could be impaired and our sales could be adversely affected. Any of these items could have an adverse affect on our financial condition or results of operations.
Our intellectual property may be misappropriated or expire, and we may be unable to obtain or enforce intellectual property rights. We rely on a combination of protections provided by contracts, including confidentiality agreements, nondisclosure agreements and assignment agreements, copyrights, patents, trademarks, and common-law rights, such as trade secrets, to protect our intellectual property. We cannot assure you that any of the patents or other intellectual property rights that we own or use will not be challenged, invalidated or circumvented by others or be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Policing the unauthorized use of our intellectual property is difficult, and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. As part of our business strategy, we license our technology in multiple geographies including in countries whose laws do not provide as much protection for our intellectual property as the laws of the United States and where we may not be able to enforce our rights. In addition, intellectual property rights which we have obtained in particular geographies may and do expire from time to time, or may be subject to formal opposition proceedings or other challenges. As a result, we cannot be certain that we will be able to prevent other parties from designing and marketing unauthorized MIPS compatible products, that others will not independently develop or otherwise acquire the same or substantially equivalent technologies as ours, or that others will not use information contained in our expired patents to successfully compete against us. Moreover, cross licensing arrangements, in which we license certain of our patents but do not generally transfer know-how or other proprietary information, may facilitate the ability of cross-licensees, either alone or in conjunction with others, to develop competitive products and designs.
We also cannot assure you that any of our patent applications to protect our intellectual property will be approved, and patents that have issued do expire over time or may be subject to reexamination proceedings. Recent judicial decisions and legislation in the United States may increase the cost of obtaining patents, limit the ability to adequately protect our proprietary technology, and have a negative impact on the enforceability of our patents. In addition, effective trade secret protection may be unavailable or limited in certain countries. If we are unable to protect, maintain or enforce our intellectual property rights, our technology may be used without the payment of license fees and royalties, which could weaken our competitive position, reduce our operating results and increase the likelihood of costly litigation.
Our results of operations could vary as a result of the methods, estimates, and judgments that we use in applying our accounting policies. The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting Policies and Estimates” under Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”). Such methods, estimates, and judgments are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise over time that lead us to change our methods, estimates, and judgments. Changes in these methods, estimates, and judgments could significantly affect our results of operations.
Changes in effective tax rates or adverse outcomes from examination of our income tax returns could adversely affect our results. Our future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or regulations or in the interpretation of tax laws or regulations. We operate in the United States and internationally and occasionally face inquiries and examinations regarding tax matters in the countries that we operate in. There can be no assurance that the outcomes from examinations will not have an adverse effect on our operating results and financial condition. In addition, we are subject to certain withholding taxes relating to the repatriation of undistributed earnings from certain foreign subsidiaries. Any changes in international laws or tax rulings in countries that we operate in could have an adverse impact on our operating results and financial condition.
If we experience security breaches, our reputation and business could suffer. We retain technical, customer, design, employee and other information on our IT systems, and it is critical to our business strategy that our facilities and infrastructure remain secure. Despite our security measures, our IT infrastructure may be vulnerable to physical break-ins, computer viruses, attacks by hackers or nefarious actors, or similar disruptive problems, including “hacktivism”. It is possible that we may have to expend additional financial and other resources to address any such problems that arise. Any physical or electronic break-in or other security breach or compromise of our IT systems and the information retained in our IT systems could adversely affect our reputation and harm our business.
We may be subject to claims and liabilities in connection with the sale of our discontinued business. In connection with the sale of our Analog Business Group to Synopsys, Inc. (Synopsys) in May 2009, we agreed to retain responsibility for certain actual or contingent liabilities and agreed to indemnify Synopsys against certain breaches of representations and warranties and other liabilities. Our potential liability to Synopsys is subject to certain limitations, including limitations on the time period during which claims may be asserted and the amounts for which we are liable. To date, we have not incurred any losses in respect of claims asserted by Synopsys in connection with this transaction. However, there can be no assurance that we will not incur future liabilities to Synopsys in connection with this transaction, or that the amount of such liabilities will not be material.
In May 2010, Synopsys delivered a letter to MIPS asserting breaches of certain representations and warranties and requesting compensation in an aggregate amount of approximately $3.7 million. We responded to Synopsys in June 2010 and denied all claims set forth in the May 2010 letter. In July 2010, Synopsys responded to our letter. General discussions and exchange of information between the parties have occurred, however, there can be no assurance that the current dispute can be resolved on terms that are acceptable to us.
We cannot be assured that our past restructurings will sufficiently reduce our expenses relative to future revenue and may have to implement additional restructuring plans in order to reduce our operating costs. We have implemented restructuring plans in the past to reduce our operating costs. If we have not sufficiently reduced operating expenses or if revenues are below our expectations, we may be required to engage in additional restructuring activities, which could result in additional restructuring charges. These restructuring charges could harm our results of operations. Further, our restructuring plans could result in a potential adverse effect on employee capabilities that could harm our efficiency and our ability to act quickly and effectively in the rapidly changing technology markets in which we sell our products.
Catastrophic events may disrupt our business and harm our operating results. Our corporate headquarters, a significant portion of our research and development activities, our data centers and certain other critical business operations are located in California. A disruption or failure of our operations in the event of a major natural disaster, telecommunications failure, cyber attack, civil unrest, acts of war, terrorist attack or other catastrophic event could cause system interruptions, delays in our product development and loss of critical data, and could prevent us from fulfilling our customers’ orders. An earthquake or other catastrophic event that results in the destruction or disruption of any of our data centers or our critical business or IT systems would severely affect our ability to conduct normal business operations and, as a result, our operating results would be adversely affected. In addition, the March 2011 earthquake and tsunami in Japan may negatively affect the operations, facilities, development plans, sales, and financial condition of our existing licensees and potential licensees with operations in Japan. The Japan earthquake and tsunami and other future catastrophic events may adversely affect our ability to enter into new agreements with licensees and the ability of these licensees to complete product shipments upon which we earn royalty revenue.
We may incur impairments to long-lived assets. We review our long-lived assets, including other intangible assets, for impairment annually in the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Significant negative industry or economic trends, including a significant decline in the market price of our common stock, or disruptions to our business could lead to an impairment charge of our long-lived assets, including the other intangible assets.
Our consideration of impairment indicators and valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance. We operate in highly competitive environments and projections of future operating results and cash flows may vary significantly from results. Additionally, if our analysis results in impairment to our goodwill, intangible and long-lived assets, we may be required to record a charge to earnings in our financial statements during a period in which such impairment is determined to exist, which may negatively impact our results of operations.
The market value of our investment portfolio is exposed to fluctuations in interest rates and changes in credit ratings which could have a material adverse impact on our financial condition and results of operations. Our cash and cash equivalents and short term investments represent significant assets that may be subject to fluctuating or even negative returns depending upon interest rate movements, changes in credit ratings, sovereign defaults and various financial market conditions. The global credit and capital markets have experienced significant volatility and disruption due to the instability in the global financial system and the current uncertainty related to global economic conditions.
There is a risk that we may incur other-than-temporary impairment charges for certain types of investments, should the credit markets experience further deterioration or the underlying assets fail to perform as anticipated. Our future investment income may fall short of expectations due to changes in interest rates or a decline in fair values of our debt securities that is judged to be other-than-temporary. Furthermore, we may suffer losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates or financial market conditions.
The amount of our other income (expense), net could be adversely affected by macroeconomic conditions and other factors. The amount of other income (expense), net in our consolidated statements of operations is subject to fluctuations in interest rates and changes in our cash and cash equivalent balances as well as fluctuations in foreign currency exchange rates. These changes are, to a large extent, beyond our control and we have limited ability to predict them.
Item 1B.
Item 1B.
Unresolved Staff Comments
Not applicable.
Item 2.
Item 2.
Properties
Our executive, administrative and technical offices currently occupy approximately 36,013 square feet in a building leased in Sunnyvale, California. This lease will expire on May 31, 2016.
We also lease a facility in Beaverton, Oregon. The facility is approximately 7,000 square feet and it is occupied by sales and engineering personnel. The lease will expire on November 30, 2016.
We lease sales offices in Japan, Taiwan, Korea, Germany, and Israel, and technical and sales office spaces in China and the United States. These leases range from 12 months to 7 years.
We believe that these facilities are adequate to meet our current needs but we may need to seek additional space in the future.
Item 3.
Item 3.
Legal Proceedings
From time to time, we receive communications from third parties asserting patent or other rights allegedly covering our products and technologies. Based upon our evaluation, we may take no action or we may seek to obtain a license, redesign an accused product or technology, initiate a formal proceeding with the appropriate agency (e.g., the U.S. Patent and Trademark Office) and/or initiate litigation. There can be no assurance in any given case that a license will be available on terms we consider reasonable or that litigation can be avoided if we desire to do so. If litigation does ensue, the adverse third party will likely seek damages (potentially including treble damages) and may seek an injunction against the sale of our products that incorporate allegedly infringing intellectual property or against the operation of our business as presently conducted, which could result in our having to stop the sale of some of our products or to increase the costs of selling some of our products. Such lawsuits could also damage our reputation. The award of damages, including material royalty payments, or the entry of an injunction against the sale of some or all of our products, could have a material adverse affect on us. For additional information regarding intellectual property litigation, see Part I, Item 1A. Risk Factors-“We may be subject to litigation and other legal claims that could adversely affect our financial results.” and “We may be subject to claims of infringement.”
Item 4.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is quoted on The NASDAQ Global Select Market under the symbol “MIPS”.
As of August 31, 2012, there were approximately 3,205 stockholders of record of our common stock. Because most of our common stock is held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. We have never paid or declared any cash dividends on our common stock or other securities and do not anticipate paying cash dividends in the foreseeable future.
PERFORMANCE GRAPH
The following graph compares the cumulative total return to stockholders for our common stock to The NASDAQ Stock Market Composite Index-U.S. and the RDG Semiconductor Composite Index. The graph assumes that $100 was invested in our common stock and in each index on June 30, 2007. No dividends have been declared or paid on our common stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.
Item 6.
Item 6. Selected Consolidated Financial Data.
You should read the selected consolidated financial data set forth below together with “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and our consolidated financial statements and the notes to those statements included elsewhere in this report. The selected consolidated statements of operations data for the fiscal years ended June 30, 2012, 2011, 2010, 2009 and 2008, and the selected consolidated balance sheet data as of June 30, 2012, 2011, 2010, 2009 and 2008, set forth below have been derived from our consolidated financial statements which have been audited by Ernst & Young LLP, independent auditors for all years.
(1)
Consolidated statement of operations data for 2011, 2010, 2009 and 2008 for the Analog Business Group (ABG) has been classified as discontinued operations for the period from August 27, 2007 through June 30, 2011. On May 7, 2009, we divested ABG. We had no discontinued operations activities in fiscal 2012.
(2)
Represents impairment charges recorded to write down the carrying value of acquired intangible assets in 2008. See Note 5 of the Notes to Consolidated Financial Statements.
(3)
Total assets at June 30, 2009 and 2008 excludes amounts classified as assets of discontinued operations in the amounts of $4.5 million and $116.1 million, respectively.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis together with our consolidated financial statements and notes to those statements included elsewhere in this report. Except for the historical information contained in this Annual Report on Form 10-K, this discussion contains forward-looking statements that involve risks and uncertainties including statements regarding our expectation for specific aspects of our results of operations in fiscal 2012. Our actual results could differ materially from those indicated in these forward-looking statements as a result of certain factors, as more fully described under “Risk Factors,” and other risks included from time to time in our other Securities and Exchange Commission reports, copies of which are available from us upon request. The forward-looking statements within this Annual Report on Form 10-K are identified by words such as “believes,” “anticipates,” “expects,” “intends,” “may” and other similar expressions. However, these words are not the exclusive means of identifying such statements. We undertake no obligation to update any forward-looking statements included in this discussion.
Introduction
MIPS Technologies is a leading provider of industry-standard processor architectures and cores for home entertainment, networking, mobile and embedded applications. The MIPS architecture powers some of the world’s most popular electronic products. Our technology is broadly used in products such as digital televisions, set-top boxes, Blu-ray players, broadband customer premises equipment (CPE), WiFi access points and routers, networking infrastructure and portable/mobile communications and entertainment products. Our customers are global semiconductor companies and system original equipment manufacturers (system OEMs). We offer our customers high-performance, easy-to-use functionality at a fraction of the cost and time to market that internal development would require. Our customers pay us license fees for architectural, product and patent rights, as well as royalties based on processor unit shipments.
Overview
Total revenue in fiscal 2012 was $86.2 million, an increase of 5% or $4.2 million from the $82.0 million reported in the prior fiscal year.
Royalty revenue in fiscal 2012 was $47.8 million, a decrease of 11% from the $53.7 million reported during fiscal 2011. Total royalty units reported in fiscal year 2012 were 708 million or 8 percent higher than the 656 million units reported in fiscal 2011. The decline in royalty revenue was due to a decrease in average royalty rate per unit from 8.2 cents in the fiscal 2011 to 6.8 cents in fiscal 2012. This decrease in royalty per unit was primarily driven by certain customers hitting lower price tiers based on timing and volume. As our royalty revenue is reported one quarter in arrears, shipments and revenue reported in our fourth quarter represented our customer shipments from the quarter ended March 31, 2012.
License and contract revenue in fiscal 2012 was $38.4 million, an increase of 35% from the $28.4 million in the prior fiscal year. The increase in license and contract revenue in fiscal 2012 as compared to the prior year was primarily due to the Broadcom License in the fourth quarter which contributed $26.3 million to our revenue. This license more than offset the decline in revenue we experienced in fiscal 2012 from traditional license and contract arrangements caused by lower deal volume. In fiscal 2012, we completed 14 new license agreements compared to 26 new license agreements in fiscal 2011.
In fiscal 2012, we began to evaluate various opportunities to monetize our patent portfolio. In June 2012, Broadcom signed a license agreement with us that included the rights to use our patent portfolio as well as providing them an extension on existing architecture and core licenses for our products. The Broadcom License represents the first tangible results from our strategic efforts around patent monetization and we continue to evaluate all of our options in this area.
Our total operating expense in fiscal 2012 increased to $69.3 million, as compared to our operating expense of $61.6 million in fiscal 2011. This increase in operating expense for our fiscal year 2012 compared to the same period of fiscal 2011 was primarily due to increase in research and development efforts associated with the launch of next generation products and ecosystem development.
We recorded a tax provision of $2.8 million in fiscal 2012 compared to $3.8 million in fiscal 2011 consisting mainly of U.S. federal and state taxes, foreign tax, and withholding tax expenses.
Our cash, cash equivalents and short term investments at June 30, 2012 were $110.9 million compared to $109.4 million at June 30, 2011.
Discontinued Operations
On May 7, 2009, we entered into a simultaneous sale and close agreement with Synopsys, Inc. (Synopsys) to sell our Analog Business Group (ABG) for $22 million in cash. As a result of the sale, the assets and liabilities related to ABG are presented as assets and liabilities of discontinued operations, respectively, and the results of ABG’s operations are classified as discontinued operations on our statements of operations for all periods presented.
In connection with the sale of our ABG to Synopsys, we agreed to retain responsibility for certain actual or contingent liabilities and agreed to indemnify Synopsys against certain breaches of representations and warranties and other liabilities. Our potential liability to Synopsys is subject to certain limitations, including limitations on the time period during which claims may be asserted and the amounts for which we are liable. To date, we have not incurred any losses in respect of claims asserted by Synopsys in connection with this transaction. However, there can be no assurance that we will not incur future liabilities to Synopsys in connection with this transaction, or that the amount of such liabilities will not be material. In May 2010, Synopsys delivered a letter to MIPS asserting breaches of certain representations and warranties and requesting compensation in an aggregate amount of approximately $3.7 million. We responded to Synopsys in June 2010 and denied all claims set forth in the May 2010 letter. In July 2010, Synopsys responded to our letter. General discussions between the parties have occurred and additional documents have been exchanged. However, there can be no assurance that the current dispute can be resolved on terms that are acceptable to us.
In fiscal 2011, we recorded a gain from discontinued operations of $0.2 million as a result of receiving a withholding tax refund from discontinued operations. In fiscal 2010, we recorded a gain from discontinued operations of $0.2 million, primarily as a result of receiving a withholding tax refund of approximately $0.3 million from discontinued operations. This gain was partially offset by administrative costs for closure of foreign subsidiaries. The payments and receipts relating to discontinued operations have been reflected as cash activities from discontinued operations in our consolidated statement of cash flows for all periods presented.
At June 30, 2012 and June 30, 2011, we had no assets or liabilities from discontinued operations of ABG.
Critical Accounting Policies and Estimates
We prepare our financial statements in conformity with U.S. generally accepted accounting principles, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We regularly evaluate our accounting estimates and assumptions. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results inevitably will differ from the estimates, and such differences may require material adjustments to our financial statements.
We believe the following critical accounting policies affect the significant judgments and estimates we use in the preparation of our consolidated financial statements.
Revenue Recognition.
Royalty Revenue.
We classify all revenue that involves the sale of a licensee’s products as royalty revenue. Royalty revenue is recognized in the quarter in which we receive a report from a licensee detailing the shipments of products incorporating our IP components, which is generally in the quarter following the licensee’s sale of the product to its customer. Royalties are calculated either as a percentage of the revenue received by the seller on sales of such products or on a per unit basis, as specified in our agreement with the licensee. We periodically engage a third party to perform royalty audits of our licensees, and if these audits indicate any over- or under-reported royalties, we account for the results when they are resolved.
License and Contract Revenue.
We generally derive revenue from license fees for the transfer of proven and reusable IP components on currently available technology, including in certain situations, a license to our patents. We enter into licensing agreements that provide licensees the right to incorporate our IP components in their products with terms and conditions that have historically varied by licensee. These agreements include a nonexclusive license for the underlying IP. Fees for contracts for currently available technology include: license fees relating to our IP, including processor designs and patents; maintenance and support, typically for one year; and royalties payable following the sale by our licensees of products incorporating the licensed technology. Generally, our customers pay us a single upfront fee that covers the license and first year maintenance and support. Our deliverables in these arrangements include (a) processor designs and related IP and (b) maintenance and support.
In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-13, “Revenue Arrangements with Multiple Deliverables” (“ASU 2009-13”). The standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable based on the relative selling price. The selling price for each deliverable is based on vendor-specific objective evidence (“VSOE”) if available, third-party evidence (“TPE”) if VSOE is not available, or best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. We adopted the provisions of ASU 2009-13 as of the beginning of fiscal 2011 for licenses that originate or are materially modified customer arrangements originating after July 1, 2010.
The amount of license and contract revenue we recognize in a given period is affected by our judgment as to whether an arrangement includes multiple deliverables and, if so, our determinations surrounding whether VSOE exists. We determine VSOE based on our normal pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range. In circumstances when VSOE does not exist, we then apply judgment with respect to whether we can obtain TPE. Generally, we are not able to determine TPE because our go-to-market strategy typically differs from that of our peers. When we are unable to establish selling price using VSOE or TPE, we use BESP in our allocation of arrangement consideration. In determining BESP, we apply significant judgment as we weigh a variety of factors, based on the facts and circumstances of the arrangement. We typically arrive at BESP for license and contract revenue by considering historical and current evidence of pricing including bundled pricing practices, selling region, license term and number of uses allowed. The adoption of ASU 2009-13 had no material effect to our financial results.
License and contract revenue from currently available technology is recorded as revenue upon the execution of the license agreement when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred and collectability is reasonably assured. We assess the credit worthiness of each customer when a transaction under the agreement occurs. If collectability is not considered reasonably assured, revenue is recognized when the fee is collected. Other than maintenance and support, there is no continuing obligation under these arrangements after delivery of the IP.
Contracts relating to technology under development also can involve delivery of a license to intellectual property, including processor designs. However, in these arrangements we undertake to provide best-efforts engineering services intended to further develop technology that has yet to be developed into a final processor design. Rather than paying an upfront fee to license completed technology, customers in these arrangements pay us milestone fees as we perform the engineering services. If the development work results in completed technology in the form of a processor design and related intellectual property, the customer is granted a license to such completed technology at no additional fee. These contracts typically include the purchase of first year maintenance and support commencing upon the completion of a processor design and related intellectual property for an additional fee, which fee is equal to the renewal rate specified in the arrangement. The licensee is also obligated to pay us royalties following sale of products incorporating the licensed technology. We continue to own the intellectual property that we develop and we retain the fees for engineering services regardless of whether the work performed results in a completed processor design. Fees for engineering services in contracts for technology under development are recognized as revenue as the services are performed; however, we limit the amount of revenue recognized to the aggregate amount received or currently due pursuant to the milestone terms. As engineering activities are best-efforts and at-risk and because the customer must pay an additional fee for the first year of maintenance and support if the activities are successful, the maintenance and support is a contingent deliverable that is not accounted for upfront under contracts relating to technology under development.
When we provide engineering services involving design and development of customized specifications, we recognize revenue on a percentage of completion basis from the signing of the agreement through the completion of all outstanding development obligations. The amount of revenue recognized is based on the total license fees under the license agreement and the percentage of completion is measured by the actual costs incurred to date on the project compared to the total estimated project cost. Revenue is recognized only when collectability is probable. The estimates of project costs are based on the IP specifications and prior experience with the same or similar IP development and are reviewed and updated regularly. Under the percentage of completion method, provisions for estimated losses on uncompleted contracts are recognized in the period in which the likelihood of such losses is determined. Licensing of existing IP that does not require any configuration is recognized upon delivery of the IP and when all other revenue recognition criteria have been met. Direct costs incurred in the design and development of the IP under these arrangements is included in cost of sales.
Maintenance and Support.
Certain arrangements include maintenance and support obligations. Under such arrangements, we provide unspecified upgrades, bug fixes and technical support. No other upgrades, products or other post-contract support are provided. These arrangements are generally renewable annually by the customer. Maintenance and support revenue is recognized at its selling price based on VSOE ratably over the period during which the obligation exists, typically 12 months. The fair value of any maintenance and support obligation is established based on the specified renewal rate for such maintenance and support. Maintenance and support revenue is included in license and contract revenue in the statement of operations and was $2.1 million, $2.5 million and $2.7 million in fiscal 2012, 2011 and 2010, respectively.
Income Taxes.
Significant judgment is required in determining our worldwide income tax provision. In the ordinary course, there are many transactions and calculations for which the ultimate tax outcome is uncertain. Although we believe that our estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and net income in the period in which such determination is made.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. In order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income in those jurisdictions where the deferred tax assets are located. We have provided a partial valuation allowance against our U.S. net deferred tax assets due to our history of net losses, difficulty in forecasting future results, and belief that we cannot rely on projections of future taxable income to realize deferred tax assets. The remaining portion of our U.S. net deferred tax assets that have no offsetting valuation allowance is recognized solely as an offset to liabilities recorded with respect to certain unrecognized tax benefits. Net of these liabilities, we have not recognized any U.S. deferred tax assets as we do not believe such amounts are more likely than not to be realized. Significant management judgment is required in determining our deferred tax assets and liabilities and valuation allowances for purposes of assessing our ability to realize any future benefit from our net deferred tax assets. We intend to maintain this valuation allowance until sufficient positive evidence exists to support the reversal of the valuation allowance. Future income tax expense will be reduced to the extent that we have sufficient positive evidence to support a reversal of, or decrease in, our valuation allowance.
We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Adjustments based on filed returns are generally recorded in the period when the tax returns are filed and the tax implications are known.
The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. Our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. As a result, our effective tax rate may fluctuate significantly on a quarterly basis.
We account for uncertain tax positions using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. At June 30, 2012 and June 30, 2011, we had gross unrecognized tax benefits of $5.2 million and $4.6 million, respectively.
The Company’s policy is to include interest and penalties related to unrecognized tax benefits, if any, within the provision for taxes in the consolidated statements of operations.
Goodwill.
Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired. Goodwill amounts are not amortized, but rather are tested for impairment at least annually or more frequently if there are indicators of impairment present. The Company performs its annual goodwill impairment analysis in the fourth quarter of each fiscal year. The Company evaluates whether goodwill has been impaired at the reporting unit level by first determining whether the estimated fair value of the reporting unit is less than its carrying value and, if so, by determining whether the implied fair value of goodwill within the reporting unit is less than the carrying value. As a result of the divestiture of the ABG, we now operate in one reportable segment and our reporting unit is consistent with the reportable segments identified. As such the estimated fair values of our single reporting unit was determined by using the Company’s market capitalization.
Impairment of Long-Lived Assets including Acquisition Related Intangible Assets.
For long-lived assets other than goodwill, the Company evaluates whether impairment losses have occurred when events and circumstances indicate that these assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. If less, the impairment losses are based on the excess of the carrying amounts of these assets over their respective fair values. Their fair values would then become the new cost basis. Fair value is determined by discounted future cash flows, appraisals or other methods.
Short-term Investments.
Investments with original maturities of greater than 90 days at the time of acquisition but less than one year from the balance sheet date are classified as short-term investments.
We classify investments in marketable debt and equity securities as available-for-sale securities. Available-for-sale securities are carried at fair value, based on quoted market prices, with the unrealized gains or losses reported net of tax, in stockholders’ equity as part of accumulated other comprehensive income (loss). We determine the fair values for short-term investments (that principally consist of marketable debt and equity securities) using industry standard pricing services, data providers and other third-party sources and by internally performing valuation analyses (see Note 4 to our Notes to Consolidated Financial Statements). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, both of which are included in interest and other income, net. Realized gains and losses, if any, are recorded on the specific identification method and are included in interest and other income, net.
We review our investments in marketable securities for possible other-than-temporary impairments on a regular basis. In determining if and when a decline in value below the adjusted cost of marketable debt and equity securities is other-than-temporary, we evaluate on an ongoing basis the market conditions, trends of earnings, financial condition, credit ratings, any underlying collateral and other key measures for our investments. In addition, we consider: 1) our intent to sell the security, 2) if we intend to hold the security, whether it is more likely than not that we will be required to sell the security before recovery of the security’s amortized cost basis and 3) if we intend to hold the security, whether or not we expect the security to recover the entire amortized cost basis. If any loss on investment is believed to be other-than-temporary, a charge will be recognized. Due to the high credit quality and short term nature of our investments, there have been no other-than-temporary impairments recorded to date.
Stock-Based Compensation.
We recognize stock compensation expense for all share-based payments to employees, including grants of employee stock options in our financial statements based on the fair value of the grants. For awards of restricted stock and restricted stock units, we measure compensation expense at grant date based on the estimated fair value of the award, reduced by expected forfeitures, and generally recognize the expense on a straight line basis over the expected requisite service period. For options granted, the fair value is estimated at the date of grant using a Black-Scholes option pricing model with weighted average assumptions for the activity under our stock plans. Option pricing model assumptions such as expected term, expected volatility, and risk-free interest rate, impact the fair value estimate. Further, the forfeiture rate impacts the amount of aggregate compensation. These assumptions are subjective and generally require significant analysis and judgment to develop. When estimating fair value, some of the assumptions will be based on or determined from external data and other assumptions may be derived from our historical experience with share-based payment arrangements. The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances.
As a result of the adjustment to our term and vesting schedule in July 2005 for stock options awarded under our 1998 and 2002 Plans, we do not believe that we are able to rely on our historical exercise and post-vested termination activity to provide relevant data for estimating our expected term for use in determining the fair value of these options. Therefore, we have opted to use the simplified method for estimating our expected term equal to the midpoint between the vesting period and the contractual term.
We currently estimate volatility by considering our historical stock volatility.
The risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the input to the Black-Scholes model.
We estimate forfeitures using a weighted average historical forfeiture rate. Our estimates of forfeitures will be adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from their estimate.
Contingencies and Litigation.
From time to time, we are involved in disputes, litigation and other legal actions (“Legal Matters”) in the ordinary course of business. We continually evaluate uncertainties associated with Legal Matters and record charges equal to the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the loss or range of loss can be reasonably estimated. This generally occurs when an agreement in principle has been reached by both parties that include substantive terms, conditions and amounts. We did not incur any charges from Legal Matters for the years ended June 30, 2012, 2011 and 2010.
Results of Operations-Years Ended June 30, 2012, 2011 and 2010
Our results of continuing operations are discussed below. See above in Item 7 Management’s Discussion and Analysis of Financial Condition and Note 6 of the Notes to Consolidated Financial Statements for additional details on our discontinued operations.
Revenue. Total revenue primarily consists of royalties, license and contract revenue. Royalties are based upon sales by licensees of products incorporating our technology. License and contract revenue consists of technology license fees generated from new and existing license agreements for developed technology and patents, associated maintenance agreements and engineering service fees generated from contracts for technology under development. Technology license fees vary based on, among other things, whether a particular technology is licensed for a single application or for multiple or unlimited applications, and whether the license granted covers a particular design or a broader architecture. Our revenues in fiscal 2012, 2011 and 2010 were as follows (in millions, except percentages):
Royalties.
Fiscal 2012 compared to fiscal 2011. The royalty revenue in fiscal 2012 decreased by 11% compared to fiscal 2011. Total royalty units reported by our customers in fiscal 2012 were 708 million compared to 656 million, an 8% increase from fiscal 2011. The royalty per unit for fiscal 2012 was 6.8 cents compared to 8.2 cents in fiscal 2011. The decline in the royalty per unit was primarily due to certain licensees reaching timing and volume tiers in their licenses that triggered lower royalty rates, coupled with decline in average selling price at certain of our customers whose royalties are calculated as a percentage of their revenue.
Fiscal 2011 compared to fiscal 2010. The 18% increase in royalty revenue resulted from an increase in units reported to 656 million in fiscal 2011 compared to 510 million in fiscal 2010. The 29% growth in unit volume was partially offset by a decrease in per unit royalty rates. Our customers in general were under pricing pressures in the markets we serve. Since a significant portion of our royalty revenue is calculated based on a percentage of our customers’ revenue, the decrease in our customers’ selling prices resulted in lower royalty revenue to us. In addition, certain customers met time or volume based discount levels in their contracts, resulting in lower per unit royalties paid to us.
License and Contract Revenue.
We license our embedded processor intellectual property in the form of both architectures and specific processor cores and in some cases our patents. Our license agreements include both limited and unlimited uses of our products; however, all licenses contain a limitation in the number of years that license is valid and only cover those products specifically licensed and available at the time of the license. Under unlimited use license agreements, customers typically pay a larger fixed, up-front fee for the unlimited use of (i) one or more of our MIPS-developed cores or (ii) our architecture to develop their own MIPS-compatible cores during the term of the agreement. Architecture license agreements are not as common as core license agreements. The company currently has 13 active architecture customers. We recognize all license revenues under limited and unlimited use license agreements upon execution of the agreement when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred and collectability is reasonably assured.
Fiscal 2012 compared to fiscal 2011. The 35% increase in license and contract revenue was primarily due to the Broadcom License in the fourth quarter which contributed $26.3 million to our revenue. This license more than offset the decline in revenue we experienced in fiscal 2012 from traditional license and contract arrangements caused by lower deal volume. The Broadcom License represents our first tangible result from strategic efforts around patent monetization. There were 14 new license agreements in fiscal 2012 compared to 26 in fiscal 2011.
Fiscal 2011 compared to fiscal 2010. The 12% increase in contract revenue was due to the higher average selling prices of our licenses in fiscal 2011 as compared to the prior year. There were 26 new agreements in fiscal 2011 compared to 37 in fiscal 2010.
Unlimited use licenses accounted for $32.8 million of our license and contract revenue in fiscal 2012. Excluding the Broadcom License, the range of terms of unlimited license agreements we completed in fiscal 2012 was 1 to 10 years with an average term of approximately 4 years. License revenue from unlimited use license agreements was $17.4 million in fiscal 2011.
International revenue accounted for approximately 38% of our total revenue in fiscal 2012, 54% of our total revenue in fiscal 2011 and 59% of our total revenue in fiscal 2010. The majority of this revenue has been denominated in U.S. dollars. We expect that revenue derived from international licensees will continue to represent a significant portion of our total revenue.
In 2012, we had one customer that accounted for approximately 45% (Customer A), in 2011 we had two customers that accounted for approximately 16% and 11% (Customer A and Customer B, respectively) and in 2010 we had one customer (Customer A) that accounted for approximately 16% of our revenue.
Broadcom License.
On June 29, 2012, we entered into the Broadcom License. As per the terms of the agreement, MIPS granted to Broadcom and its affiliates a worldwide, fully paid-up, non-exclusive license, without the right to sub-license, to patents owned or licensable by MIPS for the purpose of making, having made, using, selling, offering for sale and importing Broadcom products. In addition, MIPS granted Broadcom a multi-year license extension, including some pre-paid support and maintenance, to existing architecture and cores licenses for our products. The Broadcom License expires upon the expiration of the last to expire of the patents being licensed to Broadcom under the Broadcom License. The license fee associated with the license agreement was $26.5 million. In connection with this agreement, MIPS recognized $26.3 million of contract and license revenue in fiscal 2012 and deferred $0.2 million in pre-paid maintenance to be recognized in future periods.
Operating Expenses. Our costs and expenses in fiscal 2012, 2011, and 2010 were as follows (in millions, except percentages):
Cost of Sales. Cost of sales primarily includes labor and overhead related costs for contracts with engineering service requirements, material costs and costs associated with acquired third party software used in our products.
Fiscal 2012 compared to fiscal 2011. The cost of sales was $1.3 million in both fiscal 2012 and fiscal 2011.
Fiscal 2011 compared to fiscal 2010. The increase in cost of sales is primarily due to additional engineering labor and overhead costs associated with larger customized customer projects and an increase in purchased technology amortization cost in fiscal 2011 compared to fiscal 2010.
Research and Development. Research and development expenses include salaries and contractor and consultant fees, as well as costs related to workstations, software, and computer aided design tools utilized in the development of new technologies. The costs we incur with respect to internally developed technology and engineering services are included in research and development expenses as they are incurred and are generally not directly related to any particular licensee, license agreement or license fee.
Fiscal 2012 compared to fiscal 2011. Research and development expenses in fiscal 2012 increased by $8.2 million compared to fiscal 2011. This increase was primarily due to a $4.0 million increase in research and development efforts provided by third parties associated with the launch of next generation products and ecosystem development and a $3.2 million increase in employee related expense due to increased headcount. Our increased research and development efforts were primarily focused on (i) the development of our Aptiv cores, (ii) application development and porting programs to ensure application compatibility with MIPS-based processors, and (iii) continued investment in Android application development with Google. In addition, research and development expenses increased by $0.7 million due to an increase in stock compensation expense related to grants to additional employees and $0.3 million from increased facilities and depreciation expenses due to purchase of capital equipment.
Fiscal 2011 compared to fiscal 2010. Research and development expenses in fiscal 2011 increased by $3.3 million compared to fiscal 2010. Our 2011 research and development costs increased by $2.1 million due to increased outside services spending for additional software and tool development costs for Android and mobile related end applications. In addition, our salary and employee related expense increased by $1.4 million due to the hiring of additional headcount in our engineering team and increased payroll taxes resulting from the additional headcount as well as from stock option exercises in fiscal 2011. Our stock compensation expense also increased by $0.1 million due to higher average grant date fair value of options as compared to prior years. These increases were partially offset by a $0.3 million reduction in depreciation expense with more equipment being fully depreciated.
Our research and development staff totaled 100 employees at June 30, 2012 compared to 95 employees at June 30, 2011, and compared to 81 employees at June 30, 2010.
Sales and Marketing. Sales and marketing expenses include salaries, commissions and costs associated with third party independent software development tools and applications, direct marketing and other marketing efforts. Our sales and marketing efforts are directed at establishing and supporting our licensing relationships.
Fiscal 2012 compared to fiscal 2011. Our sales and marketing expense decreased by $1.5 million in fiscal 2012 compared to fiscal 2011 due to a mix of increases and decreases in various expenses, including (i) a $1.5 million decrease in commission and incentive compensation, (ii) a $0.7 million decrease in employee related expense due to decreased headcount, (iii) an increase of $0.4 million in severance related to a former executive of the Company, (iv) an increase of $0.3 million in consulting and outside services fees related to mobile and Android projects, (v) an increase of $0.2 million in stock compensation based on the mix and timing of employee stock grants and (vi) a decrease of $0.3 million in sales consulting expenses (vii) a decrease of $0.1 million in sales supplies and maintenance expense.
Fiscal 2011 compared to fiscal 2010. Our sales and marketing expense increased by $3.3 million in fiscal 2011 compared to fiscal 2010. Salary and employee related expenses increased by $1.3 million due to hiring of additional marketing personnel and increased payroll taxes resulting from the additional headcount as well as from stock option exercises in fiscal 2011. In addition, outside services and consulting expenses increased by $1.0 million resulting from additional sales and marketing efforts primarily focused on Android and mobile related end applications. There was also an increase in travel expense of $0.4 million with increased staffing levels and international travel. Lastly, there was an increase in stock compensation expenses of $0.6 million due to increased staffing levels and higher average grant date fair value of options as compared to prior years.
Our sales and marketing staff totaled 38 employees at June 30, 2012 compared to 41 employees at June 30, 2011, and compared to 36 employees at June 30, 2010.
General and Administrative. General and administrative expenses comprise salaries, legal fees including those associated with the establishment and protection of our patent, trademark and other intellectual property rights which are integral to our business, and expenses related to compliance with the reporting and other requirements of a publicly traded company including directors and officers liability insurance and financial audit fees.
Fiscal 2012 compared to fiscal 2011. The increase in general and administrative expense of $1.1 million in fiscal 2012 compared to fiscal 2011 was due to increases of (i) $0.9 million in consulting and outside services, (ii) $0.4 million in legal and related fees incurred in response to the activities and inquiries of an activist shareholder, (iii) $0.5 million stock compensation expense primarily resulting from the mix and timing of employee stock grants, and (iv) $0.2 million in consulting expense related to a former executive of the Company. These increases were partially offset by $0.5 million decrease in employer payroll taxes due to the higher level of employee stock option exercises in fiscal 2011 as compared to fiscal 2012 and $0.4 million decrease in incentive compensation.
Fiscal 2011 compared to fiscal 2010. The decrease in general and administrative expense of $0.1 million in fiscal 2011 compared to fiscal 2010 was primarily due to $0.5 million of severance expense in connection with the departure of our former Chief Executive Officer and recruiter expenses of $0.2 million associated with hiring a new CEO in fiscal 2010. There was also a decrease of $0.3 million in facilities and depreciation expenses primarily resulting from more equipment being fully depreciated. Salary expenses also decreased by $0.2 million due to the mix and timing of personnel being hired. These decreases were partially offset by an increase of $0.8 million in stock compensation expense primarily resulting from higher average grant date fair value of options as compared to prior years and an increase of $0.3 million with increase in payroll taxes due to an increase of stock option exercises in fiscal 2011.
Our general and administrative staff was 23 employees at June 30, 2012 compared to 26 employees at June 30, 2011, and compared to 24 employees at June 30, 2010.
Restructuring. We had no restructuring expense in fiscal 2012 and fiscal 2011. The fiscal 2010 restructuring expense of $0.7 million related to terminations of headcount in the US and was primarily designed to reduce spending in general and administrative functions and to reallocate spending to other functions.
Other Income, Net. Other income, net in fiscal 2012, 2011 and 2010 was comprised of the following (in thousands):
Other Income, net decreased by $0.7 million for fiscal 2012 compared to fiscal 2011 primarily due to a $0.6 million gain on investment in fiscal 2011 in a privately held company that was acquired by a public entity. There was also a $0.3 million decrease in interest income in fiscal 2012 due to fiscal 2011 results including $0.3 million from interest payments with respect to late royalty payments with no comparable payments received in fiscal 2012. These decreases were offset with an improvement of foreign exchange rate of $0.2 million in fiscal 2012 compared to fiscal 2011
Other Income, net increased by $0.7 million for fiscal 2011 compared to fiscal 2010 primarily due to a $0.3 million decrease in interest expense and a decrease of $0.1 million in loan amortization fees as our outstanding debt balances was fully paid off in April 2010. In addition, there was an increase in interest income by $0.3 million due to increase in our cash and investment balance in fiscal 2011.
Income Taxes. In fiscal 2012, we recorded an income tax provision of $2.8 million. The tax provision was primarily comprised of U.S. federal, foreign and withholding taxes. The majority of U.S. federal tax has been offset by foreign tax credits from withholding taxes, tax benefits from employee stock option exercises and research and development credits. The tax provision is lower than the applicable combined federal and state statutory rate primarily due to utilization of foreign tax credits and research and development credits that have been subject to a valuation allowance.
In fiscal 2011, we recorded an income tax provision of $3.8 million. The tax provision was primarily comprised of U.S. state, foreign, and withholding taxes. U.S. federal tax has been offset by foreign tax credits from withholding taxes, and tax benefits from employee stock option exercises. Included in the fiscal 2011 income tax expense is $0.9 million withholding tax related to the repatriation of undistributed earnings from one of our foreign subsidiaries, for which a U.S. foreign tax credit is available. The tax provision is lower than the applicable combined federal and state statutory rate primarily due to utilization of foreign tax credits and tax benefits from employee stock option exercises.
Impact of Currency
Certain of our international licensees pay royalties based on revenues that are reported in a local currency and translated into U.S. dollars at the exchange rate in effect when such revenues are reported by the licensee. To date, the majority of our revenue from international customers has been denominated in U.S. dollars. However, to the extent that sales by our manufacturing licensees are denominated in foreign currencies, royalties we receive on such sales could be subject to fluctuations in currency exchange rates.
Liquidity and Capital Resources
At June 30, 2012, we had cash, cash equivalents and short term investments of $110.9 million, an increase of approximately $1.5 million from June 30, 2011.
At June 30, 2011, we had cash, cash equivalents and short term investments of $109.4 million, an increase of approximately $57.0 million from June 30, 2010. Our cash and cash equivalents increased by $37.6 million, primarily as a result of cash provided from operations and stock option exercises, offset by net purchases of marketable securities. We allowed our revolving credit facility to expire during the first quarter of fiscal 2011 without being renewed.
We ended our fiscal 2010 with cash and cash equivalents and short term investments of $52.4 million, up approximately $7.9 million from June 30, 2009. In fiscal 2010, we primarily generated cash from operations while we used cash in investing and financing activities. We used cash in investing activities to diversify our portfolio. In addition, we used cash in financing activities to repay all our debt, including repaying the outstanding balance of $1.2 million on our revolving credit line in July 2009 and repaying the outstanding balance of $8.8 million of our term loan in April 2010. Since we paid off both the revolving credit line and the term loan in our fiscal 2010, we had no debt obligations as of June 30, 2010.
For complete statements of cash flows for fiscal 2012, 2011 and 2010, see Item 8 “Financial Statements and Supplementary Data.”
Operating Activities
For fiscal 2012, our operating activities used cash of $0.1 million. Our net income in fiscal 2012 included the effects of non-cash charges of $6.5 million from stock compensation expense and $1.6 million in depreciation and amortization of intangible assets. We used cash in operations primarily as a result of a $24.4 million increase in accounts receivable, reflecting timing of customer billings and payments received and a $0.5 million decrease in deferred revenue, reflecting timing of customer payments compared to timing of revenue recognition. These usages of cash were offset by cash generated as a result our positive net income net of the effects of non-cash items described above as well as a $2.0 million increase in accounts payable and accrued liabilities, primarily due to timing of engineering design software license payments and a $0.8 million increase in long term liabilities, primarily reflecting timing of engineering design software license payments.
For fiscal 2011, our operating activities provided net cash of $22.3 million. The cash generated from operating activities included $22.1 million from continuing operations and cash provided from discontinued operations of $0.2 million. The cash generated from operations was primarily a result of our positive net income net of non-cash expenses. Our net income from continuing operations included the effects of non-cash charges of $5.1 million from stock compensation expense and $1.2 million in depreciation and amortization of intangible assets. In addition, cash generated from operating activities of continuing operations increased primarily as a result of $1.2 million decrease in prepaid expenses and other current and long term assets, primarily reflecting the timing of engineering design software license payments as compared to their amortization and a $4.9 million decrease in accounts receivable, reflecting timing of customer billings and payments received. These increases in cash were offset by cash used as a result of (i) a $0.6 million decrease in long term liabilities, primarily reflecting timing of engineering design software license payments, (ii) a $5.6 million decrease in accounts payable and accrued liabilities, primarily reflecting timing of engineering design software license payments as well as timing of income tax payments and (iii) a $1.7 million decrease in deferred revenue, reflecting timing of customer payments compared to timing of revenue recognition.
For fiscal 2010, our operating activities provided net cash of $18.7 million. The cash generated from operating activities included $19.9 million from continuing operations, partially offset by cash used by discontinued operations of $1.2 million. The cash generation from continuing operations was primarily a result of our positive net income, net of non-cash expenses. Our net income from continuing operations included the effects of non-cash charges of $3.6 million from stock compensation expense and $1.6 million in depreciation and amortization of intangible assets and a $0.7 million gain on exchange and sale of investments. In addition, cash generated from operating activities of continuing operations increased primarily as a result of (i) a $4.9 million decrease in prepaid expenses and other current and long term assets reflecting increased utilization of operating assets, and (ii) a $5.6 million increase in accrued liabilities, primarily due to the increased commission and bonus costs relating to higher revenue. These increases in cash were partially offset by cash used as a result of (i) a $3.5 million decrease in long term liabilities, primarily reflecting timing of engineering design software license payments, (ii) a $0.5 million decrease in accounts payable due to the timing of payments and (iii) a $5.1 million increase in accounts receivable, reflecting timing of customer billings and payments received. The negative cash flow from operating activities of discontinued operations was primarily driven by the payment of $1.2 million of cash for restructuring and administrative expenses.
Investing Activities
Net cash provided by investing activities was $3.0 million in fiscal 2012 as a result of proceeds of $4.9 million from the net sales and maturities of available-for-sale securities and $1.9 million used to purchase property, furniture and equipment.
Net cash used in investing activities was $20.5 million in fiscal 2011 as a result of usage of $19.6 million from the net purchases of available-for-sale securities and $0.9 million used to purchase property, furniture and equipment.
Net cash used in investing activities was $21.7 million in fiscal 2010, primarily as a result of usage of $20.2 million from the net purchases of available-for-sale securities and $1.5 million used to purchase property, furniture and equipment.
Financing Activities
Net cash provided by financing activities was $4.2 million in fiscal 2012. This cash generated from financing activities resulted from $3.3 million from stock option exercises and $0.9 million of cash provided by excess tax benefits from options exercised.
Net cash provided by financing activities was $35.7 million in fiscal 2011. This cash generated from financing activities resulted from stock option exercises and purchases under our employee stock purchase plan.
Net cash used in financing activities was $9.8 million in fiscal 2010. Net cash used of $12.8 million related to the full repayment of our debt. This use of cash was partially offset by $3.0 million that we received from stock option exercises and purchases under our employee stock purchase plan.
Liquidity
Our future liquidity and capital requirements could vary significantly from quarter to quarter, depending on numerous factors, including, among others:
•
general economic and political conditions and specific conditions in the markets we address, including the continuing volatility in the technology sector and semiconductor industry, the recent global economic recession, and trends in the semiconductor markets in various geographic regions, including seasonality in sales of consumer products into which our products are incorporated;
•
our ability to generate cash flow from operations;
•
litigation expenses, settlements and judgments;
•
required levels of research and development and other operating costs;
•
changes in our compensation policies;
•
the issuance of restricted stock units and the related cash payments we make for withholding taxes due from employees in future years;
•
the level of exercises of stock options and stock purchases under our employee stock purchase plan;
•
significant payments to suppliers including Computer Aided Design (CAD) system vendors required under long term purchase agreements as these payments vary and can be up to $1.0 million per quarter;
•
the costs associated with capital expenditures.
Our investment policy requires all investments with original maturities at the time of investment of up to 6 months to be rated at least A-1/P-1 by Standard & Poor’s/Moody’s, and specifies higher minimum ratings for investments with longer maturities. We continually monitor the credit risk in our portfolio and seek to mitigate our credit and interest rate exposures. We intend to continue to closely monitor future developments in the credit markets and make appropriate changes to our investment policy as deemed necessary. Based on our ability to liquidate our investment portfolio and our expected operating cash flows, we do not anticipate any liquidity constraints as a result of either the current credit environment or potential investment fair value fluctuations.
We believe that we have sufficient cash to meet our projected operating and capital requirements for the foreseeable future and at least the next twelve months. Our future capital requirements will depend on many factors including our rate of revenue growth, the timing and extent of spending to support development efforts, any expansion of sales and marketing activities and potential future acquisitions.
Contractual Obligations
Our contractual obligations as of June 30, 2012, were as follows:
Payments due by period
(in thousands)
(1)
We lease office facilities and equipment under non-cancelable operating leases including the lease for our headquarter facility in Sunnyvale, California.
(2)
Our purchase obligations of $15.5 million at June 30, 2012 increased from our purchase obligations as of June 30, 2011 by $6.7 million primarily as a result of the company entering into purchase agreements in connection with engineering design software tools. At June 30, 2012, $6.6 million of our purchase obligations relating to engineering design software license contracts are reflected in our accrued liabilities and other long term liabilities. The remaining $8.9 million of purchase obligations includes $7.5 million of obligations which will be completed within one year with the balance to be completed within five years.
(3)
Other long-term liabilities and obligations consist of amounts due to employees under a deferred compensation plan, under which distributions are elected by the employees.
The table above excludes an aggregate liability of $2.2 million for uncertainty in income taxes as we are unable to reasonably estimate the ultimate amount or timing of settlement.
Off-Balance-Sheet Arrangements
As of June 30, 2012, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
New Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board, or FASB, issued updated guidance on goodwill impairment that gives companies the option to perform a qualitative assessment that may allow them to skip the annual two-step test and reduce costs. The updated accounting guidance is effective for fiscal years beginning after December 15, 2011. Early application is permitted. The guidance, which is effective beginning the Company’s fiscal year 2013, will not have an impact on our consolidated financial position, results of operations, or cash flows.
In June 2011, the FASB amended its guidance on the presentation of comprehensive income in financial statements. The amended guidance eliminates the option to present components of other comprehensive income (“OCI”) as part of the statement of changes in equity. Instead, entities can elect to present items of net income and OCI in one continuous statement (a “statement of comprehensive income”), or can elect to present these items in two separate but consecutive statements. The guidance, which is effective beginning the Company’s fiscal year 2013, will not have an impact on the Company’s consolidated financial statements as the guidance only relates to changes in financial statement presentation.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate risk on investments of our excess cash. The primary objective of our investment activities is to preserve capital. To achieve this objective and minimize the exposure due to adverse shifts in interest rates, we invest in high quality short-term maturity commercial paper, municipal bonds, and money market funds operated by reputable financial institutions in the United States. Due to the nature of our investments, we believe that we do not have a material interest rate risk exposure.
We are exposed to fluctuations in currency exchange rates because a substantial portion of our revenue has been, and is expected to continue to be, derived from customers outside the United States. To date, the majority of our revenue from international customers has been denominated in U.S. dollars. Because we cannot predict the amount of non-U.S. dollar denominated revenue earned by us or our licensees, we have not historically attempted to mitigate the effect that currency fluctuations may have on our revenue, and we do not presently intend to do so in the future.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The following table presents selected unaudited quarterly information for fiscal 2012 and 2011 (in thousands except per share data):
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
MIPS Technologies, Inc.
We have audited the accompanying consolidated balance sheets of MIPS Technologies, Inc. as of June 30, 2012 and 2011 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2012. Our audits also included the financial statement schedule listed in the Index at Part IV, Item 15(a)2. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MIPS Technologies, Inc. at June 30, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), MIPS Technologies, Inc.’s internal control over financial reporting as of June 30, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 10, 2012 expressed an adverse opinion thereon.
/s/ Ernst & Young LLP
San Jose, California
September 10, 2012
MIPS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
See accompanying notes.
MIPS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
See accompanying notes.
MIPS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
See accompanying notes.
MIPS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See accompanying notes.
MIPS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1.
Description of Business and Basis of Presentation
MIPS Technologies, Inc. (MIPS) is a leading provider of industry-standard processor architectures and cores for home entertainment, networking, mobile and embedded applications. The MIPS architecture powers some of the world’s most popular electronic products. Our technology is broadly used in products such as digital televisions, set-top boxes, Blu-ray players, broadband customer premises equipment (CPE), WiFi access points and routers, networking infrastructure and portable/mobile communications and entertainment products. Our customers are global semiconductor companies and system original equipment manufacturers (system OEMs). We offer our customers high-performance, easy-to-use functionality at a fraction of the cost and time to market that internal development would require. Our customers pay us license fees for architectural, product and patent rights, as well as royalties based on processor unit shipments.
Basis of Presentation.
The consolidated financial statements include the accounts of our controlled subsidiaries (all of which are wholly owned) after elimination of intercompany transactions and balances.
Note 2.
Summary of Significant Accounting Policies
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.
Discontinued operations. In fiscal 2009, we divested our ABG and therefore, it is no longer part of our ongoing operations. Accordingly, we have separately classified the results of operations, assets and liabilities, and cash flows of the discontinued operations of ABG on our Consolidated Statements of Operations, Consolidated Balance Sheets and Consolidated Statements of Cash Flows, respectively, for all periods presented.
Revenue Recognition.
Royalty Revenue.
We classify all revenue that involves the sale of a licensee’s products as royalty revenue. Royalty revenue is recognized in the quarter in which we receive a report from a licensee detailing the shipments of products incorporating our IP components, which is generally in the quarter following the licensee’s sale of the product to its customer. Royalties are calculated either as a percentage of the revenue received by the seller on sales of such products or on a per unit basis, as specified in our agreement with the licensee. We periodically engage a third party to perform royalty audits of our licensees, and if these audits indicate any over- or under-reported royalties, we account for the results when they are resolved.
License and Contract Revenue.
We generally derive revenue from license fees for the transfer of proven and reusable IP components on currently available technology, including in certain situations, a license to our patents. We enter into licensing agreements that provide licensees the right to incorporate our IP components in their products with terms and conditions that have historically varied by licensee. Each of these types of contracts includes a nonexclusive license for the underlying IP. Fees for contracts for currently available technology include: license fees relating to our IP, including processor designs and patents; maintenance and support, typically for one year; and royalties payable following the sale by our licensees of products incorporating the licensed technology. Generally, our customers pay us a single upfront fee that covers the license and first year maintenance and support. Our deliverables in these arrangements include (a) processor designs and related IP and (b) maintenance and support.
In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-13, “Revenue Arrangements with Multiple Deliverables” (“ASU 2009-13”). The standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable based on the relative selling price. The selling price for each deliverable is based on vendor-specific objective evidence (“VSOE”) if available, third-party evidence (“TPE”) if VSOE is not available, or best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. We adopted the provisions of ASU 2009-13 as of the beginning of fiscal 2011 for licenses that originate or are materially modified customer arrangements originating after July 1, 2010.
The amount of license and contract revenue we recognize in a given period is affected by our judgment as to whether an arrangement includes multiple deliverables and, if so, our determinations surrounding whether VSOE exists. We determine VSOE based on our normal pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range. In circumstances when VSOE does not exist, we then apply judgment with respect to whether we can obtain TPE. Generally, we are not able to determine TPE because our go-to-market strategy typically differs from that of our peers. When we are unable to establish selling price using VSOE or TPE, we use BESP in our allocation of arrangement consideration. In determining BESP, we apply significant judgment as we weigh a variety of factors, based on the facts and circumstances of the arrangement. We typically arrive at BESP for license and contract revenue by considering historical and current evidence of pricing including bundled pricing practices, selling region, license term and number of uses allowed. The adoption of ASU 2009-13 had no material effect to our financial results.
License and contract revenue from currently available technology is recorded as revenue upon the execution of the license agreement when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred and collectability is reasonably assured. We assess the credit worthiness of each customer when a transaction under the agreement occurs. If collectability is not considered reasonably assured, revenue is recognized when the fee is collected. Other than maintenance and support, there is no continuing obligation under these arrangements after delivery of the IP.
Contracts relating to technology under development also can involve delivery of a license to intellectual property, including processor designs. However, in these arrangements we undertake to provide best-efforts engineering services intended to further develop technology that has yet to be developed into a final processor design. Rather than paying an upfront fee to license completed technology, customers in these arrangements pay us milestone fees as we perform the engineering services. If the development work results in completed technology in the form of a processor design and related intellectual property, the customer is granted a license to such completed technology at no additional fee. These contracts typically include the purchase of first year maintenance and support commencing upon the completion of a processor design and related intellectual property for an additional fee, which fee is equal to the renewal rate specified in the arrangement. The licensee is also obligated to pay us royalties following sale of products incorporating the licensed technology. We continue to own the intellectual property that we develop and we retain the fees for engineering services regardless of whether the work performed results in a completed processor design. Fees for engineering services in contracts for technology under development are recognized as revenue as the services are performed; however, we limit the amount of revenue recognized to the aggregate amount received or currently due pursuant to the milestone terms. As engineering activities are best-efforts and at-risk and because the customer must pay an additional fee for the first year of maintenance and support if the activities are successful, the maintenance and support is a contingent deliverable that is not accounted for upfront under contracts relating to technology under development.
When we provide engineering services involving design and development of customized specifications, we recognize revenue on a percentage of completion basis from the signing of the agreement through the completion of all outstanding development obligations. The amount of revenue recognized is based on the total license fees under the license agreement and the percentage of completion is measured by the actual costs incurred to date on the project compared to the total estimated project cost. Revenue is recognized only when collectability is probable. The estimates of project costs are based on the IP specifications and prior experience with the same or similar IP development and are reviewed and updated regularly. Under the percentage of completion method, provisions for estimated losses on uncompleted contracts are recognized in the period in which the likelihood of such losses is determined. Licensing of existing IP that does not require any configuration is recognized upon delivery of the IP and when all other revenue recognition criteria have been met. Direct costs incurred in the design and development of the IP under these arrangements is included in cost of sales.
Maintenance and Support.
Certain arrangements include maintenance and support obligations. Under such arrangements, we provide unspecified upgrades, bug fixes and technical support. No other upgrades, products or other post-contract support are provided. These arrangements are generally renewable annually by the customer. Maintenance and support revenue is recognized at its selling price based on VSOE ratably over the period during which the obligation exists, typically 12 months. The fair value of any maintenance and support obligation is established based on the specified renewal rate for such maintenance and support. Maintenance and support revenue is included in license and contract revenue in the statement of operations and was $2.1 million, $2.5 million and $2.7 million in fiscal 2012, 2011 and 2010, respectively.
Cash and Cash Equivalents and Short-Term Investments. Cash and cash equivalents consist mainly of cash, money market funds, and other highly liquid investments which have original maturities of three months or less at the time of acquisition. Investments with original maturities of greater than 90 days at the time of acquisition but less than one year from the balance sheet date are classified as short-term investments. The fair value of cash and cash equivalents approximates their carrying value at June 30, 2012.
We classify investments in marketable debt and equity securities as available-for-sale securities. Available-for-sale securities are carried at fair value, based on quoted market prices, with the unrealized gains or losses reported, net of tax, in stockholders’ equity as part of accumulated other comprehensive income (loss). We determine the fair values for short-term investments (that principally consist of marketable debt and equity securities) using industry standard pricing services, data providers and other third-party sources and by internally performing valuation analyses (see Note 4). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, both of which are included in interest and other income, net. Realized gains and losses, if any, are recorded on the specific identification method and are included in interest and other income, net.
We review our investments in marketable securities for possible other-than-temporary impairments on a regular basis. In determining if and when a decline in value below the adjusted cost of marketable debt and equity securities is other-than-temporary, we evaluate, on an ongoing basis the market conditions, trends of earnings, financial condition, credit ratings, any underlying collateral and other key measures for our investments. In addition, we consider: 1) our intent to sell the security, 2) if we intend to hold the security, whether it is more likely than not that we will be required to sell the security before recovery of the security’s amortized cost basis and 3) if we intend to hold the security, whether or not we expect the security to recover the entire amortized cost basis. If any loss on investment is believed to be other-than-temporary, a charge will be recognized. Due to the high credit quality and short term nature of our investments, there have been no other-than-temporary impairments recorded to date.
Other Investment. Our investment in a non-marketable security of a private company (included in other assets in the balance sheet) is accounted for by using the cost method. This equity investment is periodically assessed for other-than-temporary impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred.
Currency Translation. The assets and liabilities of international, non-U.S. functional currency entities are translated into U.S. dollars at the rates of exchange in effect at the end of the period. Revenues and expenses are translated using rates that approximate those in effect during the period. Gains and losses from currency translation are included in stockholders’ equity in the consolidated balance sheets. Gains and losses from foreign currency transactions are included in current income.
Cost of Sales. Cost of sales primarily includes labor and overhead related costs for contracts with engineering service requirements, material costs and costs associated with acquired third party software used in our products.
Research and Development Expenses. Costs incurred with respect to internally developed technology and engineering services are included in research and development expenses, as they are not directly related to any particular licensee, license agreement or license fees. Such costs are expensed as incurred.
Equipment, Furniture and Property. Equipment, furniture and property are stated at cost and depreciation is computed using the straight-line method. Useful lives of three years are used for equipment and furniture. Leasehold improvements are depreciated over the shorter of the remaining life of the improvement or the terms of the related leases.
Computer Aided Design Tools. A number of our computer aided design tools, consisting of software used to develop our intellectual property, are now acquired through term licenses typically with terms of three years. These licenses are recorded in other assets and amortized over the term of the license.
Prepaid Expenses and Other Current Assets. Prepaid expenses and other current assets consist principally of amounts paid by us in advance for maintenance contracts on our computer-aided software design tools which typically cover a one-year period over which the cost is amortized, amounts paid by us in advance for our directors and officers and business insurance, which typically covers a one year period over which the cost is amortized, taxes receivable and deferred tax assets.
Accounts Receivable. Accounts receivable includes amounts billed and currently due from customers, net of the allowance for doubtful accounts.
Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. When we become aware of a specific customer’s inability to pay their outstanding obligation for reasons such as deterioration in their operating results or financial position or bankruptcy proceedings, we record a specific reserve for bad debt to reduce their receivable to an amount we reasonably believe is collectible. If the financial condition of specific customers were to change, our estimates of the recoverability of receivables could be further adjusted.
Goodwill. Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired. Goodwill amounts are not amortized, but rather are tested for impairment at least annually or more frequently if there are indicators of impairment present. The Company performs its annual goodwill impairment analysis in the fourth quarter of each fiscal year. The Company evaluates whether goodwill has been impaired at the reporting unit level by first determining whether the estimated fair value of the reporting unit is less than its carrying value and, if so, by determining whether the implied fair value of goodwill within the reporting unit is less than the carrying value. As a result of the divestiture of the ABG, we now operate in one reportable segment and our reporting unit is consistent with the reportable segments identified. As such, the estimated fair values of our single reporting unit was determined by using the Company's market capitalization.
Impairment of Long-Lived Assets including Acquisition Related Intangible Assets. For long-lived assets other than goodwill, we evaluate whether impairment losses have occurred when events and circumstances indicate that these assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. If less, the impairment losses are based on the excess of the carrying amounts of these assets over their respective fair values. Their fair values would then become the new cost basis. Fair value is determined using discounted future cash flows, appraisals or other methods.
Stock-Based Compensation. Stock based compensation cost recognized for the years ended June 30, 2012, 2011 and 2010 includes compensation cost that is based on the grant date fair value for all share-based payments and is being amortized on a straight-line basis over the requisite service period for the entire awards.
The following table shows total stock-based employee compensation expense (see “Note 11 Stockholders’ Equity”) included in the consolidated statement of operations for the years ended June 30, 2012, 2011 and 2010 (in thousands):
We recognize a benefit from stock-based compensation in additional paid-in-capital if an incremental tax benefit is realized after all other tax attributes currently available to us have been utilized. In addition, we have elected to account for the indirect benefits of stock-based compensation (including the research tax credits) through the income statement (continuing operations) rather than through additional paid-in-capital. We have also elected to net deferred tax assets and the associated valuation allowance related to the net operating loss and tax credit carryforwards for the accumulated stock award tax benefits determined for income tax footnote disclosure purposes. We track these stock award attributes separately and will only recognize these attributes through additional paid-in-capital.
For restricted stock units we measure the compensation expense at the grant date and recognize the expense on a straight- line basis over the vesting periods of the awards. Total compensation expense recognized in our financial statements for restricted stock units was $2.2 million, $1.0 million and $64,000 for the years ended June 30, 2012, 2011 and 2010, respectively.
Contingencies and Litigation. From time to time, we are involved in disputes, litigation and other legal actions (“Legal Matters”) in the ordinary course of business. We continually evaluate uncertainties associated with Legal Matters and record charges equal to the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the loss or range of loss can be reasonably estimated. This generally occurs when an agreement in principle has been reached by both parties that include substantive terms, conditions and amounts. We did not incur any charges from Legal Matters for the years ended June 30, 2012, 2011 and 2010.
Income Taxes. We account for income taxes in accordance with ASC 740, “Income Taxes”, which requires that deferred tax assets and liabilities be recognized for the effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. In order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income in those jurisdictions where the deferred tax assets are located. Significant management judgment is required in determining our deferred tax assets and liabilities and valuation allowances for purposes of assessing our ability to realize any future benefit from our net deferred tax assets.
We account for uncertain tax positions using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The Company’s policy is to include interest and penalties related to unrecognized tax benefits, if any, within the provision for taxes in the consolidated statements of operations.
Earnings per Share. We present basic and fully diluted earnings per share. Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of common shares that were outstanding during the period. Diluted earnings per share is computed giving effect to all dilutive potential common shares that were outstanding for any periods presented in these financial statements.
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts):
Comprehensive Income (loss). Total comprehensive income includes net income and other comprehensive income, which for us comprises adjustments from foreign currency translations and unrealized gains or losses on marketable securities.
Total comprehensive income was $14.2 million, $17.9 million and $12.9 million in fiscal 2012, 2011 and 2010, respectively.
The components of accumulated other comprehensive income were as follows (in thousands):
Segment Information. As a result of the divestiture of the ABG, effective May 7, 2009, we operate in one reportable segment.
Reclassifications. Certain reclassifications have been made to prior year balances in order to conform to current year’s presentation of financial information.
Recent Accounting Pronouncements.
In September 2011, the Financial Accounting Standards Board, or FASB, issued updated guidance on goodwill impairment that gives companies the option to perform a qualitative assessment that may allow them to skip the annual two-step test and reduce costs. The updated accounting guidance is effective for fiscal years beginning after December 15, 2011. Early application is permitted. The guidance, which is effective beginning the Company’s fiscal year 2013, will not have an impact on our consolidated financial position, results of operations, or cash flows.
In June 2011, the FASB amended its guidance on the presentation of comprehensive income in financial statements. The amended guidance eliminates the option to present components of other comprehensive income (“OCI”) as part of the statement of changes in equity. Instead, entities can elect to present items of net income and OCI in one continuous statement (a “statement of comprehensive income”), or can elect to present these items in two separate but consecutive statements. The guidance, which is effective beginning the Company’s fiscal year 2013, will not have an impact on the Company’s consolidated financial statements as the guidance only relates to changes in financial statement presentation.
Note 3.
Customer Concentration and Geographic Information
We market and license our technology and patent portfolio to a limited number of customers and generally do not require collateral. Revenue from our largest customers accounted for the following percentages of revenue by year:
We expect that a significant portion of our future revenue will continue to be generated by a limited number of customers. The non-renewal or expiration of contracts with our current customers could adversely affect our near-term future operating results.
A substantial portion of our revenue is derived from licensees based outside the United States. We anticipate that revenue from international licensees will continue to represent a substantial portion of our total revenue. To date, substantially all of the revenue from international customers has been denominated in U.S. dollars. However, to the extent that sales to customers outside the United States are denominated in foreign currencies, royalties received by us on such sales could be subject to fluctuations in currency exchange rates. The relative significance of our international operations exposes us to a number of additional risks including political and economic instability, longer accounts receivable collection periods and greater difficulty in collection of accounts receivable, reduced or limited protection for intellectual property, export license requirements, tariffs and other trade barriers and potentially adverse tax consequences. There can be no assurance that we will be able to sustain revenue derived from international customers or that the foregoing factors will not have a material adverse effect on our business, operating results and financial condition.
Our revenue by geographic area is as follows (in thousands):
Accounts receivable from our largest customers accounted for the following percentages of accounts receivable at June 30:
Our long-lived assets include tangible long-term assets. The following is a summary of our long-lived assets by geographic area (in thousands):
On June 29, 2012, we entered into the Broadcom License. As per the terms of the agreement, MIPS granted to Broadcom and its affiliates a worldwide, fully paid-up, non-exclusive license, without the right to sub-license, under patents owned or licensable by MIPS for the purpose of making, having made, using, selling, offering for sale and importing Broadcom products. In addition, MIPS granted Broadcom a multi-year license extension, including some pre-paid support and maintenance, to existing architecture and cores licenses for our products. The Broadcom License expires upon the expiration of the last to expire of the patents being licensed to Broadcom under the Broadcom License. The license fee associated with the license agreement was $26.5 million. In connection with this agreement, MIPS recognized $26.3 million of contract and license revenue in fiscal 2012 and deferred $0.2 million in pre-paid maintenance to be recognized in future periods.
Note 4. Fair Value
We invest in short-term investments which principally consist of marketable debt and equity securities. Our financial assets are measured and recorded at fair value, except for an equity investment in a privately-held company. This equity investment is accounted for under the cost method of accounting and is periodically assessed for other-than-temporary impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. Our non-financial assets, such as goodwill, intangible assets, and equipment, furniture and property are recorded at cost and are assessed for impairment when an event or circumstance indicates that a decline in value may have occurred or at least annually in the case of goodwill.
Fair Value Hierarchy
The measurements of fair value were established based on a fair value hierarchy that prioritizes the utilized inputs. This hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. The guidance for fair value measurements requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:
Level 1 - Quoted (unadjusted) prices in active markets for identical assets or liabilities.
Our Level 1 assets consist of U.S. Treasury bills, marketable equity securities and money market funds.
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Our Level 2 assets consist of time deposits, commercial paper, corporate bonds and government agency bonds.
Level 3 - Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.
We had no Level 3 assets as of June 30, 2012 and 2011.
On a recurring basis, the Company measures the fair value of certain of its assets and liabilities, which include cash equivalents, short-term investments and non-qualified deferred compensation plan assets. The Company’s non-qualified deferred compensation plan assets consist of money market and mutual funds invested in domestic and international marketable securities that are directly observable in active markets. The deferred compensation plan assets, which were all Level 1 assets, recorded as of June 30, 2012 and 2011 was $1.3 million.
The following table presents our cash equivalents and short-term investments by the above pricing levels as of June 30, 2012 (in thousands):
(1)
At June 30, 2012, $65.9 million of money market funds were included in the cash and cash equivalents in our condensed consolidated balance sheet.
Available-for-sale securities, all of which were classified as short-term investments, held by the Company as of June 30, 2012 were as follows (in thousands):
The following table presents our cash equivalents and short-term investments by the above pricing levels as of June 30, 2011 (in thousands):
Available-for-sale securities, all of which were classified as short-term investments, held by the Company as of June 30, 2011 were as follows (in thousands):
All contractual maturities of the Company’s available-for-sale marketable securities at June 30, 2012 were within one year. We review our investments to identify and evaluate investments that have an indication of possible other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near term prospects of the investee, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. We maintain an investment portfolio of various holdings, types and maturities. We do not use derivative financial instruments. We place our cash investments in instruments that meet high credit quality standards, as specified in our investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument. As of June 30, 2012 we had insignificant unrealized loss positions of $13,000 on our investments in corporate bonds. The gross unrealized losses related to these investments were due to changes in interest rates. We have determined that the gross unrealized losses on these investments at June 30, 2012 are temporary in nature.
Note 5.
Goodwill and Purchased Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. Our goodwill balance related to our continuing operations of $565,000 is primarily attributable to the First Silicon Solutions, Inc. acquisition in 2006 and did not change in 2011 and 2012.
In the fourth quarter of 2012, 2011 and 2010, we conducted our annual impairment test of goodwill. The outcome of the Company’s goodwill impairment analysis in 2012, 2011 and 2010 was that no impairment was indicated.
The balances of our acquisition related intangible assets, all relating to developed and core technology, and purchased software licenses were as follows (in thousands):
Developed and core technology is being amortized over its useful life of 10 years. Purchased software licenses are being amortized over their useful lives of 3 to 6 years.
Estimated future amortization expense related to purchased intangible assets is as follows:
Note 6. Discontinued Operations
On May 7, 2009, we entered into a simultaneous sale and close agreement with Synopsys, Inc. (Synopsys) to sell our Analog Business Group (ABG) for $22 million in cash. As a result of the sale, the assets and liabilities related to ABG are presented as assets and liabilities of discontinued operations, respectively, and the results of ABG’s operations are classified as discontinued operations on our statements of operations for all periods presented.
In connection with the sale of our ABG to Synopsys, we agreed to retain responsibility for certain actual or contingent liabilities and agreed to indemnify Synopsys against certain breaches of representations and warranties and other liabilities. Our potential liability to Synopsys is subject to certain limitations, including limitations on the time period during which claims may be asserted and the amounts for which we are liable. To date, we have not incurred any losses in respect of claims asserted by Synopsys in connection with this transaction. However, there can be no assurance that we will not incur future liabilities to Synopsys in connection with this transaction, or that the amount of such liabilities will not be material. In May 2010, Synopsys delivered a letter to MIPS asserting breaches of certain representations and warranties and requesting compensation in an aggregate amount of approximately $3.7 million. We responded to Synopsys in June 2010 and denied all claims set forth in the May 2010 letter. In July 2010, Synopsys responded to our letter. General discussions between the parties have occurred and additional documents have been exchanged. However, there can be no assurance that the current dispute can be resolved on terms that are acceptable to us.
In fiscal 2011, we recorded a gain from discontinued operations of $0.2 million as a result of receiving a withholding tax refund from discontinued operations. In fiscal 2010, we recorded a gain from discontinued operations of $0.2 million, primarily as a result of receiving a withholding tax refund of approximately $0.3 million from discontinued operations. This gain was partially offset by administrative costs for closure of foreign subsidiaries. The payments and receipts relating to discontinued operations have been reflected as cash activities from discontinued operations in our consolidated statement of cash flows for all periods presented.
At June 30, 2012 and June 30, 2011, we had no assets or liabilities from discontinued operations of ABG.
Note 7.
Restructuring
There was no restructuring activity in fiscal 2012 and 2011.
The 2010 restructuring expense of $0.7 million, all of which was recorded in fiscal 2010, was primarily related to terminations of headcount in the US and was primarily designed to reduce spending in general and administrative functions and to reallocate spending to other functions. In fiscal 2011, we completed all the payments of the $0.7 million restructuring liability that we incurred in fiscal 2010, which related to severance and benefit costs.
Note 8.
Other Long-Term Assets
The components of other long-term assets are as follows (in thousands):
There was no impairment loss in 2012, 2011 and 2010.
Note 9. Accrued Liabilities and Other Long-Term Liabilities
The components of accrued liabilities are as follows (in thousands):
The components of long-term liabilities are as follows (in thousands):
Note 10. Commitments
Purchase Commitments with Suppliers. The Company has agreements with suppliers and other parties to purchase goods, services and long-lived assets. Unconditional obligations under these agreements for each of the five years from fiscal 2013 through 2017 were approximately $7.5 million, $0.5 million, $0.4 million, $0.3 million and $0.2 million, respectively. These commitments are exclusive of purchased software licenses and engineering design software license contracts of $6.6 million that are reflected in the Company’s accrued liabilities (see Note 9). In fiscal 2011, we entered into a software license agreement where we may be obligated to pay an additional $0.2 million on an annual basis, depending upon the volume of future usage by end users from fiscal 2013 to 2017.
Operating Lease Commitments. On February 27, 2009, the Company entered into a new operating lease to move our headquarters to Sunnyvale, California for an initial lease period of seven years commencing May 29, 2009, with an option to renew for additional five years. Payments due to the landlord commence in the seventh month of our occupancy of the space, and the lease includes annual increases of three percent per year plus certain operating expenses. We account for lease expense based on a straight-line basis of total amounts due over the term of the lease. At June 30, 2012, the Company’s future minimum payments for operating lease obligations are as follows:
Rent expense under non-cancelable operating leases was approximately $1.3 million in fiscal 2012, 2011and 2010.
Note 11.
Stockholders’ Equity
Preferred Stock. There are 50,000,000 shares of preferred stock, par value $0.001 per share authorized for issuance. No shares of preferred stock have been issued.
1998 Long-Term Incentive Plan. The 1998 Long-Term Incentive Plan was adopted by our board of directors and approved by our sole stockholder in May 1998 and was amended by our board of directors in August 1998 and May 1999 with the approval of our stockholders in October 1999 and was amended by our board of directors in January 2003. In August 2007 our board of directors adopted the 1998 Long-Term Incentive Plan, as Amended and Restated (the 1998 Plan), which was approved by stockholders in December 2007. The Compensation and Nominating Committee of our board of directors administers the 1998 Plan. The 1998 Plan authorizes the issuance of various forms of stock-based awards including incentive and non-statutory stock options, stock appreciation rights, restricted stock, stock units, bonus stock and other stock related awards to officers and other key employees, consultants and members of the board of directors. Stock options and stock appreciation rights may not be granted with an exercise price less than the fair value on the date of grant; the board of directors determines the prices of other stock awards.
Options awarded under the 1998 Plan prior to July 2005 expire ten years from the date of grant unless expiration occurs earlier in connection with termination of employment. Initial stock option grants awarded prior to July 2005 generally vest over a 50-month period, with 24% of the total shares vesting on the first anniversary of the date of grant and 2% of the total shares vesting each month thereafter over a 38-month period. Annual stock option grants awarded prior to fiscal 2002 vest over a 48-month period, with approximately 8.33% vesting each month over a 12-month period beginning on the third anniversary of the date of grant. Beginning in July 2005, options expire seven years from the date of grant unless expiration occurs earlier in connection with termination of employment. Under the vesting schedule employed since 2005, initial stock option grants vest over a 36-month period with one-third of the total shares vesting on the first anniversary of the date of grant and approximately 2.78% of the total shares vesting each month thereafter over the remaining 24-month period. Annual renewal stock option grants vest over a 36-month period from the date of grant with approximately 2.78% of the total shares vesting each month. Vested options granted under the 1998 Plan to optionees other than executives generally may be exercised for three months after termination of the optionee’s service to us, other than for termination due to death or disability, in which case the vested options generally may be exercised up to 12 months following the date of death or termination of service, or termination for cause, in which case the option may not be exercised following termination. Options granted to executives generally may be exercised for 12 months following the date of termination. The number of shares subject to any award, the exercise price and the number of shares issuable under this plan are subject to adjustments in the event of a change relating to our capital structure.
In connection with the amendment and restatement of the 1998 Plan in 2007, we terminated our Directors’ Stock Option Plan and 2002 Non-qualified Stock Option Plan (the terminated plans), and provided that if any shares subject to an award previously granted under the terminated plans are forfeited, expire or otherwise terminate without issuance or any award is settled for cash or otherwise does not result in the issuance of all or a portion of such shares, such unissued shares shall again become available under the 1998 Plan.
At June 30, 2012, a total of approximately 11.7 million shares of common stock were reserved for issuance upon the exercise of outstanding awards (including stock options, restricted stock units and other awards) under the 1998 Plan and 4.1 million shares were available for future awards.
Directors’ Stock Option Plan. The Directors’ Stock Option Plan (the Director Plan) was adopted by our board of directors and our sole stockholder in July 1998, and was amended by our board of directors in May 1999 and in January 2002. The Compensation and Nominating Committee of our board of directors administers the Director Plan.
Under the Director Plan, all stock options are granted at an exercise price equal to the fair market value of our common stock on the date of grant. Options expire ten years from the date of grant. The vesting schedule for both the initial and annual stock option grants were adjusted, effective immediately in January 2002, such that, initial stock option grants vest over a 36-month period with approximately 2.78% of the total shares vesting each month; annual grants are fully vested on the date of grant. The change to the vesting schedule of the initial grant was designed to align the vesting period with the three-year period for which a director holds office. The change to the vesting schedule of the annual grant was designed to increase the independence of the board of directors by not making compensation contingent upon continued service. Vested options granted under the Director Plan generally may be exercised for three months after termination of the director’s service to us, except in the case of death or disability, in which case the options generally may be exercised up to six months following the date of death or termination of service. The number of shares subject to any award, the exercise price and the number of shares issuable under this plan are subject to adjustments in the event of a change relating to our capital structure.
Effective February 2010, the board of directors approved changes to the director's compensation program for non-employee directors. Based on the changes, upon a non-employee director's election or appointment to the board, he or she will receive an equity award of $70,000 in restricted stock units that vest 50% after one year and 50% after two years. In addition, each non-employee director will receive an annual renewal equity award of $35,000 in restricted stock units that vest 100% after one year.
In connection with the amendment and restatement of the 1998 Plan in 2007, we terminated the Directors’ Stock Option Plan, although it remains in place with respect to outstanding awards. As of June 30, 2012, a total of 190,000 shares of common stock were reserved for awards outstanding under the Directors’ Plan, and no shares were available for future awards.
Employee Stock Purchase Plan. The Employee Stock Purchase Plan was adopted by our board of directors and approved by our sole stockholder in May 1998, and was amended by our board of directors in August 1998 and May 1999, with the approval of our stockholders in October 1999, amended in January 2000 and September 2005 by our board of directors. In August 2007 our board of directors adopted the Amended and Restated Employee Stock Purchase Plan (the Purchase Plan), which was approved by stockholders in December 2007. The Compensation and Nominating Committee of our board of directors administers the Purchase Plan. The purpose of the Purchase Plan is to provide our employees who participate in the Purchase Plan with an opportunity to purchase our common stock through payroll deductions. Under this Purchase Plan eligible employees may purchase stock at 85% of the lower of the fair market value of the common stock (a) on the date of commencement of the offering period or (b) the applicable exercise date within such offering period. A six (6) month offering period commences every six months, generally at May 1 and November 1 of each year. For offering periods that commenced prior to September 2005, the offering period was a 24-month period divided into four 6-month periods. Purchases are limited to ten percent of each employee’s eligible compensation. The number of shares subject to any award, the exercise price and the number of shares issuable under this plan are subject to adjustments in the event of a change relating to our capital structure.
At June 30, 2012, 3.9 million shares had been issued under the Purchase Plan and 1.6 million shares were available for future issuance.
Supplemental Stock Purchase Plan. The Supplemental Stock Purchase Plan (the Supplemental Purchase Plan), formerly known as the Non-U.S. Purchase Plan, was adopted by our board of directors in July 1998 and amended by the board in May 1999 and October 2005. The Compensation Committee of our board of directors administers the Supplemental Plan. The purpose of the Supplemental Purchase Plan is to provide our employees and consultants who do not provide services in the United States and who participate in the Supplemental Purchase Plan with an opportunity to purchase our common stock through periodic contributions at the same discount and subject to the same general rules as the Purchase Plan. The maximum number of shares reserved under the Supplemental Plan is 60,000. At June 30, 2012, 37,945 shares have been issued under the Supplemental Purchase Plan and 22,055 shares were reserved for future issuance.
Restricted Stock Units. Restricted stock units are awards that can be granted to any employee, director or consultant which obligates the Company to issue a specific number of shares of the Company’s common stock in the future if the vesting terms and conditions are satisfied. These awards have a service condition, generally a service period of three years. The purchase price for the shares is $0.00 per share. Through December 6, 2011, restricted stock unit grants were counted against shares available shares from our 1998 Plan at a ratio of 2.07 to 1. Restricted stock unit vesting is based on continued service and generally vests over a three-year period from the date of grant, with one-third of the shares vesting on each anniversary of the grant date. From December 7, 2011 the restricted stock unit grants are counted against shares available shares from our amended and restated 1998 Plan at a ratio of 1.39 to 1.
As of June 30, 2012, 5.7 million shares were available for future awards under all plans.
Activity under our Stock Option Plans is summarized as follows:
The weighted-average grant date fair value of options granted in 2012 was $2.73.
Aggregate intrinsic value represents the excess of our closing stock price on the last trading day of the period over the exercise price multiplied by the number of options outstanding or exercisable. The intrinsic value of options exercised represents the excess of our closing stock price on the exercise date over the exercise price multiplied by the number of options exercised. Total intrinsic value of options at time of exercise was $1.4 million, $39.2 million and $0.9 million for 2012, 2011 and 2010, respectively.
Non-vested restricted stock unit award activity for the year ended June 30, 2012 is summarized as follows:
For the years ended June 30, 2012 and 2011, we recognized $2.2 million and $1.0 million of compensation expense from restricted stock units granted under our equity incentive plans. As of June 30, 2012 and 2011, we have $7.8 million and $3.6 million of unrecognized compensation costs from restricted stock units that will be recognized over a weighted-average period of 2.1 and 2.2 years. For the years ended June 30, 2012 and 2011, there were 177,604 and 35,109 restricted stock units vested. The total fair value of shares vested for the years ended June 30, 2012 and 2011, was $0.9 million and $0.4 million.
Grant Date Fair Values. The weighted-average fair value has been estimated at the date of grant using a Black-Scholes option-pricing model. For stock options, we estimated volatility by considering the historical stock volatility. As a result of the adjustment to our term and vesting schedule in July 2005 for stock options awarded under our 1998 and 2002 Plans, we do not believe that we are able to rely on our historical exercise and post-vested termination activity to provide relevant data for estimating our expected term for use in determining the fair value of these options. Therefore, we have opted to use the simplified method for estimating our expected term equal to the midpoint between the vesting period and the contractual term.
The following are significant weighted average assumptions used for estimating the fair value of the activity under our stock option plans:
Note 12.
Income Taxes
Income before income taxes consisted of the following for continuing operations (in thousands):
The provision for income taxes consists of the following (in thousands):
The provision for income taxes differs from the amount computed by applying the federal statutory income tax rate to income before taxes from continuing operations as follows (in thousands):
The components of the net deferred income tax asset are as follows (in thousands):
We have provided a partial valuation allowance against our U.S. net deferred tax assets due to unfavorable recent market trends, difficulty in forecasting future results, and belief that we cannot rely on projections of future taxable income to realize deferred tax assets. The remaining portion of our U.S. net deferred tax assets that have no offsetting valuation allowance is recognized solely as an offset to liabilities recorded with respect to certain unrecognized tax benefits. Net of these liabilities, we have not recognized any U.S. deferred tax assets as we do not believe such amounts are more likely than not to be realized. The valuation allowance decreased by $3.1 million in fiscal 2012 and decreased by $6.2 million in fiscal 2011.
There are federal research credit carryforwards of approximately $6.7 million that will expire beginning 2019 through 2032, if not utilized. We also have state research tax credit carryforwards of approximately $8.2 million at June 30, 2012, that have no expiration date. A total of $5.0 million of the federal research credit carryforwards and $5.7 million of the state research credit carryforwards are related to excess tax benefits as a result of stock option exercises, and therefore, will be recorded to additional paid-in-capital in the period in which they are realized. We also have federal foreign tax credit carryforwards of approximately $9.6 million, which expire beginning in 2015 through 2021, if not utilized. A total of $9.4 million of the federal foreign tax credit carryforwards are related to excess tax benefits as a result of stock option exercises, and therefore, will be recorded to additional paid-in-capital in the period in which they are realized.
As of June 30, 2012, principally as a result of the disposition of ABG during fiscal 2009, the Company had net operating loss carryforwards of approximately $90.3 million for state income tax reporting purposes, which expire beginning in 2020 through 2031, if not utilized. A total of $12.2 million of the state net operating loss carryforwards are related to excess tax benefits as a result of stock option exercises, and therefore, will be recorded to additional paid-in-capital in the period in which they are realized.
Utilization of federal and state tax credits may be subject to substantial limitation due to the ownership changes provided by the Internal Revenue Code and similar state provisions. The annual limitation may result in expiration of tax credits before utilization.
No provision of current U.S. income taxes has been provided for undistributed earnings of our non-U.S. subsidiaries because these earnings are either considered to be indefinitely reinvested, or have been previously taxed in the U.S. If these earnings were to be repatriated, the Company would be subject to additional U.S. income taxes (subject to adjustments for foreign tax credits). It is not practicable to determine the income tax liability that might be incurred if these earnings were to be repatriated.
The total amount of gross unrecognized tax benefits was $4.3 million as of June 30, 2010, $4.6 million as of June 30, 2011, and $5.2 million as of June 30, 2012. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $1.1 million, $1.2 million, and $1.4 million as of June 30, 2010, June 30, 2011, and June 30, 2012, respectively. A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits are as follows (in thousands, prior year reconciliation to exclude discontinued operations for comparative purpose):
We recognize interest and penalties related to uncertain tax positions as a component of provision for income taxes. Accrued interest and penalties recognized during the periods ended June 30, 2010, June 30, 2011 and June 30, 2012, was ($0.1) million, $0.1 million, and $0.1 million, respectively. As of June 30, 2011 and June 30, 2012, the total accrued penalties and interest recognized in the statement of financial positions was $0.3 million and $0.4 million, respectively.
Although we file U.S. federal, U.S. state, and foreign tax returns, our major tax jurisdiction is the United States. Our fiscal 2008 and subsequent tax years remain subject to examination by the IRS for U.S. federal tax purposes. The Company does not expect a material change to its unrecognized tax benefits in the next 12 months.
Note 13.
Contingencies
Litigation. From time to time, we receive communications from third parties asserting patent or other rights allegedly covering our products and technologies. Based upon our evaluation, we may take no action or we may seek to obtain a license, redesign an accused product or technology, initiate a formal proceeding with the appropriate agency (e.g., the U.S. Patent and Trademark Office) and/or initiate litigation. There can be no assurance in any given case that a license will be available on terms we consider reasonable or that litigation can be avoided if we desire to do so. If litigation does ensue, the adverse third party will likely seek damages (potentially including treble damages) and may seek an injunction against the sale of our products that incorporate allegedly infringing intellectual property or against the operation of our business as presently conducted, which could result in our having to stop the sale of some of our products or to increase the costs of selling some of our products. Such lawsuits could also damage our reputation. The award of damages, including material royalty payments, or the entry of an injunction against the sale of some or all of our products, could have a material adverse affect on us. Even if we were to initiate litigation, such action could be extremely expensive and time-consuming and could have a material adverse effect on us. We cannot assure you that litigation related to our intellectual property rights or the intellectual property rights of others can always be avoided or successfully concluded.
We have been notified by ten licensees of a potential infringement claim by Biax Corporation asserting two US patents, allegedly involving our products. A number of these licensees have requested indemnification from us. Given the nature of these claims, we cannot yet determine the amount or a reasonable range of potential loss, if any.
In connection with the sale of our Analog Business Group to Synopsys, Inc. (Synopsys) in May 2009, we agreed to retain responsibility for certain actual or contingent liabilities and agreed to indemnify Synopsys against certain breaches of representations and warranties and other liabilities. See Note 6 “Discontinued Operations” for further details.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Exchange Act.
Based on our evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures, at a reasonable assurance level, were not effective as of June 30, 2012 due to the existence of the material weakness in internal control over financial reporting discussed under “Management’s Report on Internal Control over Financial Reporting” below.
(b) Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design safeguards to reduce, though not eliminate, this risk. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework set forth in “Internal Control - Integrated Framework,” our management identified the following material weakness in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
During the quarter ended June 30, 2012, management determined that the Company did not maintain effective controls over the process of determining and reporting of the provision for income taxes. Specifically, controls relating to the oversight and review of the Company’s calculation of its income tax provision for completeness and accuracy by qualified personnel were ineffective. As a result of lack of oversight and review, errors were identified by our independent auditors affecting income tax expense for the year ended June 30, 2012 and deferred tax assets and liabilities as of June 30, 2012. These errors were corrected in the consolidated financial statements as of and for the year ended June 30, 2012.
As a result of the material weakness described above, management believes that, as of June 30, 2012, our internal control over financial reporting was not effective based on the criteria in Internal Control - Integrated Framework.
The effectiveness of our internal control over financial reporting as of June 30, 2012, has been audited by Ernst & Young LLP, an independent registered public accounting firm, who expressed an adverse opinion on the effectiveness of internal controls over financial reporting as stated in their report which is included below.
Sandeep Vij
William Slater
President and Chief Executive Officer,
Vice President and Chief Financial Officer,
MIPS Technologies, Inc.
MIPS Technologies, Inc.
(c) Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
MIPS Technologies, Inc.
We have audited MIPS Technologies, Inc.’s internal control over financial reporting as of June 30, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). MIPS Technologies, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included as Management’s Report on Internal Control over Financial Reporting in Item 9A(b) above. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. Management has identified a material weakness in controls related to the Company’s process of determining and reporting the provision for income taxes. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of MIPS Technologies, Inc. as of June 30, 2012 and 2011, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2012. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the June 30, 2012 consolidated financial statements, and this report does not affect our report dated September 10, 2012, which expressed an unqualified opinion on those financial statements.
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, MIPS Technologies, Inc. has not maintained effective internal control over financial reporting as of June 30, 2012, based on the COSO criteria.
/s/ Ernst & Young LLP
San Jose, California
September 10, 2012
(d) Remediation Plan
We have an on-going process of analyzing and improving our internal controls, including those related to material weakness identified by management. Beginning in the first quarter of 2013, we expect to develop and implement a plan to address the material weakness discussed above and to improve our internal control over financial reporting: With regard to the process of accounting for income taxes, our remediation plan is expected to include consideration and implementation of additional review of tax provision and reconciliations by qualified personnel experienced in application of tax rules and regulations and accounting for income taxes.
Changes in Internal Control over Financial Reporting
Other than the material weakness in our controls over the determination and reporting of the provision for income taxes described in Item 9A(b) above, there were no changes in the Company’s internal control over the financial reporting during the fourth quarter of 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART III
Item 10.
Item 10.
Directors, and Executive Officers and Corporate Governance.
Information concerning our directors is incorporated by reference to the information in the section entitled “Proposal No. 1-Election of Directors” in our Proxy Statement for the 2012 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of our fiscal year ended June 30, 2012.
Information concerning our executive officers is in Item 1 of this Annual Report on Form 10-K.
Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated by reference to information in the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for the 2012 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of our fiscal year ended June 30, 2012.
We have adopted a code of business conduct that applies to all of our directors, officers and employees and a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer, and Controller. A copy of this code is located on the Company’s website at www.mips.com.
Item 11.
Item 11.
Executive Compensation
Information regarding executive compensation is incorporated by reference to the information in the section entitled “Executive Compensation” in our Proxy Statement for the 2012 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of our fiscal year ended June 30, 2012.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding security ownership of certain beneficial owners and management is incorporated by reference to the information in the section entitled “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement for the 2012 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of our fiscal year ended June 30, 2012.
Equity Compensation Plan Information
We maintain the 1998 Long-Term Incentive Plan, as Amended and Restated, Directors’ Stock Option Plan, and Employee Stock Purchase Plan, all of which were approved by our stockholders, and the 2002 Non-Qualified Stock Option Plan and the Supplemental Stock Purchase Plan, neither of which was subject to stockholder approval. The features of these plans are described in Note 11 of our Notes to Consolidated Financial Statements. In connection with the adoption of the 1998 Long-Term Incentive Plan, as Amended and Restated in 2007, we terminated the Directors’ Stock Option Plan and the 2002 Non-Qualified Stock Option Plan, except with respect to awards remaining outstanding under those plans. The following table presents information about these plans as of June 30, 2012.
(1)
Excludes purchase rights currently accruing under the Employee Stock Purchase Plan and the Supplemental Stock Purchase Plan.
(2)
These shares include 4,089,936 shares that remain available under the 1998 Long-Term Incentive Plan, as Amended and Restated and 1,608,300 shares that remain available under the Employee Stock Purchase Plan. The shares available under the 1998 Long-Term Incentive Plan, as Amended and Restated, may be issued as stock-based awards including incentive and non-statutory stock options, stock appreciation rights, restricted stock, stock units, bonus stock and other stock related awards.
(3)
These shares remain available under the Supplemental Stock Purchase Plan.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Information regarding certain relationships and related transactions is incorporated by reference to the information in the section entitled “Certain Relationships and Related Transactions” in our Proxy Statement for the 2012 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of our fiscal year ended June 30, 2012.
Item 14.
Item 14.
Principal Accountant Fees and Services.
Information regarding principal accountant fees and services is incorporated by reference to the information in the section entitled “Fees Paid to the Independent Registered Public Accounting Firm” in our Proxy Statement for the 2012 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of our fiscal year ended June 30, 2012.
PART IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules
(a)
The following documents are filed as a part of this Report:
1.
Financial Statements. The following consolidated financial statements and supplementary information and Report of Independent Auditors are included in Part II of this Report:
Page
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets-As of June 30, 2012 and 2011
Consolidated Statements of Operations-Years Ended June 30, 2012, 2011 and 2010
Consolidated Statements of Stockholders’ Equity-Years Ended June 30, 2012, 2011 and 2010
Consolidated Statements of Cash Flows-Years Ended June 30, 2012, 2011 and 2010
Notes to Consolidated Financial Statements
2.
Financial Statement Schedule:
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Deductions represent uncollectible accounts written off, net of recoveries.
3.
Exhibits. The following Exhibits are filed as part of, or incorporated by reference into, this Report:
Exhibit No.
List of Exhibits
3.1
Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed on November 14, 2003).
3.2
Amended and Restated By-Laws (incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed on August 18, 2010).
4.1
Amended and Restated Preferred Stock Rights Agreement, as amended (incorporated herein by reference to Exhibit 10.11.3 to the Company’s Form 8-A12G/A filed on November 18, 2003).
10.1
The Amended and Restated Separation Agreement between the Company and Silicon Graphics, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year ended June 30, 1999).
10.2
The Corporate Agreement between the Company and Silicon Graphics, Inc. (incorporated herein by reference to Exhibit 10.2 to the Registration Statement on Form S-1, Registration No. 333-73071 (the “Registration Statement”)).
10.3
The Management Services Agreement between the Company and Silicon Graphics, Inc. (incorporated herein by reference to Exhibit 10.3 to the Registration Statement).
10.4
The Tax Sharing Agreement between the Company and Silicon Graphics, Inc. (incorporated herein by reference to Exhibit 10.4 to the Registration Statement).
Exhibit No.
List of Exhibits
10.5
The Technology Agreement between the Company and Silicon Graphics, Inc. (incorporated herein by reference to Exhibit 10.5 to the Registration Statement).
10.6
The Trademark Agreement between the Company and Silicon Graphics, Inc. (incorporated herein by reference to Exhibit 10.6 to the Registration Statement).
10.7
The Tax indemnification Agreement between the Company and Silicon Graphics, Inc. (incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended June 30, 2000).
10.8*
The 1998 Long-Term Incentive Plan, as amended and restated (incorporated herein by reference to Exhibit 99.01 to the Company’s Form S-8 filed on May 10, 2012).
10.9*
The Employee Stock Purchase Plan, as amended (incorporated herein by reference to Exhibit 4.03 to the Company’s Current Report on Form 8-K filed on January 11, 2008).
10.10*
Directors’ Stock Option Plan, as amended (incorporated herein by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).
10.11*
Nonqualified Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2000).
10.12*
2002 Non-Qualified Stock Option Plan (incorporated herein by reference to Exhibit 4.1 to the Company’s Form S-8 filed on April 29, 2002).
10.13*
Form of Award Document, as amended for Stock Option Grant to Director/Officer under the 1998 Long-Term Incentive Plan comprised of Stock Option Agreement and Exercise Notice (incorporated herein by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2010).
10.14*
Form of Award Document, as amended for Stock Option Grant to Employee under the 1998 Long-Term Incentive Plan comprised of Stock Option Agreement and Exercise Notice (incorporated herein by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2010).
10.15*
Form of Award Document for Restricted Stock Purchase Agreement under the 1998 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2004).
Exhibit No.
List of Exhibits
10.16*
Form of Award Document for Director Stock Option Agreement (Initial Grant) under the Directors’ Stock Option Plan (incorporated herein by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2004).
10.17*
Form of Award Document for Director Stock Option Agreement (Renewal Grant) under the Directors’ Stock Option Plan (incorporated herein by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2004).
10.18*
Form of Award Document, as amended for Stock Option Grant to International Employee under the 1998 Long-Term Incentive Plan comprised of Stock Option Agreement and Exercise Notice (incorporated herein by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2010).
10.19*
Form of Stock Unit Award Agreement (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 18, 2009).
10.20*
Form of Stock Unit Award Agreement for Members of the Board of Directors (incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K filed on February 12, 2010).
10.21*
Form of Stock Unit Award Agreement for Employees Outside the U.S. (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2010).
10.22* Form of Stock Unit Award Agreement for Consultants (incorporated herein by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2011).
10.23*
Form of Stock Unit Award Agreement for Consultants Outside the U.S. (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).
10.24
Form of Indemnification Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 31, 2005).
10.25*
Change in Control Agreement (incorporated herein by reference to Exhibit 99.03 to the Company’s Current Report on Form 8-K filed on October 16, 2007).
10.26*
Amendment to Change in Control Agreement (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on February 6, 2009).
10.27
Industrial Lease dated February 27, 2009 (incorporated herein by reference to Exhibit 99.01 to the Company’s Current Report on Form 8-K filed on March 4, 2009).
Exhibit No.
List of Exhibits
10.28*
Offer Letter dated December 22, 2009 to Sandeep Vij (incorporated herein by reference to Exhibit 99.02 to the Company's Form 8-K filed on January 25, 2010).
10.29*
Offer Letter dated March 10, 2010 to Ravikrishna Cherukuri, Vice President of Engineering (incorporated herein by reference to Exhibit 10.3 to the Company’s Form 10-Q filed on May 6, 2010).
10.30*
Letter Agreement and Transition Agreement between MIPS Technologies, Inc. and Sandy Creighton (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2010).
10.31*
Consulting Agreement between MIPS Technologies, Inc. and Sandy Creighton (incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2010).
10.32*
Performance-Based Bonus Plan for Executives (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on September 9, 2011).
10.33*
Offer Letter for Frederick Weber dated November 11, 2010 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 12, 2010).
10.34* Letter Agreement regarding the Special Bonus Plan for the Vice President of Worldwide Sales (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 17, 2011).
10.35*
Transition Agreement between MIPS Technologies, Inc. and Arthur Swift (incorporated herein by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).
10.36*
Consulting Agreement between MIPS Technologies, Inc. and Arthur Swift (incorporated herein by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).
10.37
Settlement Agreement, dated October 21, 2011, between MIPS Technologies, Inc. and Starboard (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on October 24, 2011).
10.38*
Offer Letter for William Slater, dated October 25, 2011 (incorporated herein by reference to Exhibit 10.01 to the Company's Current Report on Form 8-K filed on October 27, 2011).
10.39*
Transition and Consulting Agreement, dated November 9, 2011, between MIPS Technologies, Inc. and Maury Austin (incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2011).
10.40**
License Agreement between MIPS Technologies, Inc. and Broadcom Corporation, dated June 29, 2012.
Exhibit No.
List of Exhibits
21.1
Subsidiaries of the Registrant.
23.1
Consent of Independent Registered Public Accounting Firm.
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*
Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(b) of said form.
**
Portions of this exhibit have been omitted pending a determination by the Securities and Exchange Commission as to whether these portions should be granted confidential treatment.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
MIPS Technologies, Inc.
By:
/s/ SANDEEP VIJ
Sandeep Vij
President and Chief Executive Officer.
Date: September 10, 2012
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ SANDEEP VIJ
Sandeep Vij
Chief Executive Officer and Director (Principal Executive Officer)
September 10, 2012
/s/ WILLIAM SLATER
William Slater
Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
September 10, 2012
/s/ KENNETH L. COLEMAN
Kenneth L. Coleman
Director and Chairman of the Board
September 10, 2012
/s/ FRED M. GIBBONS
Fred M. Gibbons
Director
September 10, 2012
/s/ ROBERT R. HERB
Robert R. Herb
Director
September 10, 2012
/s/ WILLIAM M. KELLY
William M. Kelly
Director
September 10, 2012
/s/ JEFFREY MCCREARY
Jeffrey McCreary
Director
September 10, 2012
/s/ KENNETH TRAUB
Kenneth Traub
Director
September 10, 2012
/s/ ROBIN L. WASHINGTON
Robin L. Washington
Director
September 10, 2012
/s/ FRED WEBER
Fred Weber
Director
September 10, 2012
EXHIBIT INDEX
Exhibit No.
Index of Exhibits
3.1
Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed on November 14, 2003).
3.2
Amended and Restated By-Laws (incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed on August 18, 2010).
4.1
Amended and Restated Preferred Stock Rights Agreement, as amended (incorporated herein by reference to Exhibit 10.11.3 to the Company’s Form 8-A12G/A filed on November 18, 2003).
10.1
The Amended and Restated Separation Agreement between the Company and Silicon Graphics, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year ended June 30, 1999).
10.2
The Corporate Agreement between the Company and Silicon Graphics, Inc. (incorporated herein by reference to Exhibit 10.2 to the Registration Statement on Form S-1, Registration No. 333-73071 (the “Registration Statement”)).
10.3
The Management Services Agreement between the Company and Silicon Graphics, Inc. (incorporated herein by reference to Exhibit 10.3 to the Registration Statement).
10.4
The Tax Sharing Agreement between the Company and Silicon Graphics, Inc. (incorporated herein by reference to Exhibit 10.4 to the Registration Statement).
Exhibit No.
Index of Exhibits
10.5
The Technology Agreement between the Company and Silicon Graphics, Inc. (incorporated herein by reference to Exhibit 10.5 to the Registration Statement).
10.6
The Trademark Agreement between the Company and Silicon Graphics, Inc. (incorporated herein by reference to Exhibit 10.6 to the Registration Statement).
10.7
The Tax indemnification Agreement between the Company and Silicon Graphics, Inc. (incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended June 30, 2000).
10.8*
The 1998 Long-Term Incentive Plan, as amended and restated (incorporated herein by reference to Exhibit 99.01 to the Company’s Form S-8 filed on May 10, 2012).
10.9*
The Employee Stock Purchase Plan, as amended (incorporated herein by reference to Exhibit 4.03 to the Company’s Current Report on Form 8-K filed on January 11, 2008).
10.10*
Directors’ Stock Option Plan, as amended (incorporated herein by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).
10.11*
Nonqualified Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2000).
10.12*
2002 Non-Qualified Stock Option Plan (incorporated herein by reference to Exhibit 4.1 to the Company’s Form S-8 filed on April 29, 2002).
10.13*
Form of Award Document, as amended for Stock Option Grant to Director/Officer under the 1998 Long-Term Incentive Plan comprised of Stock Option Agreement and Exercise Notice (incorporated herein by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2010).
10.14*
Form of Award Document, as amended for Stock Option Grant to Employee under the 1998 Long-Term Incentive Plan comprised of Stock Option Agreement and Exercise Notice (incorporated herein by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2010).
10.15*
Form of Award Document for Restricted Stock Purchase Agreement under the 1998 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2004).
Exhibit No.
Index of Exhibits
10.16*
Form of Award Document for Director Stock Option Agreement (Initial Grant) under the Directors’ Stock Option Plan (incorporated herein by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2004).
10.17*
Form of Award Document for Director Stock Option Agreement (Renewal Grant) under the Directors’ Stock Option Plan (incorporated herein by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2004).
10.18*
Form of Award Document, as amended for Stock Option Grant to International Employee under the 1998 Long-Term Incentive Plan comprised of Stock Option Agreement and Exercise Notice (incorporated herein by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2010).
10.19*
Form of Stock Unit Award Agreement (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 18, 2009).
10.20*
Form of Stock Unit Award Agreement for Members of the Board of Directors (incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K filed on February 12, 2010).
10.21*
Form of Stock Unit Award Agreement for Employees Outside the U.S. (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2010).
10.22*
Form of Stock Unit Award Agreement for Consultants (incorporated herein by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2011).
10.23*
Form of Stock Unit Award Agreement for Consultants Outside the U.S. (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).
10.24
Form of Indemnification Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 31, 2005).
10.25*
Change in Control Agreement (incorporated herein by reference to Exhibit 99.03 to the Company’s Current Report on Form 8-K filed on October 16, 2007).
10.26*
Amendment to Change in Control Agreement (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on February 6, 2009).
10.27
Industrial Lease dated February 27, 2009 (incorporated herein by reference to Exhibit 99.01 to the Company’s Current Report on Form 8-K filed on March 4, 2009).
Exhibit No.
Index of Exhibits
10.28*
Offer Letter dated December 22, 2009 to Sandeep Vij (incorporated herein by reference to Exhibit 99.02 to the Company's Form 8-K filed on January 25, 2010).
10.29*
Offer Letter dated March 10, 2010 to Ravikrishna Cherukuri, Vice President of Engineering (incorporated herein by reference to Exhibit 10.3 to the Company’s Form 10-Q filed on May 6, 2010).
10.39*
Letter Agreement and Transition Agreement between MIPS Technologies, Inc. and Sandy Creighton (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2010).
10.31*
Consulting Agreement between MIPS Technologies, Inc. and Sandy Creighton (incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2010).
10.32*
Performance-Based Bonus Plan for Executives (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on September 9, 2011).
10.33*
Offer Letter for Frederick Weber dated November 11, 2010 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 12, 2010).
10.34* Letter Agreement regarding the Special Bonus Plan for the Vice President of Worldwide Sales (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 17, 2011).
10.35*
Transition Agreement between MIPS Technologies, Inc. and Arthur Swift (incorporated herein by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).
10.36*
Consulting Agreement between MIPS Technologies, Inc. and Arthur Swift (incorporated herein by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).
10.37
Settlement Agreement, dated October 21, 2011, between MIPS Technologies, Inc. and Starboard (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on October 24, 2011).
10.38*
Offer Letter for William Slater, dated October 25, 2011 (incorporated herein by reference to Exhibit 10.01 to the Company's Current Report on Form 8-K filed on October 27, 2011).
10.39*
Transition and Consulting Agreement, dated November 9, 2011, between MIPS Technologies, Inc. and Maury Austin (incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2011).
10.40**
License Agreement between MIPS Technologies, Inc. and Broadcom Corporation, dated June 29, 2012.
Exhibit No.
Index of Exhibits
21.1
Subsidiaries of the Registrant.
23.1
Consent of Independent Registered Public Accounting Firm.
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*
Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(b) of said form.
**
Portions of this exhibit have been omitted pending a determination by the Securities and Exchange Commission as to whether these portions should be granted confidential treatment.