PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MIPS
TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In
thousands)
|
|
March
31,
2009
|
|
|
June 30,
2008
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
21,064
|
|
|
$
|
13,938
|
|
Accounts
receivable, net
|
|
|
7,837
|
|
|
|
9,866
|
|
Unbilled
receivables
|
|
|
1,564
|
|
|
|
4,596
|
|
Short
term restricted cash
|
|
|
19,539
|
|
|
|
22,649
|
|
Prepaid
expenses and other current assets
|
|
|
1,545
|
|
|
|
2,154
|
|
Total
current assets
|
|
|
51,549
|
|
|
|
53,203
|
|
Equipment,
furniture and property, net
|
|
|
11,594
|
|
|
|
16,307
|
|
Intangible
assets, net
|
|
|
12,360
|
|
|
|
18,324
|
|
Goodwill
|
|
|
29,336
|
|
|
|
40,624
|
|
Long
term restricted cash
|
|
|
—
|
|
|
|
7,385
|
|
Other
assets
|
|
|
17,173
|
|
|
|
16,901
|
|
Total
assets
|
|
$
|
122,012
|
|
|
$
|
152,744
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,055
|
|
|
$
|
3,441
|
|
Accrued
liabilities
|
|
|
35,746
|
|
|
|
51,963
|
|
Short-term
debt
|
|
|
6,587
|
|
|
|
18,641
|
|
Deferred
revenue
|
|
|
4,079
|
|
|
|
4,283
|
|
Total
current liabilities
|
|
|
48,467
|
|
|
|
78,328
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
8,750
|
|
|
|
—
|
|
Other long term
liabilities
|
|
|
23,209
|
|
|
|
29,496
|
|
Total long term
liabilities
|
|
|
31,959
|
|
|
|
29,496
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
44
|
|
|
|
44
|
|
Additional
paid-in capital
|
|
|
256,414
|
|
|
|
252,263
|
|
Accumulated
other comprehensive income
|
|
|
10,538
|
|
|
|
15,224
|
|
Accumulated
deficit
|
|
|
(225,410
|
)
|
|
|
(222,611
|
)
|
Total stockholders’
equity
|
|
|
41,586
|
|
|
|
44,920
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
122,012
|
|
|
$
|
152,744
|
|
See
accompanying notes.
MIPS
TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In
thousands, except per share data)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
|
|
$
|
10,901
|
|
|
$
|
12,556
|
|
|
$
|
35,686
|
|
|
$
|
35,590
|
|
Contract
revenue
|
|
|
11,805
|
|
|
|
14,767
|
|
|
|
39,635
|
|
|
|
40,336
|
|
Total
revenue
|
|
|
22,706
|
|
|
|
27,323
|
|
|
|
75,321
|
|
|
|
75,926
|
|
Cost
of Contract Revenue
|
|
|
4,325
|
|
|
|
9,407
|
|
|
|
17,761
|
|
|
|
22,110
|
|
Gross
Margin
|
|
|
18,381
|
|
|
|
17,916
|
|
|
|
57,560
|
|
|
|
53,816
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
7,809
|
|
|
|
9,315
|
|
|
|
21,955
|
|
|
|
27,821
|
|
Sales
and marketing
|
|
|
4,211
|
|
|
|
6,056
|
|
|
|
13,610
|
|
|
|
17,796
|
|
General
and administrative
|
|
|
4,744
|
|
|
|
6,559
|
|
|
|
15,693
|
|
|
|
21,437
|
|
Acquired
in-process research and development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,350
|
|
Restructuring
|
|
|
959
|
|
|
|
1,279
|
|
|
|
6,438
|
|
|
|
1,279
|
|
Total
operating expenses
|
|
|
17,723
|
|
|
|
23,209
|
|
|
|
57,696
|
|
|
|
74,683
|
|
Operating
income ( loss)
|
|
|
658
|
|
|
|
(5,293
|
)
|
|
|
(136
|
)
|
|
|
(20,867
|
)
|
Other
expense, net
|
|
|
(1,142
|
)
|
|
|
(762
|
)
|
|
|
(3,455
|
)
|
|
|
(1,488
|
)
|
Loss
before income taxes
|
|
|
(484
|
)
|
|
|
(6,055
|
)
|
|
|
(3,591
|
)
|
|
|
(22,355
|
)
|
Provision
for (benefit from) income taxes
|
|
|
323
|
|
|
|
(1,798
|
)
|
|
|
(792
|
)
|
|
|
1,018
|
|
Net
loss
|
|
$
|
(807
|
)
|
|
$
|
(4,257
|
)
|
|
$
|
(2,799
|
)
|
|
$
|
(23,373
|
)
|
Net
loss per share basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.53
|
)
|
Common
shares outstanding, basic and diluted
|
|
|
44,682
|
|
|
|
43,992
|
|
|
|
44,534
|
|
|
|
43,887
|
|
See
accompanying notes.
MIPS
TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In
thousands)
|
|
Nine
Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
Operating
activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,799
|
)
|
$
|
|
)
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,747
|
|
|
|
|
Stock-based
compensation
|
|
|
3,558
|
|
|
|
|
Acquired
in-process research and development
|
|
|
—
|
|
|
|
|
Amortization
of intangibles
|
|
|
3,300
|
|
|
|
|
Impact
of exchange rate on restricted cash
|
|
|
1,385
|
|
|
|
)
|
Amortization
of loan fees
|
|
|
96
|
|
|
|
|
Other
non-cash charges
|
|
|
215
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
3,756
|
|
|
|
|
Prepaid
expenses and other current assets
|
|
|
328
|
|
|
|
|
Other
assets
|
|
|
522
|
|
|
|
|
Accounts
payable
|
|
|
(1,049
|
)
|
|
|
|
Accrued
liabilities
|
|
|
2,457
|
|
|
|
)
|
Deferred
revenue
|
|
|
619
|
|
|
|
)
|
Long-term
liabilities
|
|
|
(4,494
|
)
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
10,641
|
|
|
|
)
|
Proceeds
from sales of marketable investments
|
|
|
—
|
|
|
|
|
Capital
expenditures
|
|
|
(884
|
)
|
|
|
)
|
Acquisition
of Chipidea, net of cash acquired
|
|
|
—
|
|
|
|
)
|
Restricted
cash
|
|
|
—
|
|
|
|
)
|
Net
cash used in investing activities
|
|
|
(884
|
)
|
|
|
)
|
Net
proceeds from issuance of common stock
|
|
|
846
|
|
|
|
|
Proceeds
from debt, net
|
|
|
16,236
|
|
|
|
|
Repayments
of debt
|
|
|
(19,278
|
)
|
|
|
)
|
Borrowings
under capital lease obligations
|
|
|
|
|
|
|
|
Repayments
of capital lease obligations
|
|
|
(422
|
)
|
|
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(2,618
|
)
|
|
|
|
Effect
of exchange rate on cash
|
|
|
(13
|
)
|
|
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
7,126
|
|
|
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
13,938
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
21,064
|
|
$
|
|
|
Supplemental
disclosures of cash transaction:
|
|
|
|
|
|
|
|
Payment
of restricted cash by escrow agent to former shareholders of
Chipidea
|
|
$
|
9,175
|
|
$
|
|
|
See
accompanying notes.
MIPS
TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS—UNAUDITED
Note
1. Description of Business and Basis of Presentation.
MIPS
Technologies, Inc. is a leading global supplier of semiconductor design
intellectual property (IP) and analog IP. We believe MIPS
Technologies is the only company that provides a combined portfolio of
processors, analog IP and software tools for the system on chip, or SoC market.
We operate with two business groups, Processor Business Group (PBG) and Analog
Business Group (ABG). Our technology is broadly used in markets such as mobile
consumer electronics, digital entertainment, wired and wireless communications
and networking, office automation, security, microcontrollers, and automotive.
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
PBG customers pay us license fees for architectural and product rights, as well
as royalties based on processor unit shipments.
The
addition of Chipidea in August 2007, now operating as the ABG of MIPS
Technologies, has allowed us to grow the base of products we offer to a larger
set of customers. Analog and mixed signal IP are used in most SoCs. These are
the same integrated circuits that usually require a microprocessor core,
permitting us to sell both kinds of products to the same customers for the same
applications in many circumstances. Analog and mixed signal IP are difficult to
develop, and the number of well-trained engineers in this field is much smaller
than for digital circuitry. With the acquisition of Chipidea, we have gained a
particularly strong team of such designers for the development and sale of
commercial analog IP.
Basis of
Presentation.
The
condensed consolidated financial statements have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission (SEC)
applicable to interim financial information. Certain information and footnote
disclosures included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted in these interim
statements as allowed by such SEC rules and regulations. The balance sheet at
June 30, 2008 has been derived from audited financial statements, but does
not include all disclosures required by generally accepted accounting
principles. However, we believe that the disclosures are adequate to make the
information presented not misleading. The unaudited condensed consolidated
financial statements included in this Form 10-Q should be read in conjunction
with the audited consolidated financial statements and related notes for the
fiscal year ended June 30, 2008, included in our 2008 Annual Report on Form
10-K.
The
unaudited results of operations for the interim periods shown in these financial
statements are not necessarily indicative of operating results for the entire
fiscal year. In our opinion, the condensed consolidated financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows for each interim period shown.
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.
Accounts
Receivable.
Accounts receivable includes amounts billed and
currently due from customers, net of the allowance for doubtful
accounts. The allowance for doubtful accounts was
$1.4 million and $2.3 million at March 31, 2009 and June 30, 2008,
respectively.
Reclassifications
. Certain
balances in our fiscal 2008 consolidated financial statements have been
reclassified to conform to the presentation in fiscal 2009.
Note
2. Computation of 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 loss per
share (in thousands, except per share amounts):
|
|
Three
Months Ended
March 31,
|
|
|
Nine
Months Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(807
|
)
|
|
$
|
(4,257
|
)
|
|
$
|
(2,799
|
)
|
|
$
|
(23,373
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares of common stock outstanding
|
|
|
44,682
|
|
|
|
44,017
|
|
|
|
44,534
|
|
|
|
43,914
|
|
Less:
Weighted-average shares subject to repurchase
|
|
|
—
|
|
|
|
(25
|
)
|
|
|
—
|
|
|
|
(27
|
)
|
Shares
used in computing net loss per basic share
|
|
|
44,682
|
|
|
|
43,992
|
|
|
|
44,534
|
|
|
|
43,887
|
|
Net
loss per basic share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.53
|
)
|
Shares
used in computing loss per diluted share
|
|
|
44,682
|
|
|
|
43,992
|
|
|
|
44,534
|
|
|
|
43,887
|
|
Net
loss per diluted share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.53
|
)
|
Potentially
dilutive securities excluded from net loss per diluted share
(A)
|
|
|
12,260
|
|
|
|
13,764
|
|
|
|
18,795
|
|
|
|
10,812
|
|
(A)
|
For
the three months ended March 31, 2009 and 2008 and the nine months ended
March 31, 2009 and 2008, potentially dilutive securities were excluded
from net loss per share because they are
anti-dilutive.
|
Note
3. Comprehensive Income (loss)
Total
comprehensive loss includes net loss and other comprehensive income, which
primarily comprises unrealized gains and losses from foreign currency
adjustments. Total comprehensive loss for the third quarter of
fiscal 2009 was $2.0 million and for first nine months of fiscal 2009 was $7.5
million compared to total comprehensive loss of $3.6 million and $8.9 million
for the comparable periods in the prior year.
Note
4. Acquisition and Goodwill
Chipidea
Acquisition
On
August 27, 2007, we completed the acquisition of Chipidea, a privately held
supplier of analog and mixed signal IP based in Lisbon, Portugal. We
acquired all of the outstanding stock of Chipidea for $147 million in cash,
of which $14.7 million is held in escrow to satisfy indemnification claims
that may arise.
In
connection with the acquisition, $12.5 million of consideration was set aside in
an escrow account denominated in Euro (remaining amount approximates $4.2
million at March 31, 2009). Under the terms of the escrow agreement, payments
are due 12 months and 24 months from the acquisition date based on the
shareholders continuing to provide services to us under the terms of the escrow
agreements. We paid $6.9 million to the former shareholders on the
first anniversary of the acquisition in August 2008. In addition, we
paid one former shareholder an additional $2.3 million in September 2008 as his
services were terminated from the company in September 2008. The
remaining balance is due to the other former shareholders of Chipidea on the
second anniversary of the acquisition under the terms of the escrow
agreements. The consideration payable to former shareholders has been
ratably expensed in the Statement of Operations as payments are contingent upon
continued provision of services to us. The unpaid consideration has been
recorded as deferred purchase price consideration liability. A restricted
cash account has been established for the funding of this payment and is
recorded in short term restricted cash.
Contingent
Consideration.
In connection with the acquisition, Chipidea
made certain representations and warranties to us, and Chipidea’s former
shareholders agreed to indemnify us against damages which might arise from a
breach of those representations and warranties. Under the terms of the
acquisition, the former Chipidea shareholders set aside $14.7 million of cash
consideration for payment of possible indemnification claims made by us.
Accordingly, a liability for this contingent cash consideration has been
recorded in accrued liabilities and this amount has been considered in the
purchase price. Under the terms of the acquisition, this amount has been
set aside in an escrow account and was scheduled to be released on the one year
anniversary of the acquisition date. In August 2008, we made certain claims
under the indemnification escrow agreement. A restricted cash
account has been established for the funding of this payment and is recorded in
short term restricted cash. In August 2008, we made certain claims
for indemnification from the escrow account, and as discussed in Note 17, in
April 2009 we entered into a settlement agreement for our retention of $1.0
million in cash from this account at which time we agreed to release the
remaining balance of the escrow account to Chipidea's former
shareholders.
The
changes in the carrying amount of goodwill by operating segment for the nine
months ended March 31, 2009, were as follows:
|
|
Processor
Business
Group
|
|
|
Analog
Business
Group
|
|
|
Total
|
|
|
(In
thousands)
|
|
Balances
at June 30, 2008
|
|
$
|
565
|
|
|
$
|
40,059
|
|
|
$
|
40,624
|
|
Goodwill
adjustments (1)
|
|
|
—
|
|
|
|
(5,215
|
)
|
|
|
(5,215
|
)
|
Currency
translation adjustment
|
|
|
—
|
|
|
|
(6,073
|
)
|
|
|
(6,073
|
)
|
Balances
at March 31, 2009
|
|
$
|
565
|
|
|
$
|
28,771
|
|
|
$
|
29,336
|
|
(1)
|
Adjustments
to goodwill primarily represent changes in assumed pre-acquisition income
tax liabilities accounted for under FIN 48. To the extent that
actual amounts differ from the estimated amounts recorded, the differences
may result in future adjustments to
goodwill.
|
Note
5. Purchased Intangible Assets
The balances
of acquisition related intangible assets consisted of the following as of March
31, 2009:
|
|
March
31, 2009
|
|
|
|
Weighted
Average
Amortization
Period
(in
months)
|
|
Gross
Carrying Value
|
|
Accumulated
Amortization
|
|
Net
Carrying Value
|
|
|
|
(In
thousands, except months)
|
|
Developed
and core technology
|
|
|
70
|
|
|
$
|
14,229
|
|
|
$
|
(8,694
|
)
|
|
$
|
5,535
|
|
Customer
relationships and backlog
|
|
|
56
|
|
|
|
12,386
|
|
|
|
(6,323
|
)
|
|
|
6,063
|
|
Other
|
|
|
63
|
|
|
|
1,452
|
|
|
|
(690
|
)
|
|
|
762
|
|
Total
|
|
|
65
|
|
|
$
|
28,067
|
|
|
$
|
(15,707
|
)
|
|
$
|
12,360
|
|
The balances of
acquisition related intangible assets consisted of the following as of
June 30, 2008:
|
|
June 30,
2008
|
|
|
|
Weighted
Average
Amortization
Period
(in
months)
|
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Impairment
Losses
|
|
|
Net
Carrying
Value
|
|
|
|
(In
thousands, except months)
|
|
Developed
and core technology
|
|
|
70
|
|
|
$
|
28,116
|
|
|
$
|
(7,997
|
)
|
|
$
|
(12,164
|
)
|
|
$
|
7,955
|
|
Customer
relationships and backlog
|
|
|
56
|
|
|
|
15,286
|
|
|
|
(5,351
|
)
|
|
|
(692
|
)
|
|
|
9,243
|
|
Other
|
|
|
63
|
|
|
|
3,041
|
|
|
|
(579
|
)
|
|
|
(1,336
|
)
|
|
|
1,126
|
|
Total
|
|
|
65
|
|
|
$
|
46,443
|
|
|
$
|
(13,927
|
)
|
|
$
|
(14,192
|
)
|
|
$
|
18,324
|
|
Developed and
core technology are being amortized over their useful lives of 5 to 15
years. Customer relationships and backlog are being amortized over
their useful lives of 1 to 7 years. Other intangible assets are being
amortized over their useful lives of 3 to 5 years.
Estimated
future amortization expense related to acquisition related intangible assets as
of March 31, 2009 is as follows:
|
|
In thousands
|
|
Fiscal
Year
|
|
|
|
Remaining
2009
|
|
$
|
890
|
|
2010
|
|
|
3,561
|
|
2011
|
|
|
3,105
|
|
2012
|
|
|
2,669
|
|
2013
|
|
|
860
|
|
Thereafter
|
|
|
1,275
|
|
Total
|
|
$
|
12,360
|
|
Note
6. Debt
The
components of debt are as follows (in thousands):
|
|
March
31, 2009
|
|
|
June
30, 2008
|
|
Credit agreement
|
|
$
|
12,500
|
|
|
$
|
16,000
|
|
Bank
lines of credit
|
|
|
2,713
|
|
|
|
2,476
|
|
Other
|
|
|
124
|
|
|
|
165
|
|
Total
Debt
|
|
|
15,337
|
|
|
|
18,641
|
|
Less:
current portion
|
|
|
(6,587
|
)
|
|
|
(18,641
|
)
|
Long
term debt, net of current portion
|
|
$
|
8,750
|
|
|
$
|
—
|
|
Credit
Agreement
On July
3, 2008, we entered into a loan and security agreement with Silicon Valley Bank
(“SVB”). The loan and security agreement provides for a $15 million
term loan and a revolving credit facility in an amount up to $10
million. The proceeds borrowed on July 3, 2008, which included the
full amount of the $15 million term loan, together with approximately $1.2
million of borrowings under the revolving credit facility, were used to repay
all outstanding loans under our existing revolving credit agreement with
Jeffries Finance LLC. The borrowing availability under the revolving
credit facility varies according to MIPS’ accounts receivable and recurring
royalty revenues and other terms and conditions described in the loan and
security agreement. The revolving credit facility is also available
for the issuance of letters of credit, cash management services and foreign
exchange contracts. The revolving credit facility will mature on July
2, 2009, while the term loan is to be repaid in 48 equal monthly payments of
principal plus accrued interest. In December 2008, we amended our credit
facility agreement with SVB, providing us more flexibility to fund the
international operations of our subsidiaries. As of March 31, 2009,
outstanding balances under these facilities were $12.5 million for the term loan
and $1.2 million for the revolving credit facility. We borrowed the
full amount available under the $15 million term loan facility and paid off
approximately $2.5 million in the nine months ended March 31,
2009. We had $8.8 million available to borrow under the revolving
credit line at March 31, 2009. Loans under this facility are secured by
virtually all of our assets with the exception of IP, and the facility contains
affirmative and negative covenants that impose restrictions on the operation of
our business. At the Company’s election, borrowings under the facility bear
interest at prime rate plus 0.50% and borrowings under the revolving credit
agreement bear interest at prime plus 0.25% as defined in the credit facility
agreement. The prime rate at March 31, 2009 was 3.25%.
Bank
Lines of Credit
We
have bank line of credit agreements with several Portuguese banks with a
total aggregate available credit of approximately $1.5 million as of March 31,
2009. The interest rates on these agreements range from 3.89% to 4.35% and
the agreements have expiration dates ranging from May 21, 2009 to July 9, 2009,
with automatic renewal provisions for additional 90-day periods for the credit
lines other than a credit line in the amount of 0.2 million Euros that expires
in May 2009. As of March 31, 2009, we have outstanding borrowings of $1.5
million and no credit line available under these agreements.
Other
We have a
non-interest bearing loan with a Portuguese governmental agency. The short-term
portion of this loan is approximately $0.1 million at March 31,
2009.
As
of March 31, 2009, we have entered into letters of credit for approximately $1.4
million with various financial institutions in Portugal, Belgium and France in
association with certain building leases and government grants.
Note
7. Restructuring
We record
restructuring activities in accordance with SFAS No. 146,
Accounting for Costs Associated with
Exit or Disposal Activities
(SFAS 146) and SFAS No. 144,
Accounting for the Impairment or
Disposal of Long-Lived Assets
(SFAS 144).
In August
2008 we announced a plan to reduce the Company’s operating costs by a reduction
in employee headcount in the Company’s facilities in United States, Israel,
Portugal and closing our facilities in Belgium and
France. In the third quarter of fiscal 2009, approximately $0.6
million of severance and benefits costs were recorded as restructuring expense
for ABG in connection with this restructuring plan. These costs
primarily related to ABG costs of $0.5 million of severance costs and $0.1
million of facilities closure and other costs. We have incurred
approximately $6.0 million in restructuring charges through the third quarter of
fiscal 2009 in connection with the August restructuring plan of which $5.7
million related to ABG and $0.3 million related to PBG. The August
restructuring plan has now been substantially completed. In addition
to the August 2008 restructuring plan charges, we also incurred $0.4 million in
PBG restructuring charges in severance costs in the third quarter of fiscal 2009
in connection with certain executive departures.
The
following table provides a summary of the restructuring activities and related
liabilities included in accrued liabilities as of March 31, 2009:
|
|
Severance
and related benefits
|
|
|
Other exit-
related costs
|
|
|
Total
|
|
|
(in
thousands)
|
|
Balance
at June 30, 2008
|
|
$
|
—
|
|
|
$
|
236
|
|
|
$
|
236
|
|
Current
changes
|
|
|
4,699
|
|
|
|
232
|
|
|
|
4,931
|
|
Cash
payments
|
|
|
(3,348
|
)
|
|
|
(170
|
)
|
|
|
(3,518
|
)
|
Amount
included in accounts payable
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Impact
of foreign currency
|
|
|
(24
|
)
|
|
|
(21
|
)
|
|
|
(45
|
)
|
Non-cash
charges
|
|
|
—
|
|
|
|
(84
|
)
|
|
|
(84
|
)
|
Balance
at September 30, 2008
|
|
|
1,327
|
|
|
|
188
|
|
|
|
1,515
|
|
Current
changes
|
|
|
274
|
|
|
|
274
|
|
|
|
548
|
|
Cash
payments
|
|
|
(557
|
)
|
|
|
(90
|
)
|
|
|
(647
|
)
|
Amount
included in accounts payable
|
|
|
—
|
|
|
|
(78
|
)
|
|
|
(78
|
)
|
Impact
of foreign currency
|
|
|
(23
|
)
|
|
|
8
|
|
|
|
(15
|
)
|
Non-cash
charges
|
|
|
—
|
|
|
|
(37
|
)
|
|
|
(37
|
)
|
Balance
at December 31, 2008
|
|
|
1,021
|
|
|
|
265
|
|
|
|
1,286
|
|
Current
changes
|
|
|
878
|
|
|
|
81
|
|
|
|
959
|
|
Cash
payments
|
|
|
(948
|
)
|
|
|
(106
|
)
|
|
|
(1,054
|
)
|
Amount
included in accounts payable
|
|
|
(35
|
)
|
|
|
(5
|
)
|
|
|
(40
|
)
|
Impact
of foreign currency
|
|
|
(50
|
)
|
|
|
(11
|
)
|
|
|
(61
|
)
|
Non-cash
charges
|
|
|
—
|
|
|
|
(20
|
)
|
|
|
(20
|
)
|
Balance
at March 31, 2009
|
|
$
|
866
|
|
|
$
|
204
|
|
|
$
|
1,070
|
|
Note
8. Other Income (Expense), Net
The
components of other income (expense), net are as follows (in
thousands):
|
|
Three
months ended March 31,
|
|
|
Nine
months ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Interest
income
|
|
$
|
31
|
|
|
$
|
89
|
|
|
$
|
147
|
|
|
$
|
1,266
|
|
Interest
expense
|
|
|
(600
|
)
|
|
|
(585
|
)
|
|
|
(1,429
|
)
|
|
|
(1,417
|
)
|
Other
|
|
|
(573
|
)
|
|
|
(266
|
)
|
|
|
(2,173
|
)
|
|
|
(1,337
|
)
|
Total
other expense, net
|
|
$
|
(1,142
|
)
|
|
$
|
(762
|
)
|
|
$
|
(3,455
|
)
|
|
$
|
(1,488
|
)
|
Note
9. Equipment, Furniture and Property
The
components of equipment, furniture and property are as follows (in
thousands):
|
|
March
31, 2009
|
|
|
June
30, 2008
|
|
Equipment
|
|
$
|
13,879
|
|
|
$
|
16,363
|
|
Land
and buildings
|
|
|
7,292
|
|
|
|
8,661
|
|
Furniture
and fixtures
|
|
|
3,543
|
|
|
|
3,913
|
|
Leasehold
improvements
|
|
|
805
|
|
|
|
812
|
|
|
|
|
25,519
|
|
|
|
29,749
|
|
Accumulated
depreciation and amortization
|
|
|
(13,925
|
)
|
|
|
(13,442
|
)
|
Total
Equipment, furniture and property, net
|
|
$
|
11,594
|
|
|
$
|
16,307
|
|
Note
10. Other Long-Term Assets
The
components of other long-term assets are as follows (in thousands):
|
|
March
31, 2009
|
|
|
June
30, 2008
|
|
Investments
in other companies
|
|
$
|
2,144
|
|
|
$
|
2,157
|
|
Engineering
design software licenses
|
|
|
13,366
|
|
|
|
11,458
|
|
Investments
related to employee deferred compensation plan
|
|
|
1,374
|
|
|
|
2,070
|
|
Other
long-term assets
|
|
|
289
|
|
|
|
1,216
|
|
Total
Other Long-Term Assets
|
|
$
|
17,173
|
|
|
$
|
16,901
|
|
Note
11. Accrued and Other Long-Term Liabilities
The
components of accrued liabilities are as follows (in thousands):
|
|
March
31, 2009
|
|
|
June
30, 2008
|
|
Accrued
compensation and employee-related expenses
|
|
$
|
6,388
|
|
|
$
|
6,457
|
|
Income
taxes payable
|
|
|
749
|
|
|
|
(48
|
)
|
Payable
to Chipidea shareholders
|
|
|
15,356
|
|
|
|
15,212
|
|
Capital
lease obligations, short term
|
|
|
978
|
|
|
|
8,044
|
|
Deferred
purchase price consideration
|
|
|
2,316
|
|
|
|
6,123
|
|
Liabilities
related to engineering design software licenses
|
|
|
4,643
|
|
|
|
5,212
|
|
Restructuring
related liabilities
|
|
|
628
|
|
|
|
—
|
|
Short-term
deferred tax liability
|
|
|
61
|
|
|
|
—
|
|
Other
accrued liabilities
|
|
|
4,627
|
|
|
|
10,963
|
|
Total
Accrued Liabilities
|
|
$
|
35,746
|
|
|
$
|
51,963
|
|
The
components of other long-term liabilities are as follows (in
thousands):
|
|
March
31, 2009
|
|
|
June
30, 2008
|
|
Deferred
compensation
|
|
$
|
1,506
|
|
|
$
|
2,530
|
|
Long-term
restructuring related liabilities
|
|
|
442
|
|
|
|
—
|
|
Long-term
deferred tax liability
|
|
|
3,511
|
|
|
|
7,548
|
|
Long-term
income tax liability
|
|
|
3,888
|
|
|
|
11,758
|
|
Long-term
liabilities related to engineering design software
licenses
|
|
|
5,646
|
|
|
|
4,056
|
|
Long-term
lease obligation
|
|
|
6,086
|
|
|
|
817
|
|
Other
long-term liabilities
|
|
|
2,130
|
|
|
|
2,787
|
|
Total
Other long term liabilities
|
|
$
|
23,209
|
|
|
$
|
29,496
|
|
Note
12. Commitments and Contingencies
Purchase
Commitments with Suppliers
We have
outstanding purchase orders for ongoing operations of approximately $11.3
million as of March 31, 2009. Payments of these obligations are subject to the
provision of services or products.
On
February 27, 2009, the Company entered into a new operating lease for the
headquarter for a period of seven years commencing May 29, 2009, with an option
to renew for additional five years. At March 31, 2009, the
Company’s future minimum payments for operating lease obligations are as
follows:
|
|
In thousands
|
|
Fiscal
Year
|
|
|
|
Remaining
2009
|
|
$
|
534
|
|
2010
|
|
|
1,340
|
|
2011
|
|
|
1,418
|
|
2012
|
|
|
1,306
|
|
2013
|
|
|
1,016
|
|
Thereafter
|
|
|
2,216
|
|
Total
|
|
$
|
7,830
|
|
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 infringed
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 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.
Note 13.
Stock-Based Compensation
The following
table shows total stock-based employee compensation expense included in the
condensed consolidated statement of operations for the three months ended March
31, 2009 and 2008 and nine months ended March 31, 2009 and 2008 (in
thousands):
|
|
Three
Months Ended March 31,
|
|
|
Nine
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
437
|
|
|
$
|
604
|
|
|
|
1,102
|
|
|
|
2,262
|
|
Sales
and marketing
|
|
|
281
|
|
|
|
577
|
|
|
|
1,112
|
|
|
|
1,875
|
|
General
and administrative
|
|
|
367
|
|
|
|
618
|
|
|
|
1,344
|
|
|
|
2,135
|
|
Total
stock-based compensation expense
|
|
$
|
1,085
|
|
|
$
|
1,799
|
|
|
|
3,558
|
|
|
|
6,272
|
|
There was
no capitalized stock-based employee compensation cost as of March 31, 2009 or
2008. There were no material recognized tax benefits during the first
six months of either fiscal 2009 or fiscal 2008.
Note
14. Income Taxes
We
recorded an income tax expense of $0.3 million for the three months ended March
31, 2009 and a benefit of $0.8 million for the nine months ended March 31, 2009.
We recorded an income tax benefit of $1.8 million and an expense of $1.0 million
for the comparable periods in fiscal 2008. For the Processor Business Group, we
continued to recognize a valuation allowance against the U.S. deferred tax
assets as we believe that it is more likely than not that the deferred tax
assets will not be recognized.
Our
estimated annual income tax for fiscal 2009 primarily consists of tax benefits
from the loss generated by the Analog Business Group and releases of
unrecognized tax benefits that are no longer applicable, partially offset by US
deferred tax from goodwill amortization, foreign tax, and withholding tax. Our
estimated annual income tax for fiscal 2008 primarily consists of US federal,
state, foreign income taxes, withholding taxes, offset in part by certain
foreign tax credits and general business tax credits.
The total
amount of gross unrecognized tax benefits as of March 31, 2009 and June 30, 2008
was approximately $7.9 and $13.8 million, respectively. The decrease was
primarily due to the release of unrecognized tax benefits related to
international tax exposures that are no longer applicable. Approximately $5.3
million of acquisition related unrecognized tax benefits were released to
goodwill and approximately $1.3 million of unrecognized tax benefits were
released to the income tax provision as a benefit for the nine months ended
March 31, 2009.
We accrue
interest and penalties related to uncertain tax positions as a component of the
provision for income taxes. Accrued interest and penalties relating
to income tax on the unrecognized tax benefits as of March 31, 2009 and
June 30, 2008 was approximately, $0.9 million and $1.5 million, respectively,
with approximately $21,000 and $96,000 being included as a component of
provision for income taxes for the three and nine months ended March
31, 2009. Also, the total amount of unrecognized tax benefits that, if
recognized, would affect the effective tax rate was $1.7 million as of March 31,
2009 and $3.0 million as of June 30, 2008.
Although
we file U.S. federal, U.S. state, and tax returns in several overseas tax
jurisdictions, our major tax jurisdictions are the United States and Portugal.
Our fiscal 2005 and subsequent tax years remain subject to examination by the
IRS for U.S. federal tax purposes, and our calendar 2005 and subsequent tax
years remain subject to examination by the appropriate governmental agencies for
Portuguese tax purposes. The Company has determined that it is
reasonably possible that the total amount of uncertain tax benefits relating to
certain foreign tax liabilities will change in the next 12 months due to various
statute of limitations expiring. The amount of unrecognized tax benefits that
could change is approximately $0.5 million.
Note 15.
Operating Segments and Geographic
information
We
evaluate our reportable segments in accordance with SFAS No. 131,
Disclosures about Segments of an
Enterprise and Related Information
(SFAS 131). Our Chief Executive
Officer has been identified as our Chief Operating Decision Maker (CODM). The
CODM allocates resources to the segments based on their business prospects,
competitive factors, net revenue and operating results.
Prior to
fiscal year 2008, we operated in one reportable business group. In the first
quarter of fiscal 2008, following the acquisition of Chipidea, we organized
into two business groups, the Processor Business Group (PBG) and the Analog
Business Group (ABG). These segments were determined based upon our internal
organization and management structure and are the primary way in which the CODM
is provided with financial information. The CODM evaluates segment performance
based on net revenues and operating income, excluding certain items. These
excluded costs are certain corporate expenses such as impairment costs related
to intangible assets, general and administrative expenses, selling costs, IT
costs, certain corporate marketing costs, the amortization of purchased
intangible assets associated with the Chipidea acquisition, employee share-based
compensation expense, certain acquisition costs related to the purchase of
Chipidea and restructuring costs. Our costs and operating results are analyzed
in the two reportable business groups. The results of each segment have been
prepared using consistent accounting policies with those of MIPS as a whole.
Segment information is presented based upon our management’s organizational
structure as of March 31, 2009. Future changes to the internal financial
structure may result in changes to the reportable segments
disclosed.
The major
segments we serve are as follows:
(i) Processor
Business Group:
The PBG
provides industry-standard processor architectures and cores for digital
consumer and business applications. This group designs and licenses high
performance 32- and 64-bit architectures and cores, which offer smaller
dimensions and greater energy efficiency in embedded processors. Markets served
by the PBG segment include digital set-top, digital televisions, DVD recordable
devices, broadband access devices, digital cameras, laser printers, portable
media players, microcontrollers and network routers.
(ii) Analog
Business Group:
The ABG
includes the Chipidea operation and provides analog and mixed-signal IP that
produces cost-efficient System-on-Chip (SoC) applications and turnkey solutions.
The ABG IP portfolio covers many fundamental functions in the analog and
mixed-signal electronic space, including data conversion, clock management,
power management, radio connectivity, physical connectivity, and voice audio and
video processing. The market segments served by the ABG segment are wireless
communications, power line communications, data communications, video, audio and
voice signal processing, xDSL modems, set-top boxes, multimedia and digital
consumer electronics.
The following
is a summary of net revenue, gross margin and operating income (loss). Prior
period segment information has been reclassified to conform to the current
period presentation (in thousands):
|
|
Three
Months Ended
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
Processor
Business Group
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
17,663
|
|
|
$
|
18,110
|
|
Gross
margin
|
|
|
17,401
|
|
|
|
17,666
|
|
Operating
income
|
|
|
11,230
|
|
|
|
9,846
|
|
Analog
Business Group
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
|
5,043
|
|
|
|
9,213
|
|
Gross
margin
|
|
|
1,765
|
|
|
|
2,555
|
|
Operating
income
|
|
|
347
|
|
|
|
1,588
|
|
All
Other
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
(785
|
)
|
|
|
(2,305
|
)
|
Operating
loss
|
|
|
(10,919
|
)
|
|
|
(16,727
|
)
|
Total
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
|
22,706
|
|
|
|
27,323
|
|
Gross
margin
|
|
|
18,381
|
|
|
|
17,916
|
|
Operating
income (loss)
|
|
|
658
|
|
|
|
(5,293
|
)
|
Interest
income
|
|
|
31
|
|
|
|
89
|
|
Interest
expense
|
|
|
(600
|
)
|
|
|
(585
|
)
|
Other expense,
net
|
|
|
(573
|
)
|
|
|
(266
|
)
|
Loss
before income taxes
|
|
|
(484
|
)
|
|
|
(6,055
|
)
|
Provision
for (benefit from) income taxes
|
|
|
323
|
|
|
|
(1,798
|
)
|
Net
loss
|
|
$
|
(807
|
)
|
|
$
|
(4,257
|
)
|
|
|
Nine
months ended
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
Processor
Business Group
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
57,578
|
|
|
$
|
54,665
|
|
Gross
margin
|
|
|
56,706
|
|
|
|
53,373
|
|
Operating
income
|
|
|
38,281
|
|
|
|
29,231
|
|
Analog
Business Group
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
|
17,743
|
|
|
|
21,261
|
|
Gross
margin
|
|
|
3,879
|
|
|
|
5,775
|
|
Operating
loss
|
|
|
505
|
|
|
|
2,949
|
|
All
Other
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
(3,025
|
)
|
|
|
(5,332
|
)
|
Operating
loss
|
|
|
(38,922
|
)
|
|
|
(53,047
|
)
|
Total
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
|
75,321
|
|
|
|
75,926
|
|
Gross
margin
|
|
|
57,560
|
|
|
|
53,816
|
|
Operating
loss
|
|
|
(136
|
)
|
|
|
(20,867
|
)
|
Interest
income
|
|
|
147
|
|
|
|
1,266
|
|
Interest
expense
|
|
|
(1,429
|
)
|
|
|
(1,417
|
)
|
Other expense,
net
|
|
|
(2,173
|
)
|
|
|
(1,337
|
)
|
Loss
before income taxes
|
|
|
(3,591
|
)
|
|
|
(22,355
|
)
|
Provision
for (benefit from) income taxes
|
|
|
(792
|
)
|
|
|
1,018
|
|
Net
loss
|
|
$
|
(2,799
|
)
|
|
$
|
(23,373
|
)
|
Management
does not allocate long-lived assets to the corporate function when evaluating
the performance of the business groups.
Note
16. Recent Accounting Pronouncements
In April
2008, the FASB finalized Staff Position (“FSP”) No. 142-3,
Determination of the Useful Life of
Intangible Assets
(FSP 142-3). The position amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB SFAS 142,
Goodwill and Other Intangible
Assets
. The position applies to intangible assets that are acquired
individually or with a group of other assets and both intangible assets acquired
in business combinations and asset acquisitions. FSP 142-3 is effective for
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. We are currently evaluating the impact of the pending
adoption of FSP 142-3 on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS
141R). SFAS 141R retains the fundamental requirements in SFAS 141 that the
acquisition method of accounting (which SFAS 141 called the
purchase method
) be used for
all business combinations and for an acquirer to be identified for each business
combination. SFAS 141R also establishes principles and requirements for how the
acquirer: (a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree; (b) recognizes and measures the goodwill acquired
in the business combination or a gain from a bargain purchase; and
(c) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. SFAS 141R applies prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. We are currently
evaluating the impact that SFAS 141R will have on our financial
statements.
In
September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS
157), which defines fair value, establishes a framework for measuring fair value
and expands disclosure, about fair value measurements. SFAS 157 is
effective for fiscal year ending June 30, 2009. Adoption of
this standard did not have material impact to us. Cash and cash
equivalents comprised of money market funds.
Note
17. Subsequent Event
On April
28, 2009, we entered into a settlement agreement in connection with the
indemnification escrow agreement relating to our purchase of
Chipidea. On April 30, 2009, in connection with this settlement, we
received $1.0 million in consideration for our release of all claims under the
terms of the Chipidea acquisition. The balance of the escrow account
was released with this settlement agreement. As discussed in Note 4,
a restricted cash account was established for the funding of the escrow
agreement in connection with the acquisition.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
You should
read the following discussion and analysis together with our unaudited condensed
consolidated financial statements and the notes to those statements included
elsewhere in this report. This discussion may contain forward-looking statements
that involve risks and uncertainties. Forward-looking statements within this
Quarterly Report on Form 10-Q include our expectations for future levels of
operating expenses as well as other expenses and are identified by words such as
“believes,” “anticipates,” “expects,” “intends,” “may” and other similar
expressions. Our actual results could differ materially from those indicated in
these forward-looking statements as a result of certain factors, including those
described under “Risk Factors”, and other risks affecting our business. We
undertake no obligation to update any forward-looking statements included in
this discussion.
Overview
In the
third quarter of fiscal 2009 we made a determination with regard to the ABG to
either improve the financial performance or investigate the potential
divestiture of the unit, and progress has been made on both of those strategic
alternatives. The Company replaced the Vice President of the ABG in January 2009
and subsequently the underlying financial performance, specifically bookings,
has improved. In addition the Company has had discussions with third parties
about the possible sale of the business unit. While no definitive sale agreement
has been reached, the possibility of a divesture remains.
We ended
our third quarter of fiscal 2009 with cash and investments of $21.1 million, up
approximately $0.5 million from the prior quarter and up approximately $7.1
million from June 30, 2008. Our aggregate loan balance
outstanding as of March 31, 2009 was $15.3 million which includes
$1.6 million of debt associated with our Analog Business unit in Portugal
and the balance due under our credit facility in the United States through
Silicon Valley Bank.
Our third
quarter results were impacted by the slowdown in the worldwide
economy. Total revenue of $22.7 million in the third quarter of
fiscal 2009 was lower than the $26.4 million reported in the prior quarter and
down from the $27.3 million reported in the same quarter a year ago. Total third
quarter revenue from the PBG was $17.7 million and revenue from the ABG was
$5.0 million Our fourth quarter results may continue to be
impacted by the slowdown in the worldwide economy. We expect our fourth
quarter royalty revenue may decline from our third quarter results by 10% to
20%. However, based on the relatively positive future guidance provided by
many of our publically traded licensees we believe our fourth quarter license
revenue could be relatively flat with our third quarter revenue. There is
still significant macroeconomic uncertainty that could impact the
achievement of our fourth quarter revenue totals.
Royalty
revenue in the third quarter of fiscal 2009 was $10.9 million, a decrease
of 16% from the $13.0 million reported in the prior quarter and a decrease of
13% from the $12.6 million reported in the same quarter a year
ago. Our processor licensees reported shipments of 107 million units
during our third quarter of fiscal 2009, approximately 15% lower than the
126 million units shipped in the prior quarter and a decrease of approximately
7% compared with the 115 million units shipped in third quarter of fiscal
2008. As royalties reported by our customers are one quarter in
arrears, shipments and revenue reported in our third quarter represented our
customer shipments from the quarter ended December 31, 2008.
Contract
and license revenue in the third quarter of fiscal 2009 was $11.8 million, a
decrease of 12% from the $13.4 million reported in the prior quarter and 20%
lower than the $14.8 million reported in the same quarter a year
ago. License revenue from the processor business was $7.0 million
with 8 new license agreements signed during the quarter. Contract and License
revenue from the analog business was $5.0 million generated from existing
contracts along with a portion of the 19 new license agreements signed during
the quarter.
Our third
quarter gross margin of $18.4 million decreased $2.2 million or 11%
compared to second quarter results primarily as a result of lower royalty
revenues. However, our blended gross margin for the third quarter was
81% which is up from 78% in the second quarter of fiscal 2009 and 65% in the
fourth quarter of fiscal 2008.
Our
operating expense in the third quarter of fiscal 2009 was $17.7 million,
including a restructuring charge of $1.0 million as compared to our
operating expense in the second quarter of fiscal 2009 which was $15.7 million
including a restructuring charge of $0.5 million. Our operating expense in the
second quarter of fiscal 2009 benefitted from approximately $0.5 million of cost
savings due to refunds or updated estimates of expenses. In addition, ABG
engineers spent more time on roadmap projects in the third quarter of 2009 as
compared to prior quarters, leading to higher development costs in the third
quarter and lower cost of sales. Included in our operating expenses
in the third quarter of fiscal 2009 were approximately $1.1 million in stock
based compensation expense and $0.9 million in deferred purchase price
consideration due to former shareholders of Chipidea.
Our
initial estimated range of restructuring expense relating to the August 2008
corporate restructuring plan as reported in our 2008 Annual Report on Form 10-K
was $6.5 million to $7.5 million. We have incurred approximately $6.0
million in restructuring charges through the third quarter in connection with
the August 2008 plan and are substantially complete with those
activities. Actual costs were lower than estimated costs primarily
due to the weakening of the euro relative to the dollar and to the related
impact on severance and contract termination costs in our European
operations. In addition to the $6.0 million of restructuring charges
we incurred with the August 2008 plan, we also incurred $0.4 million in
restructuring charges in the third quarter of 2009 in connection with certain
executive departures.
Our
Operating Segments
We operate
with two business groups, the Processor Business Group (PBG) and the Analog
Business Group (ABG). These segments were determined based upon our internal
organization and management structure and are the primary way in which the CODM
is provided with financial information.
The major
segments we serve are as follows:
(i) Processor
Business Group:
The PBG
provides industry-standard processor architectures and cores for digital
consumer and business applications. This group designs and licenses high
performance 32- and 64-bit architectures and cores, which offer smaller
dimensions and greater energy efficiency in embedded processors. Markets served
by the PBG segment include digital set-top boxes, digital televisions, DVD
recordable devices, broadband access devices, digital cameras, laser printers,
portable media players, microcontrollers and network routers.
(ii) Analog
Business Group:
The ABG
includes the Chipidea operation and provides analog and mixed-signal IP that
produces cost-efficient System-on-Chip (SoC) applications and turnkey solutions.
The ABG IP portfolio covers all fundamental functions in the analog and
mixed-signal electronic space, including data conversion, clock management,
power management, radio connectivity, physical connectivity, and voice audio and
video processing. Market segments served by the ABG segment are wireless
communications, power line communications, data communications, video, audio and
voice signal processing, xDSL modems, set-top boxes, multimedia and digital
consumer electronics.
Our
reportable segments are the same as our operating segments. The
following tables provide a summary of our net revenue and operating loss by
segment (in thousands):
|
|
Three
Months Ended
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
Processor
Business Group
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
17,663
|
|
|
$
|
18,110
|
|
Gross
margin
|
|
|
17,401
|
|
|
|
17,666
|
|
Operating
income
|
|
|
11,230
|
|
|
|
9,846
|
|
Analog
Business Group
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
|
5,043
|
|
|
|
9,213
|
|
Gross
margin
|
|
|
1,765
|
|
|
|
2,555
|
|
Operating
income
|
|
|
347
|
|
|
|
1,588
|
|
All
Other
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
(785
|
)
|
|
|
(2,305
|
)
|
Operating
loss
|
|
|
(10,919
|
)
|
|
|
(16,727
|
)
|
Total
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
|
22,706
|
|
|
|
27,323
|
|
Gross
margin
|
|
|
18,381
|
|
|
|
17,916
|
|
Operating
income (loss)
|
|
|
658
|
|
|
|
(5,293
|
)
|
Interest
income
|
|
|
31
|
|
|
|
89
|
|
Interest
expense
|
|
|
(600
|
)
|
|
|
(585
|
)
|
Other expense,
net
|
|
|
(573
|
)
|
|
|
(266
|
)
|
Loss
before income taxes
|
|
|
(484
|
)
|
|
|
(6,055
|
)
|
Provision
for (benefit from) income taxes
|
|
|
323
|
|
|
|
(1,798
|
)
|
Net
loss
|
|
$
|
(807
|
)
|
|
$
|
(4,257
|
)
|
|
|
Nine
months ended
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
Processor
Business Group
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
57,578
|
|
|
$
|
54,665
|
|
Gross
margin
|
|
|
56,706
|
|
|
|
53,373
|
|
Operating
income
|
|
|
38,281
|
|
|
|
29,231
|
|
Analog
Business Group
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
|
17,743
|
|
|
|
21,261
|
|
Gross
margin
|
|
|
3,879
|
|
|
|
5,775
|
|
Operating
loss
|
|
|
505
|
|
|
|
2,949
|
|
All
Other
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
(3,025
|
)
|
|
|
(5,332
|
)
|
Operating
loss
|
|
|
(38,922
|
)
|
|
|
(53,047
|
)
|
Total
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
|
75,321
|
|
|
|
75,926
|
|
Gross
margin
|
|
|
57,560
|
|
|
|
53,816
|
|
Operating
loss
|
|
|
(136
|
)
|
|
|
(20,867
|
)
|
Interest
income
|
|
|
147
|
|
|
|
1,266
|
|
Interest
expense
|
|
|
(1,429
|
)
|
|
|
(1,417
|
)
|
Other expense,
net
|
|
|
(2,173
|
)
|
|
|
(1,337
|
)
|
Loss
before income taxes
|
|
|
(3,591
|
)
|
|
|
(22,355
|
)
|
Provision
for (benefit from) income taxes
|
|
|
(792
|
)
|
|
|
1,018
|
|
Net
loss
|
|
$
|
(2,799
|
)
|
|
$
|
(23,373
|
)
|
PBG
PBG net
revenue of $17.7 million in the third quarter of fiscal 2009 decreased by 3
percent compared to net revenue of $18.1 million in the third quarter of fiscal
2008. Net revenue decreased primarily as a result of a $1.6 million decrease in
royalty revenue partially offset by an increase of contract revenue of $1.2
million. PBG net revenue of $57.6 million for the nine months
ended March 31, 2009 increased by 5% compared to net revenue of $54.7 million
for the nine months ended March 31, 2008 as a result of a $2.9 million
increase in contract revenue.
PBG gross
margin of $17.4 million in the third quarter of fiscal 2009 decreased by 2
percent compared to gross margin of $17.7 million in the second quarter of
fiscal 2008. PBG gross margin of $56.7 million for the nine months ended March
31, 2009 increased by 6 percent compared to gross margin of $53.4 million for
the comparable period a year ago. Since PBG cost of sales are
historically an insignificant percentage of revenue totals, changes in gross
margin totals were primarily due to changes in revenue.
PBG
operating income of $11.2 million in the third quarter of fiscal 2009 increased
by 14 percent compared to operating income of $9.8 million in the third quarter
of fiscal 2008. Operating income increased as a result of the decrease in PBG
operating expenses for the quarter ended March 31, 2009 as compared to the same
period of the prior year. PBG operating income of $38.3 million for
the nine months ended March 31, 2009 increased by 30 percent compared to
operating income of $29.2 million for the comparable period a year
ago. Operating income increased primarily as a result of the
increases in PBG revenue coupled with decreases in PBG operating expenses during
fiscal year 2009. The decrease in PBG operating expenses is primarily
due to reduced headcount from the restructuring efforts and a reduction in
outside services and consulting expenses.
ABG
ABG net
revenue of $5.0 million in the third quarter of fiscal 2009 decreased 45 percent
compared to net revenue of $9.2 million in the third quarter of fiscal
2008. ABG revenue of $17.7 million during the nine months ended
March 31, 2009 decreased by 17% compared to the net revenue of $21.3 million in
same period of the prior year. The revenue decreases for both periods
was primarily due to the continuing deterioration in global economic conditions
along with the disruptions associated with our restructuring efforts announced
during the first quarter of fiscal 2009.
ABG gross
margin of $1.8 million in the third quarter of fiscal 2009 decreased from a
gross margin of $2.6 in the third quarter of fiscal 2008. ABG gross margin for
the nine months ended March 31, 2009 decreased to $3.9 million from a gross
margin of $5.8 million. Gross margins decreased in both periods
primarily due to the decrease in ABG revenue, partially offset by cost savings
resulting from our restructuring efforts.
ABG
operating income decreased to $0.3 million in the third quarter of fiscal 2009
as compared to $1.6 million during the third quarter of fiscal
2008. The ABG operating income for nine months ended March 31, 2009
is $0.5 million compared to $2.9 million during the comparable period a year
ago. These decreases in operating income are primarily due to a
decrease in the ABG revenue for the comparable periods.
All
Other Category
The All Other
Category included costs associated with Corporate activities such as selling,
General and administrative costs and other costs not allocated to the business
units.
All Other
negative gross margin was $0.8 million in the third quarter of fiscal 2009
compared to negative gross margin of $2.3 million in the third quarter of fiscal
2008. All Other negative gross margin of $3.0 million for the nine months ended
March 31, 2009 decreased compared to negative gross margin of $5.3 million for
the same period of the prior year. The decrease in negative gross margin was
primarily due to the decrease in intangible asset amortization in fiscal 2009 as
compared to fiscal 2008, primarily as a result of the impairment write-off the
company recorded in the fourth quarter of fiscal 2008. The amount of
the decrease in the nine month period in fiscal 2009 partially offset by having
only approximately seven months of amortization in fiscal 2008 as compared to
nine months in fiscal 2009 based on the timing of the Chipidea acquisition in
fiscal 2008.
All Other
operating loss of $10.9 million decreased by 35% in the third quarter of fiscal
2009 compared to operating loss of $16.7 million in the third quarter of fiscal
2008. All Other operating loss of $38.9 million for the nine months
ended March 31, 2009 decreased by 43% compared to operating loss of $53.0
million in the same period of fiscal 2008. These losses are primarily
driven by intangible asset amortization costs, general and administrative costs,
selling costs, IT costs, certain corporate marketing costs, stock compensation
costs and Chipidea acquisition costs. The decrease in costs in fiscal
2009 as compared to the comparable periods in fiscal 2008 is primarily due
to the substantial amount of non-recurring outside service and integration costs
we incurred in fiscal 2008 in connection with the Chipidea acquisition, as well
as reduced corporate expenses in fiscal 2009 as a result of restructuring
efforts and cost saving measures that the company has put in place.
Results
of Operations
Revenue.
Total revenue
consists of royalties and contract revenue. Royalties are based upon sales by
licensees of products incorporating our technology. Contract revenue consists of
technology license fees generated from new and existing license agreements for
developed technology and engineering service fees generated from contracts for
technology under development or configuration of existing IP. 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
during a specified period, and whether the license granted covers a particular
design or a broader architecture.
Our
revenue in the three-month and nine-month periods ended March 31, 2009 and March
31, 2008 was as follows (in thousands, except percentages):
|
|
Three Months Ended March 31,
|
|
|
Nine
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Change in
Percent
|
|
|
2009
|
|
|
2008
|
|
|
Change in
Percent
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
|
|
$
|
10,901
|
|
|
$
|
12,556
|
|
|
|
(13)
|
%
|
|
|
35,686
|
|
|
$
|
35,590
|
|
|
|
0
|
%
|
Percentage
of Total Revenue
|
|
|
48
|
%
|
|
|
46
|
%
|
|
|
|
|
|
|
47
|
%
|
|
|
47
|
%
|
|
|
|
|
Contract
Revenue
|
|
$
|
11,805
|
|
|
$
|
14,767
|
|
|
|
(20)
|
%
|
|
|
39,635
|
|
|
$
|
40,336
|
|
|
|
(2)
|
%
|
Percentage
of Total Revenue
|
|
|
52
|
%
|
|
|
54
|
%
|
|
|
|
|
|
|
53
|
%
|
|
|
53
|
%
|
|
|
|
|
Total
Revenue
|
|
$
|
22,706
|
|
|
$
|
27,323
|
|
|
|
(17)
|
%
|
|
$
|
75,321
|
|
|
$
|
75,926
|
|
|
|
(1)
|
%
|
Royalties
. The
decrease in royalties in the third quarter of fiscal 2009 from the comparable
period in fiscal 2008 is primarily due to a 7% decrease in unit volumes shipped
by our royalty paying licensees. This decrease is a result of the
weakness of the general economy.
Royalties
in the first nine months of fiscal 2009 were relatively flat from the comparable
period in fiscal 2008.
Contract Revenue
. The
20% decrease in contract revenue was due to decrease of ABG revenue in
the quarter ended March 31, 2009 as compared to the third quarter of fiscal
2008, partially offset by an increase in PBG contract revenue in the same
period. In the third quarter of fiscal 2009, ABG contract
revenues were $4.8 million compared to $9.0 million in third quarter of fiscal
2008. Revenue from ABG contracts is generally recognized on a
percentage of completion basis over the period of contract
performance. The ABG revenue decrease was offset in part by
a $1.2 million increase in PBG contract revenue. There
were 8 new PBG license agreements in the third quarter of fiscal 2009
compared to 6 in the third quarter of fiscal 2008.
Contract
revenue for the nine months ended March 31, 2009 was down 2% from the comparable
period in fiscal 2008. The decrease was the net effect of an increase
of $2.9 million in PBG contract revenue due to the favorable size and
timing of PBG deals that closed in 2009 as compared to 2008, and a decrease of
$3.6million in ABG contract revenue primarily due to the weakness of
the worldwide economy.
In our
Processor Business Group, we entered into a number of unlimited use license
agreements with our customers. Under these agreements, customers
generally pay a larger fixed up-front fee to use one or more of our cores in
unlimited SoC designs during the term of the agreement, which can be up to 7
years. We recognize all license revenues under these unlimited use
license agreements upon execution of the agreement provided all revenue
recognition criteria had been met. Contract revenue from unlimited
use license agreements was unchanged at $2.1 million in third quarter of fiscal
2009 and $2.1 million in third quarter of fiscal 2008. Contract revenue
from unlimited use license agreements was $8.3 million in the first nine months
of fiscal 2009 as compared with $7.9 million in same period of fiscal
2008.
Comparison
of Gross Margin and Operating Expenses
The
following is a summary of certain consolidated statement of operations data for
the periods indicated:
|
|
Three
Months Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
in
Percent
|
|
|
|
(in
thousands, except for percentages)
|
|
Cost
of Sales
|
|
$
|
4,325
|
|
|
$
|
9,407
|
|
|
|
(54)
|
%
|
Gross
Margin
|
|
$
|
18,381
|
|
|
$
|
17,916
|
|
|
|
3
|
%
|
Gross
Margin Percentage
|
|
|
81
|
%
|
|
|
66
|
%
|
|
|
|
|
Research
and Development
|
|
$
|
7,809
|
|
|
$
|
9,315
|
|
|
|
(16)
|
%
|
Sales
and Marketing
|
|
$
|
4,211
|
|
|
$
|
6,056
|
|
|
|
(30)
|
%
|
General
and Administrative
|
|
$
|
4,744
|
|
|
$
|
6,559
|
|
|
|
(28)
|
%
|
Restructuring
|
|
$
|
959
|
|
|
$
|
1,279
|
|
|
|
(25)
|
%
|
|
|
Nine
Months Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
in
Percent
|
|
|
|
(in
thousands, except for percentages)
|
|
Cost
of Sales
|
|
$
|
17,761
|
|
|
$
|
22,110
|
|
|
|
(20)
|
%
|
Gross
Margin
|
|
$
|
57,560
|
|
|
$
|
53,816
|
|
|
|
7
|
%
|
Gross
Margin Percentage
|
|
|
76
|
%
|
|
|
71
|
%
|
|
|
|
|
Research
and Development
|
|
$
|
21,955
|
|
|
$
|
27,821
|
|
|
|
(21)
|
%
|
Sales
and Marketing
|
|
$
|
13,610
|
|
|
$
|
17,796
|
|
|
|
(24)
|
%
|
General
and Administrative
|
|
$
|
15,693
|
|
|
$
|
21,437
|
|
|
|
(27)
|
%
|
Acquired
in-process research & development
|
|
$
|
—
|
|
|
$
|
6,350
|
|
|
|
(100)
|
%
|
Restructuring
|
|
$
|
6,438
|
|
|
$
|
1,279
|
|
|
|
403
|
%
|
Cost of Sales.
ABG
revenue is generated by projects which include the development
of technology that is directly related to the requirements of particular
licensees and license agreements and, accordingly entails a higher cost of sales
as compared to PBG. PBG cost of sales has historically been
insignificant as the majority of our PBG revenue is derived from royalties and
licenses which have insignificant related costs. Cost of sales
generally include salaries and related employee costs, depreciation, and
the amortization of intangible assets.
Due to
the impairment write-off we completed in June 2008, our intangible asset
amortization costs have decreased in fiscal 2009 as compared to fiscal
2008. In addition, due to our restructuring efforts and other cost
cutting measures, our headcount and expenses have decreased in fiscal 2009 as
compared to 2008, resulting in lower cost of sales expenses in fiscal
2009.
Gross Margin.
Gross
margin as a percentage of net revenue increased to 81% in the third quarter of
fiscal 2009 compared to 66% in the comparable quarter in fiscal 2008. Gross
margin for nine months ended March 31, 2009 as a percentage of net revenue
increased to 76% compared to 71% percent in the comparable period in fiscal
2008. The increase in gross margin for both periods was primarily due
to the decrease in ABG revenue as a percentage of total
revenue. In addition, our intangible asset amortization costs
are lower in fiscal 2009, and we also have lower headcount attributed to cost of
sales in fiscal 2009 due to our restructuring efforts.
Research and
Development.
Research and development expenses include salaries and
contractor and consultant fees, as well as costs related to workstations,
software, computer aided design tools, and stock-based compensation expense. 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 not directly related to any particular licensee, license agreement or
license fee.
The $1.5
million decrease in research and development expenses for the third quarter of
fiscal 2009 compared to the same period in fiscal 2008 was primarily due to $1.0
million decrease in stock compensation expense and $0.5 million decrease in
salary expense.
The $5.9
million decrease in research and development expenses for the nine months ended
March 31, 2009 compared to the same period in fiscal 2008 was primarily due to
$3.2 million decrease in salary and benefit expenses, $1.2 million decrease in
stock compensation expense, $1.0 million decrease in depreciation expenses, $0.9
decrease in outside services and consulting fees, and $0.2 million decrease in
travel expenses, partially offset by a $0.3 million increase in deferred
purchase price consideration amounts due to the founders of Chipidea and a $0.3
million increase in bonus expense.
Sales and Marketing
. Sales
and marketing expenses include salaries, commissions and costs associated with
third party independent software development tools, direct marketing, other
marketing efforts and stock-based compensation expense. Our sales and marketing
efforts are directed at establishing and supporting our licensing
relationships.
The $1.8
million decrease in sales and marketing expense for third quarter of fiscal 2009
over the comparable period in fiscal 2008 was primarily due to $1.1 million
decrease in salary, benefits and bonus expense, $0.3 million decrease in stock
compensation expense, $0.2 million decrease in travel and entertainment expense
and $0.2 million decrease in other expenses such as supplies and maintenance and
outside services.
The $4.2
million decrease in sales and marketing expense for the nine months ended March
31, 2009 over the comparable period fiscal 2008 was primarily due to $2.1
million decrease in salary and benefit expense, $0.8 million decrease in stock
compensation expense, $0.5 million decrease in supplies, maintenance and
marketing expense, $0.4 million decrease travel related expense and $0.4 million
decrease in consulting and outside services.
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, accounting and audit fees, in
addition to stock-based compensation expense.
The $1.8
million decrease in general and administrative expenses for the third quarter of
fiscal 2009 compared to the same period in fiscal 2008 was primarily due to $1.0
million decrease in outside services and consulting, $0.4 million decrease in
bonus expense, $0.2 million decrease in stock compensation expense and $0.2
million decrease in travel related expenses.
The $5.7
million decrease in general and administrative for the nine months ended March
31, 2009 compared to the same period in fiscal 2008 was primarily due $5.3
million decrease in outside services expense primarily due to the costs
associated with Chipidea acquisition and related integration efforts, a $0.8
million decrease in deferred purchase price consideration amounts due to the
founders of Chipidea, $0.5 million decrease in stock compensation expense,
partially offset by a $0.9 million increase in facilities, supplies, maintenance
and depreciation expense in fiscal 2009 primarily resulting from having 9 months
of Chipidea operations in fiscal 2009 as opposed to only approximately seven
months in fiscal 2008.
Acquired In-process Research and
Development.
In August 2007, we completed the acquisition of
Chipidea, a privately held supplier of analog and mixed signal intellectual
property. The fair value of the in-process technology was determined by
estimating the present value of the net cash flows we believed would result from
the acquired technology. Because technological feasibility of certain of the
acquired technology had not been established and no future alternative use for
the in-process technology existed at the time of the acquisition, we recorded a
charge of $6.4 million in the first nine months of fiscal 2008.
Restructuring Expense
.
In August 2008 we announced a plan to reduce the Company’s operating costs by a
reduction in employee headcount in the Company’s facilities in United States,
Israel, Portugal, and the closing of our facilities in Belgium and
France facilities. In the third quarter of fiscal 2009, approximately
$0.6 million of severance and benefits costs were recorded as restructuring
expense in connection with the August 2008 restructuring plan. In
addition, we incurred approximately $0.4 million of additional restructuring
expenses in the third quarter in connection with additional restructuring
efforts relating to the departure of certain company executives. For
the nine months ended March 31, 2009 approximately $6.4 million of severance and
benefits costs, asset disposal and other costs was recorded as restructuring
expenses.
Other Income (expense),
Net
. Other income (expense), net for the third quarter of fiscal
2009 was an expense of $1.1 million as compared to expense of $0.8 million for
the comparable period in fiscal 2008. The decrease in other expense was
primarily due to weakening euro as compared with the dollar in fiscal 2009.
Interest expense was $0.6 million in the third quarters of each of fiscal 2009
and 2008.
Income Taxes
. We
recorded an income tax expense of $0.3 million for the three months and a
benefit of $0.8 million for the nine months ended March 31, 2009. We recorded an
income tax benefit of $1.8 million and an expense of $1.0 million for the
comparable periods in fiscal 2008. For the Processor Business Group, we
continued to recognize a valuation allowance against the U.S. deferred tax
assets as we believe that it is more likely than not that the deferred
tax assets will not be recognized.
Our
estimated annual income tax for fiscal 2009 primarily consists of tax benefits
from the loss generated by the Analog Business Group and releases of
unrecognized tax benefits that are no longer applicable, partially offset by US
deferred tax from goodwill amortization, foreign tax, and withholding tax. Our
estimated annual income tax for fiscal 2008 primarily consists of US federal,
state, foreign income taxes, withholding taxes, offset in part by certain
foreign tax credits and general business tax credits.
Liquidity
and Capital Resources
At March
31, 2009, we had cash and cash equivalents of $21.1 million, an increase of
approximately $7.1 million from June 30, 2008.
On
July 3, 2008, we entered into a new credit facility with Silicon Valley
Bank (SVB). This new facility includes a four year term loan of $15 million and
a revolving credit line allowing us to borrow up to $10 million for which
related borrowings will be due on July 2, 2009. In December 2008, we
amended our credit facility agreement with SVB, providing us more flexibility to
fund the international operations of our subsidiaries. As of March
31, 2009, outstanding balances under this facility were $12.5 million for the
term loan and $1.2 million for the revolving credit facility. We
borrowed the full amount available under the $15 million term loan facility and
paid off approximately $2.5 million in the nine months ended March 31,
2009. We had $8.8 million available to borrow under the revolving
credit line at March 31, 2009. Loans under this facility are secured by
virtually all of our assets with the exception of IP, and the facility contains
affirmative and negative covenants that impose restrictions on the operation of
our business. Proceeds of $16.2 million from this new facility were used to pay
off our prior loan balance.
On
August 13, 2008, we announced a restructuring plan designed to reduce
approximately $5.0 million in costs of sales and operating expenses per quarter.
With the reduction in interest and principle payments associated with the new
loan and the operating cost reductions being implemented in fiscal 2009, our
liquidity position improved in each of the first, second and third quarters of
fiscal 2009 as we were able to generate positive cash of approximately $2.3
million in the first quarter of fiscal 2009, approximately $4.3 million in the
second quarter of fiscal 2009 and approximately $0.5 million in the third
quarter of fiscal 2009.
For
complete statements of cash flows for the nine months ended March 31, 2009 and
2008, see our consolidated financial statements.
Net cash
provided by operating activities was $10.6 million for the nine months ended
March 31, 2009. Our loss in the first nine months of fiscal 2009 of $2.8 million
was substantially offset by non-cash charges of $3.6 million of stock based
compensation, $3.3 million relating to amortization of acquired
intangible assets and $2.7 million of depreciation expense. In
addition, we generated operating cash in connection with a decrease in our
accounts receivable balance at March 31, 2009 compared to June 30,
2008. This decrease was primarily due to our mix of sales in the
third quarter of fiscal 2009 including more upfront customer payments as
compared to the quarter ended June 30, 2008 coupled with lower contract revenue
in the third quarter of 2009 as compared to the fourth quarter of
2008.
Net cash
used in operating activities was $0.6 million for the nine months ended March
31, 2008, primarily due to our net loss partially offset by non-cash charges
including stock-based compensation under SFAS No. 123R, depreciation,
amortization of intangible assets, and acquired in-process research and
development costs. In addition, cash was used by a decrease in our income taxes
payable and a decrease in accrued liabilities due to the payment of accrued
invoices for acquisition and integration costs. These uses of cash were
partially offset by cash provided by collections from existing Chipidea
receivables acquired in connection with the Chipidea acquisition and a decrease
in our long-term assets due to normal amortization.
Net cash
used in investing activities was $0.9 million for the nine months ended March
31, 2009 as a result of capital expenditures in the period.
Net cash
used in investing activities was $124.2 million for the nine months ended March
31, 2008 which was primarily due to cash used for our acquisition of Chipidea
and the establishment of restricted cash accounts for the amounts held in escrow
related to the Chipidea acquisition. This use of cash was offset in part by
$25.9 million of cash provided from the proceeds of the sale of our marketable
investments.
Net cash
used in financing activities was $2.6 million for the nine months ended March
31, 2009. This usage was due to the net payment of $3.0 million of
debt in the nine months ended March 31, 2009 and capital lease payments of $0.4
million, offset by $0.8 million in proceeds from the issuance of common
stock.
Net cash
provided by financing activities was $21.0 million for the nine months ended
March 31, 2008, primarily attributable to the loan of $20 million under our
prior revolving credit agreement and activity under our employee stock plans,
offset in part by cash paid for loan origination fees and loan
repayments.
Our future
liquidity and capital requirements could vary significantly from quarter to
quarter, depending on numerous factors, including, among others:
·
from
time to time we have certain significant payments to suppliers including CAD
system vendors required under long term purchase agreements. These payments vary
and can be up to $2 million per quarter.
·
from
time to time we have certain significant payments to investors relating to prior
acquisitions. These payments can range up to $1.0 million a quarter, excluding
payments from funds previously set aside in escrow accounts.
·
divestitures
or investments.
·
our
ability to generate new business and meet revenue targets.
·
our
ability to continue to generate cash flow from operations.
·
financing
activities under borrowing arrangements. Our borrowing availability with SVB
varies according to our accounts receivable and recurring royalty revenues and
other terms and conditions described in the loan and security
agreement.
·
the
costs associated with capital expenditures and our land and building in
Portugal.
·
level
and timing of restructuring activities. In August 2008, we announced a corporate
restructuring to better integrate the ABG and reduce overall cost
structure. In addition, in Q3 2009, we had restructuring activities
associated with certain executive departures. See Note 7 of the Notes
to Condensed Consolidated Financial Statements for additional details on our
restructuring activities.
We
believe that we have sufficient cash and borrowing capabilities to meet our
projected operating and capital requirements for the foreseeable future and at
least the next twelve months. However, we may in the future be required to raise
additional funds through public or private financing, strategic relationships or
other arrangements. Additional equity financing may be dilutive to holders of
our common stock, and debt financing, if available, may involve restrictive
covenants. Our failure to raise capital when needed could have a material
adverse effect on our business, results of operations and financial
condition.
Our
contractual obligations as of March 31, 2009 were as follows:
|
|
Payments
due by period (in thousands)
|
|
|
|
Total
|
|
|
Less than
1
year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More than
5
years
|
|
Operating
lease obligations (1)
|
|
$
|
7,830
|
|
|
$
|
1,556
|
|
|
$
|
2,330
|
|
|
$
|
2,712
|
|
|
$
|
1,232
|
|
Capital
lease obligations (2)
|
|
|
9,790
|
|
|
|
1,422
|
|
|
|
1,995
|
|
|
|
1,578
|
|
|
|
4,795
|
|
Purchase
obligations (3)
|
|
|
11,460
|
|
|
|
5,814
|
|
|
|
5,646
|
|
|
|
—
|
|
|
|
—
|
|
Short
Term Debt (4)
|
|
|
7,016
|
|
|
|
7,016
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
short-term liabilities reflected on our Balance Sheet (5)
|
|
|
21,497
|
|
|
|
21,497
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Long
Term Debt (6)
|
|
|
9,153
|
|
|
|
—
|
|
|
|
7,893
|
|
|
|
1,260
|
|
|
|
—
|
|
Other
long-term liabilities and obligations (7)
|
|
|
1,506
|
|
|
|
—
|
|
|
|
1,506
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
68,252
|
|
|
$
|
37,305
|
|
|
$
|
19,370
|
|
|
$
|
5,550
|
|
|
$
|
6,027
|
|
(1)
|
We
lease office facilities and equipment under noncancelable operating leases
that expire through 2016. In connection with the lease for our
Mountain View headquarters, we have entered into a letter of credit as a
security deposit with a financial institution for $0.3 million, which is
guaranteed by a time-based certificate of deposit. In addition,
we have entered into letters of credit of approximately $1.4
million with various financial institutions in Portugal, Belgium,
Norway, and France in association with certain building leases and
government grants.
|
(2)
|
Commitments
due under our capital leases for equipment and
property.
|
(3)
|
Outstanding
purchase orders for ongoing operations. Payments of these obligations are
subject to the provision of services or products. Since December 31, 2008,
purchase obligations have decreased by approximately $1.4 million largely
due to amortization from existing CAD
licenses.
|
(4)
|
Short
term debt includes $5.4 million of principal and interest due under our
SVB term loan and revolving credit facility, $1.5 million due under
various credit lines and $0.1 million primarily due to a loan with a
government agency in Portugal and the related future interest
payment.
|
(5)
|
Short
term liabilities includes: $15.1 million related to an escrow
account related to the Chipidea acquisition completed in August
2007, $4.2 million liabilities related to an escrow account for
the consideration contingent due upon continued employment of certain
employees related to the Chipidea acquisition, $0.8 million due
to shareholders of a company acquired by Chipidea prior to August 2007,
and $1.4 million in payables for computer aided design licenses not
included under outstanding purchase
orders.
|
(6)
|
Long
term debt includes $9.2 million of principal and interest due under the
SVB term loan.
|
(7)
|
Long-term
liabilities and obligations include: $1.5 million due to
employees under a deferred compensation plan, under which
distributions are elected by the
employees.
|
|
The
table above excludes liabilities, aggregating $3.9 million, estimated
under FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” as we are unable to reasonably estimate the ultimate amount or
timing of settlement.
|
Critical
Accounting Polices 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 there have been no significant changes to the items we disclosed as
our critical accounting policies and estimates in our discussion and analysis of
financial condition and results of operations in our 2008 Form
10-K.
ITEM 3.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET
RISK
We believe
there have been no significant changes to the discussion of quantitative and
qualitative disclosures about market risk in our 2008 Form
10-K.
ITEM 4.
CONTROLS AND
PROCEDURES
Our chief
executive officer and our chief financial officer have concluded, based on the
evaluation of the effectiveness of our disclosure controls and procedures by our
management, with the participation of our chief executive officer and our chief
financial officer, as of the end of the period covered by this report, that our
disclosure controls and procedures (as such term is defined under Rule 13a-15(e)
or 15(d)-15(e) under the Exchange Act) were not effective as of March 31, 2009,
because of the material weakness described in Part II, Item 9A, in our 2008
Annual Report on Form 10-K. In that section, we describe a material weakness in
our internal control over financial reporting as a result of errors found during
the preparation of our financial statements with regards to the process of
accounting for income taxes.
Management began
implementing a remediation plan for this material weakness during
fiscal 2007. Our remediation plan includes: a) reduction in the
turnover of internal and external tax professionals, b) 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, and c) consultation with tax experts in a timely
manner. Though we have made progress in hiring qualified tax
personnel and have set in place additional review procedures, that plan is
still in progress. We expect to complete the implementation of the
controls included in this remediation plan during fiscal 2009. Competition for
highly qualified tax personnel remains intense in the Bay Area. Our inability to
attract and retain personnel with adequate experience and skills could make it
difficult to timely complete the remediation plan.
Other
than the changes as part of the remediation plan discussed above, there were no
changes in our internal control over the financial reporting (as such term is
defined under Rule 13a-15(f) under the Exchange Act) that occurred during the
third quarter of fiscal 2009 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
PART II – OTHER INFORMATION
ITEM 1.
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. For additional information regarding intellectual property
litigation, see Part I, Item 1A. Risk factors—“We may be subject to claims
of infringement”.
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.
Our financial results could be
negatively impacted by economic conditions.
The U.S. economy
and other global economies are in a recession and we cannot predict when global
economic conditions will cease to deteriorate. 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. The semiconductor industry appears to be facing
particularly challenging economic trends 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, which have recently
deteriorated significantly in many countries and regions, including the United
States, and may remain depressed indefinitely. Contract revenues depend on the
willingness of our potential customers to invest in new products, and 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 residential real estate and mortgage markets,
labor and healthcare costs, access to credit, consumer confidence and other
macroeconomic factors affecting consumer spending behavior. 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.
The recent financial crisis could
negatively affect our business, results of operations, and financial
condition
.
The
recent financial crisis affecting the banking system and financial markets and
the ongoing weakness of financial institutions have resulted in a
tightening in the credit markets; a low level of liquidity in many financial
markets; and extreme volatility in credit, fixed income, and equity markets.
There could be a number of follow-on effects from the recent financial crisis on
our business, including insolvency issues with our customers or
suppliers.
During the first quarter of fiscal
2008, we completed the acquisition of Chipidea, and there are numerous risks
associated with this acquisition.
In August 2007,
we completed the acquisition of Chipidea, a Portuguese company that supplies
analog and mixed signal intellectual property for the digital consumer, wireless
and connectivity markets. The purchase price for this acquisition was $147
million in cash paid at closing.
This is a
substantially larger acquisition than any that we have previously completed and
involves technology and products that are largely new to us. Many of the risks
discussed below under “We may encounter difficulties with future acquisitions
that could harm our business” may be enhanced as a result of the Chipidea
acquisition. Among the many risks associated with the acquisition are the
following:
·
the
challenges and expense associated with integrating and managing a large acquired
business, which challenge will be further complicated by the geographical
distance between our headquarters in California and the Chipidea headquarters in
Portugal;
·
our
dependence on the MIPS management team to manage the Chipidea business, and
integrate it with our existing business;
·
the
ongoing risk of the loss of key personnel whose ongoing employment with us could
be important to our ability to continue to advance the Chipidea technology and
to effectively market and sell its products;
·
diversion
of our management team’s attention as we seek to capitalize on the opportunities
presented by this acquisition may adversely affect our ability to operate our
existing business.
To date we
have not achieved the advantages that we envisioned when we decided to complete
this acquisition. In the fourth quarter of fiscal 2008 we recorded substantial
charges for the impairment of goodwill and intangible assets from this
acquisition, as our updated forecasts for the business showed lower near and
long term profitability than we had estimated at the time of completing the
acquisition. Supporting the licensing of analog and mixed signal IP is
relatively more labor intensive than that of our microprocessor IP business, and
we cannot be assured of our ability to achieve operating results from this
business that correspond to those that we can achieve in our existing
business. In the third quarter of fiscal 2009, we made a determination
with regard to the ABG to either improve the financial performance or
investigate the potential divestiture of the unit, and progress has been made on
both of those strategic alternatives. In addition, the Company has
had discussions with third parties about the possible sale of the business
unit. While no definitive sale agreement has been reached, the possibility
of a divesture remains.
If we are
not as successful as we anticipated with the Chipidea business, our future
operating results and financial position would be adversely
affected.
Our capacity to meet financial
obligations depends on our ability to generate positive cash
flow.
We used all of our available cash and short term
investments to complete the acquisition of Chipidea and we now have significant
debt. This use of cash, coupled with negative cash flow in our Analog
Business Group, dramatically reduces our liquidity, and if we encounter
difficulty in generating cash from the operation of our business we may be
required to curtail our operations or take other acts that could adversely
affect our ability to be successful over the longer term. Our term
loan with Silicon Valley Bank in the amount of $15 million is due and payable in
monthly installments over four years and has a revolving credit line in the
amount of $10 million. Under the terms of a Loan and Security Agreement we must
pay off all amounts due under the Revolving Credit Agreement or extend the
agreement on or before July 2, 2009. At March 31, 2009, we owed
approximately $12.5 million under the term loan and approximately $1.2 million
under the Revolving Credit Agreement. Loans under the new facility
are secured by virtually all of our assets, and the facility contains
affirmative and negative covenants that impose restrictions on the operation of
our business. Certain restrictive covenants may limit our ability to fund
the international operations of our subsidiaries and therefore may substantially
and negatively impact our ability to conduct business overseas or may accelerate
the timing of when principal payments are due. In addition, we cannot
be assured that we will be able to repay this debt on or before its due date. We
will be required to make interest payments for so long as this debt is
outstanding. This incurrence of long term debt could adversely affect our
operating results and financial condition and the sale of equity securities
could be on terms that are dilutive to our existing stockholders. Further, the
covenants contained in the credit facility may prevent us from taking advantage
of opportunities that are otherwise available to us or could cause an earlier
acceleration of the facility. We may not be able to obtain favorable
credit terms related to any debt that we may incur in the future.
Our quarterly financial results are
subject to significant fluctuations that could adversely affect our stock
price.
Our quarterly 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. Our acquisition of Chipidea will increase the challenge
that we face in planning and predicting our future operating results. 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:
·
our
ability to identify attractive licensing opportunities and then enter into new
licensing agreements on terms that are acceptable to us;
·
our
ability to successfully conclude licensing agreements of any significant value
in a given quarter, particularly as we have become more reliant on larger
transactions in PBG;
·
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;
·
the
demand for products that incorporate our technology;
·
our
ability to develop, introduce and market new intellectual property;
·
the
establishment or loss of licensing relationships with semiconductor companies or
digital consumer, wireless, connectivity and business product
manufacturers;
·
the
timing of new products and product enhancements by us and our
competitors;
·
changes
in development schedules, research and development expenditure levels and
product support by us and semiconductor companies and digital consumer,
wireless, connectivity and business product manufacturers; and
·
uncertain
economic and market conditions.
The success of our business depends
on sustaining or growing our contract
revenue.
Contract revenue consists of technology license
fees paid for access to our developed technology 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, digital consumer, wireless, connectivity and business
product manufacturers, adopting our technology and using it in the products they
sell. Our PBG contract revenue declined 12% in fiscal 2006, increased by 42% in
fiscal 2007 and declined by 23% in fiscal 2008. In addition, our PBG contract
revenue increased by 15% in the first nine months of fiscal 2009 as compared to
the same period of fiscal 2008. In our PBG, we entered into a number of
unlimited use license agreements with our customers. Under these agreements,
customers generally pay a larger fixed up-front fee to use a number of our cores
in unlimited SoC designs during the term of the agreement, which is generally
between 4 and 7 years. The number of licensed cores can vary from one core to
every core currently available. We recognize all license revenues under these
unlimited use license agreements upon execution of the agreement, provided all
revenue recognition criteria had been met. Contract revenue from unlimited use
license agreement was 69% in fiscal 2008, 49% in fiscal 2007, and 32% in fiscal
2006 of the total PBG license and contract revenue. Additionally, contract
revenue from unlimited use license agreements was $8.3 million in first nine
months of fiscal 2009 as compared with $7.9 million in first nine months of
fiscal 2008. Historically, a license-based business can have strong
quarters or weak quarters depending on the number and size of the license deals
closed during the quarter. We cannot predict whether we can maintain our current
contract revenue levels or if contract revenue will grow. Our licensees are not
obligated to license new or future generations of our products, so past contract
revenue may not be indicative of the amount of such revenue in any future
period. 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.
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 will depend, 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:
·
our
ability to anticipate and timely respond to changes in the requirements of
semiconductor companies, and original equipment manufacturers, or OEMs, of
digital consumer, wireless, connectivity and business products;
·
our
ability to anticipate and timely respond to changes in semiconductor
manufacturing processes;
·
changing
customer preferences in the digital consumer, wireless, connectivity and
business products markets;
·
the
emergence of new standards in the semiconductor industry and for digital
consumer, wireless, connectivity and business products;
·
the
significant investment in a potential product that is often required before
commercial viability is determined; and
·
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.
In our Processor business we depend
on royalties from the sale of products incorporating our technology, and we have
limited visibility as to the timing and amount of such
sales.
As royalties reported by our customers are one quarter
in arrears, shipments and revenue reported in our third quarter represented our
customer shipments from the quarter ended December 31, 2008. Due to
the recent slowdown in the semiconductor and consumer electronics segments, our
royalties will likely be negatively impacted in our fourth quarter of fiscal
2009. Our receipt of royalties from our licenses depends on our
customers incorporating our technology into their products, their bringing these
products to market, and the success of these products. In the case of our
semiconductor customers, the amount of such sales is further dependent upon the
sale of the products by their customers into which our customers’ products are
incorporated. Thus, our ability to achieve design wins and enter into licensing
agreements does not assure us of future 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:
·
the
competition these companies face and the market acceptance of their
products;
·
the
engineering, marketing and management capabilities of these companies and
technical challenges unrelated to our technology that they face in developing
their products; and
·
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 do not set the prices at which products incorporating our
technology are sold.
We rely
on our customers 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 customer’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.
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, larger customer bases as
well as greater financial and marketing resources than we do. 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.
We may incur restructuring charges in
the future, which could harm our results of operations.
On
August 13, 2008, we announced a plan to reduce the Company’s operating
costs by a reduction in employee headcount. This plan involves the termination
of employees in our facilities in the United States, Israel and Europe. We have
incurred substantially all costs associated with this plan through March 31,
2009 in the amount of approximately $6.0 million. In addition, in our
third quarter of fiscal 2009, we incurred approximately $0.4 million of
additional restructuring charges in connection with executive
departures. These restructuring activities may not be sufficient to
appropriately align our operating expenses with our revenue
expectations. 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.
Our operations in foreign countries
are subject to political and economic risks.
With the
acquisition of Chipidea we have substantially expanded our operations outside
the United States. In addition to the main Chipidea facilities in Portugal,
we also have operations in China, France, Macau, Norway, Switzerland and Poland
as well as sales offices in China, Germany, Japan, Israel, Korea and
Taiwan. Our operations in countries outside the U.S. subject us to risks,
including:
·
changes
in tax laws, trade protection measures and import or export licensing
requirements;
·
potential
difficulties in protecting our intellectual property;
·
changes
in foreign currency rates;
·
restrictions,
or taxes, on transfers of funds between entities or facilities in different
countries; and
·
changes
in a given country’s political or economic conditions.
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, our
taxes could increase, and our sales could be adversely affected. Any of
these items could have an adverse affect on 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. This
dependence is enhanced with our acquisition of Chipidea, as our ability to
successfully operate this business in the future will depend significantly on
our ability to retain key Chipidea management and employees. We cannot assure
that we will retain our key officers and employees. Competition for qualified
personnel, particularly those with significant experience in the semiconductor,
analog, mixed signal and processor design industries, remains intense. The loss
of the services of any of our key personnel or our inability to attract and
retain qualified personnel in the future could make it difficult to meet key
objectives, such as timely and effective project milestones and product
introductions which could adversely affect our business, results of operations
and financial condition.
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 Estimates” in Part I, Item 7 of our Form 10-K for the year
ended June 30, 2008). 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 those 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 earnings being lower than anticipated in countries with
low statutory tax rates, by changes in the valuation of our deferred tax assets
and liabilities, or by changes in tax laws or regulations or the interpretation
of tax laws or regulations. We operate in countries other than the United States
and occasionally face inquiries and examinations regarding tax matters in these
countries. There can be no assurance that the outcomes from examinations will
not have an adverse effect on our operating results and financial
condition.
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 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. 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 use of
our technology. 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 infringed
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 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.
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 and nondisclosure
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. 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. Recent judicial decisions and
proposed 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.
We have recorded long-lived assets,
and our results of operations would be adversely affected if their value becomes
impaired.
Although we took a substantial charge in the fourth
quarter of fiscal 2008 for the impairment of goodwill and acquired intangible
assets associated with the Chipidea acquisition and prior acquisitions, we
continue to carry substantial amounts of acquired intangible assets and
goodwill. If we complete additional acquisitions in the future, our acquired
intangible asset amortization expenses could further increase, and we may be
required to record additional amounts of goodwill. In addition, we have made
investments in certain private companies which could become impaired if the
operating results of those companies change adversely. We evaluate our
long-lived assets, including acquired intangible assets, goodwill and
investments in private companies for impairment on an annual basis or whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable from its estimated future cash flows.
In the
future, if we make a further determination that our long-lived assets are
impaired, we will have to recognize additional charges for the impairment. We
cannot be sure that we will not be required to record additional long-lived
asset impairment charges in the future. Our determination of fair value of
long-lived assets relies on management’s assumptions of our future revenues,
operating costs, and other relevant factors. If management’s estimates of future
operating results change or if there are changes to other assumptions such as
the discount rate applied to future cash flows, the estimate of the fair value
of our reporting units could change significantly, which could result in
additional goodwill impairment charges.
We cannot be assured that our recent
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, including plans announced in
January and August 2008. We also implemented additional restructuring
efforts in the third quarter of fiscal 2009 in connection the departure of
certain company executives. We may not realize fully the anticipated benefits of
the restructuring plans, which may lead to additional future restructurings to
align our expenses with our anticipated revenue. If we are required to do so, we
likely would incur additional amounts of material restructuring
charges.
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 foreign
currency exchange rates, fluctuations in interest rates and changes in our cash
and cash equivalent balances. These changes are, to a large extent,
beyond our control and we have limited ability to predict them.