MIPS Technologies 10-K 2010
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED June 30, 2010
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to .
Commission file number 000-24487
MIPS TECHNOLOGIES, INC.>
(Exact name of registrant as specified in its charter)
(Address of principal executive offices)
Registrant’s telephone number, including area code: (408) 530-5000
Securities registered pursuant to section 12(b) of the Act:
Securities registered pursuant to section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting Company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12-b2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act). Yes ¨ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter (December 31, 2009) was approximately $198 million for the registrant’s common stock, $0.001 par value per share. For purposes of this disclosure, shares of common stock held by persons who hold more than 5% of the outstanding shares of common stock and shares held by officers and directors of the registrant have been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of August 31, 2010, the number of outstanding shares of the registrant’s common stock, $0.001 par value, was 47,158,062.
DOCUMENTS INCORPORATED BY REFERENCE
Item 1. Business
MIPS Technologies, Inc. is a leading provider of industry-standard processor architectures and cores that power some of the world’s most popular home entertainment, communications, networking and portable multimedia products. 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. Our customers are global semiconductor companies and system original equipment manufacturers (system OEMs). We offer our customers high-performance, easy-to-use functionality at a fraction of the cost and time to market that internal development would require. Our customers pay us license fees for architectural and product rights, as well as royalties based on processor unit shipments.
Our business model is based on the licensing of embedded processor intellectual property (IP) in the form of both architectures and implementations. Embedded processor IP requires considerable development effort in order to create a product, but once created, it can be licensed for use to multiple parties and distributed electronically. We license our IP products for prices ranging from a few hundred thousand dollars to millions of dollars, depending on the technology involved and the specifics of the license. Once our IP has been incorporated into our licensees’ products, which may take several months to several years, we are eligible to receive royalties from our licensees.
We have developed standards for both 32-bit and 64-bit computing. We license our industry-standard MIPS32 and MIPS64 instruction-set architectures (ISAs), application specific extensions (ASEs), core designs and other related IP to semiconductor companies and system OEMs. Together with our architecture licensees, we offer a broad variety of embedded processors that scale across multiple markets in standard, custom, semi-custom and application-specific products. We currently have more than 370 license agreements with approximately 125 companies around the world offering MIPS-Based chips for embedded systems. Fifty six licensees paid royalties in fiscal 2010 on shipments of more than 510 million units. Since calendar year 2000, more than 2.2 billion MIPS-Based Systems on Chips (SoCs) have been shipped by MIPS licensees.
The markets and applications that benefit from the MIPS architecture continue to expand. As transistor density increases and as per unit manufacturing costs continue to drop, more and more high volume markets are moving to 32-bit or 64-bit processing power. While our products serve a broad cross-section of these markets, we will continue to focus and target high-growth and high-volume markets where the cost or performance advantages of our products have significant value.
Effective December 31, 2009, our long-time President and CEO John Bourgoin retired from the company. On January 25, 2010, we announced that Sandeep Vij had been appointed as the new President and Chief Executive Officer of the Company and a director of the Company.
Since the acceptance of the fabless business model for semiconductor providers, companies have been able to leverage standards in foundry processes, electronic design automation (EDA), tools and intellectual property to enable a worldwide industry of hundreds of companies designing, developing and supplying SoC solutions. Continuing rapid advances in semiconductor technology have enabled the integration of very large numbers of transistors on single integrated circuit (IC) silicon chips. The same capability enables lower cost, lower power, and higher performance per function in those chips. During the 1990s and continuing in the 2000s, the state of silicon technology art reached the point where truly powerful computers could be integrated as embedded microprocessors that could be built at a manufacturing cost of well under a dollar. It is now cost-effective for system OEMs to embed these processors into a wider range of electronic products and systems, offering new generations of products. The availability of low-cost, high-performance processors and the development of SoC technology have contributed to the emergence and rapid growth of the market for embedded systems, particularly for portable devices, advanced digital consumer, mobile wireless and broadband communications, microcontrollers, automotive and business products.
Embedded processor systems are broadly defined as microcontrollers and SoCs that include processors incorporated into devices other than personal computers, workstations, servers, mainframes and minicomputers. Today, the market for these embedded processors is much larger than the personal computer market in terms of processor unit volumes. A very large portion of this market consists of 4-bit, 8-bit, 16-bit and 32-bit microcontrollers embedded primarily into low-cost automotive and consumer products such as home appliances, fax machines, printers, and telephone answering machines. The growing need for performance is opening more and more of the embedded processor market to 32-bit and 64-bit embedded processors. The use of these advanced processors provides a material advantage to the system builder. The market for 32-bit and 64-bit processors has grown from less than 50 million units in 1997 to more than five billion units at the end of calendar year 2009 with a 19 percent compound annual growth rate expected through 2014 according to The Linley Group.
Digital consumer and business products that incorporate low-power and high-performance processors can offer advanced functionality such as realistic 3D graphics rendering, digital audio and video, and communications and high-speed signal processing. Examples include digital TVs, set-top boxes, DVD Blu-ray players and recorders, broadband access devices such as cable modems, Passive Optical Networks (PONs), Digital Subscriber Lines (DSL) modems, Voice-over IP (VoIP) enabled devices, mobile handsets, video game consoles, processor-based smart cards, digital cameras, 802.11 wireless networking devices and printers (including home and office printers, as well as all-in-one printer, fax, and copier multi-function peripherals). To meet the demands of the digital consumer and business products markets, system OEMs rely on semiconductor companies to design and deliver critical components within demanding price and performance parameters. In order to supply products for these markets, semiconductor suppliers are increasingly combining their own IP into SoCs with IP from third-party suppliers, such as our IP, in the form of processor cores and other functional blocks.
Processors are unlike many other kinds of semiconductors, such as memories, which interface with other components in a highly standardized manner. Each processor architecture has its own unique language called an instruction set. The specifics of the architecture and its instruction set have a major impact on the cost, performance and power of the end product, and require a range of supporting third party products and know-how.
Only a few processor architectures are used widely enough to generate broad third party support to create a de facto standard, and MIPS is one of these. The system developer has access through third parties to a broad array of software and engineering development tools such as compilers, debuggers and in-circuit emulation testers, middleware, application platforms and reference designs. The collective effect of this collateral work is what we call the “ecosystem.” The availability of this supportive technology is an incentive for anyone building a new system to stay with the standard. Such ecosystems serve as barriers to entry for anyone attempting to create new standards for processor architectures in the embedded market.
Over 100 companies including Green Hills Software, MontaVista Software and Wind River Systems form the MIPS Ecosystem, providing more than 250 products in support of the MIPS architecture. Popular operating systems compatible with our architecture include Android, Express Logic’s ThreadX, Mentor Graphics Corporation’s Nucleus, Microsoft Corporation’s Windows CE, Linux, and Wind River’s VxWorks. This broad range of third-party support allows system OEMs to save cost and shorten the time required to design the MIPS processor technology throughout their portfolios and get to market rapidly.
We have approximately 125 licensees that develop, manufacture or have manufactured and sell silicon solutions based on the MIPS architecture, processors and cores. We have two major types of licensees: architecture licensees that license design rights and independently develop their own MIPS-compatible cores, and implementation licensees that license processor core implementations from MIPS—which are normally inserted directly into their own SoCs containing other elements of their system.
Through MIPS’ flexible approach to licensing architectural IP, our licensees are able to design optimized semiconductor products for multiple segments of the embedded market, broadening the market reach beyond markets addressed by processor cores designed and licensed by MIPS—resulting in what we believe is the broadest offering of embedded processor solutions in the world. Architecture licensees may also license our processor core implementations to fill gaps in their product families.
We develop and license our processor designs in two forms. We generate both high-level description language representations of our cores called synthesizable, or “soft,” cores, and process-optimized or “hard” cores, which are silicon process specific implementations expressed in an electronic data format that can be used almost directly to create masks used in the production process. Synthesizable cores are more flexible. Customers can specify a number of configuration options on synthesizable cores, such as the size of the included memory, and have control over which silicon technology is targeted with the final product. This allows our synthesizable core customers flexibility in sourcing production of their chips from competing foundries.
“Hard” cores have the advantage that most of the work required to gain a precise expectation of the actual results in terms of size, speed, and power has been completed by MIPS or one of our design service providers. The benefit may be faster time-to-market with less risk and lower development cost. Any particular hard core can be used in one technology from one foundry only and configuration parameters have been predetermined by MIPS.
Designs.> We provide flexible, modular processor and related core designs that meet a range of performance, power and cost needs, and enable our licensees to provide both standardized and customized semiconductor products more quickly to system OEMs. These designs include:
MIPS32 M14K and M14Kc Cores. MIPS’ newest core family, the M14K cores began shipping in March 2010. The cores are based on the new microMIPS instruction set architecture, designed to provide high levels of system performance for extremely cost-sensitive embedded applications such as 32-bit microcontrollers (MCUs), home entertainment, personal entertainment and home networking. Since March 2010, M14K cores have been licensed to five companies, achieving among the fastest rate of early licensing of any of our products.
MIPS32 4K Cores. The 4K, 4KSd, 4KE and M4K processor cores are high-performance, low-power, compact 32-bit core designs for custom system-on-a-chip SoC applications. All of these core designs are available in synthesizable formats and are designed for easy integration with a wide variety of custom logic and peripherals. These cores have been licensed by eighty six licensees including Zoran, Atheros, Lantiq, Microchip Technology, Renesas Electronics, MStar and others, and are broadly utilized in SoCs shipping in production today, both as the main processor or as subsystem controllers in SoCs using multiple processor cores.
MIPS32 24K Cores. The 24K core family started shipping in fiscal 2004 and is designed to be scalable to future generations of silicon process technology. The 24KE core leverages the high performance 24K microarchitecture and efficiently adds Digital Signal Processing (DSP) functionality. This significantly reduces overall SoC die area, cost and power consumption as well as system complexity when compared to a system solution employing both a MIPS core and a DSP core. The 24K and 24KE cores have been licensed to fifty-eight companies, including Atheros, Broadcom, Lantiq, Trident, Toshiba, Ralink, Sigma Designs, Renesas Electronics, Broadlight, Cisco Systems and others.
MIPS32 34K Cores. In September 2005, we started shipping the 34K core family, which provides both the DSP and multithreading (MT) ASEs. The 34K core family’s MT capabilities allow the user to take advantage of the fact that embedded systems run multiple program tasks or threads of execution in parallel, and that system performance limitations from memory access timing can be improved by efficiently switching tasks from one that is waiting for data to another that is ready to execute. The 34K family has been licensed by twenty two companies, including Broadcom, Mobileye, MStar, PMC-Sierra, Wintegra and others.
MIPS32 74K Cores. In May 2007, we introduced the 74K core family as the industry’s first fully synthesizable processors to surpass 1 GHz using industry standard libraries and EDA flows. The 74K core family is based on MIPS’ next-generation superscalar microarchitecture with out-of-order instruction dispatch. The distinguishing feature of the 74K family is that it provides all the essential advantages for high-performance SoC design, while significantly reducing overall die area, and cost. To date, the 74K family has been licensed by twenty one companies, including Broadcom, Lantiq, Renesas Electronics, Sigma Designs and others.
MIPS32 1004K Cores. In April 2008, we introduced the 1004K Coherent Processing System (CPS) as the industry's first multi-threaded multiprocessor IP core. Incorporating multi-threading in each core in a coherent multi-core architecture enables the 1004K multiprocessor to surpass the performance of multi-core systems based on single-threaded processor cores. This performance boost essentially is “free” in both hardware and software, as the additional hardware threads in the cores are minimal in size relative to a typical SoC design, and multi-threading makes use of the same Symmetric Multiprocessing (SMP) versions of operating systems and software programming models as coherent multi-core platforms. The 1004K cores have been licensed by eleven companies, including Mobileye, PMC-Sierra, ViXS and others.
MIPS32 and MIPS64 Architectures.> The MIPS32 and MIPS64 architectures have been the foundation of the MIPS embedded processor environment for many years. As such, they provide a reliable, widely-used target for software and other collateral products. MIPS maintains the architectural standard and evolves it in a manner consistent with advancing needs, while assuring both backward compatibility and the flexibility to innovate with the architecture in the future. This maintains both the current software and tools investment for MIPS and our customers, while providing real opportunity to build for advanced needs. There are a total of eighteen active architecture licenses at companies including Broadcom, Cavium Networks, Netlogic Microsystems, Renesas Electronics, Sony, Toshiba and The Institute of Computing Technology of the Chinese Academy of Sciences.
microMIPS Instruction Set Architecture.> The new microMIPS instruction set architecture (ISA) was introduced to the market in November 2009, and is the basis for MIPS’ new M14K cores which began shipping in March 2010. The microMIPS ISA was developed specifically to provide a high level of code compression without any loss in MIPS32 performance, a major requirement and advantage for microcontroller and embedded system SoC developers to reduce cost. microMIPS maintains 98% of MIPS32 performance while reducing code size by 35%, translating to significant silicon cost savings. The microMIPS ISA is backward compatible, enabling reuse of optimized MIPS micro-architecture.
Application Specific Extensions>. ASEs provide design flexibility for our application-specific products and are licensed to our architecture licensees as additional features to use in designing processors. The ASE may also be incorporated into MIPS cores to provide extended capability for code compression, 3D graphics, security, DSP math functions, multi-threading and multi-core applications.
We also perform development work in a broad range of areas that highlight the competitive strengths of our product offerings. Examples of this work include development and improvement of the Linux kernel for the range of MIPS architectures, including MIPS32, MIPS64 and microMIPS. MIPS Technologies contributes to the open source community, offering optimizations and updates to the MIPS Linux kernel available for download at www.linux-mips.org. MIPS Technologies has entered into a strategic relationship with Timesys to distribute the latest version of the Linux distribution kit. Support for Linux distribution is also available from our partners, MontaVista Software and Wind River. CodeSourcery, in partnership with MIPS Technologies, provides releases and support of the development software programs for the MIPS architecture, including microMIPS. MIPS provides our customers with a comprehensive set of tools for SoC development and pre-silicon software test and validation, including the System Navigator™ debug system, MIPS Navigator ICS (Integrated Component Suite) software development utilities and system engineering boards.
Internally and with partners, MIPS is actively optimizing and developing solutions for the Android operating system. Android on MIPS source code is available for developers to download from www.mipsandroid.org. MIPS is also a member of the Open Handset Alliance, a community of companies promoting and contributing to development of Android.
The primary markets addressed by our actual and potential customers include:
Digital Consumer Products>. Together with our existing semiconductor licensees, we license our products into solutions for a wide variety of sophisticated, high-volume, digital consumer products.
Set-Top Boxes. Set-top boxes (STBs) provide the interface between signals transmitted in either digital or analog formats over the air, over cables, from satellites or via the Internet. As worldwide standards for transmission move to digital, enabling better frequency spectrum utilization, STB performance demands are increasing. As such, STBs are becoming sophisticated digital appliances with features like high-definition, video-on-demand, personal video recording and internet video access, which has driven performance requirements as well as multiple connectivity standards such as Ethernet, MOCA (Media over Coax), Wireless, USB and HDMI. MIPS-Based silicon is included in systems by Motorola, Pace, Pioneer, TiVo, and Cisco. Our licensees in this market include Broadcom, Cisco, Entropic, Haier, Motorola, Renesas Electronics, Trident, Sigma Designs, Toshiba and Zoran.
Automotive Driver Assistance, Navigation and Infotainment Products. These applications provide a new level of visual information, from sources such as global positioning systems (GPS), with mapping and routing, traffic congestion and other useful information for travelers. Other products provide advanced driver assistance for accident prevention and mitigation, with functionality such as forward collision warning, lane departure warning, and headway monitoring/warning. Sophisticated displays require substantial processing power as well as fast GPS lock time to render the display in real-time. Driver assistance applications require real-time responsiveness and reliability that will help reduce accidents and make roads safer. Companies such as Mobileye, Renesas Electronics, NetLogic Microsystems and Toshiba are supplying MIPS-Based chips for these applications.
Video Games. Video games represent a highly specialized high-volume opportunity, which is served by our design rights licensees such as Renesas Electronics, Sony and Toshiba. Key design wins in this market include the Sony PSP.
Digital Television. As the world shifts from analog to digital transmission of television programming, the SoCs used in digital televisions are upgrading to 32-bit processors. Licensees such as Broadcom, Haier, Renesas Electronics, Sigma Designs, Trident, Toshiba and Zoran provide SoCs to LG, Philips, Samsung, Sharp, Sony, Toshiba, Vizio, Panasonic and other digital television OEMs.
Broadband Products. High-speed connectivity to networks outside the enterprise is becoming increasingly important for businesses as well as home users. Products that provide such connectivity include cable modems, DSL modems, 802.11 wireless ICs, 802.16 WiMax ICs and PON. Approximately 1.8 billion people currently have Internet access. According to industry forecasts, there will be approximately 2.2 billion Internet users by 2013. Access points must handle fast data, voice and video with the lowest possible latency and next-to-perfect up-time. Other burdens include user authentication, link security and data encryption. Our licensees in this market include Atheros, Broadlight, Broadcom, Ikanos, Infineon Technologies, Metalink, Ralink and Texas Instruments.
Digital Cameras. Digital Still Cameras (DSCs) and Digital Video Cameras (DVCs) perform many computations beyond just compressing the captured image. This includes auto-focus, aperture and speed selection based on various light metering schemes, as well as possible lens distortion corrections and other image processing. The menu graphics, font rendering, USB interface and battery charge monitoring all draw on MIPS processor offerings. Licensees in this market include Megachips, Sony, Toshiba and Zoran.
Mobile Handsets. Mobile handsets are a new market for MIPS Technologies. Prior to the introduction of the Google developed Android platform, there were technological and competitive barriers to entry for MIPS in mobile handsets. However, with the industry migrating toward 4G data networks and the architecture-neutral Android platform, those barriers have been removed. There are several entry points for MIPS in mobile handsets, including the baseband processor and applications processor. MIPS has several customers developing baseband and applications processors for mobile handsets based on MIPS technology.
Business Products>. We and our licensees have also developed solutions for corporate and industrial applications.
Office Automation Products. MIPS-Based processors are being used in high-end and mid-range office automation applications, such as laser printers and multifunction printers with products from K-micro, Marvell Semiconductor, Renesas Electronics, PMC-Sierra and Toshiba.
Networking Equipment. The MIPS architecture is a leading architecture in networking routers and switches. Our licensees, including Cavium Networks, NetLogic Microsystems and Wintegra, supply chips based on our technology to Cisco Systems, Extreme Networks, Huawei, Juniper Networks, Nortel Networks, Lucent and others.
Microcontrollers>. 32-bit microcontrollers (MCUs) are increasingly becoming important alternatives to 8-bit and 16-bit MCUs. MCUs are moving to standard 32-bit processor IP for support of embedded peripherals such as USB, LCD controllers, audio codecs with on board flash and RAM memory blocks. Industrial control, office automation, home appliances, automotive, peripheral controllers for consumer electronics and smart cards are the dominant markets addressed by these off-the-shelf standard products. Some of our licensees serving this market include Microchip Technology, Maxim, Toshiba and Zoran.
We believe that our future competitive position will depend in large part on our ability to develop new and enhanced processors and related technology solutions in a timely and cost-effective manner. We believe that these capabilities are necessary to meet the evolving and rapidly changing needs of semiconductor companies and system OEMs in our target markets. To this end, we have assembled a team of highly skilled engineers who possess significant experience in the design and development of complex processors. We use this base of experience, and the technologies that we have developed, to enhance our product offerings and value propositions, and to develop a broader line of products that are optimized for various applications. Our strategy is to use a modular approach that emphasizes re-usable, licensable IP blocks. We believe that increased flexibility and modularity will allow our licensees to provide high-performance, cost-effective and low-power customized products more quickly to their customers.
Our research and development expenses were $24.3 million in fiscal 2010, $21.5 million in fiscal 2009 and $30.2 million in fiscal 2008. As of June 30, 2010, our engineering staff involved in engineering design services and research and development activities totaled 81 employees. As business conditions dictate, we adjust the level of technical personnel for our engineering activities. We conduct the majority of our research and development activities in our Sunnyvale, California headquarters. We have smaller design teams in other locations in the United States and Asia.
We reach our customers through different sales channels, consisting of:
Direct Sales. We have an internal sales force that calls directly on potential licensees worldwide. Our sales force consists of both direct sales personnel and “systems architects” who provide technical pre-sale assistance to our customers and potential customers. Most of MIPS’ licenses are derived from this sales force.
Sales Agents. From time to time we employ representatives in certain areas where specialized account knowledge or cultural skills are critical to success. Sales from Sales Agents do not constitute a material portion of our revenues.
Indirect Distribution Channels. We have expanded our reach into applications and markets with unique needs by adding indirect distribution channels. These distribution channels include ASIC companies such as K-micro and Renesas Electronics, and design services companies such as Avnet ASIC Israel, CSMC, Inc., Open-Silicon, Socle Technology Corporation and Wipro Limited. Sales from indirect channels do not constitute a material portion of our revenues.
In addition to these sales channels, we track the use of products based on MIPS IP by a variety of system OEMs in the embedded market. A number of digital consumer and business products incorporate MIPS IP, including broadband devices from Linksys, DTVs and digital consumer devices from Sony, DVD recordable devices from Pioneer, digital set-top boxes from Motorola, network routers from Cisco, 32-bit microcontrollers from Microchip Technology and laser printers from Hewlett-Packard. We participate in various sales and technical efforts directed to system OEMs, and our strategic marketing organization is focused on building value and brand awareness of MIPS among system OEMs. These efforts may result in direct license agreements from these OEMs, or in the OEMs expressing a preference or requirement for MIPS-Based SoC solutions from their semiconductor suppliers.
We generally license our IP products on a non-exclusive and worldwide basis to semiconductor companies who, in turn, sell products incorporating these technologies to system OEMs. Although the precise terms of our contracts vary, they typically provide for technology license fees for developed, or currently available technology or engineering service fees that relate to technology under development, which may be payable up-front or upon the achievement of certain milestones such as provision of deliverables by us or production of semiconductor products by the licensee. Each of these types of contracts is a non-exclusive license for the underlying intellectual property. While we may be required to perform certain services to render the intellectual property suitable for license under an engineering service contract, we continue to own the intellectual property that we develop. We also have the right to license to other licensees the intellectual property developed under engineering service agreements. Our processor contracts generally provide for annual maintenance fees and for the payment of royalties to us based on a percentage of the net revenue earned by the licensee from the sale of products incorporating our technology or, in some cases, based on unit sales of such products.
In fiscal 2010, 2009, and 2008, we had one customer, Broadcom, that accounted for more than 10% of our revenue. The revenue derived from Broadcom was primarily from royalties. For further discussion, please see “Revenue” under Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Historically the company has not reported backlog because we did not believe that backlog was a meaningful measure for understanding our historical business or revenues. In addition, royalties have generally accounted for a substantial portion of our revenue. Since royalty payments and the related revenue are generally based on licensee sales, with no guaranteed minimums, our royalty revenue does not factor into backlog calculations. Similarly, from time to time, we have license agreements in place under which we may receive future revenue if our customer achieves certain of their own milestones. Insofar as many factors including market conditions and customer product success determine the milestone achievement, we do not believe these potential future payments should be characterized as backlog.
Our patents, copyrights, trademarks, trade secrets and other intellectual property rights are critical to our success, and we rely on a combination of patent, trademark, copyright and trade secret laws to protect our proprietary rights. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, results of operation and financial condition.
Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy or otherwise use our technologies, including the marketing and sale of unauthorized MIPS-compatible clones in particular geographies. We intend to protect vigorously our intellectual property rights. There can be no assurance that we will be able to enforce our rights or prevent other parties from designing and marketing such unauthorized MIPS-compatible products.
We own more than 550 patent properties (patents and applications) worldwide on various aspects of our technology. There can be no assurance that patents will be issued from any patent applications we submit, that any patents we hold will not be challenged, invalidated or circumvented or that any claims allowed from our patents will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us. In addition, patent rights which we have obtained will expire from time to time, with expiration dates ranging from 2010 to after 2028. We are not able to predict the extent to which third parties may use information contained in expired patents to successfully compete against us.
We also rely on unpatented trade secrets to protect our proprietary technology. No assurance can be given that others will not independently develop or otherwise acquire the same or substantially equivalent technologies or otherwise gain access to our proprietary technology or disclose such technology or that we can ultimately protect our rights to such unpatented proprietary technology. In addition, no assurance can be given that third parties will not obtain patent rights to such unpatented trade secrets, which patent rights could be used to assert infringement claims against us.
We also use licensing agreements, and employee and third party nondisclosure and assignment agreements, to limit access to and distribution of our proprietary information and to obtain ownership of technology prepared on a work-for-hire or other basis. There can be no assurance that the steps we have taken to protect our intellectual property rights will be adequate to deter misappropriation of such rights or that we will be able to detect unauthorized uses and take immediate or effective steps to enforce our rights. There can also be no assurance that the steps we have taken to obtain ownership of contributed intellectual property will be sufficient to assure our ownership of all proprietary rights.
From time to time we may wish to negotiate rights to third party intellectual property. There can be no assurance that we will be able to negotiate commercially attractive intellectual property licensing arrangements with third parties in the future.
MIPS' designs, architectures and extensions are subject to patent, trade secret, copyright and trademark protection. MIPS, MIPS-3D, MIPS16e, SmartMIPS, MIPS32, MIPS64, MIPS-Based, MIPS-Verified, MIPS logo, 4K, 4Kc, 4Km, 4Kp, 4KE, 4KEc, 4KEm, 4KEp, 4KSd, M14K, M14Kc, M4K, 24K, 24Kc, 24Kf, 24KE, 24KEc, 24KEf, 34K, 34Kc, 34Kf, 74K, 74Kc, 74Kf, 1004K, 1004Kc, 1004Kf, microMIPS, and CorExtend are among the trademarks or registered trademarks of MIPS Technologies, Inc. in the United States and other countries.
The market for embedded processors and cores is highly competitive and characterized by rapidly changing technological needs and capabilities. We believe that the principal competitive factors in the SoC markets are legacy software compatibility, manufacturing and licensing cost, performance, functionality, customizability and power consumption. Our customers seek a range of products that provide multiple price performance points to allow them to offer their own rich product lines.
Our processors and cores compete with those of ARM Holdings plc, Tensilica Incorporated, ARC processor solutions from PowerPC, a product family developed and marketed by AMCC, IBM Corporation and Freescale Semiconductor. We also compete against certain semiconductor manufacturers, whose product lines include processors for embedded and non-embedded applications, including x86 processors from Advanced Micro Devices, Inc. and Intel Corporation. In addition, we may face competition from the producers of clones that implement part of the MIPS architecture, including early-developed portions of the MIPS architecture that are no longer subject to patent protection in particular geographies.
To remain competitive, we must continue to differentiate designs from those available or under development by the internal design groups of semiconductor companies, including our current and prospective licensees.
As of June 30, 2010, we had 141 employees. Of this total, 81 were engineers involved in engineering design services and in research and development, 36 were in sales and marketing and 24 were general and administrative employees. Our future success will depend in part on our ability to attract, retain and motivate highly qualified technical and management personnel who are in great demand in the semiconductor industry.
Our Internet website is located at http://www.mips.com. We make available free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or SEC. Other than the information expressly set forth in this annual report, the information contained, or referred to, on our website is not a part of this annual report.
MIPS Technologies, Inc. was incorporated in Delaware in June 1992. Our predecessor, MIPS Computer Systems, Inc., was founded in 1984 and was acquired by Silicon Graphics in 1992. We were separated from the business of Silicon Graphics, effective June 1, 1998. Our principal executive office is located at 955 East Arques Avenue, Sunnyvale, California 94085, and our telephone number at that address is (408) 530-5000. Our website address is www.mips.com. References to “MIPS,” “we,” “us,” “management,” “our,” or the “Company” means MIPS Technologies, Inc. and our consolidated subsidiaries.
For financial information regarding revenue derived from our international licensees, and assets outside the United States, see “Note 17 Operating and Geographic Segment Information” under Notes to Consolidated Financial Statements.
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 entered into a recession in our fiscal 2009. While global economic conditions appear to be stabilizing, we cannot predict when or the extent to which they will improve. The markets served by the Company, and those of our customers, can be highly cyclical, and our financial results, both our royalty revenue and our ability to secure new contracts, could be impacted by consumer spending in the U.S. and global economies. In addition, although recovering, the semiconductor industry still faces certain economic challenges, 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 real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting consumer spending behavior. In addition, recent economic volatility could lead to a number of follow-on effects on our business, including insolvency issues with our customers or suppliers. These and other economic factors could have a material adverse effect on demand for our products and services, and on our financial condition and operating results.
We compete against much larger companies in the microprocessor IP market that have larger market share and broader lines of products. >Some of our competitors, including Intel Corporation and ARM Holdings, have significant financial resources enabling them to market their products aggressively and to target our customers with special incentives. As long as Intel and ARM remain in their dominant position, we may be negatively impacted by their business practices, product mix and product introduction schedules, marketing strategies and exclusivity clauses with customers. In addition, Intel and ARM have substantially greater financial resources than we do and, accordingly, spend substantially greater amounts on research and development and marketing than we do. We expect Intel and ARM to maintain their dominant market positions and to continue to invest heavily in marketing, research and development and in other technology companies. To the extent our competitors develop microprocessor products using more advanced process technologies or introduce competitive new products into the market before we do, our financial condition and operating results will be adversely impacted.
Since a substantial portion of our revenue is derived from a few significant customers, the loss of a key customer or any significant delay in our customers’ product development plans could seriously impact our revenue and harm our business. In addition, if we are unable to continue to sell existing and new products to our key customers or to attract new significant customers, our future operating results could be adversely affected. >We have derived a substantial portion of our past revenue from sales to and royalties from a relatively small number of customers. As a result, the loss of any significant customer could materially and adversely affect our financial condition and results of operations.
Revenue from our five largest customers represented 43% and 38% of our net revenue in the fiscal years ended June 30, 2010 and 2009, respectively. We expect that our largest customers will continue to account for a substantial portion of our net revenue for the foreseeable future. Our largest customers, and their respective contributions to our net revenue, have varied from time to time and will probably continue to vary.
We may not be able to maintain or increase revenue from certain of our key customers for a variety of reasons, including the following:
The loss of a key customer, a reduction in the contractual royalty rate of a customer based on volume or the passage of time, a reduction in royalty units used by any key customer, a significant delay in our customers’ product development plans or our inability to attract new significant customers could adversely impact our revenue and our results of operations.
Our financial results are subject to significant fluctuations that could adversely affect our stock price.> Our financial results may vary significantly due to a number of factors. In addition, our revenue components are difficult to predict and may fluctuate significantly from period to period. Because our revenues are somewhat independent of our expenses in any particular period, it is difficult to accurately forecast our operating results. Our operating expenses are based, in part, on anticipated future revenue and a very high percentage of our expenses are fixed in the short term. As a result, if our revenue is below expectations in any quarter, the adverse effect may be magnified by our inability to adjust spending in a timely manner to compensate for the revenue shortfall. Therefore, we believe that quarter-to-quarter comparisons of our revenue and operating results may not be a good indication of our future performance. It is possible that in some future periods our results of operations may be below the expectations of securities analysts and investors. In that event, the price of our common stock may fall.
Factors that could cause our revenue and operating results to vary from quarter to quarter include:
The success of our business depends on sustaining or growing our license and contract revenue.> License and contract revenue consists of technology license fees paid for access to our developed technology, associated maintenance agreements and engineering service fees related to technology under development. Our ability to secure the licenses from which our contract revenues are derived depends on our customers, including semiconductor companies, digital consumer, wireless, connectivity and business product manufacturers, adopting our technology and using it in the products they sell. As compared to the prior year our contract revenue decreased by 23%, 8% and 9% in fiscal 2008, 2009 and 2010 respectively. We enter into unlimited use license agreements with some of our customers under which 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 generally range from 4 to 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 agreements was 54% in fiscal 2008, 32% in fiscal 2009 and 51% in fiscal 2010 of our total license and contract revenue. Total contract revenue from unlimited use license agreements was $13.0 million in fiscal 2010 as compared with $8.8 million in fiscal 2009. 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.
As international business is a significant component of our revenue, we are increasingly exposed to various legal, business, political and economic risks associated with our international operations. >For our fiscal 2010 and 2009, 59% and 54% of our net revenue, respectively, was derived from sales to customers outside the United States. In addition, we have sales and operations in China as well as sales offices in Germany, Japan, Israel, Korea and Taiwan.
We intend to continue our international business activities. International operations are subject to many inherent risks, including but not limited to:
Any of the factors described above may have a material adverse effect on our ability to increase or maintain our foreign sales. Economic conditions in our primary overseas markets, particularly in Asia, may negatively impact the demand for our products abroad. All of our international sales to date have been denominated in U.S. dollars. Accordingly, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets or require us to assume the risk of denominating certain sales in foreign currencies. These factors could impact our business to a greater degree if we further expand our international business activities.
Our ability to achieve design wins may be limited unless we are able to develop enhancements and new generations of our intellectual property.> Our future success depends, in part, on our ability to develop enhancements and new generations of our processors, cores or other intellectual property that satisfy the requirements of specific product applications and introduce these new technologies to the marketplace in a timely manner. If our development efforts are not successful or are significantly delayed, or if the characteristics of our IP product offerings and related designs are not compatible with the requirements of specific product applications, our ability to achieve design wins may be limited. Our failure to achieve a significant number of design wins would adversely affect our business, results of operations and financial condition.
Technical innovations of the type critical to our success are inherently complex and involve several risks, including:
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.
We depend on our key personnel to succeed and have transitioned to a new Chief Executive Officer.> 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. John Bourgoin, the Company’s former President and Chief Executive Officer retired at the end of 2009. Sandeep Vij was appointed President and CEO effective January 25, 2010. The transition to a new Chief Executive Officer could distract our existing management team and may lead to potential changes in corporate strategy. These changes may negatively impact our ability to meet key objectives, such as timely and effectively achieving project milestones and product introductions, which could adversely affect our business, results of operations and financial condition. In addition, we cannot assume that we will retain other key officers and employees. Competition for qualified personnel, particularly those with significant experience in the semiconductor and processor design industries, remains intense.
We rely on the efforts of third parties to enhance our technology offerings, and an inability to develop or maintain relationships with these parties would harm our ability to remain competitive. >We have developed relationships with third parties, including software developers, development tools providers, and third party IP suppliers, pursuant to which these parties provide operating systems, tool support, reference designs and other services that support the MIPS-based ecosystem for our licensees. We believe that these relationships enhance the attractiveness of our technology and improve our ability to achieve design wins. If we are unable to develop or maintain these relationships, or if a product is discontinued by an existing ecosystem partner, our ability to achieve design wins in the future may be limited and our ability to remain competitive would be harmed. In addition, the inability to maintain an attractive MIPS-based ecosystem could adversely affect our business, results of operations and financial condition.
If we do not succeed on key platforms, including Android, our ability to compete and grow may be adversely impacted. >Our future success may depend, in part, on our ability to develop software, processor cores or other intellectual property that satisfies the requirements of key platforms, such as Android. If our development efforts are not successful or are significantly delayed, or if the characteristics of our IP product offerings and related designs are not compatible with the requirements of key platforms, our ability to achieve design wins may be limited. In addition, if we fail to achieve a significant number of design wins with respect to new platforms like Android, our medium to longer term revenue growth may be adversely impacted. Furthermore, even if we are successful in developing technologies based on Android or other key platforms, those platforms may not be widely adopted in the industry, which may also limit our growth opportunities.
If we do not succeed in the mobile handset market, our medium to long term revenue growth may be adversely impacted. >Our future success may depend, in part, on our ability to develop software, processor cores or other intellectual property that satisfies the requirements of developers, chip suppliers and manufacturers in the market for mobile handsets. We are committing resources towards research and development efforts for this market. If our development efforts are not successful or are significantly delayed, or if our IP product offerings and related designs are not widely adopted, our ability to achieve design wins in the mobile handset market may be limited. If we fail to license our technology to a significant number of customers in the mobile handset market, our medium to long term revenue growth may be adversely impacted.
Our business depends on royalties from the sale of products incorporating our technology, and we have limited visibility as to the timing and amount of such sales.> Our receipt of royalties from our licenses depends on our licensees incorporating our technology into their products, bringing those products to market, and the success of those products in the market. In the case of our semiconductor licensees, the amount of such sales is further dependent upon the sale of the products by their customers into which our licensees’ products are incorporated. Thus, our ability to achieve design wins and enter into licensing agreements does not assure us of future 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:
Because we do not control the business practices of our licensees and their customers, we have little influence on the degree to which our licensees promote our technology and we do not set the prices at which products incorporating our technology are sold. Further, the royalty revenues we report in any given quarter represent licensee and customer shipments one quarter in arrears, and we have very little visibility into our licensees’ and customers’ shipping of products incorporating our technology.
We rely on our licensees to correctly report to us the number or dollar value of products incorporating our technology that they have sold, as these sales are the basis for the royalty payments that they make to us. We have the right under our licensing agreements to perform a royalty audit of the licensee’s sales so that we can verify the accuracy of their reporting, and if we determine that there has been an over-reported or under-reported amount of royalty, we account for the results when they are identified.
If we do not compete effectively in the market for SoC intellectual property cores and related designs, our business will be adversely affected.> Competition in the market for SoC intellectual property and related designs is intense. Our products compete with those of other designers and developers of IP product offerings, as well as those of semiconductor manufacturers whose product lines include digital, analog and/or mixed signal designs for embedded and non-embedded applications. In addition, we may face competition from the producers of unauthorized clones of our processor and other technology designs. The market for embedded processors in particular has recently faced downward pricing pressures on products. We cannot assure you that we will be able to compete successfully or that competitive pressure will not materially and adversely affect our business, results of operations and financial condition.
In order to be successful in marketing our products to semiconductor companies, we must differentiate our intellectual property cores and related designs from those available or under development by the internal design groups of these companies, including some of our current and prospective licensees. Many of these internal design groups have substantial engineering and design resources and are part of larger organizations with substantial financial and marketing resources. These internal design groups may develop products that compete with ours.
Some of our existing competitors, as well as a number of potential new competitors, have longer operating histories, greater brand recognition, and larger customer bases, as well as greater financial and marketing resources. This may allow them to respond more quickly than we can to new or emerging technologies and changes in customer requirements. It may also allow them to devote greater resources than we can to the development and promotion of their technologies and products.
As a result of one or more of these risks, our operating costs could increase substantially, our flexibility in operating our business could be impaired, 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.
Our results of operations could vary as a result of the methods, estimates, and judgments that we use in applying our accounting policies>. The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting Policies and Estimates” under Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”). Such methods, estimates, and judgments are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise over time that lead us to change our methods, estimates, and judgments. Changes in these methods, estimates, and judgments could significantly affect our results of operations.
Changes in effective tax rates or adverse outcomes from examination of our income tax returns could adversely affect our results.> Our future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or regulations or in the interpretation of tax laws or regulations. We operate in the United States and internationally and occasionally face inquiries and examinations regarding tax matters in the countries that we operate in. There can be no assurance that the outcomes from examinations will not have an adverse effect on our operating results and financial condition. In addition, we are subject to certain withholding taxes relating to the repatriation of undistributed earnings from certain foreign subsidiaries. Any changes in international laws or tax rulings in countries that we operate in could have an adverse impact on our operating results and financial condition.
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. In addition, it is standard practice for us to include some form of indemnification of our licensees in our core and architecture license agreements. We cannot be certain that third parties will not make a claim of infringement against us, our licensees, or our licensees’ customers in connection with the use of our technology. 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 or claim for indemnification could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations, which could have a material adverse effect on us.
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, assignment agreements, copyrights, patents, trademarks, and common-law rights, such as trade secrets, to protect our intellectual property. We cannot assure you that any of the patents or other intellectual property rights that we own or use will not be challenged, invalidated or circumvented by others or be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Policing the unauthorized use of our intellectual property is difficult, and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. As part of our business strategy, we license our technology in multiple geographies including in countries whose laws do not provide as much protection for our intellectual property as the laws of the United States and where we may not be able to enforce our rights. In addition, intellectual property rights which we have obtained in particular geographies may and do expire from time to time. 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 may be subject to claims and liabilities in connection with the sale of our discontinued business. In connection with the sale of our Analog Business Group to Synopsys, Inc. (Synopsys) in May 2009, we agreed to retain responsibility for certain actual or contingent liabilities and agreed to indemnify Synopsys against certain breaches of representations and warranties and other liabilities. Our potential liability to Synopsys is subject to certain limitations, including limitations on the time period during which claims may be asserted and the amounts for which we are liable. To date, we have not incurred any losses in respect of claims asserted by Synopsys in connection with this transaction. However, there can be no assurance that we will not incur future liabilities to Synopsys in connection with this transaction, or that the amount of such liabilities will not be material.
In May 2010, Synopsys delivered a letter to MIPS asserting breaches of certain representations and warranties and requesting compensation in an aggregate amount of approximately $3.7 million. We responded to Synopsys in June 2010 and denied all claims set forth in the May 2010 letter. In July 2010, Synopsys responded to our letter. General discussions between the parties have commenced; however, there can be no assurance that the current dispute can be resolved on terms that are acceptable to us.
We cannot be assured that our 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. 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.
The market value of our investment portfolio is exposed to fluctuations in interest rates and changes in credit ratings which could have a material adverse impact on our financial condition and results of operations.> Our cash and cash equivalents and short term investments represent significant assets that may be subject to fluctuating or even negative returns depending upon interest rate movements, changes in credit ratings and various financial market conditions. The global credit and capital markets have experienced significant volatility and disruption due to the instability in the global financial system and the current uncertainty related to global economic conditions.
There is a risk that we may incur other-than-temporary impairment charges for certain types of investments, should the credit markets experience further deterioration or the underlying assets fail to perform as anticipated. Our future investment income may fall short of expectations due to changes in interest rates or a decline in fair values of our debt securities that is judged to be other-than-temporary. Furthermore, we may suffer losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates or financial market conditions.
The amount of our other income (expense), net could be adversely affected by macroeconomic conditions and other factors. >The amount of other income (expense), net in our consolidated statements of operations is subject to fluctuations in 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.
We are subject to certain affirmative and negative covenants which could restrict our ability to operate our business.> We have a revolving credit facility with Silicon Valley Bank that is currently not in use. This facility is secured by virtually all of our assets, and the facility contains affirmative and negative covenants that impose restrictions on the operation of our business and may prevent us from taking advantage of opportunities that are otherwise available to us or could cause an earlier acceleration of the facility. Any future incurrence of debt under the facility could adversely affect our operating results and financial condition. In addition, we may not be able to obtain favorable credit terms related to any debt that we may incur in the future.
Our executive, administrative and technical offices currently occupy approximately 36,013 square feet in a building leased in Sunnyvale, California. This lease will expire on May 31, 2016.
We also lease a facility in Beaverton, Oregon. The facility is approximately 7,000 square feet and it is occupied by sales and engineering personnel. The lease will expire June 30, 2012.
We lease sales offices in Japan, Taiwan, Korea, Germany, and Israel, technical office spaces in China and the United States and an administrative office space in Switzerland. These leases range from 12 months to 7 years.
We believe that these facilities are adequate to meet our current needs but we may need to seek additional space in the future.
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.”
No matters were submitted to a vote of security holders during the quarter ended June 30, 2010.
Item 4A. Executive Officers of the Registrant.>
Our executive officers and their ages as of June 30, 2010, were as follows:
Sandeep Vij has served as our Chief Executive Officer and our President since January 2010. He has more than 20 years of senior-level management and marketing experience in the semiconductor industry. Prior to assuming his current position, Mr. Vij served as Vice President and General Manager of the Broadband and Consumer Division of Cavium Networks from February 2009 to January 2010 and VP of Strategic Markets and Business Development of Cavium Networks from May 2008 through February 2009. From 1996 to April 2008, Mr. Vij was on the executive staff of Xilinx Inc., a digital programmable logic manufacturer. From 2007 to 2008 he served as VP of Worldwide Marketing, Services and Support at Xilinx. From 2001 to 2007, he served as VP of Worldwide Marketing at Xilinx. From 1997 to 2001, he served as VP and GM, General Products Division at Xilinx where he held profit and loss responsibility for their high-volume Field Programmable Gate Array (FPGA) products. Mr. Vij worked at Altera Corp. in a variety of marketing and management roles. Mr. Vij serves on the board of directors of Coherent, Inc., a laser and photonics company.
Maury Austin has served as our Chief Financial Officer since March 2008. He has more than 25 years of corporate finance experience including executive positions at Apple Computer and General Electric Company. Mr. Austin served as SVP & CFO of Portal Software, Inc. from June 2005 until its acquisition and integration into Oracle Corporation in November 2006. Prior to Portal, Mr. Austin was SVP and CFO for Southwall Technologies from 2004 to 2005. Prior to his employment with Southwall Technologies, Inc., Mr. Austin was SVP and CFO for Vicinity Corporation from 2000 until its acquisition by Microsoft Corporation in 2003. Prior to 2000 Mr. Austin held executive positions at Apple Computer and General Electric.
Brad Holtzinger has served as our Vice President, Worldwide Sales since October 2005. Mr. Holtzinger served as Vice President of Sales for the Americas region from July 2004 to October 2005 and as Director of Sales for the Americas from May 2003 to July 2004. Mr. Holtzinger joined us in December 2001 and served as the Director of Systems Solutions until May 2003.
Ravikrishna Cherukuri has served as our Vice President, Engineering since March 10, 2010. He has more than 20 years of senior-level management and engineering experience in the semiconductor industry. Prior to assuming his current position, Mr. Cherukuri was Co-founder and VP of Engineering of Sonoa Systems, an infrastructure provider of analytics, management and governance solutions for cloud services and Application Programming Interfaces (APIs) from July 2004 to July 2008. Prior to that, from May 1998 to May 2004, Mr. Cherukuri was on the founding team and managed Application Specific Integrated Circuit (ASIC) and hardware development for Siara Systems, acquired by Redback Networks. Mr. Cherukuri was a key designer of AMD’s K6 microprocessor and also led the K7 chipset (irongate) development effort from May 1991 to May 1998. Earlier in his career, Mr. Cherukuri held engineering position with HCL Infosystems, working on architecture and implementation of the company’s flagship Magnum multiprocessor platform.
Art Swift has served as Vice President of Marketing since March 2009. He has more than 20 years of experience in marketing and executive management for semiconductor and processor IP companies. Before assuming his current position, Mr. Swift was President and CEO of Unidym, Inc., a supplier of nanotechnology solutions and a majority held subsidiary of Arrowhead Research Corporation, from June 2007 to December 2008. Prior to that, from March 2005 to January 2007, Mr. Swift was President and CEO and a member of the Board of Directors of Transmeta Corporation, a provider of low-power microprocessors and IP. He also held the position of senior vice president of marketing for Transmeta from March 2003 to March 2005. Earlier in his career, Mr. Swift held management and engineering positions with Cirrus Logic, Sun Microsystems, Digital Equipment, Bipolar Integrated Technology, and Fairchild Semiconductor.
Gail Shulman has served as General Counsel since February 2009. Ms. Shulman joined MIPS in November of 1999 and has held various positions in the Legal Department, including serving as Associate General Counsel and Assistant Corporate Secretary prior to her appointment as General Counsel. Prior to that, she was the senior corporate lawyer for Axil Computer (a subsidiary of Hyundai Electronics) and had worked for Thelen, Reid, Brown, Raysman & Steiner.
There are no family relationships between any of our executive officers.
Our common stock is quoted on The NASDAQ Global Select Market under the symbol “MIPS”.
As of August 31, 2010, there were approximately 3,567 stockholders of record of our common stock. Because most of our common stock is held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. We have never paid or declared any cash dividends on our common stock or other securities and do not anticipate paying cash dividends in the foreseeable future.
The following graph compares the cumulative total return to stockholders for our common stock to The NASDAQ Stock Market Composite Index—U.S. and the RDG Semiconductor Composite Index. The graph assumes that $100 was invested in our common stock and in each index on June 30, 2005. No dividends have been declared or paid on our common stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.
You should read the selected consolidated financial data set forth below together with “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and our consolidated financial statements and the notes to those statements included elsewhere in this report. The selected consolidated statements of operations data for the fiscal years ended June 30, 2010, 2009, 2008, 2007 and 2006, and the selected consolidated balance sheet data as of June 30, 2010, 2009, 2008, 2007 and 2006, set forth below have been derived from our consolidated financial statements which have been audited by Ernst & Young LLP, independent auditors for all years.
You should read the following discussion and analysis together with our consolidated financial statements and notes to those statements included elsewhere in this report. Except for the historical information contained in this Annual Report on Form 10-K, this discussion contains forward-looking statements that involve risks and uncertainties including statements regarding our expectation for specific aspects of our results of operations in fiscal 2010. Our actual results could differ materially from those indicated in these forward-looking statements as a result of certain factors, as more fully described under “Risk Factors,” and other risks included from time to time in our other Securities and Exchange Commission reports, copies of which are available from us upon request. The forward-looking statements within this Annual Report on Form 10-K are identified by words such as “believes,” “anticipates,” “expects,” “intends,” “may” and other similar expressions. However, these words are not the exclusive means of identifying such statements. We undertake no obligation to update any forward-looking statements included in this discussion.
MIPS Technologies, Inc. is a leading provider of industry-standard processor architectures and cores that power some of the world’s most popular products for the home entertainment, communications, networking and portable multimedia markets. With more than 125 worldwide customers, MIPS’ products are broadly used in markets such as mobile consumer electronics, digital entertainment, wired and wireless communications and networking, office automation, security, microcontrollers, and automotive. Our customers are global semiconductor companies. We offer our customers high-performance, easy-to-use functionality at a fraction of the cost and time to market that internal development would require. Our customers pay us license fees for processor architectural and product rights, as well as royalties based on processor unit shipments. The majority of the license fees are for existing IP and the revenue recognition associated with the delivery of the IP is generally immediate.
Our fiscal 2010 revenue increased by $0.8 million over the prior year. Total fiscal 2010 revenue of $71 million increased 1.1% from the $70.2 million reported in the prior fiscal year.
Royalty revenue in fiscal 2010 was $45.7 million, an increase of 7.4% from the $42.5 million reported during fiscal 2009. Total royalty units reported in fiscal year 2010 were 510 million or 19 percent higher than the 427 million units reported in fiscal 2009. The impact of the increase in units reported in fiscal year 2010 was offset in part by a decrease in the average per unit royalty rate on chips sold by our licensees. As our royalty revenue is reported one quarter in arrears, shipments and revenue reported in our fourth quarter represented our customer shipments from the quarter ended March 31, 2010.
Contract and license revenue in fiscal 2010 was $25.3 million, a decrease of 8.6% from the $27.7 million in the prior fiscal year. The global economic slowdown contributed to the decrease for the year, but our license and contract revenue showed significant growth in the fourth quarter of fiscal 2010, increasing to $10.9 million as compared to $4.9 million in the same period of the prior year. In fiscal 2010, we completed 37 new license agreements compared to 31 in the prior year.
We ended our fiscal 2010 with cash and cash equivalents and short term investments of $52.4 million, up approximately $7.9 million from June 30, 2009. The increase was primarily due to positive net income excluding non-cash items. Our overall increase in cash and short term investments was partially offset by the repayment of $12.8 million in debt in fiscal 2010, resulting in the company having no debt obligations subsequent to the repayments in April 2010.
Our operating expense in fiscal 2010 was $55.3 million, including a restructuring charge of $0.7 million as compared to our operating expense of $49.4 million in fiscal 2009, also including a restructuring charge of $0.7 million. The increase in operating expenses primarily resulted from additional software and tool development costs for Android and mobile related end applications as well as higher commission and bonus costs as company exceeded certain financial targets for the year.
We recorded a $3.3 million benefit to our income tax provision during fiscal 2010 consisting mainly of U.S. state, foreign tax, and withholding tax expenses.
In fiscal 2011, we plan to continue our moderate investments in Android and mobile technologies and ecosystems offset to a degree by lower spending in the general and administrative areas. We believe Android and mobile technologies can provide MIPS with strong medium to longer term revenue growth potential as these technologies will require more processor computing capabilities – an area where MIPS has had a historical competitive advantage.
In connection with the sale of our Analog Business Group (ABG) to Synopsys, Inc. (Synopsys) in May 2009, we agreed to retain responsibility for certain actual or contingent liabilities and agreed to indemnify Synopsys against certain breaches of representations and warranties and other liabilities. Our potential liability to Synopsys is subject to certain limitations, including limitations on the time period during which claims may be asserted and the amounts for which we are liable. To date, we have not incurred any losses in respect of claims asserted by Synopsys in connection with this transaction. However, there can be no assurance that we will not incur future liabilities to Synopsys in connection with this transaction, or that the amount of such liabilities will not be material. In May 2010, Synopsys delivered a letter to MIPS asserting breaches of certain representations and warranties and requesting compensation in an aggregate amount of approximately $3.7 million. We responded to Synopsys in June 2010 and denied all claims set forth in the May 2010 letter. In July 2010, Synopsys responded to our letter. General discussions between the parties have commenced; however, there can be no assurance that the current dispute can be resolved on terms that are acceptable to us.
The results from discontinued operations of ABG (exclusive of the gain on disposition) are as follows for the years ended June 30, 2010, 2009 and 2008 (in thousands):
In the fourth quarter of 2008, we conducted our annual impairment test of goodwill. As a result of this analysis, we concluded that the carrying amount of goodwill assigned to our ABG segment (discontinued operation in fiscal 2009 based on our divestiture) exceeded the implied fair value and recorded an impairment charge of approximately $88.9 million, which is included in the caption “Loss from discontinued operations, net of tax” in our 2008 consolidated statement of operations. The impairment charge was determined by comparing the carrying value of goodwill assigned to the reporting unit (ABG Segment) as of June 30, 2008, with the implied fair value of the goodwill. We considered both the income and market approaches in determining the implied fair value of the goodwill, which required estimates of future operating results and cash flows of the reporting unit discounted using estimated discount rates ranging from 18 percent to 24 percent. The estimates of future operating results and cash flows were principally derived from an updated long-term financial forecast, which is developed as part of our strategic planning cycle conducted annually during our fourth quarter. The decline in the implied fair value of the goodwill and resulting impairment charge was primarily driven by the softening overall market for IP and delays experienced in realizing expected synergies resulting in our updated long-term financial forecasts showing lower estimated near-term and longer-term profitability compared to estimates developed at the time of the completion of the acquisition. The updated long-term financial forecast used represented the best estimate that the Company’s management had at June 30, 2008 and the Company believed that its underlying assumptions were reasonable.
The outcome of our 2008 goodwill impairment analysis indicated that the carrying amount of certain acquisition related intangible assets or asset groups may not be recoverable. At June 30, 2008, we assessed the recoverability of the acquisition related intangible assets or asset groups, as appropriate, by determining whether the unamortized balances could be recovered through undiscounted future net cash flows. We determined that certain of the acquisition related developed product technology associated with our ABG segment were impaired primarily due to the revised lower revenue forecasts associated with the products incorporating such developed product technology. We measured the amount of impairment by calculating the amount by which the carrying value of the assets exceeded their estimated fair values, which were based on projected discounted future net cash flows. As a result of this impairment analysis, the Company recorded an impairment charge of $12.5 million which is included in the caption “Loss from discontinued operations, net of tax”.
The summarized balance sheet of discontinued operations of ABG consisted of the following (in thousands):
The restricted cash balance at June 30, 2009 related to the founder’s escrow liability that we incurred with our acquisition of Chipidea in August 2007. As per the terms of our acquisition, in August 2009, this balance was released in full to the founders of Chipidea. The other liabilities of the discontinued operations at June 30, 2009 have been paid in fiscal 2010 and primarily related to severance costs. In fiscal 2010, we recorded a gain from discontinued operations of $0.2 million, primarily as a result of receiving a withholding tax refund of approximately $0.3 million from discontinued operations. This gain was partially offset by administrative costs for closure of foreign subsidiaries, and our remaining liability at June 30, 2010 consists of remaining administrative costs relating to the closure of certain foreign operations. The payments and receipts relating to discontinued operations have been reflected as cash outflows from discontinued operations in our Statement of Cash Flows for all periods presented.
We prepare our financial statements in conformity with U.S. generally accepted accounting principles, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We regularly evaluate our accounting estimates and assumptions. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results inevitably will differ from the estimates, and such differences may require material adjustments to our financial statements.
We believe the following critical accounting policies affect the significant judgments and estimates we use in the preparation of our consolidated financial statements.
We classify all revenue that involves the sale of a licensee’s products as royalty revenue. Royalty revenue is recognized in the quarter in which a report is received from a licensee detailing the shipments of products incorporating our IP components, which is generally in the quarter following the sale of the licensee’s product to its customer. Royalties are calculated either as a percentage of the revenue received by the seller on sales of such products or on a per unit basis. We periodically engage a third party to perform royalty audits of our licensees, and if these audits indicate any over- or under-reported royalties, we account for the results when they are resolved.
License and Contract Revenue.
We generally derive revenue from license fees for the transfer of proven and reusable IP components. We enter into licensing agreements that provide licensees the right to incorporate our IP components in their products with terms and conditions that have historically varied by licensee. In arrangements with multiple deliverables, we determine whether there is more than one unit of accounting. To the extent that the deliverables are separable into multiple units of accounting, we then allocate the total fee on such arrangements to the individual units of accounting using the residual method. We then recognize revenue for each unit of accounting depending on the nature of the deliverable(s) comprising the unit of accounting.
We generally derive revenue from license fees for currently available technology. Each of these types of contracts includes a nonexclusive license for the underlying IP. Fees for contracts for currently available technology include: license fees relating to our IP, including processor designs; maintenance and support, typically for one year; and royalties payable following the sale by our licensees of products incorporating the licensed technology. Generally, our customers pay us a single upfront fee that covers the license and first year maintenance and support. Our deliverables in these arrangements include (a) processor designs and related IP and (b) maintenance and support. The license for our IP, which includes processor designs, has standalone value and can be used by the licensee without maintenance and support. Further, objective and reliable evidence of fair value exists for maintenance and support based on specified renewal rates. Accordingly, (a) license fees and (b) maintenance and support fees are each treated as separate units of accounting. Total upfront fees are allocated to the license of processor designs and related IP and maintenance and support using the residual method. Designs and related IP are initially delivered followed by maintenance and support. Objective and reliable evidence of the fair value exists for maintenance and support. However, no such evidence of fair value exists for processor designs and related IP. Consistent with the residual method, the amount of consideration allocated to processor designs and related IP equals the total arrangement consideration less the fair value of maintenance and support, which is based on specified renewal rates. Fees for or allocated to licenses to currently available technology are recorded as revenue upon the execution of the license agreement when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred and collectability is reasonably assured. We assess the credit worthiness of each customer when a transaction under the agreement occurs. If collectability is not considered reasonably assured, revenue is recognized when the fee is collected. Other than maintenance and support, there is no continuing obligation under these arrangements after delivery of the IP.
Contracts relating to technology under development also can involve delivery of a license to intellectual property, including processor designs. However, in these arrangements we undertake best-efforts engineering services intended to further the development of certain technology that has yet to be developed into a final processor design. Rather than paying an upfront fee to license completed technology, customers in these arrangements pay us milestone fees as we perform the engineering services. If the development work results in completed technology in the form of a processor design and related intellectual property, the customer is granted a license to such completed technology at no additional fee. These contracts typically include the purchase of first year maintenance and support commencing upon the completion of a processor design and related intellectual property for an additional fee, which fee is equal to the renewal rate specified in the arrangement. The licensee is also obligated to pay us royalties following sale by our licensee of products incorporating the licensed technology. We continue to own the intellectual property that we develop and we retain the fees for engineering services regardless of whether the work performed results in a completed processor design. Fees for engineering services in contracts for technology under development, which contracts are performed on a best efforts basis, are recognized as revenue as services are performed; however, we limit the amount of revenue recognized to the aggregate amount received or currently due pursuant to the milestone terms. As engineering activities are best-efforts and at-risk and because the customer must pay an additional fee for the first year of maintenance and support if the activities are successful, the maintenance and support is a contingent deliverable that is not accounted for upfront under contracts relating to technology under development.
For contracts that we provide engineering services involving design and development of customized specifications, we recognize revenue on a percentage of completion basis from the signing of the agreement through the completion of all outstanding development obligations. The amount of revenue recognized is based on the total license fees under the license agreement and the percentage of completion is measured by the actual costs incurred to date on the project compared to the total estimated project cost. Revenue is recognized only when collectability is probable. The estimates of project costs are based on the IP specifications and prior experience of the same or similar IP development and are reviewed and updated regularly by management. Under the percentage of completion method, provisions for estimated losses on uncompleted contracts are recognized in the period in which the likelihood of such losses is determined. Licensing of existing IP that does not require any configuration is recognized upon delivery of the IP and when all other revenue recognition criteria have been met. Direct costs incurred in the design and development of the IP under these arrangements is included in cost of contract revenue.
Maintenance and Support.
Certain arrangements also include maintenance and support obligations. Under such arrangements, we provide unspecified upgrades, bug fixes and technical support. No other upgrades, products or other post-contract support are provided. These arrangements are generally renewable annually by the customer. Maintenance and support revenue is recognized at its fair value ratably over the period during which the obligation exists, typically 12 months. The fair value of any maintenance and support obligation is established based on the specified renewal rate for such maintenance and support. Maintenance and support revenue is included in license and contract revenue in the statement of operations and was $2.7 million, $3.2 million and $3.7 million in fiscal 2010, 2009 and 2008, respectively.
Significant judgment is required in determining our worldwide income tax provision. In the ordinary course, there are many transactions and calculations for which the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue sharing and cost reimbursement arrangements among related entities and segregation of foreign and domestic income and expense to avoid double taxation. Although we believe that our estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and net income in the period in which such determination is made.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. In order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income in those jurisdictions where the deferred tax assets are located. We have provided a full valuation allowance against our U.S. net deferred tax assets due to our history of net losses, difficulty in forecasting future results and belief that we cannot rely on projections of future taxable income to realize deferred tax assets. Significant management judgment is required in determining our deferred tax assets and liabilities and valuation allowances for purposes of assessing our ability to realize any future benefit from our net deferred tax assets. We intend to maintain this valuation allowance until sufficient positive evidence exists to support the reversal of the valuation allowance. Future income tax expense will be reduced to the extent that we have sufficient positive evidence to support a reversal of, or decrease in, our valuation allowance.
We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Adjustments based on filed returns are generally recorded in the period when the tax returns are filed and the tax implications are known.
The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. Our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. As a result, our effective tax rate may fluctuate significantly on a quarterly basis.
We account for uncertain tax positions using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. At June 30, 2010 and June 30, 2009, we had gross unrecognized tax benefits of $4.2 million and $3.8 million, respectively.
The Company’s policy is to include interest and penalties related to unrecognized tax benefits, if any, within the provision for taxes in the consolidated statements of operations.
Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired. Goodwill amounts are not amortized, but rather are tested for impairment at least annually or more frequently if there are indicators of impairment present. The Company performs its annual goodwill impairment analysis in the fourth quarter of each fiscal year. The Company evaluates whether goodwill has been impaired at the reporting unit level by first determining whether the estimated fair value of the reporting unit is less than its carrying value and, if so, by determining whether the implied fair value of goodwill within the reporting unit is less than the carrying value. Fair values are determined by discounted future cash flow analyses.
Impairment of Long-Lived Assets including Acquisition Related Intangible Assets.
For long-lived assets other than goodwill, the Company evaluates whether impairment losses have occurred when events and circumstances indicate that these assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. If less, the impairment losses are based on the excess of the carrying amounts of these assets over their respective fair values. Their fair values would then become the new cost basis. Fair value is determined by discounted future cash flows, appraisals or other methods.
Investments with original maturities of greater than 90 days at the time of acquisition but less than one year from the balance sheet date are classified as short-term investments.
Available-for-sale securities are carried at fair value, based on quoted market prices, with the unrealized gains or losses reported net of tax, in stockholders’ equity as part of accumulated other comprehensive income (loss). We determine the fair values for short-term investments (that principally consist of marketable debt and equity securities) using industry standard pricing services, data providers and other third-party sources and by internally performing valuation analyses (see Note 4 to our Notes to Consolidated Financial Statements). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, both of which are included in interest and other income, net. Realized gains and losses, if any, are recorded on the specific identification method and are included in interest and other income, net.
We review our investments in marketable securities for possible other-than-temporary impairments on a regular basis. In determining if and when a decline in value below the adjusted cost of marketable debt and equity securities is other-than-temporary, we evaluate on an ongoing basis the market conditions, trends of earnings, financial condition, credit ratings, any underlying collateral and other key measures for our investments. In addition, we consider: 1) our intent to sell the security, 2) if we intend to hold the security, whether it is more likely than not that we will be required to sell the security before recovery of the security’s amortized cost basis and 3) if we intend to hold the security, whether or not we expect the security to recover the entire amortized cost basis. If any loss on investment is believed to be other-than-temporary, a charge will be recognized. Due to the high credit quality and short term nature of our investments, there have been no other-than-temporary impairments recorded to date.
We recognize stock compensation expense for all share-based payments to employees, including grants of employee stock options in our financial statements based on the fair value of the grants. For awards of restricted stock and restricted stock units, we measure compensation expense at grant date based on the estimated fair value of the award, reduced by expected forfeitures, and generally recognize the expense on a straight line basis over the expected requisite service period. For options granted, the fair value is estimated at the date of grant using a Black-Scholes option pricing model with weighted average assumptions for the activity under our stock plans. Option pricing model assumptions such as expected term, expected volatility, and risk-free interest rate, impact the fair value estimate. Further, the forfeiture rate impacts the amount of aggregate compensation. These assumptions are subjective and generally require significant analysis and judgment to develop. When estimating fair value, some of the assumptions will be based on or determined from external data and other assumptions may be derived from our historical experience with share-based payment arrangements. The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances.
As a result of the adjustment to our term and vesting schedule in July 2005 for stock options awarded under our 1998 and 2002 Plans, we do not believe that we are able to rely on our historical exercise and post-vested termination activity to provide relevant data for estimating our expected term for use in determining the fair value of these options. Therefore, we have opted to use the simplified method for estimating our expected term equal to the midpoint between the vesting period and the contractual term.
We currently estimate volatility by considering our historical stock volatility.
The risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the input to the Black-Scholes model.
We estimate forfeitures using a weighted average historical forfeiture rate. Our estimates of forfeitures will be adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from their estimate.
Results of Operations—Years Ended June 30, 2010, 2009 and 2008>
Our results of continuing operations are discussed below. See Note 6 of the Notes to Consolidated Financial Statements for additional details on our discontinued operations.
Revenue. Total revenue primarily consists of royalties, license and contract revenue. Royalties are based upon sales by licensees of products incorporating our technology. License and contract revenue consists of technology license fees generated from new and existing license agreements for developed technology, associated maintenance agreements and engineering service fees generated from contracts for technology under development. Technology license fees vary based on, among other things, whether a particular technology is licensed for a single application or for multiple or unlimited applications, and whether the license granted covers a particular design or a broader architecture. Our revenues in fiscal 2010, 2009 and 2008 were as follows (in millions, except percentages):
Fiscal 2010 compared to fiscal 2009. The 7% increase in royalties resulted from an increase in units reported to 510 million in fiscal 2010 compared to 427 million in fiscal 2009. The 19% growth in unit volume was partially offset by a decrease in average selling price as certain customers met time or volume based discount levels in their contracts. The 9% decrease in contract revenue was primarily due to the global economic slowdown during the year, but our license and contract revenue showed significant growth in the fourth quarter of fiscal 2010, increasing to $10.9 million as compared to $4.9 million in the same period of the prior year. There were 37 new agreements in fiscal 2010 compared to 31 in fiscal 2009.
Fiscal 2009 compared to fiscal 2008. The 7% decrease in royalties primarily resulted from a decrease in average selling price as several customers met higher time or volume discount levels in their contracts. The 8% decrease in contract revenue is due to the global economic slowdown and a decrease in our average selling price of licenses in 2009. There were 31 new agreements executed in fiscal 2009 compared to 25 in fiscal 2008.
In the periods presented we entered into a number of unlimited use license agreements with some of our customers under which 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 typically can be up to 8 years. We recognized 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 $13.0 million in fiscal 2010 as compared with $8.8 million in fiscal 2009. Contract revenue from unlimited use license agreements was $8.8 million in fiscal 2009 as compared with $16.3 million in fiscal 2008. The yearly fluctuations can be significant and are primarily driven by the timing of renewals on unlimited use license agreements with existing customers.
International revenue accounted for approximately 59% of our total revenue in fiscal 2010, 54% of our total revenue in fiscal 2009 and 50% of our total revenue in fiscal 2008. The majority of this revenue has been denominated in U.S. dollars. We expect that revenue derived from international licensees will continue to represent a significant portion of our total revenue.
In 2010, 2009 and 2008, we have one customer that accounted for 16%, 19%, and 18% of our revenue, respectively.
Costs and Expenses. Our costs and expenses in fiscal 2010, 2009 and 2008 were as follows (in millions, except percentages):
Cost of Sales. Cost of sales primarily includes labor and overhead related costs for contracts with engineering service requirements, material costs and costs associated with acquired third party software used in our products. In fiscal 2008, our cost of sales also included amortization of intangible assets used to deliver the associated developed technologies.
Fiscal 2010 compared to fiscal 2009. The increase in cost of sales is primarily due to additional engineering labor and overhead costs associated with larger customized customer projects in fiscal 2010 compared to fiscal 2009.
Fiscal 2009 compared to fiscal 2008. The decrease in cost of sales in fiscal 2009 over fiscal 2008 is due to impairment of acquired intangible assets that the company recorded in June 2008. In connection with that impairment charge, we wrote off certain acquired intangible assets being charged to our cost of sales.
Research and Development. Research and development expenses include salaries and contractor and consultant fees, as well as costs related to workstations, software, and computer aided design tools utilized in the development of new technologies. The costs we incur with respect to internally developed technology and engineering services are included in research and development expenses as they are incurred and are generally not directly related to any particular licensee, license agreement or license fee.
Fiscal 2010 compared to fiscal 2009. Research and development expenses in fiscal 2010 increased by $2.8 million compared to fiscal 2009. Our 2010 research and development costs increased by $1.5 million due to higher bonus expense as the company exceeded certain financial targets for the year. In addition, we increased outside services spending by $1.2 million for additional software and tool development costs for Android and mobile related end applications. Our salary expense also increased by $0.7 million due to the mix and timing of hiring of our engineering team. These increases were partially offset by a $0.5 million reduction in depreciation and facilities expenses primarily resulting from lower rent in connection with our headquarter relocation in May 2009 and $0.1 million reduction in stock compensation expenses due to lower average grant date fair value of options as compared to prior years.
Fiscal 2009 compared to fiscal 2008. Research and development expenses in fiscal 2009 decreased by $8.7 million compared to fiscal 2008. Our 2009 research and development costs decreased by $3.6 million due to lower salary related costs resulting from general cost saving measures, including a reduction in the number of employees engaged in research and development. In addition, we decreased spending on outside services and consulting by $1.3 million primarily due to decreased foreign contracting fees and outside service costs. Our research and development depreciation expense decreased by $1.3 million due to less spending on development related fixed assets provided by our vendors. Additionally, our stock compensation expense decreased by $1.2 million due to decreased staffing levels and lower average grant date fair value of options in 2009 as compared to 2008. In addition, we had a $0.6 million decrease in benefits expense and a $0.3 million decrease in bonus expenses.
Our research and development staff totaled 81 employees at June 30, 2010 and June 30, 2009 as compared to 90 employees at June 30, 2008. At June 30, 2008, we had 315 research and development staff from discontinued operations.
Sales and Marketing. Sales and marketing expenses include salaries, commissions and costs associated with third party independent software development tools, direct marketing and other marketing efforts. Our sales and marketing efforts are directed at establishing and supporting our licensing relationships.
Fiscal 2010 compared to fiscal 2009. Our sales and marketing expense increased by $4.8 million in fiscal 2010 compared to fiscal 2009. As a result of our sales teams’ focus on selling our processor products with the divestiture of ABG the costs increased by $3.4 million. The increase in sales cost was due to commissions and bonus expense increasing by $1.0 million as the company exceeded certain sales and financial targets and to an increase of $1.3 million in outside services and consulting expenses resulting from additional sales and marketing efforts with significant focus on Android and mobile related end applications. These increases were partially offset by a decrease in stock compensation expenses of $0.5 million due to decreased staffing levels and lower average grant date fair value of options as compared to prior years, decrease in facilities and depreciation expenses of $0.2 million primarily resulting from lower rent in connection with our headquarter relocation in May 2009 and decrease in travel expenses of $0.2 million.
Fiscal 2009 compared to fiscal 2008. Our sales and marketing expense decreased by $6.9 million in fiscal 2009 compared to fiscal 2008. Salary related expenses, including commissions, decreased by $3.8 million from the prior year due mainly to restructuring efforts. In addition, our stock compensation expense decreased by $0.9 million due to decreased staffing levels and lower average grant date fair value of options in 2009 as compared to 2008. As a result of the cost reduction plans, we also reduced sales and marketing spending by $0.6 million in supplies and maintenance, $0.5 million in travel, $0.4 million in marketing program expenses, consulting and outside services, $0.3 million in benefits and $0.3 million in facilities expenses.
Our sales and marketing staff decreased to 36 employees at June 30, 2010 compared to 37 employees at June 30, 2009 and compared to 53 employees at June 30, 2008. We had two discontinued operations sales staff at June 30, 2009 who were subsequently terminated in connection with our fiscal 2009 restructuring efforts. At June 30, 2008, we had 6 sales and marketing staff from discontinued operations.
General and Administrative. General and administrative expenses comprise salaries, legal fees including those associated with the establishment and protection of our patent, trademark and other intellectual property rights which are integral to our business, and expenses related to compliance with the reporting and other requirements of a publicly traded company including directors and officers liability insurance and financial audit fees.
Fiscal 2010 compared to fiscal 2009. The decrease in general and administrative expense of $1.9 million in fiscal 2010 compared to fiscal 2009 was primarily due to a $2.2 million decrease in outside services resulting from the lower legal, tax and audit fees in fiscal 2010. There was also a decrease of $0.6 million in facilities and depreciation expenses primarily resulting from lower rent in connection with our headquarter relocation in May 2009, a decrease of $0.5 million in salary related costs due to lower staffing levels, and a decrease of $0.3 million in stock compensation expense due to decreased staffing levels and lower average grant date fair value of options as compared to prior years. These decreases were partially offset by a higher bonus expense of $1.3 million as we exceeded certain financial targets for the year and higher recruiting expenses of $0.3 million associated with hiring a new CEO.
Fiscal 2009 compared to fiscal 2008. The decrease in general and administrative expense of $4.1 million in fiscal 2009 compared to fiscal 2008 was primarily due to a $3.1 million decrease in outside services resulting from the lower legal, tax and audit fees in fiscal 2009. In addition our stock compensation expense decreased by $1.0 million primarily due to decreased staffing levels and lower average grant date fair value of options in 2009 as compared to 2008.
Our general and administrative staff from continuing operations was 24 employees at June 30, 2010 compared to 28 employees at June 30, 2009 and compared to 27 employees at June 30, 2008. At June 30, 2008, we had 21 general and administrative staff from discontinued operations.
Restructuring. The fiscal 2010 restructuring expense of $0.7 million related to terminations of headcount in the US and was primarily designed to reduce spending in general and administrative functions and to reallocate spending to other functions. The 2009 restructuring expense of $0.7 million from continuing operations was primarily driven by two executive terminations and reductions in our sales force. The fiscal 2008 restructuring expense related to the closure of the UK office and terminations of headcount in the US.
Other Income, Net. Other income, net in fiscal 2010, 2009 and 2008 was comprised of the following (in thousands):
Other Income, net increased by $2.6 million for fiscal 2010 compared to fiscal 2009 primarily due to a $0.7 million gain on the investment in a privately held company that was acquired by a public entity and a $0.3 million decrease in interest expense as our outstanding debt balances decreased from fiscal 2009. In addition, in fiscal 2009 the other-than-temporary impairment due to a write down in the value of equity held in a privately held company was $1.7 million, and there was no other-than temporary impairment expense in fiscal 2010. These changes were partially offset by an increase in foreign exchange loss in fiscal 2010 as compared to fiscal 2009. The decrease in interest income in fiscal 2009 compared with fiscal 2008 was due to a lower average cash and cash equivalents balance and lower interest rates in fiscal 2009. The decrease in other-than-temporary impairment expense in fiscal 2009 compared to 2008 was primarily due to a smaller write down in the value of equity held in a privately held company.
Income Taxes. In fiscal 2010, we recorded an income tax provision of $3.3 million. The tax provision was primarily comprised of U.S. state, foreign, and withholding taxes, partially offset by tax refunds from tax incentives in certain jurisdictions, and benefits from previously unrecognized tax benefits. U.S. federal income tax has been offset by foreign tax credits. During the quarter ended June 30, 2010, we filed a tax refund claim for U.S. net operating loss carry-back and realized a tax benefit of approximately $0.5 million. Included in the current year expense is $1.0 million withholding tax related to the pending repatriation of undistributed earnings from one of our foreign subsidiaries, for which a U.S. foreign tax credit will be available in the future. However, this deferred tax asset is subject to a valuation allowance. The tax provision is lower than the applicable combined federal and state statutory rate primarily due to utilization of foreign tax credits and net operating loss from the disposition of ABG during fiscal 2009.
In fiscal 2009, we recorded an income tax provision of approximately $7.5 million from continuing operations and an income tax benefit of $8.3 million from discontinued operations for a total consolidated income tax benefit of $0.8 million. The tax provision from continuing operations is primarily comprised of foreign withholding taxes on royalties and license fees and income taxes in jurisdictions where there is taxable income. The tax benefit for discontinued operations reflects a benefit associated with using the discontinued operations losses to offset U.S. taxable income from continuing operations and a tax benefit associated with foreign losses, partially offset by foreign withholding tax on royalties and license fees.
In fiscal 2008, we recorded an income tax provision of $3.8 million from continuing operations and an income tax benefit of $4.1 million from discontinued operations with a total income tax benefit of $0.3 million. The tax provision from continuing operations is primarily comprised of foreign withholding tax on royalties and license fees, and income taxes in jurisdictions where there is taxable income. The tax benefit rate for discontinued operations is lower than the applicable combined federal and state statutory rate primarily due to the impairment of goodwill, foreign taxes, and other items not deductible for tax purposes.
In the first quarter of fiscal 2008 following the acquisition of Chipidea, we organized into two business groups, the Processor Business Group and the ABG. As a result of the divestiture of the ABG, effective May 7, 2009, we operated in one reportable business group and our historical disclosures have been revised accordingly.
Certain of our international licensees pay royalties based on revenues that are reported in a local currency and translated into U.S. dollars at the exchange rate in effect when such revenues are reported by the licensee. To date, the majority of our revenue from international customers has been denominated in U.S. dollars. However, to the extent that sales by our manufacturing licensees are denominated in foreign currencies, royalties we receive on such sales could be subject to fluctuations in currency exchange rates.
We ended our fiscal 2010 with cash and cash equivalents and short term investments of $52.4 million, up approximately $7.9 million from June 30, 2009. In fiscal 2010, we primarily generated cash from operations while we used cash in investing and financing activities. We used cash in investing activities to diversify our portfolio. In addition, we used cash in financing activities to repay all our debt, including repaying the outstanding balance of $1.2 million on our revolving credit line in July 2009 and repaying the outstanding balance of $8.8 million of our term loan in April 2010. Since we paid off both the revolving credit line and the term loan in our fiscal 2010, we have no debt obligations as of June 30, 2010.
In fiscal 2009, we divested our ABG and therefore it is no longer part of our ongoing operations. As a result of the divestiture, we have separately classified the cash flows of the discontinued operations from operating activities in our Statements of Cash Flows for all impacted periods that have been presented. For cash flows from investing and financing activities, we have combined our disclosure of cash flows from continuing and discontinued operations.
We ended our fiscal 2009 with cash and cash equivalents of $44.5 million, up approximately $24.5 million from the prior quarter and up approximately $31.8 million from June 30, 2008 cash from continuing operations. The increase was largely due to our divesture of ABG. Our aggregate loan balance outstanding as of June 30, 2009 was $12.8 million which represented our credit facility in the United States through Silicon Valley Bank.
On July 3, 2008 we entered into a credit facility with Silicon Valley Bank (SVB). This facility included a four year term loan of $15 million and a one year revolving credit line providing us the ability to borrow up to $10 million. We renewed the revolving line of credit in the first quarter of fiscal 2010, enabling us to borrow up to $10 million through September 20, 2010. 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 from this new facility were used to pay off a prior loan obligation. We borrowed $15 million under the term loan and $1.2 million under the revolving credit line on July 3, 2008. Our debt balance at June 30, 2009 was $12.8 million.
At June 30, 2008, we had cash and cash equivalents of $13.9 million (including $1.2 million of cash and cash equivalents from discontinued operations), a reduction of $131 million from June 30, 2007. This significant decrease represents the impact of our cash acquisition of Chipidea in August 2007. We completed this acquisition for an aggregate cash purchase price, including expenses, of approximately $148 million. In connection with the acquisition we established a $35 million credit facility to fund a portion of the acquisition costs and support our working capital needs. As of June 30, 2008 we had an outstanding balance of $16 million under this facility which was paid off in July 2008 when we obtained a term loan and revolving line of credit with Silicon Valley Bank.
For complete statements of cash flows for fiscal 2010, 2009 and 2008, see Item 8 “Financial Statements and Supplementary Data.”
For fiscal 2010, our operating activities provided net cash of $18.7 million. The cash generated from operating activities included $19.9 million from continuing operations, partially offset by cash used by discontinued operations of $1.2 million. The cash generation from continuing operations was primarily a result of our positive net income, net of non-cash expenses. Our net income from continuing operations included the effects of non-cash charges of $3.6 million from stock compensation expense and $1.6 million in depreciation and amortization of intangible assets and a $0.7 million gain on exchange and sale of investments. In addition, cash generated from operating activities of continuing operations increased primarily as a result of (i) a $4.9 million decrease in prepaid expenses and other current and long term assets reflecting increased utilization of operating assets, and (ii) a $5.6 million increase in accrued liabilities, primarily due to the increased commission and bonus costs relating to higher revenue. These increases in cash were partially offset by cash used as a result of (i) a $3.5 million decrease in long term liabilities, primarily reflecting timing of engineering design software license payments, (ii) a $0.5 million decrease in accounts payable due to the timing of payments and (iii) a $5.1 million increase in accounts receivable, reflecting timing of customer billings and payments received. The negative cash flow from operating activities of discontinued operations was primarily driven by the payment of $1.2 million of cash for restructuring and administrative expenses.
For fiscal 2009, our operating activities provided net cash of $13.1 million. The cash generated from operating activities included $21.0 million from continuing operations, partially offset by cash used by discontinued operations of $7.9 million. The cash generation from continuing operations was primarily a result of our positive net income, net of non-cash expenses. Our net income from continuing operations included the effects of non-cash charges of (i) $4.2 million from stock compensation expense, (ii) $2.2 million in depreciation and amortization, (iii) $1.7 million impairment of a private company investment and (iv) $0.1 million of other non-cash charges, including non-cash activities relating to our disposition of Chipidea. The majority of remaining increase in cash was due to timing of customer receipts and timing of paying liabilities as our accounts receivable and accounts payable accounted for an additional increase in cash of $3.2 million in the aggregate in 2009. The negative cash flow from operating activities of discontinued operations was primarily driven by the $22.1 million loss from discontinued operations, net of tax, being partially offset by $5.7 million of cash being provided from customer accounts receivables. In addition, $4.9 million of the discontinued operations loss resulted from non-cash charges from depreciation and amortization expenses.
For fiscal 2008, our operating activities provided net cash of $2.2 million. The 2008 net loss was substantially offset by non-cash activities specifically related to Chipidea, including (i) $101.4 million impairment of Chipidea goodwill and acquired intangible assets, (ii) $8.2 million of amortization of Chipidea acquired intangible assets and (iii) $6.4 million of acquired in-process research and development. Other non-cash charges of $2.7 million of depreciation, $1.7 million impairment of acquired intangible assets, $1.2 million of intangible asset amortization, $7.4 million of stock compensation expense and the $2.3 million unrealized loss of a private company investment accounted for the majority of the remaining adjustments to operating cash flows in 2008. In total, cash provided from operating activities of continuing operations in 2008 was $13.3 million, and cash used in operating activities from discontinued operations was $11.1 million.
Net cash used in investing activities was $21.7 million in fiscal 2010, primarily as a result of usage of $20.2 million from the net purchases of available-for-sale securities and $1.5 million used to purchase property, furniture and equipment.
Net cash provided by investing activities was $20.4 million in 2009, primarily as a result of the receipt of net proceeds of $21.8 million from our disposition of Chipidea which includes $1.0 million of cash from the settlement of indemnification claims made by us against Chipidea shareholders in connection with our acquisition of Chipidea in August 2007. These sources of cash were partially offset by $1.3 million of cash used for capital expenditures.
Net cash used in investing activities was $125.6 million for fiscal 2008. The primary driver of cash outflow from investing activities was the usage of $148.1 million for the Chipidea acquisition including $27.2 million in cash that was used to set up the required acquisition escrow accounts. We also used $3.4 million of cash for capital expenditures. These uses of cash were partially offset by $25.9 million of cash provided from the maturity of marketable investments.
Net cash used in financing activities was $9.8 million in fiscal 2010. Net cash used of $12.8 million related to the full repayment of our debt. This use of cash was partially offset by $3.0 million that we received from stock option exercises and purchases under our employee stock purchase plan.
Net cash used in financing activities was $3.9 million in fiscal 2009. Net cash provided by debt financing of $16.2 million was the primary driver of cash provided by financing activities. This inflow was more than offset by payments of debt of $21.3 million. In addition, we received $1.7 million from the issuance of common stock from stock option exercises and purchases under our employee stock purchase plans. We also used $0.5 million to repay capital lease obligations.
Net cash provided by financing activities was $19.6 million in fiscal 2008. Net cash provided by debt financing of $15.6 million was the primary driver of cash provided by financing activities. In addition, we also received $3.7 million from the issuance of common stock from stock option exercises and purchases under our employee stock purchase plans and $0.3 million from net capital lease activities.
Our future liquidity and capital requirements could vary significantly from quarter to quarter, depending on numerous factors, including, among others:
Our investment policy requires all investments with original maturities at the time of investment of up to 6 months to be rated at least A-1/P-1 by Standard & Poor’s/Moody’s, and specifies higher minimum ratings for investments with longer maturities. We continually monitor the credit risk in our portfolio and mitigate our credit and interest rate exposures. We intend to continue to closely monitor future developments in the credit markets and make appropriate changes to our investment policy as deemed necessary. Based on our ability to liquidate our investment portfolio and our expected operating cash flows, we do not anticipate any liquidity constraints as a result of either the current credit environment or potential investment fair value fluctuations.
We believe that we have sufficient cash and borrowing capabilities to meet our projected operating and capital requirements for the foreseeable future and at least the next twelve months. Our future capital requirements will depend on many factors including our rate of revenue growth, the timing and extent of spending to support development efforts, any expansion of sales and marketing activities and potential future acquisitions.
Our contractual obligations as of June 30, 2010, were as follows:
Payments due by period
The table above excludes an aggregate liability of $1.1 million for uncertainty in income taxes as we are unable to reasonably estimate the ultimate amount or timing of settlement.
As of June 30, 2010, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
New Accounting Pronouncements>
In October 2009, the FASB issued Accounting Standards Update No. 2009-13 (ASU 2009-13), which addresses the accounting for multiple-deliverable revenue arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. ASU 2009-13 is effective for revenue arrangements entered into or materially modified beginning in fiscal years on or after June 15, 2010. Early adoption is permitted. We do not believe the adoption of this pronouncement will have a material impact on our financial statements.
In January 2010, the FASB issued amended Accounting Standards Codification No. 820 (ASC 820) that requires additional fair value disclosures. These disclosure requirements are effective in two phases. In the first quarter of 2010, we adopted the requirements for disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers. Beginning in the first quarter of 2011, these amended standards will require presentation of disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3). We do not believe the adoption of this pronouncement will have a material impact on our financial statements.
We are exposed to interest rate risk on investments of our excess cash. The primary objective of our investment activities is to preserve capital. To achieve this objective and minimize the exposure due to adverse shifts in interest rates, we invest in high quality short-term maturity commercial paper, municipal bonds, and money market funds operated by reputable financial institutions in the United States. Due to the nature of our investments, we believe that we do not have a material interest rate risk exposure.
We are exposed to fluctuations in currency exchange rates because a substantial portion of our revenue has been, and is expected to continue to be, derived from customers outside the United States. To date, the majority of our revenue from international customers has been denominated in U.S. dollars. Because we cannot predict the amount of non-U.S. dollar denominated revenue earned by us or our licensees, we have not historically attempted to mitigate the effect that currency fluctuations may have on our revenue, and we do not presently intend to do so in the future.
Item 8. Financial Statements and Supplementary Data.>
The following table presents selected unaudited quarterly information for fiscal 2010 and 2009 (in thousands except per share data):