Note 1. Description of Business and Basis of Presentation.
MIPS Technologies, Inc. (MIPS) is a leading provider of industry-standard processor architectures and cores for home entertainment, networking, mobile and embedded applications. The MIPS architecture powers some of the world’s most popular electronic products. Our technology is used in products such as digital televisions, set-top boxes, Blu-ray players, broadband customer premises equipment (CPE), WiFi access points and routers, networking infrastructure and portable/mobile communications and entertainment products. Our customers are global semiconductor companies and system original equipment manufacturers (system OEMs). We offer our customers high-performance, easy-to-use functionality at a fraction of the cost and time to market that internal development would require. Our customers pay us license fees for architectural, product and patent rights, as well as royalties based on processor unit shipments.
Pending Acquisition by Bridge Crossing LLC and Imagination Technologies Group plc
On November 5, 2012, MIPS entered into a patent sale agreement with Bridge Crossing, LLC (“Bridge Crossing”), an acquisition vehicle of Allied Security Trust I (“AST”), and a merger agreement with Imagination Technologies Group plc (LSE: IMG) (“Imagination”) with anticipated net proceeds of approximately $7.31 per share in cash to each holder of MIPS common stock. On December 9, 2012, MIPS entered into an amendment to its merger agreement with Imagination that increased the purchase price being paid by Imagination to $80 million (from an original purchase price of $60 million) and removed the conditions to closing requiring the approval of the Committee on Foreign Investment in the United States and that MIPS is not a real property holding corporation. As a result of the amendment, the net proceeds to each holder of MIPS common stock following the consummation of the proposed patent sale transaction with Bridge Crossing, the proposed recapitalization and the proposed merger, increased to approximately $7.64 per share in cash. On December 16, 2012, MIPS entered into an amendment to its merger agreement with Imagination that increased the purchase price being paid by Imagination to $100 million. As a result of the amendment, the net proceeds to each holder of MIPS common stock, following the consummation of the proposed patent sale transaction with Bridge Crossing, the proposed recapitalization and the proposed merger, has increased to approximately $7.94 per share in cash.
The patent sale agreement contemplates the sale of all of our right, title and interest in most of our active issued patents and patent applications to Bridge Crossing and sublicensable rights to a smaller group of our patents and patent applications for a total of $350 million. The patents and patent applications sold pursuant to the patent sale agreement relate to, among other categories, features, functionality, instruction set architectures and microarchitectural characteristics of microprocessors and related semiconductor hardware.
The merger agreement contemplates the merger of an acquisition subsidiary (of Imagination) with and into MIPS, with MIPS continuing as the surviving corporation and a wholly owned, indirect subsidiary of Imagination following the merger. The merger agreement provides that following the closing of the patent sale but prior to the closing of the merger, MIPS will effect a recapitalization by amending its certificate of incorporation. If the certificate of amendment is adopted, approved and filed, MIPS will distribute the proceeds from the patent sale agreement and all cash on hand, less a fixed holdback of approximately $100 million and MIPS stockholders will be entitled to receive 0.226276 shares of MIPS common stock (which shares will be converted into cash in connection with the merger) and a cash payment, without interest and less any applicable withholding taxes, for each share of MIPS common stock held by such stockholder at the time of filing of the certificate of amendment. The amount payable to stockholders in connection with the recapitalization will be affected by the Company’s operating results, estimated transaction expenses, timing of the recapitalization and other factors.
Both the patent sale transaction and the merger transaction are subject to customary closing conditions, including the approval of the Company’s stockholders, who will vote separately on each of the transactions and the recapitalization. Approval of the patent sale transaction is not subject to stockholder approval of the recapitalization or the merger transaction. Approval of the recapitalization is subject to stockholder approval of the patent sale transaction and the merger transaction. Approval of the merger transaction is subject to stockholder approval of the patent sale transaction and the recapitalization.
Assuming the stockholders approve both transactions and the recapitalization, the proceeds of the transactions, which are subject to a fixed holdback of approximately $100 million to cover tax and other liabilities, will be distributed to the Company’s stockholders on a pro-rata basis through a recapitalization of MIPS common stock. If the Company completes the patent sale transaction but does not complete the proposed merger transaction, the impact of the patent sale would be an increase to the Company’s cash balance by the proceeds of the patent sale and an increase to the Company’s liabilities to advisers with respect to the patent sale. In addition, the gain that results from the patent sale would give rise to taxable income, which would be partially offset by the Company’s ability to realize, and therefore recognize, certain net U.S. deferred tax assets.
The Company’s annual meeting is currently scheduled to be held on February 6, 2013. At the annual meeting, stockholders will vote on a number of proposals, including the patent sale transaction, the recapitalization and the merger transaction.
Basis of Presentation.
The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) applicable to interim financial information. Certain information and footnote disclosures included in financial statements prepared in accordance with generally accepted accounting principles have been omitted in these interim statements as allowed by such SEC rules and regulations. The balance sheet at June 30, 2012 has been derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. However, we believe that the disclosures are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements included in this Form 10-Q should be read in conjunction with the audited consolidated financial statements and related notes for the fiscal year ended June 30, 2012, included in our 2012 Annual Report on Form 10-K.
The unaudited results of operations for the interim periods shown in these financial statements are not necessarily indicative of operating results for the entire fiscal year. In our opinion, the unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for each interim period shown.
Use of Estimates.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.
Revenue Recognition.
Royalty Revenue.
We classify all revenue that involves the sale of a licensee’s products as royalty revenue. Royalty revenue is recognized in the quarter in which we receive a report from a licensee detailing the shipments of products incorporating our IP components, which is generally in the quarter following the licensee’s sale of the product to its customer. Royalties are calculated either as a percentage of the revenue received by the seller on sales of such products or on a per unit basis, as specified in our agreement with the licensee. We periodically engage a third party to perform royalty audits of our licensees, and if these audits indicate any over- or under-reported royalties, we account for the results when they are resolved.
License and Contract Revenue.
We generally derive license revenue for the transfer of proven and reusable IP components on currently available technology, including in certain situations, a license to our patents. We enter into licensing agreements that provide licensees the right to incorporate our IP components in their products with terms and conditions that have historically varied by licensee. Each of these types of contracts includes a nonexclusive license for the underlying IP. Fees for contracts for currently available technology include: license fees relating to our IP, including processor designs and patents; maintenance and support, typically for one year; and royalties payable following the sale by our licensees of products incorporating the licensed technology. Generally, our customers pay us a single upfront fee that covers the license and first year maintenance and support. Our deliverables in these arrangements include (a) processor designs and related IP and (b) maintenance and support.
Contracts relating to technology under development also can involve delivery of a license to intellectual property, including processor designs. However, in these arrangements we undertake to provide best-efforts engineering services intended to further develop technology that has yet to be developed into a final processor design. Rather than paying an upfront fee to license completed technology, customers in these arrangements pay us milestone fees as we perform the engineering services. If the development work results in completed technology in the form of a processor design and related intellectual property, the customer is granted a license to such completed technology at no additional fee. These contracts typically include the purchase of first year maintenance and support commencing upon the completion of a processor design and related intellectual property for an additional fee, which fee is equal to the renewal rate specified in the arrangement. The licensee is also obligated to pay us royalties following sale of products incorporating the licensed technology. We continue to own the intellectual property that we develop and we retain the fees for engineering services regardless of whether the work performed results in a completed processor design. Fees for engineering services in contracts for technology under development are recognized as revenue as the services are performed; however, we limit the amount of revenue recognized to the aggregate amount received or currently due pursuant to the milestone terms. As engineering activities are best-efforts and at-risk and because the customer must pay an additional fee for the first year of maintenance and support if the activities are successful, the maintenance and support is a contingent deliverable that is not accounted for upfront under contracts relating to technology under development.
When we provide engineering services involving design and development of customized specifications, we recognize revenue on a percentage of completion basis from the signing of the agreement through the completion of all outstanding development obligations. The amount of revenue recognized is based on the total license fees under the license agreement and the percentage of completion is measured by the actual costs incurred to date on the project compared to the total estimated project cost. Revenue is recognized only when collectability is probable. The estimates of project costs are based on the IP specifications and prior experience with the same or similar IP development and are reviewed and updated regularly. Under the percentage of completion method, provisions for estimated losses on uncompleted contracts are recognized in the period in which the likelihood of such losses is determined. Licensing of existing IP that does not require any configuration is recognized upon delivery of the IP and when all other revenue recognition criteria have been met. Direct costs incurred in the design and development of the IP under these arrangements is included in cost of sales.
The amount of license and contract revenue we recognize in a given period is affected by our judgment as to whether an arrangement includes multiple deliverables and, if so, our determinations surrounding whether VSOE exists. We determine VSOE based on our normal pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range. In circumstances when VSOE does not exist, we then apply judgment with respect to whether we can obtain TPE. Generally, we are not able to determine TPE because our go-to-market strategy typically differs from that of our peers. When we are unable to establish selling price using VSOE or TPE, we use BESP in our allocation of arrangement consideration. In determining BESP, we apply significant judgment as we weigh a variety of factors, based on the facts and circumstances of the arrangement. We typically arrive at BESP for license and contract revenue by considering historical and current evidence of pricing including bundled pricing practices, selling region, license term and number of uses allowed.
License and contract revenue is recorded as revenue 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.
Maintenance and Support.
Certain arrangements include maintenance and support obligations. Under such arrangements, we provide unspecified upgrades, bug fixes and technical support. No other upgrades, products or other post-contract support are provided. These arrangements are generally renewable annually by the customer. Maintenance and support revenue is recognized at its fair value ratably over the period during which the obligation exists, typically 12 months.
Cash and Cash Equivalents and Short-Term Investments.
Cash and cash equivalents consist mainly of cash, money market funds, and other highly liquid investments which have original maturities of three months or less at the time of acquisition. Investments with original maturities of greater than 90 days at the time of acquisition but less than one year from the balance sheet date are classified as short-term investments. The fair value of cash and cash equivalents approximates their carrying value at December 31, 2012.
Available-for-sale securities are carried at fair value, based on quoted market prices, with the unrealized gains or losses reported, net of tax, in stockholders’ equity as part of accumulated other comprehensive income (loss). We determine the fair values for short-term investments (that principally consist of marketable debt and equity securities) using industry standard pricing services, data providers and other third-party sources and by internally performing valuation analyses (see Note 4). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, both of which are included in other income (expense), net. Realized gains and losses, if any, are recorded on the specific identification method and are included in other income (expense). We had no available-for-securities as of December 31, 2012.
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 to recover the entire amortized cost basis of the security. 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. As of December 31, 2012, there were no available-for-sale securities.
Note 2. Transaction Related Costs
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Three Months Ended
December 31,
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Six Months Ended
December 31,
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2012
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2011
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2012
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2011
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Transaction related costs
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The Company retained investment banking firms to advise us in connection with potential transactions related to patent monetization and other opportunities for increasing shareholder value. The Company incurred $1.6 million in legal fees, $0.1 million in banking fees and $0.2 million in professional costs in each of the three months and six months ended December 31, 2012 relating to the pending merger with Imagination, which have been reported as transaction related costs in the Company’s condensed consolidated statements of operations for the three months and six months ended December 31, 2012. At the effective time of the transaction, the Company is expected to incur additional aggregate fees of approximately $9.7 million to the investment banking firms based on the current transaction terms.
Note 3. Computation of Earnings Per Share
Basic earnings per share is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares that were outstanding during the period. Diluted earnings per share is computed giving effect to all dilutive potential common shares that were outstanding for any periods presented in these financial statements.
The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share amounts):
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Three Months Ended
December 31,
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Six Months Ended
December 31,
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2012
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2011
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2012
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2011
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)
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Weighted-average shares of common stock outstanding
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Effect of dilutive securities
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Shares used in computing diluted net loss per share
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Net loss per share, basic
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)
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Net loss per share, diluted
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)
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Potentially dilutive securities from outstanding stock options and restricted stock units excluded from diluted net income (loss) per share because they are anti-dilutive (A)
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(A)
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For the three and six months ended December 31, 2012, dilutive securities were excluded from diluted net loss per share because they are anti-dilutive.
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Note 4. Comprehensive Loss
Total comprehensive loss includes net loss and other comprehensive loss, which primarily comprises foreign currency adjustments and changes in unrealized gains (losses) on short-term investments. Total comprehensive loss for the second quarter of fiscal year 2013 was $6.4 million and total comprehensive loss for the six months of fiscal 2013 was $10.7 million compared to comprehensive loss for the second quarter of fiscal year 2012 was $1.0 million and total comprehensive loss for the six months of fiscal 2012 was $0.5 million.
Note 5. Fair Value
Historically, we invest in short-term investments which principally consist of marketable debt and equity securities. Our financial assets are measured and recorded at fair value, except for equity investments in privately-held companies. These equity investments are generally accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. Our non-financial assets, such as goodwill, intangible assets, and property, plant and equipment, are recorded at cost and are assessed for impairment when an event or circumstance indicates that a decline in value may have occurred or at least annually in the case of goodwill.
Fair Value Hierarchy
The measurements of fair value were established based on a fair value hierarchy that prioritizes the utilized inputs. This hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. The guidance for fair value measurements requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:
Level 1
– Quoted (unadjusted) prices in active markets for identical assets or liabilities.
Our Level 1 assets consist of U.S. Treasury bills, marketable equity securities and money market funds.
Level 2
- Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Our Level 2 assets consist of time deposits, commercial paper, corporate bonds and government agency bonds.
Level 3
- Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.
We had no Level 3 assets as of December 31, 2012 or June 30, 2012.
Cash equivalents, short-term investments and non-qualified deferred compensation plan assets are measured at fair value on a recurring basis. The Company’s non-qualified deferred compensation plan assets consist of money market and mutual funds invested in domestic and international marketable securities that are directly observable in active markets. The deferred compensation plan assets, which were all Level 1 assets, recorded as of December 31, 2012 and June 30, 2012 were $1.5 million and $1.3 million, respectively.
We had no available-for-sale securities as of December 31, 2012 as a result of the sale and maturity of our investments in the three months ended December 31, 2012. In the three and six months ended December 31, 2012 we recorded a realized gain of $12,300 on our investments as part of the sale of certain securities.
The following table presents our cash equivalents and short-term investments by pricing category as of June 30, 2012 (in thousands):
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Fair value measurement at reporting dates using
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Total
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Quoted Price in Active Markets for Identical Assets
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Significant Other Observable Inputs
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Significant Unobservable Inputs
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(Level 1)
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(Level 2)
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(Level 3)
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Total Short-term Investments
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(1)
At June 30, 2012, $65.9 million of money market funds were included in the cash and cash equivalents in our condensed consolidated balance sheet.
Available-for-sale securities, all of which were classified as short-term investments, held by the Company as of June 30, 2012 were as follows (in thousands):
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June 30, 2012
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Gross
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Gross
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Amortized
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Unrealized
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Unrealized
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Fair
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Cost
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Gains
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Losses
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Value
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Total Short-term Investments
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Note 6. Goodwill and Purchased Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired through past business combinations. Our goodwill balance of $565,000 is primarily attributable to the First Silicon Solutions acquisition that occurred in September 2005 and did not change in fiscal year 2012 and in the first six months of fiscal year 2013.
The balances of our acquisition related intangible assets, all relating to developed and core technology, and the basis in purchased software licenses were as follows (in thousands):
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December 31, 2012
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June 30, 2012
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Gross Carrying
Value
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Accumulated
Amortization
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Net Carrying
Value
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Gross Carrying
Value
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Accumulated
Amortization
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Net Carrying
Value
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Developed and core technology
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Purchased software licenses
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)
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Purchased intangible assets
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)
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Developed and core technology is being amortized over its useful life of 10 years. Purchased software licenses are being amortized over their useful lives of 3 to 6 years.
Estimated future amortization expense related to our existing acquisition related intangible assets and purchased software licenses is as follows:
Note 7. Other Long-Term Assets
The components of other long-term assets are as follows (in thousands):
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December 31, 2012
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June 30, 2012
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Investment in privately held company
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Long-term engineering design software licenses
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Deferred compensation plan
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Note 8. Accrued and Other Long-Term Liabilities
The components of accrued liabilities are as follows (in thousands):
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December 31, 2012
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June 30, 2012
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Accrued compensation and employee-related expenses
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Engineering design software licenses
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Accrued legal and related fees
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Other accrued liabilities
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Total accrued liabilities
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The components of other long-term liabilities are as follows (in thousands):
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December 31, 2012
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June 30, 2012
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Long-term income tax liability
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Long-term obligation related to engineering design software licenses
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Long-term deferred revenue
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Total long-term liabilities
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Note 9. Commitments and Contingencies
Purchase Commitments with Suppliers.
The Company has agreements with suppliers and other parties to purchase goods, services and long-lived assets. Unconditional obligations under these agreements for each of the four years from fiscal year 2013 through 2016 were approximately $4.8 million, $0.5 million, $0.3 million, and $0.3 million, respectively. These commitments are exclusive of purchased software licenses and engineering design software license contracts of $5.1 million and advisory fees of $0.5 million that were incurred as of December 31, 2012. These items are reflected in the Company’s accrued liabilities (see Note 7). In fiscal year 2011, we entered into a software license agreement where we may be obligated to pay an additional $0.2 million on an annual basis, depending upon the volume of future usage by end users from fiscal year 2013 to 2017.
Operating Lease Commitments
.
At December 31, 2012, the Company’s future minimum payments for operating lease obligations are as follows:
Litigation.
From time to time, we are involved in disputes, litigation and other legal actions in the ordinary course of business. We continually evaluate uncertainties associated with legal matters and record charges equal to the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the loss or range of loss can be reasonably estimated. MIPS believes it has adequate provisions for any such matters as of December 31, 2012 and it was not reasonably possible that an additional material loss had been incurred in an amount in excess of the total amount already recognized on MIPS's financial statements.
From time to time, we receive communications from third parties asserting patent or other rights allegedly covering our products and technologies. Based upon our evaluation, we may take no action or we may seek to obtain a license, redesign an accused product or technology, initiate a formal proceeding with the appropriate agency (e.g., the U.S. Patent and Trademark Office) and/or initiate litigation. There can be no assurance in any given case that a license will be available on terms we consider reasonable or that litigation can be avoided if we desire to do so. If litigation does ensue, the adverse third party will likely seek damages (potentially including treble damages) and may seek an injunction against the sale of our products that incorporate allegedly infringing intellectual property or against the operation of our business as presently conducted, which could result in our having to stop the sale of some of our products or to increase the costs of selling some of our products. Such lawsuits could also damage our reputation. The award of damages, including material royalty payments, or the entry of an injunction against the sale of some or all of our products, could have a material adverse affect on us. Even if we were to initiate litigation, such action could be extremely expensive and time-consuming and could have a material adverse effect on us. We cannot assure you that litigation related to our intellectual property rights or the intellectual property rights of others can always be avoided or successfully concluded.
We have been notified by ten licensees of a potential infringement claim by Biax Corporation asserting two US patents, allegedly involving our products. A number of these licensees have requested indemnification from us. Given the nature of these claims, we cannot yet determine the amount or a reasonable range of potential loss, if any.
In connection with the sale of our Analog Business Group to Synopsys, Inc. (Synopsys) in May 2009, we agreed to retain responsibility for certain actual or contingent liabilities and agreed to indemnify Synopsys against certain breaches of representations and warranties and other liabilities.
On November 29, 2012, an alleged stockholder filed a putative class action entitled
Capgrowth Group v. Sandeep S. Vij, et al.
, Case No. 1:12-CV-236874, in the Superior Court of the State of California, Santa Clara County, which we refer to as the Capgrowth Action. The defendants are MIPS Technologies and the members of our board of directors. The complaint alleges that the individual defendants breached their fiduciary duties to MIPS Technologies stockholders in connection with the patent sale agreement with Bridge Crossing and the merger agreement with Imagination Technologies and the transactions contemplated thereby. Specifically, the complaint alleges, among other things, that the proposed transactions arise out of a flawed process, that the individual defendants engaged in self-dealing in relation to the proposed transactions, which resulted in a failure to maximize stockholder value. The complaint further alleges that MIPS Technologies and the individual defendants breached their fiduciary duties by omitting material facts from the preliminary proxy statement filed by MIPS Technologies with the Securities and Exchange Commission on November 20, 2012, in connection with the proposed transactions. The plaintiff seeks, among other things, an order enjoining the consummation of the merger, an award of compensatory or rescissory damages, and awarding attorneys’ fees and costs. On December 17, 2012, defendants filed a motion to stay the Capgrowth Action pending resolution of the more advanced Shankar Action (defined below).
On December 12, 2012, an alleged stockholder filed a putative class action entitled
Frank Minjarez v. MIPS Technologies, Inc., et al.
, Case No. 1:12-CV-237719, in the Superior Court of the State of California, Santa Clara County, which we refer to as the Minjarez Action. The defendants are MIPS Technologies, the members of our board of directors, an acquisition subsidiary of Imagination Technologies (“Acquisition Sub”), AST and Bridge Crossing. The complaint alleges that MIPS Technologies and the individual defendants breached their fiduciary duties to MIPS Technologies stockholders in connection with the patent sale agreement and the merger agreement and the transactions contemplated thereby. Specifically, the complaint alleges, among other things, that the proposed transactions arise out of a flawed process, that the individual defendants engaged in self-dealing in relation to the proposed transactions, which resulted in a failure to maximize stockholder value. The complaint further alleges that MIPS Technologies and the individual defendants breached their fiduciary duties by omitting material facts from the preliminary proxy statement filed by MIPS Technologies with the Securities and Exchange Commission on November 20, 2012, in connection with the proposed transactions. The complaint further alleges Acquisition Sub, Bridge Crossing and AST aided and abetted the alleged breaches of fiduciary duty by MIPS Technologies and the individual defendants. The plaintiff seeks, among other things, an order enjoining the consummation of the proposed transactions, rescinding the proposed transactions if they are consummated, and awarding attorneys’ fees and costs.
On December 12, 2012, an alleged stockholder filed a putative class action entitled
Ashish Shankar v. Kenneth L. Coleman, et al.
, Case No. 8103-VCN, in the Court of Chancery of the State of Delaware, which we refer as the Shankar Action. The defendants are MIPS Technologies, the members of our board of directors, Acquisition Sub, Imagination Technologies, AST, and Bridge Crossing. The complaint alleges that the individual defendants breached their fiduciary duties to MIPS Technologies stockholders in connection with the patent sale agreement and the merger agreement and the transactions contemplated thereby. Specifically, the complaint alleges, among other things, that the proposed transactions arise out of a flawed process, that the individual defendants engaged in self-dealing in relation to the proposed transactions, which resulted in a failure to maximize stockholder value. The complaint further alleges that the individual defendants breached their fiduciary duties by omitting material facts from the preliminary proxy statement filed by MIPS Technologies with the Securities and Exchange Commission on November 20, 2012, in connection with the proposed transactions. The complaint further alleges Imagination Technologies, Acquisition Sub, Bridge Crossing and AST aided and abetted the alleged breaches of fiduciary duty by the individual defendants. The plaintiff seeks, among other things, an order enjoining the consummation of the proposed transactions, rescinding the proposed transactions if they are consummated or awarding rescissory damages, awarding damages, and awarding attorneys’ fees and costs.
On December 14, 2012, MIPS Technologies and the individual defendants answered the complaint in the Shankar Action. On December 17, 2012, Imagination Technologies and Acquisition Sub entered their appearance in the Shankar Action. Also on December 17, the Court of Chancery entered an order governing the production and exchange of confidential and highly confidential information. On December 18, the Court of Chancery entered a scheduling order providing for, among other things, the certification of a non-opt out class in the Shankar Action. That scheduling order further provided, among other things, that plaintiff will file an amended complaint no later than three days after MIPS Technologies filed a revised preliminary proxy statement with the SEC. Also on December 18, Imagination Technologies and Acquisition Sub answered the complaint in the Shankar Action.
On December 18, 2012, the plaintiff in the Capgrowth action filed a first amended complaint adding Imagination Technologies, Acquisition Sub, and Bridge Crossing as defendants. The first amended complaint further added allegations that Imagination Technologies, Acquisition Sub, and Bridge Crossing aided and abetted the alleged breaches of fiduciary duty by MIPS Technologies and the individual defendants. The first amended complaint further added a claim against MIPS Technologies, in which plaintiff seeks attorneys' fees associated with the increase in the merger consideration that plaintiff alleges to have precipitated. Also on December 18, 2012, the plaintiff filed an application for a temporary restraining order seeking to enjoin the consummation of the proposed transactions.
On December 19, 2012, an alleged stockholder filed a putative class action entitled
John Mahlke v. MIPS Technologies, Inc.
, Case No. 8127, in the Court of Chancery of the State of Delaware, which we refer to as the Mahlke Action. The defendants are MIPS Technologies, the members of our board of directors, Acquisition Sub, and Imagination Technologies. The complaint alleges that the individual defendants breached their fiduciary duties to MIPS Technologies stockholders in connection with the merger agreement and the transactions contemplated thereby. Specifically, the complaint alleges, among other things, that the proposed merger arises out of a flawed process which resulted in a failure to maximize stockholder value. The complaint further alleges that the individual defendants breached their fiduciary duties by omitting material facts from the preliminary proxy statement filed by MIPS Technologies with the Securities and Exchange Commission on November 20, 2012, in connection with the proposed merger. The complaint further alleges Imagination Technologies and Acquisition Sub aided and abetted the alleged breaches of fiduciary duty by the individual defendants. The plaintiff seeks, among other things, an order enjoining the consummation of the proposed merger, rescinding the proposed merger if it is consummated or awarding rescissory damages, awarding damages, and awarding attorneys’ fees and costs. On December 20, 2012, MIPS Technologies and the individual defendants answered the complaint in the Mahlke Action. On December 21, 2012, Imagination Technologies and Acquisition Sub answered the complaint in the Mahlke Action.
On December 21, 2012, MIPS Technologies and the individual defendants filed an amended motion to stay in the Capgrowth Action.
On December 24, 2012, plaintiff in the Shankar Action filed an amended complaint. On December 27, 2012, the Court of Chancery granted an order consolidating the Shankar action and the Mahlke action into one action entitled
In re MIPS Technologies, Inc. Stockholder Litigation
, Consolidated C.A. No. 8103-VCN, which we refer to as the Consolidated Action. Pursuant to the agreement of the parties in the Consolidated Action, the amended complaint in the Shankar Action was treated as the operative complaint for the Consolidated Action.
On December 28, 2012, an alleged stockholder filed a putative class action entitled
Abhilash Joseph v. Sandeep S. Vij, et al.
, Case No. 1:12-cv-238629, in the Superior Court of the State of California, Santa Clara County, which we refer to as the Joseph Action. The defendants are MIPS Technologies and the members of our board of directors. The complaint alleges that the individual defendants breached their fiduciary duties to MIPS Technologies stockholders in connection with the patent sale agreement and the merger agreement and the transactions contemplated thereby. Specifically, the complaint alleges, among other things, that the proposed transactions arise out of a flawed process, that the individual defendants engaged in self-dealing in relation to the proposed transactions, which resulted in a failure to maximize stockholder value. The complaint further alleges that MIPS Technologies and the individual defendants breached their fiduciary duties by omitting material facts from both the preliminary proxy statement and the revised preliminary proxy statement filed by MIPS Technologies with the Securities and Exchange Commission on November 20 and December 20, 2012, in connection with the proposed transactions. The plaintiff seeks, among other things, an order declaring the merger agreement was entered into in breach of the individual defendants' fiduciary duties and that the merger agreement is unenforceable, enjoining the consummation of the proposed transactions, rescinding the merger agreement or the patent sale agreement to the extent either is already implemented, and awarding attorneys’ fees and costs.
On January 3, 2013, without admitting any wrongdoing and to avoid the burden, expense and disruption of continued litigation, MIPS Technologies, the individual defendants, Bridge Crossing, AST, Imagination Technologies and Acquisition Sub entered into a memorandum of understanding with the plaintiffs in the Consolidated Action providing for the settlement in principle of the claims brought on behalf of the class in the Consolidated Action. Pursuant to the memorandum of understanding, MIPS Technologies included additional disclosures in the definitive proxy statement requested by plaintiffs and agreed to waive certain provisions in standstill agreements applicable to two parties. The parties to the Consolidated Action are in the process of documenting the settlement and will present the settlement to the Court of Chancery for approval when that documentation is complete.
On January 11, 2013, MIPS Technologies entered into a stipulation with the plaintiffs in the Capgrowth Action and Minjarez Action in which the parties agreed that the settlement in the Consolidated Action in Delaware, plus certain supplemental disclosures made by the Company, resolve the claims asserted in the Capgrowth Action and the Minjarez Action.
We intend to defend vigorously against those suits that have not been settled in principle. However, because any lawsuits which have not been settled in principle are in the early stages, we cannot predict the outcome at this time, and we cannot be assured that the actions will not delay the consummation of the patent sale or the merger or result in substantial costs (which may include settlement costs); even a meritless lawsuit may potentially delay consummation of the patent sale and the merger.
Note 10. Stock-Based Compensation
The following table shows total stock-based employee compensation expense included in the condensed consolidated statements of operations for the three months and six months ended December 31, 2012 and 2011 (in thousands):
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Three months ended
December 31,
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Six months ended
December 31,
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2012
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2011
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2012
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2011
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General and administrative
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Total stock-based compensation expense
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In the three months and six months ended December 31, 2012 we issued 556,522 and 839,386 shares, respectively, of common stock for employee stock purchase plan issuances, employee restricted stock awards and stock option exercises. For the three months and six months ended December 31, 2011, we issued 234,505 and 418,255 shares, respectively, of common stock for employee stock purchase plan issuances, employee restricted stock awards and stock option exercises.
Stock Options
The following are significant weighted average assumptions used for estimating the fair value of the activity under our stock option plans:
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Employee Stock Options for
three months ended December 31,
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Employee Stock Options for
six months ended December 31,
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Employee Stock Purchase Plan for
three months ended December 31,
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Employee Stock Purchase Plan for
six months ended December 31,
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2012
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2011
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2012
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2011
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2012
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2011
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2012
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2011
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Weighted-average grant date fair value
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For the three months ended December 31, 2012, there were no options granted.
Restricted Stock Units and Awards
For the three months and six months ended December 31, 2012, we granted 18,000 and 455,779 restricted stock units, respectively, with an average grant date fair value of $7.16 and $6.60, respectively. For the three months and six months ended December 31, 2011, we granted 187,730 and 493,238 restricted stock units, respectively, with an average grant date fair value of $4.64 and $4.92, respectively.
Note 11. Income Taxes
We recorded an income tax expense and benefit of $0.1 million and $0.2 million for the three-month and six-month periods ended December 31, 2012, respectively, compared to an income tax expense of $0.4 million and $0.9 million for the comparable periods in fiscal year 2012. The expense decreased in both periods of fiscal 2013 as compared to the same periods of fiscal 2012 primarily as a result of less revenue being subject to withholding tax in fiscal 2013 and the Company receiving $0.7 million of withholding tax refunds in the first quarter of fiscal year 2013. We continue to recognize a partial valuation allowance against our net U.S. deferred tax assets as we believe that it is more likely than not that the majority of our deferred tax assets will not be recognized. The portion of our U.S. net deferred tax assets that has no offsetting valuation allowance is recognized solely as an offset to liabilities recorded with respect to certain unrecognized tax benefits.
Our annual income tax for fiscal 2013 will consist of U.S. state income taxes, foreign income taxes and withholding taxes, as did our annual income tax for fiscal 2012 .
During the quarter ended December 31, 2012, we entered into a definitive agreement with Bridge Crossing to sell certain patent properties for $350 million. The gain that results from this transaction would give rise to taxable income that would allow us to realize, and therefore recognize, the majority of our existing net U.S. deferred tax assets. The definitive agreement is subject to stockholder approval. Pending that approval, we have not yet reversed the valuation allowance against our net U.S. deferred tax assets.
There were no material changes to our reserves for unrecognized tax benefits in our quarter ended December 31, 2012. The total amount of gross unrecognized tax benefits as of December 31, 2012 and June 30, 2012 was approximately $5.3 million and $5.2 million, respectively. We accrue interest and penalties related to uncertain tax positions as a component of the provision for income taxes. Accrued interest and penalties relating to income tax on the unrecognized tax benefits as of December 31, 2012 and June 30, 2012 was approximately $0.4 million, respectively. Also, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $1.5 million and $1.4 million for the periods ended as of December 31, 2012 and June 30, 2012, respectively.
Although we file tax returns in several overseas tax jurisdictions, our major tax jurisdiction is the United States where we file U.S. federal and state returns. Our fiscal 2008 and subsequent tax years remain subject to examination by the IRS for U.S. federal tax purposes. The Company does not expect any significant change in the total amount of uncertain tax benefits in the next 12 months.
