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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACTS OF 1934.
For the fiscal year ended June 30, 1998
|_| 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
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MIPS Technologies, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0322161
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
1225 CHARLESTON ROAD, MOUNTAIN VIEW, CA 94043-1353
(Address of principal executive offices)
Registrants' telephone number, including area code: (650) 567-5000
Securities registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.001 Par Value
(Title of class)
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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 |_| No |X|
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. |_|
Aggregate market value of the registrant's Common Stock held by
non-affiliates of the Registrant as of September 1, 1998 was approximately $94.0
million based upon the closing price reported for such date on the Nasdaq
National market. 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.
The number of outstanding shares of the Registrant's Common Stock, $.001
par value, was 37,250,000 as of September 1, 1998.
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PART 1
Item 1. Business
General
On July 6, 1998 the Company completed its initial public offering (the
"Offering"). Prior to the Offering, the Company was a wholly owned subsidiary of
Silicon Graphics. In order to increase the focus of the MIPS Group on the design
and development of microprocessor applications dedicated to the embedded market,
in December 1997, Silicon Graphics initiated a plan to separate the business of
the MIPS Group from its other operations. In April 1998, the Board of Directors
of the Company approved a transaction, pursuant to which, Silicon Graphics
transferred to the Company the assets and liabilities related to the design and
development of microprocessor intellectual property for embedded market
applications (the "Separation"). Prior to the Separation, the Company's business
was conducted by Silicon Graphics primarily through its MIPS Group, a division
of Silicon Graphics. The Company's predecessor, MIPS Computer Systems, Inc., was
founded in 1984 and was engaged in the design and development of RISC
microprocessors for the computer systems and embedded markets. Silicon Graphics
adopted the MIPS architecture for its computer systems in 1988 and acquired MIPS
Computer Systems, Inc. in 1992. Following the acquisition, Silicon Graphics
continued the MIPS microprocessor business through its MIPS Group, which focused
primarily on the development of high-performance microprocessors for Silicon
Graphics' workstations and servers. Until the last few years, cost
considerations limited the broader use of these microprocessors. However, as the
cost to design and manufacture microprocessors based on the MIPS technology
decreased, the MIPS Group sought to penetrate the consumer market, both through
supporting and coordinating the efforts of the MIPS semiconductor partners and
by partnering with Nintendo Co., Ltd. ("Nintendo") in its design of the Nintendo
64 video game player and related cartridges.
The Company is a leading designer and developer of RISC-based
high-performance microprocessor intellectual property for embedded systems
applications. The Company has established a distribution channel for its
intellectual property by licensing its technology to key semiconductor partners.
Each of these partners possesses leading design and/or process technology and
can leverage a strong market position in strategic embedded markets. To date,
the MIPS RISC architecture has been used to create over 60 separate
microprocessor products. These microprocessor products have a cumulative
installed base of over 70 million units and have been embedded into a variety of
products such as video games, color printers and handheld personal computers.
The Company's semiconductor partners reported that approximately 47 million
units based on the Company's RISC architecture were shipped in fiscal year 1998.
The Company's technology focuses on providing cost-effective and
high-performance microprocessor and related designs for high-volume embedded
applications. The MIPS RISC architecture is flexible and allows semiconductor
manufacturers to integrate their intellectual property with the Company's
microprocessor and related designs to develop differentiated and innovative
products for a variety of embedded applications within demanding time-to-market
requirements. The advantages of the MIPS architecture relate primarily to
scalability of die size and performance. Products incorporating the MIPS
architecture range from disk drives using microprocessor cores with a die size
of less than two square millimeters to high-performance workstations using
microprocessors with a die size of 300 square millimeters. In addition, while
designed for high performance, the Company's RISC-based architectures have been
incorporated in low-power applications such as the Philips Velo and the NEC
MobilePro handheld personal computers. The MIPS architecture is designed around
upward compatible instruction sets that enable manufacturers developing products
across a broad range of price/performance points to use common support tools and
software.
The Company was incorporated in Delaware in June 1992. The Company has its
principal executive offices at 1225 Charleston Road, Mountain View, California
94043-1353, and its telephone number at that address is (650) 567-5000.
Industry Background
Rapid advances in semiconductor technology have enabled the development of
higher performance microprocessors at lower cost. As a result, it is now
cost-effective for system OEMs to embed these microprocessors into a wider range
of electronic products and systems, including a new generation of digital
consumer products. At the same time, improvements in semiconductor manufacturing
processes have enabled the integration of entire
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systems onto a single integrated circuit to create complex system-on-a-chip
solutions. However, design tool capabilities and the internal design resources
of semiconductor manufacturers and system OEMs have not kept pace with the
increase in the number of transistors that can be placed on a single chip.
Consequently, a significant and growing "design gap" for semiconductor designers
and manufacturers has developed. To address this "design gap," semiconductor
designers and manufacturers are increasingly licensing proven and reusable
intellectual property components such as microprocessor cores, memories and
logic blocks from third-party suppliers to create differentiated products and
reduce development costs and time-to-market. The availability of low-cost,
high-performance microprocessors and the development of system-on-a-chip
technology have contributed to the emergence and rapid growth of the market for
embedded systems, particularly advanced digital consumer products.
Embedded systems are broadly defined as microcontrollers and
microprocessors plus related software incorporated into devices other than
personal computers, workstations, servers, mainframes and minicomputers. Until
recently, this market was dominated by low-cost 4-, 8- and 16-bit
microcontrollers embedded primarily into low-cost, high-volume consumer products
such as home appliances, facsimile machines, printers, telephone answering
machines and various automobile systems. The use of higher performance 32- and
64-bit microprocessors was common in higher cost but lower volume applications
such as telecommunications switching equipment and data networking routers.
Although microcontrollers are adequate for basic system control functions, they
lack the performance and bandwidth capabilities to implement today's advanced
functions. Recently, however, the price of 32- and 64-bit microprocessors has
reached the point where it is now cost-effective to embed these solutions into
low-cost, high-volume digital consumer products.
Digital consumer products that incorporate high-performance microprocessors
and software can offer advanced functionality such as realistic 3-D graphics
rendering, digital audio and video, and communications and high-speed signal
processing. To meet the demands of the digital consumer products market, system
OEMs rely on semiconductor manufacturers to design and deliver critical
components within rigorous price and performance parameters. In order to supply
products for these markets, semiconductor suppliers are increasingly combining
their own intellectual property with that of third-party suppliers such as the
Company in the form of microprocessor cores and other functional blocks.
The MIPS Network
Through its network of semiconductor partners, independent software vendors
and system OEMs, the Company has developed the infrastructure to support its
architecture as a standard platform for the embedded market.
Semiconductor Partners. The Company currently has seven semiconductor
partners that develop, market and sell silicon solutions based on the MIPS RISC
microprocessor architecture. Because products incorporating the Company's
intellectual property are sold to system OEMs by its semiconductor partners (and
not directly by the Company), these partners operate as a value-added
distribution channel. Several of the Company's partners have had contracts with
the Company and its predecessors since prior to Silicon Graphics' acquisition of
MIPS Computer Systems, Inc. in 1992. The Company's current semiconductor
partners are Integrated Device Technology ("IDT"), LSI Logic Corporation ("LSI
Logic"), NEC Corporation ("NEC"), NKK Corporation ("NKK"), Philips Electronics
N.V. ("Philips"), Quantum Effect Design, Inc. ("QED") and Toshiba Corporation
("Toshiba"). Several of the Company's manufacturing partners have made
significant investments in MIPS technology and market development which has
resulted in multiple design teams around the world engaged in the development of
MIPS-based microprocessors and related designs. The Company's partners and their
associated design teams have developed a broad portfolio of microprocessors and
standard products based on the MIPS RISC architecture as well as application
specific extensions which can be licensed back to the Company and offered to its
other partners
Independent Software Vendors. The Company's RISC architecture is further
enabled by a variety of third-party independent software vendors that provide
operating systems and engineering development tools such as compilers, debuggers
and in-circuit emulation testers. Currently, these companies provide over 150
products in support of the Company's RISC architecture. This software support
allows system OEMs to design the MIPS microprocessor technology into their
products. Software operating systems developed by Microsoft, Wind River Systems,
Inc. and Integrated Systems Inc. are compatible with the Company's RISC
architecture.
System OEMs. Microprocessor products based on the Company's RISC
architecture are used by a variety of system OEMs in the embedded market. A
number of high-profile digital consumer products incorporate the Company's
RISC-based microprocessor intellectual property, including the Nintendo 64 and
Sony PlayStation
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video game systems, the Philips Velo and NEC MobilePro handheld personal
computers and the digital set-top boxes from Echostar and WebTV. The Company
participates in various sales and technical efforts directed to system OEMs and
has launched a promotional campaign aimed at increasing brand awareness of the
MIPS RISC architecture among system OEMs and software vendors.
Markets and Applications
Digital Consumer Products. Together with its existing semiconductor
manufacturing partners and their associated design teams, the Company seeks to
leverage the MIPS RISC architecture into solutions for a wide variety of
sophisticated, high-volume digital consumer products such as video game
products, handheld personal computers and set-top boxes. To date, the Company's
RISC-based microprocessors have been designed into many digital consumer
products, including the Nintendo 64 and Sony PlayStation video game systems.
Revenue related to the video game market presently accounts for a substantial
majority of the Company's total revenue, and such revenue is expected to
continue to account for a significant portion of the Company's total revenue for
at least the next several years.
Video Games. The market for video games, which represented the first
high-volume consumer application for 32- and 64-bit microprocessors,
accounted for approximately 30 million units in 1997, of which an estimated
90% used the Company's technology. The Company's key design wins in this
market include the Nintendo 64 video game system, which was introduced in
1996 and uses a MIPS R4300i microprocessor manufactured by NEC, and the
Sony PlayStation, which was introduced in 1994 and uses a MIPS R3000 class
embedded microprocessor developed by LSI Logic.
Set-Top Boxes. As digital transmission of video signals becomes more
widely utilized, the Company believes that the market for compatible
set-top boxes could represent an area of growth in the use of 32- and
64-bit microprocessors and related designs. The Company's key design wins
in this market include the set-top box used in WebTV's Internet appliance,
introduced in 1996, which uses a MIPS R4000 class microprocessor
manufactured by IDT. Echostar's Dish Network set-top box, introduced in
1996, uses a MIPS R3000 class microprocessor that is also manufactured by
IDT. General Instrument Corporation's DCT-5000+ advanced interactive
digital set-top terminal will also use a MIPS based product.
Handheld Personal Computers. While the market for handheld personal
computers has only recently begun to develop, the Company expects that this
market will continue to grow as these devices become more interactive with
desktop PCs. To date, the Company's RISC-based microprocessor designs have
been incorporated into products such as the Philips Velo and Sharp's
Mobilon, both of which use a MIPS R3000 class microprocessor developed by
Philips. In addition, NEC has incorporated a MIPS R4000 class
microprocessor design into its MobilePro handheld personal computer.
Other Embedded Applications. Significant design wins in more traditional
embedded market applications include networking communications equipment from
Cisco as well as laser printers from Hewlett-Packard Company, Electronics for
Imaging Inc. and Brother Industries, Ltd.
Products
The Company designs, develops and licenses intellectual property for
high-performance microprocessors. The Company's intellectual property is used in
the design of microprocessor cores, instruction set architectures ("ISAs") and
application specific extensions ("ASEs") that enable its semiconductor partners
to manufacture flexible, high-performance microprocessors for embedded systems
within demanding time-to-market requirements. Through licensing and
royalty-based arrangements with its semiconductor partners, the Company seeks to
strengthen the position of the MIPS architecture in the microprocessor industry
and proliferate its designs in embedded systems applications. The Company has
not historically and does not intend to manufacture microprocessors and related
devices.
Basic Cores. The Company currently provides flexible, modular
microprocessor cores covering a range of performance/price points to enable its
manufacturing partners to provide customized semiconductor products more quickly
to system OEMs.
R3000. The R3000 is a 32-bit microprocessor introduced in 1988 that
has served as the basis for many derivatives by the Company's semiconductor
partners and is available from the Company in core form. The
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small die size (less than two square millimeters in one implementation) and
performance characteristics of the R3000 make it well-suited for
applications such as video game consoles, including the Sony PlayStation,
and handheld personal computers, copiers, networking equipment and laser
printers.
R4000. The R4000 is a 64-bit microprocessor introduced in 1992 that
has served as the basis for a variety of derivatives, including the R4300i
which, together with Silicon Graphics' Reality Co-Processor (RCP), is used
in Nintendo 64 video game players. The R4000 was designed for applications
in which high performance is the principle objective, such as video games,
computer systems, network servers and interactive consumer applications
such as set-top boxes.
R5000. The R5000 is a 64-bit microprocessor developed by QED in
January 1996 that is presently licensed to the Company. The R5000, which
can be sublicensed by the Company to its other semiconductor partners, is a
dual instruction issue processor that has served as the microprocessor in
several of Silicon Graphics' workstations. Its performance characteristics
make it an attractive microprocessor for more powerful and sophisticated
embedded applications.
Instruction Set Architectures. Instruction set architectures are
combinations of binary instructions and the hardware to execute them which
together determine the native capability of a microprocessor. ISA standards are
important because, among other things, they become the common points around
which tools are built, software libraries and compilers are written and software
operating systems are developed. Elements of an ISA may be copyrighted or
patented thus preventing unrestricted use without a license. The Company
licenses its ISAs to promote the development and marketing of MIPS compatible
parts by its semiconductor manufacturing partners.
MIPS I/II. The MIPS I/II instruction set architecture is the basic
series of instructions for 32-bit operations. This instruction set, which
is presently used in a wide range of applications, allows the performance
of integer and floating point computation, logical operations, data
movement and a variety of other functions. The MIPS II ISA is implemented
in the R3000 series of products. Full MIPS I/II compatibility is protected
by patents, copyrights and trademarks owned by the Company.
MIPS III. In addition to providing full support for the MIPS II ISA,
the MIPS III instruction set architecture extends the MIPS II ISA to 64-bit
operations, increases the number of floating point registers and adds
certain other functions. The MIPS III ISA is implemented in the R4000
series of products. MIPS III is a patented instruction set that is
necessary to operate 64-bit MIPS microprocessors in 64-bit mode.
MIPS IV. MIPS IV enhances floating point operations and adds
additional instructions that improve performance in a number of engineering
and scientific applications. The MIPS IV ISA is implemented in the R5000
series of products.
MIPS V. MIPS V provides instructions that enhance performance in 3-D
graphics applications. The hardware for the MIPS V ISA has not been
implemented.
Application Specific Extensions. Application specific extensions are
intended to provide design flexibility for application-specific MIPS products
and are offered to the Company's semiconductor manufacturing partners as
optional, additional features to its microprocessor cores.
MIPS16. MIPS16 is an ASE to the Company's RISC architecture introduced
in October 1996 that permits substantially reduced systems costs by
reducing memory requirements through the use of 16-bit instruction
representation.
MIPS Digital Media Extensions (MDMX). MDMX is an ASE designed to
provide enhanced digital media processing including video compression and
decompression and audio and signal processing.
Research and Development
The Company believes that its future competitive position will depend in
large part on its ability to develop new and enhanced microprocessor cores and
related designs in a timely and cost-effective manner. The Company believes that
these capabilities are necessary to meet the evolving and rapidly changing needs
of semiconductor manufacturers and system OEMs in the digital consumer products
industry. To this end, the Company has assembled a team of highly skilled
engineers that possess significant experience in the design and development of
complex microprocessors. The Company intends to build on this base of experience
and the technologies that it has developed to enhance the MIPS RISC architecture
and develop a broader line of microprocessor cores that are optimized for
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applications in the digital consumer products industry. The Company's strategy
is to use a modular approach that emphasizes re-usable, licensable
microprocessors, cores and software technology. The Company believes that this
increased flexibility and modularity will allow its semiconductor partners to
provide high-performance, customized products more quickly to their customers.
In addition, the Company develops and licenses standardized ISAs and ASEs to
work within and around its RISC architecture to enhance and tailor the
capabilities of its microprocessor designs for specific applications.
Historically, the Company has collaborated with its semiconductor manufacturing
partners to develop these specific product applications and ASEs from its core
microprocessor designs.
The Company develops and licenses its microprocessor designs in two forms.
Initial or "process targeted designs" are designs intended to address the
specific silicon manufacturing process technology of the semiconductor
manufacturer to which it is licensed. For example, details such as transistor
and interconnect dimensions vary from manufacturer to manufacturer and affect
performance. The Company believes that its ability to adjust its microprocessor
designs to work at optimum performance levels for targeted silicon process
technologies is a significant competitive advantage. Because they are designed
with the manufacturing partner's specific silicon process technology in mind, it
is expected that these initial microprocessor cores will have superior
performance levels and high value for the target partner. The Company also
expects to generate both high-level description language representations of
these designs called "soft" cores and intermediate representations with some
process targeting called "firm" cores. Key internal circuits of "firm" cores can
be enhanced to maintain substantially the level of performance of the "process
targeted designs" on which they are based. "Soft" cores and "firm" cores are
flexible and can be licensed to multiple customers and used in multiple
applications.
In anticipation of the Separation and the more limited focus of its
research and development efforts, the Company has significantly reduced its
research and development staff, from 221 persons at December 31, 1997 to 40
persons at June 30, 1998. This decrease principally reflects the transfer to
Silicon Graphics of employees engaged in the development of next generation
microprocessors for Silicon Graphics' systems as well as other staff reductions
associated with the Company's shift in strategic direction. Because the Company
expects to use industry-standard third-party design tools, it will not be
required to develop and maintain the proprietary design tools that were
necessary in connection with the design of high-performance microprocessors for
Silicon Graphics. As a result, the Company expects that its staffing
requirements will be significantly lower than those required prior to the
Separation. For the fiscal years ended June 30, 1998, 1997 and 1996 the
Company's research and development costs were $43.4 million, $68.8 million and
$48.4 million, respectively.
Sales and Marketing
The Company's sales and marketing activities are focused principally on
establishing and maintaining licensing arrangements with semiconductor
manufacturers and participating in marketing, sales and technical efforts
directed to system OEMs. The Company licenses its RISC-based microprocessor and
related design technology on a non-exclusive and worldwide basis to
semiconductor manufacturers who, in turn, sell products incorporating these
technologies to system OEMs. The partnerships established by the Company form a
distribution channel and are an important element of its strategy to proliferate
the MIPS RISC architecture as the standard in the embedded microprocessor
industry. In establishing these partnerships, the Company seeks to license its
technology to those companies it believes can offer value-added design
capabilities in the Company's existing target markets as well as expand the
market for the Company's microprocessor and related designs. By licensing its
technology to multiple semiconductor manufacturers, the Company seeks to ensure
that system access to multiple sources of its RISC-based microprocessors and
related designs. The Company presently has two customers that individually
account for more than 10% of its total revenue: Nintendo and NEC. Substantially
all of the revenue derived from these two customers reflects contract revenue
and royalties related to development and sales of Nintendo 64 video game players
and related cartridges. Revenue related to sales of Nintendo 64 video game
cartridges is expected to continue to account for a significant portion of the
Company's total revenue for the next several years and, therefore, the Company
expects that a significant portion of its total revenue will continue to be
derived from Nintendo and, to a lesser extent, NEC. Because revenue related to
sales of Nintendo 64 video game cartridges is expected to represent a
substantial portion of the Company's total revenue, the Company expects to
experience seasonal fluctuations in its revenue and operating results. See
"Factors That May Affect Our Business--Seasonality" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Revenue." For
financial information regarding revenue derived from the Company's international
licensees, see Note 13 of Notes to Financial Statements.
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Although the precise terms of the Company's contracts vary from licensee to
licensee, they typically provide for technology license and engineering service
fees which may be payable up-front and/or upon the achievement of certain
milestones such as provision of deliverables by the Company or production of
semiconductor products by the licensee. The Company's contracts also provide for
the payment of royalties to the Company based on a percentage of the net revenue
earned by the licensee from the sale of products incorporating the Company's
technology and, in some cases, based on unit sales of such products. The
Company's contracts with its semiconductors partners are typically subject to
periodic renewal or extension. The Company also offers licensees the option to
license its technology on a single-use or unlimited-use basis, and may provide
licensees with various technical support, training and consulting services and
sales and marketing support.
Certain of the Company's marketing activities are also aimed at system
OEMs. Through targeted advertising and co-marketing programs with its partners,
the Company seeks to increase awareness of the MIPS RISC architecture in popular
digital consumer products.
Because the Company's past microprocessor design efforts have primarily
focused on serving the needs of Silicon Graphics, and although the Company has
always maintained a sales and marketing staff to support its strategic
relationships, its sales and marketing activities have not historically been
central to its operations. The Company's sales and marketing staff and related
expenses are expected to increase as the Company seeks to diversify its revenue
base. The Company's sales and marketing effort is a significant factor to the
Company's future operating success.
Intellectual Property
The Company regards its patents, copyrights, mask work rights, trademarks,
trade secrets and similar intellectual property as critical to its success, and
relies on a combination of patent, trademark, copyright, mask work and trade
secret laws to protect its proprietary rights. Any failure of the Company to
obtain or maintain adequate protection of its intellectual property rights for
any reason could have a material adverse effect on its business, results of
operations and financial condition. The Company owns approximately 51 U.S.
patents on various aspects of its technology, with expiration dates ranging from
2006 to 2015, approximately 24 pending U.S. patent applications, as well as all
foreign counterparts relating thereto. There can be no assurance that patents
will issue from any patent applications submitted by the Company, that any
patents held by the Company will not be challenged, invalidated or circumvented
or that any claims allowed from its patents will be of sufficient scope or
strength to provide meaningful protection or any commercial advantage to the
Company. In addition, there can be no assurance that third parties will not
assert claims of infringement against the Company or against the Company's
semiconductor manufacturing partners in connection with their use of the
Company's technology. Such claims, even those without merit, could be time
consuming, result in costly litigation and/or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, or at all.
Moreover, the laws of certain foreign countries may not protect the Company's
intellectual property to the same extent as do the laws of the United States
and, because of the importance of the Company's intellectual property rights to
its business, this could have a material adverse effect on its business, results
of operations and financial condition.
The Company also uses licensing agreements and employee and third party
nondisclosure and assignment agreements to limit access to and distribution of
its proprietary information and to obtain ownership of technology prepared on a
work-for-hire basis. There can be no assurance that the steps taken by the
Company to protect its intellectual property rights will be adequate to deter
misappropriation of such rights or that the Company will be able to detect
unauthorized uses and take immediate or effective steps to enforce its rights.
There can also be no assurance that the steps taken by the Company to obtain
ownership of contributed intellectual property will be sufficient to assure its
ownership of all proprietary rights. The Company also relies on unpatented trade
secrets to protect its 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 the Company's
proprietary technology or disclose such technology or that the Company can
ultimately protect its 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 the Company. From time to time the Company
has entered, and in the future may enter, into cross licensing arrangements with
others, pursuant to which the Company licenses certain of its patents in
exchange for patent licenses from such licensees. Although these types of cross
licensing arrangements are common in the semiconductor and microprocessor
6
industries, and do not generally provide for transfers of know-how or other
proprietary information, such arrangements may facilitate the ability of such
licensees, either alone or in conjunction with others, to develop competitive
products and designs.
The Company and Silicon Graphics have entered into arrangements pursuant to
which certain intellectual property was assigned to the Company, subject to the
grant of a license to Silicon Graphics; certain intellectual property was
retained by Silicon Graphics, subject to the grant of a license to the Company;
and certain intellectual property was retained by Silicon Graphics without any
ongoing interest to the Company. The Company's inability to use Silicon
Graphics' intellectual property in the future could have a material adverse
affect on its business and results of operations. In the past, the MIPS Group
has benefited from its status as a division of Silicon Graphics in its access to
the intellectual property of third parties through licensing arrangements or
otherwise, and in the negotiation of the financial and other terms of any such
arrangements. As a result of the Separation, there can be no assurance that the
Company will be able to negotiate commercially attractive intellectual property
licensing arrangements with third parties in the future, particularly if the
Company ceases to be a majority-owned subsidiary of Silicon Graphics. In
addition, in connection with any future intellectual property infringement
claims, the Company will not have the benefit of asserting counterclaims based
on Silicon Graphics' intellectual property portfolio, nor will the Company be
able to provide licenses to Silicon Graphics' intellectual property in order to
resolve such claims.
Competition
The market for embedded microprocessors is highly competitive and
characterized by rapidly changing technological needs and capabilities. The
Company believes that the principal competitive factors in the embedded
microprocessor market are performance, functionality, price, customizability and
power consumption. The Company competes primarily against ARM Holdings plc and
Hitachi Semiconductor (America) Inc. The Company also competes against certain
semiconductor manufacturers whose product lines include microprocessors for
embedded and non-embedded applications, including Advanced Micro Devices, Inc.,
Intel Corporation, Motorola, Inc. and National Semiconductor Corporation. In
addition, the Company must continue to differentiate its microprocessor and
related designs from those available or under development by the internal design
groups of semiconductor manufacturers, including its current and prospective
manufacturing partners. Many of these internal design groups have substantial
programming and design resources and are part of larger organizations, which
have substantial financial and marketing resources. There can be no assurance
that internal design groups will not develop products that compete directly with
the Company's microprocessor and related designs or will not actively seek to
participate as merchant vendors in the intellectual property component market by
selling to third-party semiconductor manufacturers or, if they do, that the
Company will be able to compete with them successfully. To the extent that these
alternative technologies provide comparable performance at a lower or similar
cost than the Company's technology, semiconductor manufacturers may adopt and
promote these alternative technologies. Certain of the Company's competitors
have greater name recognition and customer bases as well as greater financial
and marketing resources than the Company, and such competition could adversely
affect the Company's business, results of operations and financial condition.
Employees
As of June 30, 1998, the Company had 63 full time employees. Of this total,
40 were in research and development, 16 were in sales and marketing and 7 were
in finance and administration. The Company's future success will depend in part
on its ability to attract, retain and motivate highly qualified technical and
management personnel who are in great demand in the semiconductor industry. The
Company's business plan requires that it identify and hire additional highly
skilled technical personnel during fiscal 1999 to staff its anticipated research
and development activities. None of the Company's employees is represented by a
labor union or subject to a collective bargaining agreement. The Company
believes that its relations with its employees are good.
Item 2. Properties
The Company's executive, administrative and technical offices currently
occupy approximately 27,500 square feet (with an option to increase to 55,000
square feet) in a building subleased from Silicon Graphics in Mountain View,
California. Payments by the Company to Silicon Graphics under this sublease are
equal to amounts payable by Silicon Graphics under its sublease for the property
with a third party. This sublease will expire on May 31, 2002, subject to
earlier termination in certain circumstances. The Company believes that these
facilities are adequate to meets its current needs but that it may need to seek
additional space in the future.
7
Item 3. Legal Proceedings
On April 6, 1998, the Company and Silicon Graphics filed an action against
ArtX, Inc. and certain employees of ArtX, Inc. in the Superior Court of the
State of California alleging, among other things, misappropriation of trade
secrets and breach of contractual and fiduciary duties in connection with the
defendants' actions in developing graphics technology for Nintendo's next
generation video game system. On April 23, 1998, Nintendo notified Silicon
Graphics and the Company of its belief that the disclosure in the Company's
registration statement filed with the Securities and Exchange Commission on
April 21, 1998 of certain information regarding the contract for the development
of the Nintendo 64 video game system constituted a breach of that contract.
Silicon Graphics and the Company strongly disagree that any such breach has
occurred. On May 27, 1998, Silicon Graphics, the Company, Nintendo and ArtX,
Inc. entered into a memorandum of understanding pursuant to which the companies
are engaged in further discussions relating to a possible mutually beneficial
business relationship, including the possible selection of a MIPS-based
microprocessor for the next generation Nintendo video game system. On the basis
of this understanding, Silicon Graphics and the Company have dismissed without
prejudice the pending lawsuit against ArtX, Inc., and Nintendo has agreed that,
in the absence of a lawsuit against Nintendo or ArtX, Inc., it will not assert
any claim that the Nintendo 64 contract has been breached in connection with the
filing of the Company's registration statement.
On April 10, 1998, the Company filed an action against Lexra, Inc., a
Massachusetts company ("Lexra"), in the United States District Court for the
Northern District of California, asserting claims for false advertisement,
trademark infringement, trademark dilution and unfair competition. This lawsuit
arose out of Lexra's claim that its newly introduced product offering is "MIPS
compatible." Lexra does not have a license from the Company to use its
intellectual property in connection with any Lexra products. In the suit, the
Company sought injunctive relief as well as monetary damages. In May 1998, Lexra
filed an answer and counterclaim seeking to cancel certain of the Company's
trademarks. The parties recently reached an agreement in principle to settle
this matter. Among other things, Lexra will no longer state that its products
are "MIPS compatible". Lexra's counterclaims will also be dismissed. The Company
is continuing to evaluate possible patent infringement claims against Lexra and
will assert such claims if appropriate.
In February 1998, the Company received a notice asserting that the R10000
and potentially other microprocessors designed by the Company allegedly infringe
a patent originally assigned to Control Data Corporation. The Company is
evaluating these claims.
The Company believes that the foregoing proceedings are not likely to have
a material adverse effect on its business, results of operations or financial
condition.
From time to time, the Company receives communications from third parties
asserting patent or other rights covering the Company's products and
technologies. Based upon the Company's evaluation, it may take no action or it
may seek to obtain a license. There can be no assurance in any given case that a
license will be available on terms the Company considers reasonable, or that
litigation will not ensue.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) During the fourth quarter of fiscal 1998, Silicon Graphics, Inc., the
Company's sole stockholder, took action by written consent on, May 22, 1998,
June 2, 1998 and June 26, 1998.
(b) On June 26, 1998, the sole stockholder consented to the election of
Anthony B. Holbrook and Fred M. Gibbons as directors of the Company, to be
effective on July 6, 1998, the closing of the Company's initial public offering.
The Directors whose terms of office continued after the stockholder action are
Forest Baskett, John E. Bourgoin, Kenneth L. Coleman, William M. Kelly and
Teruyasu Sekimoto.
(c) Other matters approved by the sole stockholder were the 1998 Long Term
Incentive Plan and the Employee Stock Purchase Plan on May 22, 1998, an increase
in the authorized capital stock of the Company on June 2, 1998 and the
restatement of the Company's Certificate of Incorporation in connection with the
Company's initial public offering on June 26, 1998.
8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) The Company's initial public offering of its Common Stock was declared
effective on June 29, 1998 at a price of $14.00 per share. The Company's Common
Stock is listed on the Nasdaq National Market under the symbol "MIPS." The
ending stock price for the period ended June 30, 1998 as reported by Nasdaq was
$13.437.
On July 6, 1998 the Company completed its initial public offering of
5,500,000 shares of its Common Stock pursuant to a Registration Statement on
Form S-1 (File No. 333-50643) declared effective by the Securities and Exchange
Commission on June 29, 1998. The offering was underwritten by Deutsche Bank
Securities, BancAmerica Robertson Stephens and Hambrecht & Quist. Of the
5,500,000 Common Shares offered, 1,250,000 were offered by the Company and
4,250,000 were offered by Silicon Graphics, Inc. The Company received
approximately $16,035,000 from the initial public offering, net of underwriting
discounts, commissions and other offering costs and expenses.
(b) Prior to June 30, 1998, Silicon Graphics was the only holder of record
of the Company's Common Stock. Subsequent to the closing of the Offering,
Silicon Graphics owns approximately 85.2% of the outstanding common stock of the
Company. As of September 10, 1998, there were 20 holders of record of the
Company's Common Stock.
(c) The Company has never paid or declared any cash dividends on its Common
Stock or other securities and does not anticipate paying cash dividends in the
foreseeable future.
(d) There were no sales by the Company of its equity securities during the
quarter ended June 30, 1998, which were not registered under the Securities Act
of 1933.
No payments constituted direct or indirect payments to directors, officers,
general partners of the issuer or their associates, or to persons owning ten
percent or more of any class of equity securities of the issuer or to affiliates
of the issuer.
The Company has used the net proceeds from the Offering to fund working
capital and general corporate purposes. The funds that are not being used to
fund short-term needs have been placed in temporary investments pending future
use.
9
Item 6. Selected Financial Data.
The following table presents selected financial data of the Company. The
information below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations". The historical
financial information, particularly for periods prior to March 31, 1998 may not
be indicative of the Company's future performance and does not necessarily
reflect what the financial position and results of operations of the Company
would have been had the Company operated as a separate, stand-alone entity
during the periods covered. The historical financial information does not
reflect many significant changes that have occurred in the funding and
operations of the Company and the sources and costs of the Company's revenue as
a result of both the Separation and the Company's recent shift in strategic
direction.
Years Ended June 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands, except per share data)
Statements of Operations Data:
Revenue:
Royalties .................... $ 55,980 $ 37,192 $ 19,716 $ 13,576 $ 8,402
Contract revenue ............. 830 3,115 17,327 13,903 8,962
-------- -------- -------- -------- --------
Total revenue .......... 56,810 40,307 37,043 27,479 17,364
Costs and expenses:
Cost of contract revenue ..... 375 1,345 5,580 7,364 2,768
Research and development ..... 43,446 68,827 48,402 39,033 24,396
Sales and marketing .......... 5,307 6,170 6,026 6,761 5,668
General and administrative ... 4,685 4,750 4,601 4,272 3,692
Restructuring charge ......... 2,614 -- -- -- --
-------- -------- -------- -------- --------
Total costs and expenses 56,427 81,092 64,609 57,430 36,524
-------- -------- -------- -------- --------
Operating income (loss) ........ 383 (40,785) (27,566) (29,951) (19,160)
Interest expense ............... (7) (50) (99) (69) (70)
-------- -------- -------- -------- --------
Net income (loss) .............. $ 376 $(40,835) $(27,665) $(30,020) $(19,230)
======== ======== ======== ======== ========
Net income (loss) per basic and
diluted share ................ $ 0.01 $ (1.13) $ (0.77) $ (0.83) $ (0.53)
======== ======== ======== ======== ========
June 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Working capital deficiency ..... $ (4,530) $ (8,446) $ (8,531) $(16,683) $(11,230)
Total assets ................... 4,696 19,674 15,289 15,744 12,338
Long-term obligations, net of
current maturities ........... -- -- 331 739 457
Total stockholders' equity (deficit) (747) 8,072 3,853 (3,736) (755)
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this report. Except for the
historical information contained in this Annual Report on Form 10-K, the matters
discussed herein may contain forward-looking statements that are subject to
certain risks and uncertainties that could cause the Company's actual results to
differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause such differences include, but are not
limited to, those identified herein under "Factors That May Affect Our
Business," and other risks detailed below and included from time to time in the
Company's other Securities and Exchange Commission ("SEC") reports and press
releases, copies of which are available from the Company 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. The Company assumes no obligation to update any
forward-looking statements contained herein.
Overview
The Company's predecessor, MIPS Computer Systems, Inc., was founded in 1984
and was engaged in the design and development of RISC microprocessors for the
computer systems and embedded markets. Silicon Graphics adopted the MIPS
architecture for its computer systems in 1988 and acquired MIPS Computer
Systems, Inc. in 1992. Following the acquisition, Silicon Graphics continued the
MIPS microprocessor business through its MIPS Group (a division of Silicon
Graphics), which focused primarily on the development of high-performance
microprocessors for Silicon Graphics' workstations and servers. Until the last
few years, cost considerations limited the broader use of these microprocessors.
However, as the cost to design and manufacture microprocessors based on the MIPS
technology decreased, the MIPS Group sought to penetrate the consumer market,
both through supporting and coordinating the efforts of the MIPS semiconductor
partners and, most notably, by partnering with Nintendo in its design of the
Nintendo 64 video game player and related cartridges. Revenue related to sales
of Nintendo 64 video game players and related cartridges currently accounts for
the substantial majority of the Company's revenue. Based on reports provided by
the Company's semiconductor partners, sales of MIPS-based devices have grown
from 320,000 units in calendar year 1992 to over 48 million units in calendar
year 1997.
The financial statements discussed below reflect the historical results of
operations, financial position and cash flows of the MIPS Group, certain
portions of which were transferred to the Company by Silicon Graphics in the
Separation. The financial statements contained herein and discussed below have
been carved out from the financial statements of Silicon Graphics using the
historical results of operations and historical basis of the assets and
liabilities of such business, as adjusted to reflect allocations of certain
corporate charges that management believes are reasonable. However, the
financial information included herein may not necessarily reflect the results of
operations, financial position and cash flows of the Company in the future or
what the results of operations, financial position and cash flows would have
been had the MIPS Group been a separate, stand-alone entity during the periods
presented. This is due to the historical operation of the MIPS Group as a part
of the larger Silicon Graphics enterprise. The financial information included
herein, does not reflect the many significant changes that have ocurred in the
funding and operations of the Company and the sources and costs of the Company's
revenue as a result of both the Separation and the Company's recent shift in
strategic direction.
The Company's revenue consists of royalties and contract revenue earned
under contracts with its semiconductor partners and under its agreement with
Nintendo. The Company's contracts with its semiconductor partners are typically
subject to periodic renewal or extension and expire at various dates from
January 1999 through December 2007. The Company generates royalties from the
sale by semiconductor manufacturers of products incorporating the Company's
technology. The Company also receives royalties from Nintendo relating to sales
of Nintendo 64 video game players and related cartridges. Royalties may be
calculated as a percentage of the revenue received by the seller on sales of
such products or on a per unit basis. Contract revenue includes technology
license fees and engineering service fees earned primarily under contracts with
Nintendo and the Company's semiconductor manufacturing partners. Technology
license fees range from several hundred thousand dollars for a single-use
license to millions of dollars for an unlimited license to use the Company's
technology. Part of these fees may be payable up-front and part may be due upon
the achievement of certain milestones such as provision of deliverables by the
Company or production of semiconductor chips by the licensee. In fiscal 1996 the
Company's total revenue was split relatively equally between royalties and
contract revenue. Royalties in fiscal 1996 were earned primarily from NEC, while
contract revenue for those periods primarily reflected engineering service fees
from Nintendo
11
related to the Nintendo 64 video game system prior to its commercial
introduction. In fiscal 1997 and fiscal 1998, the Company's revenue mix changed
significantly, with royalties representing over 90% of the Company's total
revenue during those periods, due primarily to royalties earned from Nintendo,
and to a lesser extent NEC, on sales of Nintendo 64 video game players and
related cartridges.
In the near term, the Company's revenue will consist primarily of royalties
received from Nintendo and NEC on sales of Nintendo 64 video game players and
related cartridges. For the fiscal year ended June 30, 1998, such royalties
accounted for approximately 79% of the Company's total revenue. The Company
receives royalties from NEC based on a percentage of the revenue derived by NEC
from sales of the microprocessor included in the Nintendo 64 video game player.
The Company's agreement with Nintendo provides for the payment of royalties
based on unit sales of Nintendo 64 video game players and unit sales of related
video game cartridges. Total royalties from Nintendo with respect to sales of
Nintendo 64 video game players had a cap based on unit sales that was reached in
the second quarter of fiscal 1998. There is no cap on royalties from NEC with
respect to its sale of microprocessors to Nintendo for Nintendo 64 video game
players or on royalties from Nintendo with respect to sales of Nintendo 64 video
game cartridges. The Company anticipates that revenue related to sales of
Nintendo 64 video game cartridges will represent a substantial portion of its
total revenue for the next several years. However, competition in the market for
home entertainment products is intense and the introduction of new products or
technologies as well as shifting consumer preferences could negatively impact
video game cartridge sales. There can be no assurance as to the amount and
timing of sales of Nintendo 64 video game players and related cartridges and,
consequently, there can be no assurance as to the royalty stream to the Company
from such sales. In particular, the eventual introduction of the next generation
Nintendo video game system is expected to result in declining sales of Nintendo
64 video game players and related cartridges, although sales of video game
cartridges would be likely to continue for some time. In the near term, factors
negatively affecting sales of Nintendo 64 video game cartridges could have a
material adverse effect on the Company's results of operations and financial
condition.
The Company expects that royalties will continue to represent a significant
percentage of its total revenue over the next several years due to its
relationship with Nintendo. The amount, timing and relative mix of royalties and
contract revenue is difficult for the Company to predict. The amount and timing
of future royalties will depend on the adoption of the Company's technology by
digital consumer product manufacturers, consumer acceptance of products
incorporating the Company's technology, changes in the average selling prices of
semiconductor and digital consumer products and fluctuations in currency
exchange rates. Moreover, the Company's royalty arrangements will vary from
licensee to licensee depending on a number of factors, including the amount of
any license fee paid and the marketing and engineering support required by the
licensee. The amount and timing of future contract revenue will depend upon the
financial terms of the Company's contractual arrangements with its semiconductor
partners (which may require significant up-front payments or payments based on
the achievement of certain milestones) and the adoption of the Company's
technology by semiconductor manufacturers, which is influenced by a number of
factors including competitive conditions in the market for microprocessor
intellectual property. In addition, contract revenue may fluctuate significantly
from period to period and any increase or decrease in such revenue will not be
indicative of future period-to-period increases or decreases.
The Company's primary costs and expenses are research and development and
sales and marketing. The Separation has had a significant impact on the
Company's research and development cost structure. Silicon Graphics' design
efforts have required a significant staffing level because its complex
microprocessor requirements and the development and maintenance of proprietary
design tools have demanded large design teams. By contrast, the Company uses
smaller design teams and relies largely on industry standard third-party design
tools, which has reduced staffing requirements and costs. The Company reduced
its research and development staff from 221 persons at December 31, 1997 to 40
persons at June 30, 1998, principally due to the transfer to Silicon Graphics of
employees engaged in the development of next generation microprocessors for
Silicon Graphics' systems as well as other staff reductions associated with the
Company's change in strategic direction.
Sales and marketing expenses include salaries, travel expenses and costs
associated with trade shows, advertising and other marketing efforts. Costs of
technical support are also included in sales and marketing expenses. The
Company's sales and marketing efforts are principally directed at establishing
and supporting strategic relationships with semiconductor manufacturers. At June
30, 1998, the Company's sales and marketing staff totaled 16 persons.
12
Results of Operations -- Years Ended June 30, 1998, 1997 and 1996
Total revenue was $56.8 million, $40.3 million and $37.0 million in fiscal
1998, 1997 and 1996, respectively. Royalties for fiscal 1998 and 1997 consisted
of royalties from sale by semiconductor manufacturers of products incorporating
the Company's technology and from sales of Nintendo 64 video game players and
related cartridges. Revenue for fiscal 1996 consisted of royalties from the sale
by semiconductor manufacturers of products incorporating the Company's
technology. The significant increase in royalties in fiscal 1998 from fiscal
1997 and in fiscal 1997 from fiscal 1996 reflects royalties received from
Nintendo and NEC related to sales of Nintendo 64 video game players and related
cartridges. The Company earned its first significant royalties from Nintendo 64
video game system sales in the third quarter of fiscal 1997, following the
commercial introduction of that system. In the second quarter of fiscal 1998,
royalties from the graphics chip included in the Nintendo game player reached
its cap. Contract revenue for fiscal 1998 consisted principally of license fees
related to code compression technology, and for fiscal 1997 consisted
principally of engineering service fees from Nintendo related to development
efforts for Nintendo 64 video game products. Fiscal 1996 contract revenue
included engineering service fees related to development efforts for the
Nintendo 64 video game system as well as approximately $10.0 million in license
fees from three licensees. The decrease in contract revenue in fiscal 1997
reflected substantial completion in fiscal 1996 of the Nintendo 64 video game
system development prior to its commercial introduction by Nintendo. Under the
terms of the Company's contracts with three of its semiconductor partners, such
partners pay royalties to the Company on sales to Silicon Graphics of certain
products incorporating the Company's technology. For fiscal 1998 the Company
estimates that less than 5% of its total revenue was related to such sales. The
Company expects that revenue related to such sales will decrease in the future.
Cost of contract revenue was $375,000, $1.3 million and $5.6 million in
fiscal 1998, 1997 and 1996, respectively. Cost of contract revenue in fiscal
1998 was principally attributable to sublicense fees and in fiscal 1997 and 1996
was principally attributable to non-recurring engineering fees related to
Nintendo 64 video game system development. The decrease in fiscal 1997 from 1996
was principally attributable to the completion in fiscal 1996 of the Nintendo 64
video game system development. The Company believes that future cost of contract
revenue will be minimal.
Research and development expenses were $43.4 million, $68.8 million and
$48.4 million in fiscal 1998, 1997 and 1996, respectively. The decrease in
research and development expenses in fiscal 1998 was primarily due to the
reduction in the Company's research and development staff from 221 persons at
December 31, 1997 to 40 persons at June 30, 1998. This reduction reflects the
transfer to Silicon Graphics of employees engaged in the development of next
generation microprocessors for Silicon Graphics' systems as well as other staff
reductions associated with the Company's change in strategic direction. The
increase in research and development expenses in fiscal 1997 was attributable to
additional personnel, including consultants, working on next generation
microprocessor development projects.
Sales and marketing expenses were $5.3 million, $6.2 million and $6.0
million in fiscal 1998, 1997 and 1996, respectively. The decrease in fiscal 1998
was primarily due to a decrease in advertising and promotional spending. General
and administrative expenses remained relatively unchanged as such costs were
$4.7 million, $4.8 million and $4.6 million in fiscal 1998, 1997 and 1996,
respectively.
The restructuring charge taken in the second quarter of fiscal 1998
included $500,000 in severance related costs and $2.1 million in asset
write-downs related to the Company's shift in strategic direction.
Prior to the Separation, the Company did not have a tax sharing agreement
in place but, rather, was included in the income tax returns filed by Silicon
Graphics and its subsidiaries in various domestic and foreign jurisdictions.
Pursuant to the tax sharing agreement, the Company will realize no income tax
benefit, nor bear any income tax liability, related to its operations prior to
the completion of its initial public offering. Moreover, in light of historical
losses, on a stand-alone basis, the Company's tax provision for fiscal 1998
would have been immaterial. Therefore, no provision or benefit for income taxes
has been recorded for the periods presented in the accompanying financial
statements.
Impact of Currency
Certain of the Company's international licensees pay royalties based on
revenues that are reported in a local currency (currently yen) and translated
into U.S. dollars at the exchange rate in effect when such revenues are reported
by the licensee. To date, substantially all of the Company's revenue from
international customers has been denominated in U.S. dollars. However, to the
extent that sales to digital consumer product manufacturers by the
13
Company's manufacturing partners are denominated in foreign currencies,
royalties received by the Company on such sales could be subject to fluctuations
in currency exchange rates. In addition, if the effective price of the
technology sold by the Company to its partners were to increase as a result of
fluctuations in foreign currency exchange rates, demand for the Company's
technology could fall which would, in turn, reduce the Company's royalties. The
Company is unable to predict the amount of non-U.S. dollar denominated revenue
earned by its licensees and, therefore, has not attempted to mitigate the effect
that currency fluctuations may have on its royalty revenue.
Liquidity and Capital Resources
On July 6, 1998 the Company completed its initial public offering of
5,500,000 shares ot its common stock. Of the 5,500,000 shares offered, 1,250,000
shares were offered by the Company and 4,250,000 shares were offered by Silicon
Graphics. The Company raised approximately $16M from the initial public
offering. The Company's principal capital requirements are to fund working
capital needs and capital expenditures in order to support the Company's revenue
growth. Prior to its initial public offering and during the periods presented,
these capital requirements have been satisfied by funds provided by Silicon
Graphics. Silicon Graphics historically has performed cash management services
for the Company, whereby the Company's cash flow was directed to Silicon
Graphics and Silicon Graphics provided cash to the Company to fund its operating
expenses and capital expenditures. Subsequent to the Separation, the Company has
not participated in Silicon Graphics' cash management system and Silicon
Graphics has not provided additional funds to the Company to finance its
operations.
The Company's future liquidity and capital requirements are expected to
vary greatly from quarter to quarter, depending on numerous factors, including,
among others, the cost, timing and success of product development efforts, the
cost and timing of sales and marketing activities, the extent to which the
Company's existing and new technologies gain market acceptance, the level and
timing of contract revenues and royalties, competing technological and market
developments and the costs of maintaining and enforcing patent claims and other
intellectual property rights. The Company believes that cash generated by its
operations, together with the net proceeds to the Company from its initial
public offering, will be sufficient to meet its projected operating and capital
requirements. The Company may elect to raise additional funds through public or
private financing, strategic relationships or other arrangements. Additional
equity financing may be dilutive to holders of the Common Stock, and debt
financing, if available, may involve restrictive covenants. Moreover, strategic
relationships, if necessary to raise additional funds, may require that the
Company relinquish its rights to certain of its technologies. As long as Silicon
Graphics desires to maintain its percentage ownership interest in the Company,
the Company may be constrained in its ability to issue Common Stock in
connection with acquisitions or to raise equity capital. Any failure of the
Company to raise capital when needed could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company has had no direct third-party indebtedness. The Company intends
to enter into a revolving credit facility with a bank or other financial
institution to provide for certain of its working capital needs.
Year 2000 Compliance
The Company is currently examining the Year 2000 issue. The Company
believes its products are Year 2000 compliant; however, the Company is
initiating a program to prepare its information technology ("IT") and related
non-IT and processes for the Year 2000 and plans to have changes to critical
systems completed by the third quarter of calendar year 1999 to allow time for
testing.
Management is assessing the Year 2000 project costs and expects the
assessment to be complete by the end of the second quarter of fiscal 1999, but
based on preliminary estimates, the costs of any necessary actions are not
expected to be material to the Company's results of operations or financial
condition.
The Company intends to cooperate with its manufacturing partners and others
with which it does business to coordinate Year 2000 compliance with operational
processes and marketed products, although the Company is unable to evaluate the
Year 2000 compliance of products and technology developed by third parties that
incorporates the Company's technology. To the extent that any such third-party
product or technology fails to be Year 2000 compliant, the Company may be
adversely affected due to its association with such product or technology. The
Company will also be contacting critical suppliers of products and services to
determine that the suppliers' operations and the products and services they
provide are Year 2000 capable or to monitor their progress toward Year 2000
capability. There can be no assurance that another company's failure to ensure
Year 2000 capability would not have an adverse effect on the Company.
14
Factors That May Affect Our Business
Risks Associated with Recent Shift in Strategic Direction. The Company's
research and development efforts historically focused primarily on the
development of high-performance microprocessor and related designs for Silicon
Graphics' workstations and servers. However, as the cost to design and
manufacture microprocessors based on the Company's technology decreased, the
Company has sought to penetrate the market for high-volume, high-performance
embedded applications by supporting and coordinating the efforts of its
semiconductor partners in that area. In connection with the Separation and the
Offering, the Company has formulated a new strategic direction in which its
primary focus is the development of microprocessors and related designs for
applications in the embedded market, including digital consumer products such as
video game products, handheld personal computers and digital set-top boxes. The
design and development of high-performance microprocessors for the next
generation Silicon Graphics' product line is carried out by persons who have
been transferred to Silicon Graphics in connection with the Separation. The
Company's shift in strategic direction involves several risks, including (i)
increased reliance on the evolving and highly competitive digital consumer
products industry; (ii) the need for the Company to refocus its research and
development efforts from microprocessors primarily for high-performance computer
systems to microprocessors and related designs for use in a wide range of
digital consumer products; and (iii) increased importance of the Company's sales
and marketing activities and its limited experience in this area. Any failure by
the Company to adequately address any of these risks could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Limited Relevance of Historical Financial Information. The historical
financial information included herein, particularly for periods prior to the
third quarter of fiscal 1998, does not reflect the many significant changes in
the Company's cost structure that occurred as a result of the Separation and the
Company's recent shift in strategic direction nor the changes that occurred in
the funding and operations of the Company due to its status as a separate,
stand-alone entity. The Company has reduced its research and development staff
from 221 persons at December 31, 1997 to 40 persons at June 30, 1998. This
reduction primarily reflects the transfer to Silicon Graphics of employees
engaged in the development of next generation microprocessors for Silicon
Graphics' systems. Because the employees transferred to Silicon Graphics were
primarily engaged in research and development activities that did not generate
any material revenue for the Company, however, the reduction in the Company's
research and development staff resulting from the Separation and the shift in
strategic direction is not expected to have a material effect on the Company's
revenue in future periods. In addition, sales and marketing activities are
expected to increase as the Company shifts its focus from the design of
microprocessors addressing the needs of Silicon Graphics to the development,
marketing and licensing of microprocessor and related designs for a wide variety
of applications in the digital consumer products industry.
Unpredictable and Fluctuating Operating Results. The Company experiences
significant fluctuations in its quarterly operating results due to a variety of
factors, many of which are outside of its control. Moreover, because many of the
Company's revenue components fluctuate and are difficult to predict and the
Company's expenses are largely independent of its revenue in any particular
period, it is difficult for the Company to accurately forecast operating
results. The Company's revenue in any particular quarter is dependent on a
number of factors, including the demand for and average selling prices of
semiconductor products that incorporate the Company's technology, the financial
terms of the Company's contractual arrangements with its semiconductor partners
(which may require significant up-front payments or payments based on the
achievement of certain milestones), the relative mix of contract revenue and
royalties, and competitive pressures resulting in lower contract revenue or
royalty rates. In addition, contract revenue may fluctuate significantly from
period to period and any increase or decrease in such revenue will not be
indicative of future period-to-period increases or decreases. Because the
Company's expense levels are based, in part, on management's expectations
regarding future revenue, if revenue is below expectations in any quarter, the
adverse effect may be magnified by the Company's inability to adjust spending in
a timely manner to compensate for any such revenue shortfall.
Factors that may adversely affect the Company's quarterly operating results
include the Company's ability to develop, introduce and market new
microprocessor intellectual property, the demand for and average selling prices
of semiconductor products that incorporate the Company's technology, the
establishment or loss of strategic relationships with semiconductor
manufacturing partners or manufacturers of digital consumer products, the timing
of new products and product enhancements by the Company and its competitors,
changes in the Company's and digital consumer product manufacturers' development
schedules and levels of expenditures on research and development and product
support and general economic conditions. As a result, the Company's total
revenue and
15
operating results in any future period cannot be predicted with certainty, and
its operating results in any quarter may not be indicative of its future
performance. Moreover, the Company expects to experience seasonal fluctuations
in its revenue and operating results.
Revenue Concentration. The Company is subject to revenue concentration
risks at both the product and semiconductor manufacturing partner levels. To
date, a substantial portion of the Company's total revenue has been derived from
contract revenue and royalties earned on sales of video game products that use
the Company's RISC-based microprocessor technology. In particular, royalties and
contract revenue from Nintendo and NEC relating to sales of Nintendo 64 video
game players and related cartridges accounted for 79%, 69% and 23% of the
Company's total revenue for the fiscal years ended June 30, 1998, 1997 and 1996,
respectively.
The Company anticipates that royalties related to sales of Nintendo 64
video game cartridges will represent a substantial portion of its total revenue
for the next several years. However, competition in the market for home
entertainment products is intense and the introduction of new products or
technologies, as well as shifting consumer preferences, could negatively impact
Nintendo 64 video game cartridge sales. There can be no assurance as to the
amount and timing of sales of Nintendo 64 video game players and related
cartridges and, consequently, there can be no assurance as to the royalty stream
to the Company from such sales. In particular, the eventual introduction of the
next generation Nintendo video game system is expected to result in declining
sales of Nintendo 64 video game players and related cartridges, although sales
of video game cartridges would be likely to continue for some time. In the near
term, factors negatively affecting sales of Nintendo 64 video game cartridges
could have a material adverse effect on the Company's results of operations and
financial condition.
Although the Company expects that an increasingly significant portion of
its future revenue will be related to sales of digital consumer products such as
handheld personal computers and set-top boxes as well as other video game
products, there can be no assurance that the Company's technology will be
selected for design into any such products. Accordingly, the Company may remain
significantly dependent on revenue related to sales of video game products. The
identity of significant products may vary from period to period depending on the
addition of new contracts and the number of designs using the Company's
technology.
A significant portion of the Company's total revenue has been and is
expected to continue to be derived from a limited number of semiconductor
manufacturers. For the fiscal years ended June 30, 1998, 1997 and 1996, NEC
accounted for approximately 13%, 23% and 31%, respectively, of the Company's
total revenue. The Company believes that NEC will continue to represent in
excess of 10% of its total revenue for at least the next several years, although
NEC is not obligated to continue using the Company's technology in its current
or future products. Because there is a relatively limited number of
semiconductor manufacturers to which the Company could license its technology on
a basis consistent with its business model, it is likely that the Company's
revenue will continue to be concentrated at the semiconductor manufacturing
partner level. This revenue concentration for any given period will vary
depending on the addition or expiration of contracts, the nature and timing of
payments due under such contracts and the volumes and prices at which the
Company's partners sell products incorporating its technology. Accordingly, the
identity of particular manufacturing partners that will account for any such
revenue concentration will vary from period to period and may be difficult to
predict.
Seasonality. Because revenue related to sales of Nintendo 64 video game
cartridges is expected to represent a substantial portion of the Company's total
revenue over the next several years, the Company expects to experience seasonal
fluctuations in its revenue and operating results. The Company records royalty
revenue from Nintendo in the quarter following the sale of the related Nintendo
64 video game cartridge. Because a disproportionate amount of Nintendo 64 video
game cartridges are typically sold in the Company's second fiscal quarter (which
includes the holiday selling season), a disproportionate amount of the Company's
revenue and operating income is expected to be realized in its third fiscal
quarter. In addition, as the Company increases its focus on microprocessor
intellectual property for high-volume digital consumer products, the Company can
be expected to continue to experience similar seasonal fluctuations in its
revenue and operating results.
Intellectual Property Matters. The Company regards its patents, copyrights,
mask work rights, trademarks, trade secrets and similar intellectual property as
critical to its success, and relies on a combination of patent, trademark,
copyright, mask work and trade secret laws to protect its proprietary rights.
Any failure of the Company to obtain or maintain adequate protection of its
intellectual property rights for any reason could have a material adverse effect
on its business, results of operations and financial condition. Subject to the
grant of a license to Silicon Graphics, the Company owns approximately 51 U.S.
patents on various aspects of its technology, with expiration dates ranging
16
from 2006 to 2015, approximately 24 pending U.S. patent applications as well as
all foreign counterparts relating thereto. There can be no assurance that
patents will issue from any patent applications submitted by the Company, that
any patents held by the Company will not be challenged, invalidated or
circumvented or that any claims allowed from its patents will be of sufficient
scope or strength to provide meaningful protection or any commercial advantage
to the Company. In addition, there can be no assurance that third parties will
not assert claims of infringement against the Company or against the Company's
semiconductor manufacturing partners in connection with their use of the
Company's technology. Such claims, even those without merit, could be time
consuming, result in costly litigation and/or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, or at all.
Moreover, the laws of certain foreign countries may not protect the Company's
intellectual property to the same extent as do the laws of the United States
and, because of the importance of the Company's intellectual property rights to
its business, this could have a material adverse effect on its business, results
of operations and financial condition.
The Company also uses licensing agreements and employee and third party
nondisclosure and assignment agreements to limit access to and distribution of
its proprietary information and to obtain ownership of technology prepared on a
work-for-hire basis. There can be no assurance that the steps taken by the
Company to protect its intellectual property rights will be adequate to deter
misappropriation of such rights or that the Company will be able to detect
unauthorized uses and take immediate or effective steps to enforce its rights.
There can also be no assurance that the steps taken by the Company to obtain
ownership of contributed intellectual property will be sufficient to assure its
ownership of all proprietary rights. The Company also relies on unpatented trade
secrets to protect its 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 the Company's
proprietary technology or disclose such technology or that the Company can
ultimately protect its 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 the Company. From time to time the Company
has entered, and in the future may enter, into cross licensing arrangements with
others, pursuant to which the Company licenses certain of its patents in
exchange for patent licenses from such licensees. Although these types of cross
licensing arrangements are common in the semiconductor and microprocessor
industries, and do not generally provide for transfers of know-how or other
proprietary information, such arrangements may facilitate the ability of such
licensees, either alone or in conjunction with others, to develop competitive
products and designs.
The Company and Silicon Graphics have entered into arrangements pursuant to
which certain intellectual property was assigned to the Company, subject to the
grant of a license to Silicon Graphics; certain intellectual property was
retained by Silicon Graphics, subject to the grant of a license to the Company;
and certain intellectual property was retained by Silicon Graphics without any
ongoing interest to the Company. The Company's inability to use Silicon
Graphics' intellectual property in the future could have a material adverse
affect on its business and results of operations. In the past, the MIPS Group
has benefited from its status as a division of Silicon Graphics in its access to
the intellectual property of third parties through licensing arrangements or
otherwise, and in the negotiation of the financial and other terms of any such
arrangements. As a result of the Separation, there can be no assurance that the
Company will be able to negotiate commercially attractive intellectual property
licensing arrangements with third parties in the future, particularly if the
Company ceases to be a majority-owned subsidiary of Silicon Graphics. In
addition, in connection with any future intellectual property infringement
claims, the Company will not have the benefit of asserting counterclaims based
on Silicon Graphics' intellectual property portfolio, nor will the Company be
able to provide licenses to Silicon Graphics' intellectual property in order to
resolve such claims.
Lack of Independent Operating History. The Company has never operated as a
stand-alone company. The Company continues to be a majority owned subsidiary of
Silicon Graphics, however, Silicon Graphics will have no obligation to provide
assistance to the Company. The Company will be required to develop and implement
the operational, administrative and other systems and infrastructure necessary
to support its current and future business. There can be no assurance that the
Company will be able to develop the necessary systems and infrastructure and any
failure to do so could have an adverse effect on the Company's business, results
of operations and financial condition.
17
New Product Development and Technological Change. The Company's success is
highly dependent on its ability to develop enhancements and new generations of
its microprocessor intellectual property, introduce them to the marketplace in a
timely manner, and have them incorporated into semiconductor products that are
ultimately selected for design into the products of leading digital consumer
product manufacturers. There can be no assurance that the Company's development
efforts will be successful or that the characteristics of its microprocessor
intellectual property will satisfy those that may be critical to specific
applications in the embedded market. To the extent that the Company's
development efforts are unsuccessful or the characteristics of its
microprocessor intellectual property are not compatible with the requirements of
specific digital consumer product applications, its ability to achieve design
wins may be limited. Failure to achieve sufficient design wins could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Technical innovations of the type critical to the Company's success are
inherently complex. Any failure by the Company to anticipate or respond
adequately to changes in the requirements of digital consumer product
manufacturers or in the semiconductor manufacturing process, or any significant
delays in the development or introduction of new microprocessor intellectual
property, could have a material adverse effect on the Company's business,
results of operations and financial condition. Moreover, significant technical
innovations generally require a substantial investment before their commercial
viability is determined. There can be no assurance that the Company will have
the financial resources necessary to fund the future development of
microprocessor and related designs. In addition, there can be no assurance that
any enhancements or new generations of the Company's technology, even if
successfully developed, will generate revenue in excess of the costs of
development or not be quickly rendered obsolete by changing consumer
preferences, the introduction of products embodying new technologies or features
or other technological developments in the semiconductor and digital consumer
products industries.
Dependence on Digital Consumer Products Industry. The digital consumer
products industry will be the primary market for the Company's microprocessor
and related designs. The Company's success will be dependent upon the level of
consumer acceptance of the products that incorporate its technology, which may
be affected by changing consumer preferences and the introduction of products
embodying new technologies or features. In addition, certain digital consumer
products such as video game products may present limited opportunities for
design wins due to a limited number of product manufacturers and the length of
product life cycles. Many applications in the digital consumer products
industry, such as handheld personal computers and set-top boxes, have only
recently been introduced to the market and the level of consumer interest and
acceptance is difficult to predict. Factors negatively affecting the digital
consumer products industry and the demand for digital consumer products, such as
the failure to develop industry standards for hardware and software or to
achieve adequate product cost reductions, could have a material adverse effect
on the Company's business, results of operations and financial condition.
Moreover, to the extent that the performance, functionality, price and power
characteristics of the Company's microprocessor designs do not satisfy those
that may be critical to specific digital consumer product applications, the
Company's dependence on the digital consumer products industry may be further
confined to a limited segment of that industry.
Reliance on Manufacturing Partners. The Company does not manufacture or
sell microprocessors containing its technology. Rather, the Company licenses its
technology to semiconductor manufacturers that incorporate the Company's
technology into the products they sell. In some cases, these manufacturing
partners also add custom integration services and derivative design technologies
to the Company's microprocessor designs. Accordingly, the Company's success is
substantially dependent on the adoption and continued use of its technology by
semiconductor manufacturers. The Company faces numerous risks in obtaining
agreements with semiconductor manufacturers on terms consistent with its
business model, including, among others, the lengthy and expensive process of
building a relationship with a potential partner before there is any assurance
of an agreement; persuading large semiconductor companies to work with, to rely
for critical technology on, and to disclose proprietary manufacturing technology
to, the Company; and persuading potential partners to bear certain development
costs associated with the Company's technology and to make the necessary
investment to successfully produce embedded microprocessors using the Company's
technology. Moreover, none of the Company's manufacturing partners is obligated
to license new or future generations of the Company's microprocessor designs.
The Company is also subject to many risks beyond its control that influence
the success of its semiconductor manufacturing partners, including, among
others, the highly competitive environment in which its current and any future
partners operate, the market for their products and the engineering capabilities
and financial and other resources of its partners. The Company also believes
that its principal competition may come from semiconductor
18
manufacturers, including its current manufacturing partners that internally
develop products using similar or alternative technologies. Any such competition
may adversely affect the Company's existing relationships and its ability to
establish new relationships. Moreover, the Company's relationships with certain
of its existing partners may be negatively affected by its separation from
Silicon Graphics, insofar as Silicon Graphics' status as a customer of such
partners has been a factor in establishing and maintaining such relationships or
in negotiating the financial and other terms of the contractual arrangements
with such partners.
The Company currently has seven semiconductor manufacturing partners. There
can be no assurance that the Company will be successful in maintaining
relationships with its current manufacturing partners or in entering into new
relationships with additional partners. Any failure by the Company to establish
or maintain such relationships could have a material adverse effect on the
Company's business, results of operations and financial condition.
Dependence on Digital Consumer Product Manufacturers. The timing and amount
of royalties received by the Company is directly affected by sales of consumer
products incorporating the Company's technology. Accordingly, the Company's
success is substantially dependent upon the adoption of its technology by
digital consumer product manufacturers. The Company is subject to many risks
beyond its control that influence the success or failure of a particular digital
consumer product manufacturer, including, among others, competition faced by the
manufacturer in its particular industry; market acceptance of the manufacturer's
products; the engineering, marketing and management capabilities of the
manufacturer; technical challenges unrelated to the Company's technology faced
by the manufacturer in developing its products; and the financial and other
resources of the manufacturer. The process of persuading digital consumer
product manufacturers to adopt the Company's technology can be lengthy and, even
if adopted, there can be no assurance that the Company's technology will be used
in a product that is ultimately brought to market, achieves commercial
acceptance or results in meaningful royalties to the Company. The failure of
manufacturers in the digital consumer products industry to adopt the Company's
technology for incorporation into their products could have a material adverse
effect on the Company's business, results of operations and financial condition.
Furthermore, because the Company does not control the business practices of its
licensees, it has no ability to establish the prices at which the products
incorporating its technology are made available to digital consumer product
manufacturers or the degree to which its licensees promote the Company's
technology to such manufacturers.
Competition. Competition in the market for embedded microprocessors is
intense. The Company believes that the principal competitive factors in the
industry are performance, functionality, price, customizability and power
consumption. The Company competes primarily against ARM Holdings plc. and
Hitachi Semiconductor (America) Inc. The Company also competes against certain
semiconductor manufacturers whose product lines include microprocessors for
embedded and non-embedded applications, including Intel Corporation, National
Semiconductor Corporation, Advanced Micro Devices, Inc. and Motorola, Inc. In
addition, the Company must continue to differentiate its microprocessor and
related designs from those available or under development by the internal design
groups of semiconductor manufacturers, including its current and prospective
manufacturing partners. Many of these internal design groups have substantial
programming and design resources and are part of larger organizations, which
have substantial financial and marketing resources. There can be no assurance
that internal design groups will not develop products that compete directly with
those of the Company or will not actively seek to license their own technology
to third-party semiconductor manufacturers. Certain of the Company's competitors
have greater name recognition and customer bases as well as greater financial
and marketing resources than the Company, and such competition could adversely
affect the Company's business, results of operations and financial condition.
Dependence on Key Personnel. The Company's success depends in part on the
continued contributions of its key management, technical, sales and marketing
personnel, many of whom are highly skilled and difficult to replace. In
addition, the Company's business plan requires, and its future operating results
depend in significant part upon, the identification and hiring of additional
highly skilled personnel, particularly technical personnel for its anticipated
research and development activities. Competition for qualified personnel,
particularly those with significant experience in the semiconductor and
microprocessor design industries, is intense. The loss of the services of any of
the key personnel, the inability to attract and retain qualified personnel in
the future or delays in hiring personnel, particularly technical personnel,
could have a material adverse effect on the Company's business, operating
results and financial condition.
19
Risks Associated with International Operations. A substantial portion of
the Company's revenue is derived from outside the United States. For the fiscal
years ended June 30, 1998, 1997 and 1996, revenue from customers outside the
United States, primarily in Japan, represented approximately 90%, 87% and 83%,
respectively, of the Company's total revenue. The Company anticipates that
revenue from international customers primarily in Asia, will continue to
represent a substantial portion of its total revenue. To date, substantially all
of the Company's revenue from international customers has been denominated in
U.S. dollars. However, to the extent that sales to digital consumer product
manufacturers by the Company's manufacturing partners are denominated in foreign
currencies, royalties received by the Company on such sales could be subject to
fluctuations in currency exchange rates. In addition, if the effective price of
the technology sold by the Company to its partners were to increase as a result
of fluctuations in foreign currency exchange rates, demand for the Company's
technology could fall which would, in turn, reduce the Company's royalties. The
Company is unable to predict the amount of non-U.S. dollar denominated revenue
earned by its licensees. Therefore, the Company has not historically attempted
to mitigate the effect that currency fluctuations may have on its revenue, and
does not presently intend to do so in the future. The relative significance of
the Company's international operations exposes it to a number of additional
risks including political and economic instability, longer accounts receivable
collection periods and greater difficulty in collection of accounts receivable,
reduced or limited protection for intellectual property, export license
requirements, tariffs and other trade barriers and potentially adverse tax
consequences. Several countries in Asia are experiencing a severe economic
crisis, characterized by reduced economic activity, lack of liquidity, highly
volatile foreign currency exchange and interest rates and unstable stock
markets. Several of the Company's semiconductor partners sell products into Asia
that incorporate the Company's microprocessor and related designs. Any negative
impact of the circumstances in Asia on its sales of such products by the
Company's semiconductor partners could have a negative impact on its royalty
revenue. There can be no assurance that the Company will be able to sustain
revenue derived from international customers or that the foregoing factors will
not have a material adverse effect on the Company's business, operating results
and financial condition.
Management of Growth. The Company has limited managerial, financial,
engineering and other resources and may not be equipped to manage successfully
any future periods of rapid growth or expansion. In addition, the Company's
business plan requires that it identify and hire additional highly skilled
technical personnel during fiscal 1999 to staff its anticipated research and
development activities. Recruitment and integration of these additional
employees, as well as any future periods of rapid growth or expansion, can be
expected to place significant strains on the Company's resources, which may be
exacerbated by the Company's recent shift in strategic direction. Digital
consumer product manufacturers as well as the Company's semiconductor
manufacturing partners typically require significant engineering support in the
design, testing and manufacture of products incorporating the Company's
technology. As a result, any increase in the adoption of the Company's
technology will increase the strain on the Company's personnel, particularly its
engineers. The Company's future growth will also depend on its ability to
implement operational, financial and management information and control systems
and procedures necessary to operate as a stand-alone company and without the
financial, operational, managerial and administrative support previously
provided by Silicon Graphics.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not Applicable.
Item 8. Financial Statements and Supplementary Data.
20
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
of MIPS Technologies, Inc.
We have audited the accompanying balance sheets of MIPS Technologies, Inc.
(the "Company") as of June 30, 1998 and 1997, and the related statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MIPS Technologies, Inc. at
June 30, 1998 and 1997, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1998 in conformity with
generally accepted accounting principles.
/S/ Ernst & Young LLP
San Jose, California
July 20, 1998
21
MIPS TECHNOLOGIES, INC.
BALANCE SHEETS
(In thousands, except share data)
June 30,
-----------------------
1998 1997
--------- ---------
ASSETS
Current assets:
Cash ........................................................ $ 45 $ --
Accounts receivable ......................................... 250 381
Prepaid expenses and other current assets ................... 618 2,775
--------- ---------
Total current assets .................................... 913 3,156
Equipment and furniture, net .................................. 2,787 15,190
Employee notes receivable ..................................... 996 1,328
--------- ---------
$ 4,696 $ 19,674
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ............................................ $ 3,087 $ 5,834
Accrued liabilities ......................................... 2,356 5,437
Current portion of capital lease obligations ................ -- 331
--------- ---------
Total current liabilities ............................... 5,443 11,602
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $0.001 par value: 150,000,000 shares
authorized; 36,000,000 shares issued and outstanding ...... 36 36
Additional paid-in capital .................................. 120,041 129,236
Accumulated deficit ......................................... (120,824) (121,200)
--------- ---------
Total stockholders' equity (deficit) .................... (747) 8,072
--------- ---------
$ 4,696 $ 19,674
========= =========
See accompanying notes.
22
MIPS TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended June 30,
----------------------------------
1998 1997 1996
-------- -------- --------
Revenue:
Royalties ............................... $ 55,980 $ 37,192 $ 19,716
Contract revenue ........................ 830 3,115 17,327
-------- -------- --------
Total revenue ....................... 56,810 40,307 37,043
Costs and expenses (see Note 11
regarding related party transactions with
Silicon Graphics):
Cost of contract revenue ................ 375 1,345 5,580
Research and development ................ 43,446 68,827 48,402
Sales and marketing ..................... 5,307 6,170 6,026
General and administrative .............. 4,685 4,750 4,601
Restructuring charge .................... 2,614 -- --
-------- -------- --------
Total costs and expenses ............ 56,427 81,092 64,609
-------- -------- --------
Operating income (loss) ..................... 383 (40,785) (27,566)
Interest expense ............................ (7) (50) (99)
-------- -------- --------
Net income (loss) ........................... $ 376 $(40,835) $(27,665)
======== ======== ========
Net income (loss) per basic and diluted share $ 0.01 $ (1.13) $ (0.77)
======== ======== ========
Common shares outstanding-basic ............. 36,000 36,000 36,000
======== ======== ========
Common shares outstanding-diluted ........... 36,033 36,000 36,000
======== ======== ========
See accompanying notes.
23
MIPS TECHNOLOGIES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
Total
Additional Stockholders'
Common Paid-in- Accumulated Equity
Stock Capital Deficit (Deficit)
--------- --------- --------- ---------
Balances at June 30, 1995 ...... $ 36 $ 48,928 $ (52,700) $ (3,736)
Net loss ................... -- -- (27,665) (27,665)
Net financing provided from
Silicon Graphics ......... -- 35,254 -- 35,254
--------- --------- --------- ---------
Balances at June 30, 1996 ...... 36 84,182 (80,365) 3,853
Net loss ................... -- -- (40,835) (40,835)
Net financing provided from
Silicon Graphics ......... -- 45,054 -- 45,054
--------- --------- --------- ---------
Balances at June 30, 1997 ...... 36 129,236 (121,200) 8,072
Net income ................. -- -- 376 376
Net financing returned to
Silicon Graphics ......... -- (1,965) -- (1,965)
Net equipment transferred to
Silicon Graphics ......... -- (7,230) -- (7,230)
--------- --------- --------- ---------
Balances at June 30, 1998 ...... $ 36 $ 120,041 $(120,824) $ (747)
========= ========= ========= =========
See accompanying notes.
24
MIPS TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
Years ended June 30,
----------------------------------
1998 1997 1996
-------- -------- --------
Operating activities:
Net income (loss) ............................................. $ 376 $(40,835) $(27,665)
Adjustments to reconcile net income to cash
provided by (used in) operations:
Depreciation .............................................