Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission file number 000-24487

MIPS Technologies, Inc.
(Exact name of registrant as specified in its charter)

1225 CHARLESTON ROAD, MOUNTAIN VIEW, CA 94043-1353
(Address of principal executive offices)

Registrants' telephone number, including area code: (650) 567-5000

        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 ý No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No ý

        As of January 31, 2003, the number of outstanding shares of the Registrant's Class A common stock, $.001 par value, was 14,997,440. As of January 31, 2003, the number of outstanding shares of the Registrant's Class B common stock, $.001 par value, was 25,057,715.

2

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MIPS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In thousands)

See accompanying notes.

3

MIPS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In thousands, except per share data)

See accompanying notes.

4

MIPS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)

See accompanying notes.

5

MIPS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

Note 1. Description of Business and Basis of Presentation

        Formation of MIPS Technologies, Inc. (MIPS).    Silicon Graphics, Inc. acquired our predecessor MIPS Computer Systems, Inc. in 1992 and continued the MIPS processor business through its MIPS Group. In December 1997, Silicon Graphics initiated a plan to separate the business of the MIPS Group from its other operations and in April 1998, our Board of Directors approved a transaction pursuant to which Silicon Graphics transferred to us the assets and liabilities related to the design and development of processor intellectual property for embedded market applications. We were a majority owned subsidiary of Silicon Graphics from the closing of our initial public offering on July 6, 1998 until June 20, 2000, when Silicon Graphics distributed all of its remaining interest in us in the form of a stock dividend of Class B common stock to its stockholders.

        Basis of Presentation.    The unaudited results of operations for the interim periods shown in these financial statements are not necessarily indicative of operating results for the entire fiscal year. In our opinion, the condensed consolidated financial statements include all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position, results of operations and cash flows for each interim period shown.

        The condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to interim financial information. Certain information and footnote disclosures included in financial statements prepared in accordance with generally accepted accounting principles have been omitted in these interim statements as allowed by such SEC rules and regulations. The balance sheet at June 30, 2002 has been derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. However, we believe that the disclosures are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements included in this Form 10-Q should be read in conjunction with the audited consolidated financial statements and related notes for the fiscal year ended June 30, 2002, included in our 2002 Annual Report on Form 10-K.

        Use of Estimates.    The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.

        Revenue Recognition.    We derive revenue from fees for the transfer of proven and reusable intellectual property components or the performance of engineering services. We enter into licensing agreements that provide licensees the right to incorporate MIPS' intellectual property components in their products with terms and conditions that have historically varied by licensee. Generally, these payments include a nonrefundable technology license fee, which is payable upon the transfer of intellectual property, or a nonrefundable engineering service fee, which generally is payable upon achievement of defined milestones. In addition, these agreements also include royalty payments, which are payable upon sale of a licensee's product, and maintenance and limited support fees. We classify all revenue that involves the sale of a licensee's products as royalty revenue. Royalty revenue is recognized in the quarter in which a report is received from a licensee detailing the shipments of products incorporating our intellectual property components (i.e., in the quarter following the sale of licensed product by the licensee). We classify all revenue that does not involve the sale of a licensee's products, primarily license fees and engineering service fees and maintenance and support fees, as contract

6

revenue. License fees are recognized upon the execution of the license agreement and transfer of intellectual property, provided no further significant performance obligations exist and collectibility is deemed probable.

        Fees related to engineering services contracts, which are performed on a best efforts basis and for which we receive periodic milestone payments, are recognized as revenue over the estimated development period, using a cost-based percentage of completion method. We do not recognize revenue under engineering services contracts in amounts exceeding the amount of milestone payments received.

        Annual maintenance and support fees, renewable by the licensee, are classified as contract revenue and are amortized over the period of support, generally 12 months. Since the beginning of fiscal 2002, revenue from these arrangements has remained generally constant in absolute dollars, but has been increasing as a percentage of total revenue.

        Cash and Cash Equivalents and Short-term Investments.    Cash and cash equivalents consists mainly of financial instruments which are readily convertible into cash and have original maturities of three months or less at the time of acquisition. Short-term investments consist mainly of financial instruments that have original maturities of one year or less at the time of original acquisition. The fair values of cash and cash equivalents and short-term investments approximated their cost at December 31, 2002 and June 30, 2002.

        Goodwill and Purchased Intangible Assets.    We make estimates when we acquire businesses or acquire groups of assets for a single aggregate price. The purchase method of accounting for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the tangible and intangible assets acquired, including in-process research and development, or IPR&D. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition of a business and the fair value of the net tangible and intangible assets acquired. Goodwill is not amortized but is subject to annual impairment tests. The amounts and useful lives assigned to tangible and intangible assets, other than IPR&D, impact future amortization expense; the amount assigned to IPR&D is expensed immediately.

Note 2. Computation of Earnings Per Share

        The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

Note 3. Comprehensive Income (Loss)

        Total comprehensive income (loss) includes net income (loss) and other comprehensive income, which for us primarily comprises unrealized gains and losses from foreign currency adjustments. Total

7

comprehensive loss for the first six months of fiscal 2003 was $17.8 million and total comprehensive loss for the comparable period in the prior year was $4.1 million.

Note 4. Acquisition and Investment

        In December 2001, we acquired a small equity interest in Lexra, Inc., a privately held company, and recorded an investment of $1.4 million.

        In July 2002, we acquired Algorithmics Limited, a United Kingdom-based tool chain company, and an affiliated company, DFS3 Limited. The total purchase price for both companies was approximately $3.1 million and consisted of $800,000 in cash, the issuance of approximately 520,000 shares of our common stock valued at approximately $1.9 million, and acquisition-related costs of approximately $485,000. The value of the common stock has been recorded as deferred compensation and will be amortized to expense over a three-year period.

        A charge of $394,000 for purchased in-process research and development expenses was recorded upon completion of the acquisition of the technology because technological feasibility of the acquired technology had not been established and no future alternative uses existed. The value of the projects was determined by estimating the present value of the net cash flows we believed would result from the acquired technology.

        In December 2002, we recorded an impairment charge of $1.4 million as we wrote off the full value of our investment in Lexra, Inc.

Note 5. Purchased Intangible Assets

        All of our purchased intangible assets, except goodwill, are subject to amortization. Purchased intangible assets subject to amortization consisted of the following as of December 31, 2002 and June 30, 2002 (in thousands):

        During the second quarter of fiscal 2003, we purchased certain patents and patent applications for an aggregate consideration of $1.1 million.

        During the second quarter of fiscal 2002, we acquired from Lexra, Inc. certain technology related to our processor architectures and cores. We recorded a valuation of $1.7 million for developed technology and $2.9 million for core technology.

        During the second quarter of fiscal 2003, as part of our restructuring activities discussed in Note 6, we determined that we would not seek to integrate into our product plans the developed technology we acquired from Lexra, Inc. in December 2001 and recorded an impairment charge for approximately $1.2 million, the remaining value of this asset.

        Amortization expense related to purchased intangible assets was $216,000 for the three months ended December 31, 2002 and was zero for the comparable period in fiscal 2002. Amortization expense related to purchased intangible assets was $474,000 for the first six months of fiscal 2003 and was zero for the comparable period in fiscal 2002.

8

        The estimated future amortization expense of existing purchased intangible assets is approximately $296,000, $592,000, $553,000, $549,000 and $549,000 for the remaining six months of fiscal year 2003 and for fiscal years 2004, 2005, 2006 and 2007, respectively, and approximately $1.3 million for years following fiscal 2007.

Note 6. Restructuring Charge

        In the second quarter of fiscal 2003, we closed our Denmark design center to consolidate our research and development activities in our headquarters in California and in our recently acquired design center in the United Kingdom. In addition, we implemented plans to eliminate 67 regular positions or about 30% of our global workforce by the end of fiscal 2003 across all functions with the objective of reducing our operating expenses. These actions resulted in a restructuring charge in the second quarter of fiscal 2003 of approximately $7.6 million. The restructuring charge includes approximately $3.3 million of employee severance and related benefits, $1.7 million of facilities exit costs, primarily related to lease expenses net of anticipated sublease income, $2.5 million in asset write-offs and $174,000 in legal and other costs. These costs and activities are accounted for under EITF Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and other Costs to Exit an Activity.

        A summary of restructuring activities follows below (in thousands). The balance of each category presented was zero as of October 1, 2002.

        Our restructuring plans included vacating the facilities at our Denmark design center. The $1.7 million estimated charge for vacating this facility is comprised of our future obligations of $6.4 million under the facility operating lease expiring in March, 2010, partially offset by estimated sublease income of approximately $4.7 million. The sublease income assumption we have made with respect to the Denmark facility is based on current and expected real estate market conditions in nearby Copenhagen, Denmark, and necessarily entail a high level of management judgment. These market conditions can fluctuate greatly due to such factors as changes in property occupancy rates and the rental prices charged for comparable properties. As a result, in future periods, we may be required to record significant additional charges or reverse currently accrued amounts.

        As part of our restructuring plan, we decided to reduce our investment in research and development, and we revised our product plans. We determined that we would not seek to integrate into our product plans the developed technology we acquired from Lexra, Inc. in December 2001 and recorded an impairment charge of $1.2 million for the remaining value of this intangible asset.

        Other assets written off include leasehold improvements and computer aided design software related to vacating the Denmark facilities. Other costs are composed primarily of legal fees and other restructuring costs.

        As of December 31, 2002, the remaining restructuring cost accrual was $3.8 million. The severance and benefit costs associated with 12 of the positions eliminated were paid as of December 31, 2002. The remaining severance of $2.1 million related to the other 55 positions eliminated is expected to be

9

paid through April 2003. The operating lease accrual, net of estimated sublease income, is made up of lease payments to be paid through March 2010. Actual future cash requirements may differ materially from the amounts accrued at December 31, 2002, particularly if actual sublease income differs significantly from current estimates.

Note 7. Recent Accounting Pronouncements

        In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit and Disposal Activities effective for exit or disposal activities initiated after December 31, 2002. This statement revises the accounting for exit and disposal activities under EITF Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and other Costs to Exit an Activity. Under SFAS No. 146 companies will record exit or disposal costs when they are "incurred" and can be measured at fair value, rather than when a commitment is made to an exit or disposal plan.

        In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. SFAS No. 148 amends SFAS No. 123 Accounting for Stock-Based Compensation to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The additional disclosure requirements of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. We have elected to continue to follow the intrinsic value method of accounting as prescribed by Accounting Principles Board Opinion No. 25 (or APB 25), Accounting for Stock Issued to Employees, to account for employee stock options.

        In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. The disclosure provisions of FIN 45 are effective for financial statements of interim or annual periods that end after December 15, 2002. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor's year end. We currently do not have guarantees required to be disclosed under FIN 45. We do not expect the adoption of FIN 45 will have a material impact on our financial position, results of operation, or cash flow.

10

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

        You should read the following discussion and analysis together with our unaudited condensed consolidated financial statements and the notes to those statements included elsewhere in this report. This discussion may contain forward-looking statements that involve risks and uncertainties. These forward-looking statements within this Quarterly Report on Form 10-Q are identified by words such as "believes," "anticipates," "expects," "intends," "may" and other similar expressions. Our actual results could differ materially from those indicated in these forward-looking statements as a result of certain factors, including those described under "Factors That May Affect Our Business", and other risks affecting our business. We undertake no obligation to update any forward-looking statements included in this discussion.

Critical Accounting Polices and Estimates

        We prepare our financial statements in conformity with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We regularly evaluate our accounting estimates and assumptions. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results inevitably will differ from the estimates, and such differences may require material adjustments to our financial statements.

        Accrued Facilities Restructuring Costs.    In October 2002, we implemented plans to restructure the company that included exiting our Denmark research facility, and we recorded a restructuring charge in the second quarter of fiscal 2003 to reflect the anticipated costs of the restructuring. Among other things, the anticipated costs included lease charges that were based on assumptions about future rental income that might be received on the property we vacated. If, in the future, it is determined that we have over-accrued for restructuring charges, the reversal of such over-accrual would have a favorable impact on our financial statements in the period this was determined and would be recorded as a credit to restructuring costs. Conversely, if it is determined that our accrual is insufficient, an additional charge would have an unfavorable impact on our financial statements in the period this was determined.

        For a discussion of our other critical accounting policies, please see "Critical Accounting Policies and Estimates" in Item 7 of our Annual Report on Form 10-K for the year ended June 30, 2002.

Results of Operations

        Revenue.    Our revenue consists of royalties and contract revenue earned under contracts with our licensees. Our contracts with our licensees are typically subject to periodic renewal or extension and expire at various dates through June 2018. Although the precise terms of our contracts vary, they typically provide for royalties, technology license or engineering service fees, and maintenance fees.

        We generate royalties from the sale by our licensees of products incorporating our technology. Royalty revenue is recognized in the quarter in which a report is received from a licensee detailing the shipments of products incorporating our intellectual property, which is in the quarter following the sale of the licensee's product to its customer. Royalties are calculated either as a percentage of the revenue received by the seller on sales of such products or on a per unit basis.

        Contract revenue includes technology license fees and engineering services fees. We receive license fees for the use of technology that we have developed internally and, in some cases, which we have

11

licensed from third parties. License fees are typically recognized upon the execution of the license agreement and transfer of intellectual property, provided no further significant performance obligations exist and collectibility is deemed probable. Technology license fees vary based on, among other things, whether a particular technology is licensed for a single application or for multiple or unlimited applications, and whether the license granted covers a particular design or a broader architecture. Fees related to engineering services contracts, which are performed on a best efforts basis and for which we receive periodic milestone payments, are recognized as revenue over the estimated development period using a cost-based percentage of completion method. In most instances, the technology we develop, including under engineering services contracts, can be licensed to multiple customers.

        Total revenue for the second quarter of fiscal 2003 was $10.4 million and for the first six months of fiscal 2003 was $19.8 million compared to $12.0 million and $24.5 million for the comparable periods in fiscal 2002. Royalties for the second quarter of fiscal 2003 were $4.1 million and for the first six months of fiscal 2003 were $7.7 million compared to and $4.7 million and $9.4 million for the comparable periods in fiscal 2002. The decrease in both periods was due to lower royalties derived from sales of Nintendo products, which continue to decline and have been insignificant in fiscal 2003. Royalties excluding royalties from Nintendo 64 game products increased 27% in the second quarter of fiscal 2003 and increased 14% for the first six months of fiscal 2003 compared to the comparable periods in fiscal 2002 due primarily to an increase in the number of new customers shipping products incorporating our technology. Contract revenues for the second quarter of fiscal 2003 were $6.2 million and for the first six months of fiscal 2003 were $12.2 million compared to $7.3 million and $15.0 million for the same periods in fiscal 2002. The decrease in both periods resulted from our completing only four new license agreements in the second quarter of fiscal 2003 and six new agreements in the first six months of fiscal 2003 compared to nine and sixteen agreements in the same periods in 2002. In addition, these agreements were generally lower in value due to a shift in demand towards our 32-bit core designs than in the corresponding periods in fiscal 2002. We continue to experience a longer sales cycle compared to the comparable periods in fiscal 2002, which we believe is due to our customers lengthening their decision making process in response to current economic conditions. Contract revenue for the second quarter of fiscal 2003 included an aggregate of $2.0 million in fees paid by a customer for a license to use our technology and to resolve our claims of infringement of our intellectual property rights for prior use of our technology. The amount of engineering service fees recognized in the second quarter and first six months of fiscal 2003 decreased slightly compared to the same periods in the prior year. We expect that contract revenue will be greater than 50% of our total revenue for the fiscal year ending June 30, 2003.

        Cost of Contract Revenue.    Our cost of contract revenue consists of sublicense fees payable to third parties. We incur an obligation to pay these fees when we sublicense technology to our customers that we have licensed from third parties. Sublicense fees are recorded as cost of contract revenue when the obligation is incurred, which is typically the same period in which the related revenue is recognized.

        Cost of contract revenue for the second quarter and first six months of fiscal 2003 and 2002 was $250,000. We expect that in future periods cost of contract revenue will continue to be immaterial.

        Research and Development.    Costs incurred with respect to technology we develop internally and engineering services we perform which are not directly related to any particular licensee, license agreement or license fee are recorded as research and development expense.

        Research and development expenses for the second quarter of fiscal 2003 were $9.1 million and for the first six months of fiscal 2003 were $17.6 million compared with research and development expenses of $8.1 million and $16.9 million for the comparable periods in fiscal 2002. The increase in research and development expenses in both periods was due to an increase in employee compensation as well as an increase in amortization expense resulting from the amortization of intangible assets and deferred compensation. Although we will continue to invest in our research and development efforts, we expect

12

that these expenses will decline beginning in the third quarter of fiscal 2003 as a result of the closure of our Denmark design center in December 2002 and the consolidation of our research and development activities into our California and United Kingdom locations. This restructuring activity will result in a reduction of our research and development workforce of 57 employees by the end of the fiscal 2003.

        Sales and Marketing.    Sales and marketing expenses for the second quarter of fiscal 2003 were $3.9 million and for the first six months of fiscal 2003 were $7.1 million compared to $4.1 million and $8.4 million for the comparable periods in fiscal 2002. The decrease in sales and marketing expenses for both periods was primarily due to lower spending on third party software development tools, as we deferred spending on MIPS compatible development tools such as compilers, debuggers, probes and operating systems. We expect that our sales and marketing expenses will vary from period to period driven primarily by attainment of specified milestones by third party tools providers.

        General and Administrative.    General and administrative expenses for the second quarter of fiscal 2003 were $2.0 million and for the first six months of fiscal 2003 were $3.8 million compared to $1.9 million and $3.6 million for the comparable periods in fiscal 2002. The increase in general and administrative expenses primarily reflects an increase in our directors and officers insurance rates compared to the prior year.

        Acquired In-Process Research and Development.    In July 2002, we completed the acquisition of Algorithmics Limited, a United Kingdom-based tool chain company, and an affiliated company, DFS3 Limited, for cash and stock consideration. We recorded a charge of $394,000 for purchased in-process research and development expenses upon completion of the acquisition because technological feasibility of the acquired technology had not been established and no future alternative uses existed. The fair value of the projects was determined by estimating the present value of the net cash flows we believed would result from the acquired technology.

        In December 2001, we acquired from Lexra, Inc. certain technology related to our processor architectures and cores, and we recorded a charge of $1.7 million for purchased in-process research and development expenses upon acquisition of the technology. The amount allocated to in-process research and development was expensed upon acquisition because technological feasibility had not been established and no future alternative uses for the technology existed. The fair value of the projects was determined by estimating the present value of the net cash flows we believed would result from the acquired technology.

        Restructuring.    In the second quarter of fiscal 2003, we closed our Denmark design center to consolidate our research and development activities in our headquarters in California and in our recently acquired design center in the United Kingdom. In addition, we implemented plans to eliminate 67 regular positions or about 30% of our global workforce by the end of fiscal 2003 across all functions with the objective of reducing our operating expenses. These actions resulted in a restructuring charge in the second quarter of fiscal 2003 of approximately $7.6 million. The restructuring charge includes approximately $3.3 million of employee severance and related benefits, $1.7 million of facilities exit costs, primarily related to lease expenses net of anticipated sublease income, $2.5 million in asset write-offs and $174,000 in legal and other costs. These costs and activities are accounted for under EITF Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and other Costs to Exit an Activity.

13

        A summary of restructuring activities follows below (in thousands). The balance of each category presented was zero as of October 1, 2002.