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

FORM 10-K

(Mark One)

For the fiscal year ended June 30, 1999

For the transition period from                to                .

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

Securities registered pursuant to section 12(b) of the Act:
None

Securities registered pursuant to section 12(g) of the Act:
Class A common stock, $.001 Par Value
(Title of class)

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No

    Indicate by check mark 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 Class A common stock held by non-affiliates of the Registrant as of September 1, 1999 was approximately $378.2 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 Class A common stock and shares held by officers and directors of the Registrant have been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

    As of September 1, 1999, the number of outstanding shares of the Registrant's Class A common stock, $.001 par value, was 12,660,600. The number of outstanding shares of the Registrant's Class B common stock, par value $.001, was 25,069,759, all of which are beneficially owned by Silicon Graphics, Inc.

    Documents incorporated by reference:

    Portions of the registrant's proxy statement for its 1999 annual meeting of stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

Item 1. Business

General

    MIPS Technologies is a leading designer of high-performance processors, cores and related intellectual property for use in a wide variety of increasingly sophisticated consumer devices and business equipment. Our designs are based on our 32- and 64-bit reduced instruction set computing (RISC) architectures. Our 64-bit RISC architecture is the volume leading architecture for 64-bit processors. We license our designs and related intellectual property to semiconductor companies and system original equipment manufacturers. Together with our licensees, we offer a variety of high-performance processors in standard, custom, semi-custom and application-specific products. Our licensees include, among others, Alchemy, ATI Technologies, Inc., Broadcom Corporation, Chartered Semiconductor Manufacturing, CommQuest (IBM), Integrated Device Technology, Inc., LSI Logic Corporation, NEC Corporation, NKK Corporation, Philips Semiconductors, Quantum Effect Devices, Inc., Sony Corporation, SiByte, Inc., Synova, Inc., Texas Instruments, Incorporated and Toshiba Corporation.

    Our licensees currently offer over 60 standard processors based on our RISC architecture, which have a cumulative installed base of over 120 million units. Based on industry sources, we believe that more than one third of the RISC-based processors shipped in calendar year 1998 were based on the MIPS RISC architecture. Our primary target market is the emerging market for digital consumer products. We believe that our 32- and 64-bit processor designs are well suited for this market due to the scalability and performance of our RISC architecture and the cost and time-to-market advantages provided by our intellectual property. Our core processor designs and related intellectual property have been incorporated into several key products in this market, including video games such as the Nintendo 64 and Sony PlayStation, handheld personal computers such as the NEC MobilePro, the Philips Nino, the Sharp Mobilon and the Vadem Clio, digital set-top boxes such as EchoStar's Dish Network and General Instrument's DVi-5000+ and Internet appliances from WebTV.

    MIPS Technologies, Inc. was incorporated in Delaware in June 1992. Our principal executive offices are located at 1225 Charleston Road, Mountain View, California 94043-1353, and our 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 and business equipment. Processors may be purchased individually and placed on a printed circuit board or they may be embedded into larger silicon chips. Improvements in semiconductor manufacturing processes have enabled the integration of entire systems onto a single integrated circuit to create complex system-on-a-chip solutions. In many cases, these system-on-a-chip solutions are the most cost-effective method of creating new product solutions. 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, processors and cores plus related software incorporated into devices other than personal computers, workstations, servers, mainframes and minicomputers. In the past, 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. Today, 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. Examples include the home video game console, in which the use of 32- and 64-bit embedded processors enables the processing of realistic graphic images digital, cable set-top boxes, internet appliances and handheld personal computers. 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 us in the form of processor cores and other functional blocks.

The MIPS Technologies Network

    Our technology focuses on providing cost-effective and high-performance processors, cores and related designs for high-volume embedded applications. The MIPS RISC architecture is flexible and designed to allow semiconductor manufacturers to integrate their intellectual property with our processor, core and related designs to develop differentiated and innovative products for a variety of embedded applications within demanding time-to-market requirements. Products incorporating the MIPS architecture range from disk drives using processor cores with a die size of less than two square millimeters to high-performance workstations using processors with a die size of 300 square millimeters. In addition, while designed for high performance, our RISC-based architectures have been incorporated in a number of low-power applications such as 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.

    Through our network of semiconductor manufacturing and design companies, system OEMs and independent software vendors, we have an established infrastructure to support our architecture as a standard platform for the embedded market.

    Semiconductor Licensees.  We have eight semiconductor licensees that develop, manufacture (or have manufactured) and currently sell silicon solutions based on the MIPS RISC processor architecture. These semiconductor licensees are Integrated Device Technology, Inc.; LSI Logic Corporation; NEC Corporation; NKK Corporation; Philips Semiconductors; Quantum Effect Devices; Synova, Inc. and Toshiba Corporation. Several of these licensees and others have made significant investments in our technology and market development which has resulted in multiple design teams around the world engaged in the development of MIPS-based processors and cores. Using our flexible intellectual property, our licensees, and the multiple design teams within these companies, are able to design optimized semiconductor products for multiple segments of the embedded market. In some cases, our licensees also add custom integration services and derivative design technologies to enhance our processor designs. Our licensees and their associated design teams have developed a broad portfolio of processors and standard products based on the MIPS RISC architecture as well as application specific extensions which can be licensed back to us and offered to other licensees. For example, MIPS16 technology, an extension to the instruction set architecture that reduces memory requirements and costs by allowing instructions to be expressed with 16 rather than 32 bits, was developed primarily by LSI Logic and is presently licensed by us to several of our semiconductor manufacturing licensees.

    We also develop and license custom processor designs intended to address the specific silicon process technology of the manufacturer to which it is licensed. Such designs customized to the technology of our licensee provide significant price-performance advantages. We believe that our ability to provide these custom processor designs is a competitive advantage.

    System OEMs.  Products based on the MIPS RISC architecture are used by a variety of system OEMs in the embedded market. A number of high-profile digital consumer products incorporate the MIPS RISC architecture, including the Nintendo 64 and Sony PlayStation video game systems, the Philips Nino and NEC MobilePro handheld personal computers, the Echo Star digital set-top box and WebTV's Internet appliance. We participate in various sales and technical efforts directed to system OEMs and have increased our business development organization to build brand awareness of the MIPS RISC architecture among system OEMs.

    Independent Software Vendors.  Our 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 MIPS RISC architecture. This software support allows system OEMs to design the MIPS processor technology into their products. In particular, software operating systems developed by Microsoft, Wind River Systems, Inc. and Integrated Systems, Inc. are compatible with our RISC architecture. We are working with Microsoft to optimize processor designs for products running on the Windows CE operating system.

Markets and Applications

    Digital Consumer Products.  Together with our existing semiconductor manufacturing licensees and our associated design teams, we seek to leverage our 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, MIPS RISC-based processors have been designed into many digital consumer products. Revenue related to the video game market presently accounts for a substantial majority of the our total revenue, and such revenue is expected to continue to account for a significant portion of our total revenue for at least the next few years.

    Video Games.  The market for video games, which represented the first high-volume consumer application for 32- and 64-bit microprocessors. Our key design wins in this market include the Nintendo 64 video game system, which uses our MIPS R4300i processor manufactured by NEC, and the Sony PlayStation, which uses our MIPS R3000 class embedded processor developed by LSI Logic.

    Set-Top Boxes.  As digital transmission of video signals becomes more widely available and utilized, we believe that the market for compatible set-top boxes could represent an area of growth in the use of 32- and 64-bit processors and related designs. Key design wins in this market include the set-top box used in WebTV's Internet appliance, which uses our MIPS R4000 class processor manufactured by IDT, Echostar's Dish Network set-top box, which uses our MIPS R3000 class microprocessor manufactured by IDT and General Instrument Corporation's DVi-5000+ advanced interactive digital set-top terminal, introduced in 1998, which uses a MIPS based product from NEC. Broadcom has announced a MIPS-based BCM3310 QAMLink communications processor targeted at the cable modem and set-top box markets.

    Handheld Personal Computers.  While the market for handheld personal computers has only recently begun to develop, we expect that this market will continue to grow. To date, our RISC-based processor designs have been incorporated into products such as the Philips Nino and Sharp's Mobilon, both of which use our MIPS R3000 class processor developed by Philips. In addition, NEC has incorporated our R4000 class processor design into its MobilePro handheld personal computer, and Vadem has incorporated a similar processor into its Clio.

    Other Digital Consumer Products.  Other potential digital consumer product applications for our 32- and 64-bit processors include Windows-based terminals, mobile telecommunications products, Digital Versatile Disk (DVD) players, digital televisions and cameras and the automobile PC, a product that provides drivers with a variety of services, including directions, using voice recognition and voice synthesis.

    Business Equipment.  Significant design wins in network and office automation applications include networking management equipment from Cisco and laser printers from Hewlett-Packard, QMS, Lanier and Kodak.

Products

    We design, develop and license intellectual property for high-performance processors. Our intellectual property is used in the design of processors, cores, instruction set architectures (ISAs) and application specific extensions (ASEs) that enable our semiconductor licensees to design and/or manufacture flexible, high-performance processors and cores for embedded systems within demanding time-to-market requirements. Through licensing and royalty-based arrangements with our semiconductor licensees, we seek to strengthen the position of the MIPS architecture and proliferate our designs in embedded systems applications. We have not historically and do not intend to manufacture processors and related devices.

    Designs.  We currently provide flexible, modular processor and core designs covering a range of performance/price points to enable our licensees to provide both standardized and customized semiconductor products more quickly to system OEMs. These designs include:

    R3000 Processor.  The R3000 processor is a 32-bit processor design introduced in 1988 that has served as the basis for many derivatives by our semiconductor licensees. The small die size (less than two square millimeters in one implementation) and performance characteristics of this processor make it well-suited for applications such as video game consoles, handheld personal computers, networking equipment and laser printers and copiers.

    R4000 Processor.  The R4000 processor is a 64-bit processor design introduced in 1992 that has served as the basis for a variety of derivatives, including the R4300i processor which is used in Nintendo 64 video game players. The R4000 processor was designed for applications in which high performance is the principle objective, such as video games and network servers and interactive consumer applications such as set-top boxes.

    R5000 Processor.  The R5000 processor is a 64-bit processor design developed by QED in January 1996 that is presently licensed to us. The R5000 processor, which we can sublicense to other licensees, is a dual instruction issue processor. Its performance characteristics make it an attractive processor for more powerful and sophisticated embedded applications.

    MIPS32 4K Cores.  Announced in November 1998, the MIPS32 4Kc and the MIPS32 4Kp processor cores are high-performance, low-power, 32-bit core designs for custom silicon-on-chip applications. Announced in September 1999, the MIPS32 4Km core delivers a low-cost 32-bit MIPS core design. These implementations of the MIPS32 architecture are an enhancement to the R3000 processor and include certain key features from the R4000 processor. The MIPS32 4K core designs are available in both optimized and synthesizable formats and are designed for easy integration with a wide variety of custom logic and peripherals.

    MIPS64 5K Core.  Announced in November 1998, the MIPS64 5K processor core is a 64-bit core design aimed at companies with short time-to-market requirements that also require the higher performance of a 64-bit core. The MIPS64 5K core design will soon be available in both optimized and synthesizable formats.

    MIPS64 20K Processors.  Announced in November 1998, the MIPS64 20K processor is a 64-bit processor design based on the MIPS64 architecture with special 64-bit operations for high performance graphics. The MIPS64 20K processor is well suited for digital consumer devices, enterprise networking and communications products.

    MIPS32 and MIPS64 Architectures.  Announced in May 1999, the MIPS32 and MIPS64 architectures provide new and improved features for the system developer and make it easier for the development tool vendors to provide comprehensive support across both 32-bit and 64-bit implementations. These architectures are a combination of binary instructions, and the hardware to execute them, which together determine the native capability of a processor. Architectural 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 instruction set architecture may be copyrighted or patented, thus preventing unrestricted use without a license. We license our instruction set architectures to promote the development and marketing of our compatible parts by our semiconductor licensees. Prior to our creating the MIPS32 and MIPS64 architectures, we developed the MIPS I through MIPS V instruction set architectures (ISAs) described below.

    MIPS I/II ISA.  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. Many of the R3000-class cores implement the MIPS II instruction set architecture.

    MIPS III ISA.  In addition to providing full support for the MIPS II instruction set architecture, the MIPS III instruction set architecture extends the MIPS II instruction set architecture to 64-bit operations, increases the number of floating point registers and adds certain other functions. The MIPS III instruction set architecture is implemented in the R4000 series of products, and is necessary to operate 64-bit MIPS processors in 64-bit mode.

    MIPS IV ISA.  The MIPS IV instruction set architecture enhances floating-point operations and adds additional instructions that improve performance in a number of engineering and scientific applications. The MIPS IV instruction set architecture is implemented in the R5000 series of products.

    MIPS V ISA.  The MIPS V instruction set architecture provides instructions that enhance performance in 3-D graphics applications. Hardware for the MIPS V instruction set architecture has not been implemented.

    Application Specific Extensions.  Application specific extensions (ASEs) are intended to provide design flexibility for our application-specific products and are offered to our semiconductor manufacturing licensees as optional, additional features to our processors and cores.

    MIPS16 ASE.  The MIPS16 application specific extension was introduced in October 1996 and permits substantially reduced systems costs by reducing memory requirements through the use of 16-bit instruction representation.

    MIPS designs, architectures and extensions are subject to patent, copyright and trademark protection. MIPS, R3000, R4000, R5000 are registered trademarks, and R4300i, MIPS16, MIPS32, MIPS64, 4K, 4Kc, 4Kp, 4Km, 5K, 20K, MIPS I, MIPS II, MIPS III, MIPS IV and MIPS V are trademarks of MIPS Technologies, Inc. This report also contains trademarks and registered trademarks of other companies.

Research and Development

    We believe that our future competitive position will depend in large part on our ability to develop new and enhanced processors, cores and related designs in a timely and cost-effective manner. We believe that these capabilities are necessary to meet the evolving and rapidly changing needs of semiconductor manufacturers and system OEMs in our target markets. To this end, we have assembled a team of highly skilled engineers that possess significant experience in the design and development of complex processors. We are building on this base of experience and the technologies that we have developed to enhance the MIPS RISC architecture and develop a broader line of processors and cores that are optimized for various applications. Our strategy is to use a modular approach that emphasizes re-usable, licensable processors, cores and software technology. We believe that this increased flexibility and modularity will allow our semiconductor licensees to provide high-performance, customized products more quickly to their customers. In addition, we develop and license standardized instruction set architecture and application specific extensions to work within and around our RISC architecture to enhance and tailor the capabilities of our processor designs for specific applications.

    We develop and license our processor designs in several forms. Custom processor designs are intended to address the specific silicon process technology of the manufacturer to which it is licensed. We believe that our ability to provide these custom designs is a competitive advantage. We also generate both high-level description language representations of our custom designs called synthesizable or "soft" cores, and intermediate representations with some process targeting called optimized cores. Synthesizable and optimized cores are flexible and can be licensed to multiple customers and used in multiple applications. Synthesizable cores are delivered as high-level, process independent circuit descriptions, leaving the process implementation details to the system OEM. These designs provide the greatest flexibility to semiconductor companies. Optimized cores are generated using standard ASIC methodologies, including circuit synthesis and automatic place-and-route. The use of optimized cores simplifies and expedites the task of porting a design to a specific manufacturing process. Implementation advantages of a new process technology can be quickly exploited using optimized cores without significant circuit redesign.

    We are working with Microsoft to optimize the MIPS RISC-based processor designs for products running on the Windows CE operating system. The Windows CE operating system, which was developed using the MIPS RISC architecture, targets the general embedded and digital consumer products markets as well as the mobile computing and Windows-based terminals markets. The Windows CE operating system has the advantage of a flexible and modular system and a large installed base of developers who are experienced with Windows API development tools. This could provide system OEMs with a familiar software platform and could accelerate the growth of the digital consumer products market.

    At June 30, 1999, our research and development staff totaled 98 persons compared to 36 employees at June 30, 1998. This increase reflects, in part, the addition of 32 employees operating out of a new development center opened in Denmark in December 1998. Employees staffing this development center engage in product development and provide support and design expertise for our customers based in Europe. We intend to hire additional highly skilled technical personnel to staff our anticipated research and development activities. Research and development expenses were $21.1 million, $43.4 million and $68.8 million in fiscal 1999, 1998 and 1997 respectively.

Sales and Marketing

    Our 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. We license our RISC-based processors, cores 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 we establish form a distribution channel and are an important element of our strategy to proliferate the MIPS RISC architecture as the standard in the embedded processor industry. In establishing these partnerships, we seek to license our technology to those companies we believe can help us grow the overall market shares of MIPS-based products through the use of their design capabilities, sales relationships, manufacturing expertise, applications knowledge or other capabilities.

    We presently have two customers that individually account for more than 10% of our 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 our total revenue for the next few years and, therefore, we expect that a significant portion of our total revenue will continue to be derived from Nintendo and, to a lesser extent, NEC. We understand that the next generation Nintendo video game system will not incorporate any of our technology. Because revenue related to sales of Nintendo 64 video game cartridges is expected to represent a substantial portion of our total revenue, we also expect to experience seasonal fluctuations in our revenue and operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operation—Revenue". For financial information regarding revenue derived from our international licensees, see Note 14 of Notes to Consolidated Financial Statements.

    Although the precise terms of our 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 us or production of semiconductor products by the licensee. Our contracts also provide for the payment of royalties to us based on a percentage of the net revenue earned by the licensee from the sale of products incorporating our technology and, in some cases, based on unit sales of such products. Our contracts with our semiconductor licensees are typically subject to periodic renewal or extension. We also offer licensees the option to license our 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 our marketing activities are also aimed at system OEMs. Through targeted advertising and co-marketing programs with our licensees, we seek to increase awareness of the MIPS RISC architecture. We believe that these efforts will provide product differentiation that will generate demand for our technology from digital consumer product and business equipment manufacturers, thereby increasing demand from semiconductor manufacturers for our designs in their products.

Intellectual Property

    We regard our patents, copyrights, mask work rights, trademarks, trade secrets and similar intellectual property as critical to our success, and rely on a combination of patent, trademark, copyright, mask work and trade secret laws to protect our proprietary rights. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, results of operations and financial condition.

    Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy or otherwise use our technologies, including the marketing and sale of unauthorized MIPS-based clones. We intend to vigorously protect our intellectual property rights through litigation and other means. However, there can be no assurance that we will be able to enforce our rights or prevent other parties from designing and marketing unauthorized MIPS-based products.

    We own 53 U.S. patents on various aspects of our technology, with expiration dates ranging from 2006 to 2017, 26 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 we submitted, that any patents we hold will not be challenged, invalidated or circumvented or that any claims allowed from our patents will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us.

    We also use licensing agreements and employee and third party nondisclosure and assignment agreements to limit access to and distribution of our proprietary information and to obtain ownership of technology prepared on a work-for-hire basis. There can be no assurance that the steps we have taken to protect our intellectual property rights will be adequate to deter misappropriation of such rights or that we will be able to detect unauthorized uses and take immediate or effective steps to enforce our rights. There can also be no assurance that the steps we have taken to obtain ownership of contributed intellectual property will be sufficient to assure our ownership of all proprietary rights.

    We also rely on unpatented trade secrets to protect our proprietary technology. No assurance can be given that others will not independently develop or otherwise acquire the same or substantially equivalent technologies or otherwise gain access to our proprietary technology or disclose such technology or that we can ultimately protect our rights to such unpatented proprietary technology. In addition, no assurance can be given that third parties will not obtain patent rights to such unpatented trade secrets, which patent rights could be used to assert infringement claims against us.

    From time to time we have entered, and in the future may enter, into cross licensing arrangements with others, pursuant to which we license certain of our patents in exchange for patent licenses from such licensees. Although these types of cross licensing arrangements are common in the semiconductor and processor 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.

    We have entered into arrangements with Silicon Graphics pursuant to which certain intellectual property was assigned to us, 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 us; and certain intellectual property was retained by Silicon Graphics without any ongoing interest to us. Our inability to use Silicon Graphics' intellectual property in the future could have a material adverse affect on our business and results of operations.

    In the past, the MIPS Group (a division of Silicon Graphics) has benefited from its status as a division of Silicon Graphics in our 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. There can be no assurance that the separation of our business from that of Silicon Graphics will not adversely affect our ability to negotiate commercially attractive intellectual property licensing arrangements with third parties in the future.

    In addition, in connection with any future intellectual property infringement claims, we will not have the benefit of asserting counterclaims based on Silicon Graphics' intellectual property portfolio, nor will we be able to provide licenses to Silicon Graphics' intellectual property in order to resolve such claims.

Competition

    The market for embedded processors and cores is highly competitive and characterized by rapidly changing technological needs and capabilities. We believe that the principal competitive factors in the embedded processor market are performance, functionality, price, customizability and power consumption. Our processors and cores compete with those of ARM Holdings plc, Hitachi Semiconductor (America) Inc. and Power PC a product family developed and marketed by Motorola, Inc. and IBM Corporation. We also compete against certain semiconductor manufacturers, whose product lines include processors for embedded and non-embedded applications, including Advanced Micro Devices, Inc., Intel Corporation, Motorola, Inc. and National Semiconductor Corporation. In addition, we may face competition from the producers of unauthorized MIPS-based clones and non-RISC based technology designs.

    To remain competitive, we must continue to differentiate our processors, cores and related designs from those available or under development by the internal design groups of semiconductor manufacturers, including our current and prospective manufacturing licensees. 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 our processor 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 we 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 our technology, semiconductor manufacturers may adopt and promote these alternative technologies. Certain of our competitors have greater name recognition and customer bases as well as greater financial and marketing resources than us, and such competition could adversely affect our business, results of operations and financial condition.

Employees

    As of June 30, 1999, we had 139 full time employees. Of this total, 98 were in research and development, 25 were in sales and marketing and 16 were in finance and administration. Our future success will depend in part on our ability to attract, retain and motivate highly qualified technical and management personnel who are in great demand in the semiconductor industry. We intend to hire additional highly skilled technical personnel to staff our anticipated research and development activities. None of our employees are represented by a labor union or subject to a collective bargaining agreement. We believe that our relations with our employees are good.

Item 2. Properties

    Our 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 us 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.

    In addition, we sublease approximately 9,000 square feet of office space from LSI Logic in Copenhagen, Denmark. The lease will expire in February 2006, subject to our earlier termination.

    We believe that these facilities are adequate to meet our current needs but that we may need to seek additional space in the future.

Item 3. Legal Proceedings

    From time to time, we receive communications from third parties asserting patent or other rights covering our products and technologies. Based upon our evaluation, we may take no action or we may seek to obtain a license. There can be no assurance in any given case that a license will be available on terms we consider reasonable, or that litigation will not ensue. In addition, from time to time we evaluate possible patent infringement claims against third parties and may assert such claims if appropriate.

Item 4. Submission of Matters to a Vote of Security Holders.

    No matters were submitted to a vote of security holders during the quarter ended June 30, 1999.

Executive Officers of the Registrant.

    Our executive officers and their ages as of June 30, 1999, were as follows:

    John E. Bourgoin has served as our Chief Executive Officer since February 1998 and our President since September 1996, and has served on our board of directors since May 1997. Mr. Bourgoin also served as a Senior Vice President of Silicon Graphics from September 1996 through May 1998. Prior to joining Silicon Graphics, Mr. Bourgoin was Group Vice President, Computation Products Group at Advanced Micro Devices, Inc.

    Lavi Lev has served as our Senior Vice President—Engineering since March 1998, and was Vice President—Engineering of Silicon Graphics from 1996 to March 1998. From 1995 to 1996, he served as Vice President, Engineering at MicroUnity Systems Engineering and between 1992 and 1995 he was a manager at Sun Microsystems, Inc. Prior to joining Sun Microsystems, Inc., Mr. Lev was employed by Intel Corporation and was involved in the development of the Pentium microprocessor.

    Kevin C. Eichler has served as our Vice President, Chief Financial Officer and Treasurer since May 1998. Prior to joining us and since 1996, Mr. Eichler served as Vice President, Finance, Chief Financial Officer, Treasurer and Secretary of Visigenic Software Inc., an independent provider of software tools for distributed object technologies for the Internet, Intranet and enterprise computing environments. From 1995 to 1996, he served as Executive Vice President, Finance and Chief Financial Officer of National Insurance Group, a provider of technology solutions for financial services companies. From 1991 to 1995, Mr. Eichler served as Executive Vice President, Finance and Chief Financial Officer of Mortgage Quality Management, Inc., a national provider of quality control services and technologies to residential mortgage lenders. Prior to 1991, Mr. Eichler held management positions with NeXT Software and Microsoft.

    Derek Meyer joined us in May 1996 as Director of Worldwide Marketing and Sales, became Vice President—Sales and Marketing in March 1998, and became Vice President of Worldwide Field Operations in September 1999. Prior to joining us and since 1994, Mr. Meyer served as marketing director for the TriMedia division of Philips Semiconductors and prior to that time he was director of SPARC marketing for Sun Microsystems, Inc.

    Sandy Creighton joined us in June 1998 as Vice President, General Counsel and Secretary. Prior to joining us and since 1991, Ms. Creighton was Deputy General Counsel at Sun Microsystems, Inc. Prior to joining Sun Microsystems, Inc., Ms. Creighton was an associate with the law firm Pillsbury, Madison & Sutro in their San Francisco and San Jose offices.

    There is no family relationship between any of our executive officers.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

    Our common stock has been quoted on the NASDAQ National Market under the symbol "MIPS" since our initial public offering on June 30, 1998. Prior to such time, there was no public market for our common stock. Effective April 5, 1999 and in connection with our recapitalization, our common stock, as then quoted on the NASDAQ National Market, was redesignated as Class A common stock. On the effective date of our initial public offering, June 30, 1998, the reported last sale price of our common stock was $13.44 per share. The following table sets forth, for the periods indicated, the high and low reported last sale prices per share of our common stock on the NASDAQ National Market.

    As of September 1, 1999, there were approximately 12 stockholders of record of our Class A common stock. Because many of our Class A common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. Silicon Graphics is the only holder of our Class B common stock. Our Class B common stock is not publicly traded.

    We have never paid or declared any cash dividends on our common stock or other securities and do not anticipate paying cash dividends in the foreseeable future.

Item 6. Selected Consolidated Financial Data.

    You should read the selected consolidated financial data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation" and our consolidated financial statements and the notes to those statements included elsewhere in this report. The selected consolidated financial data set forth below for the fiscal years ended June 30, 1999, 1998, 1997 and 1996 have been derived from our consolidated financial statements which have been audited by Ernst & Young LLP, independent auditors. The data for the fiscal year ended June 30, 1995, is unaudited and, in the opinion of our management, include all adjustments (consisting only of normal recurring accruals) necessary to present fairly our results of operation for the period then ended and our financial position as of such date.

    Effective as of June 1, 1998, our business assets and liabilities were separated from those of Silicon Graphics. Prior to that time, our business was operated as a division of Silicon Graphics. The historical financial information presented below, particularly for periods prior to March 31, 1998, may not be indicative of our future performance and does not necessarily reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone entity during the periods presented. The historical financial information for such periods does not reflect many significant changes that have occurred in our funding and operations and the sources and costs of our revenue as a result of both the separation of our business from that of Silicon Graphics and our shift in strategic direction that occurred at that time.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.

    You should read the following discussion and analysis together with our Consolidated Financial Statements and Notes to those statements included elsewhere in this report. Except for the historical information contained in this Annual Report on Form 10-K, this discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those indicated in these forward-looking statements as a result of certain factors, as more fully described under "Factors That May Affect Our Business," and other risks included from time to time in our other Securities and Exchange Commission ("SEC") reports, copies of which are available from us upon request. The forward-looking statements within this Annual Report on Form 10-K are identified by words such as "believes," "anticipates," "expects," "intends," "may" and other similar expressions. However, these words are not the exclusive means of identifying such statements. We undertake no obligation to update any forward-looking statements included in this discussion.

Overview

    Our predecessor, MIPS Computer Systems, Inc., was founded in 1984 and was engaged in the design and development of RISC processors 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 processor business through its MIPS Group (a division of Silicon Graphics), which focused primarily on the development of high-performance processors for Silicon Graphics' workstations and servers. Until the last few years, cost considerations limited the use of MIPS RISC processors in high-volume digital consumer products. As the cost to manufacture processors 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 licensees and, most notably, by partnering with Nintendo in its design of the Nintendo 64 video game player and related cartridges. In order to increase the focus of the MIPS Group on the design and development of processor intellectual property for the embedded market, effective June 1, 1998, Silicon Graphics separated the business of the MIPS Group from its other operations and transferred to us the assets, liabilities and intellectual property related to this business.

    Revenue related to sales of Nintendo 64 video game players and related cartridges currently accounts for the substantial majority of our revenue. In the short term, we intend to use our operating cash flow, including royalties we receive with respect to sales of Nintendo 64 video game players and related cartridges, to fund processor and related design efforts aimed at the digital consumer products market and to establish and strengthen relationships with semiconductor licensees and system original equipment manufacturers (system OEMs). As part of these efforts, we intend to develop processors with increased flexibility and modularity that will allow our semiconductor licensees, as well as system OEMs, to provide high-performance, customized products more quickly.

    The financial statements for periods prior to the third quarter of fiscal 1998 reflect the historical results of operations, financial position and cash flows of the MIPS Group, certain portions of which were transferred to us by Silicon Graphics in connection with the separation of the two businesses. The financial statements for such periods 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 our business, as adjusted to reflect allocations of certain corporate charges that our management believes are reasonable. Our financial information for periods prior to the third quarter of fiscal 1998 may not necessarily reflect the results of our operations, financial position and cash flows 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 those periods. The financial information for such earlier periods does not reflect the many significant changes that have occurred in our funding and operations and the sources and costs of revenue as a result of both our separation from Silicon Graphics and our shift in strategic direction.

    Our revenue consists of royalties and contract revenue earned under contracts with our licensees and under our agreement with Nintendo. Our contracts with our licensees are typically subject to periodic renewal or extension and expire at various dates through December 2009. We generate royalties from the sale by semiconductor manufacturers of products incorporating our technology. Royalty revenue generally is recognized in the quarter in which a report is received from a licensee detailing the shipments of products incorporating our intellectual property (i.e., generally in the quarter following the sale of the licensee's product to its customer). 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. Under the terms of an agreement with Silicon Graphics entered into in connection with the separation, we also receive all royalties payable by Nintendo relating to sales of Nintendo 64 video game players and related cartridges.

    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 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. 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. 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 us or production of semiconductor chips by the licensee. Engineering services fees are recognized as revenue when defined milestones are completed and the milestone payment is probable of collection. In most instances, the technology we develop, including under engineering services contracts, can be licensed to multiple customers.

    In fiscal 1999, 1998 and 1997, our revenue consisted primarily of royalties which exceeded 80% of our 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.

    Royalties from Nintendo and NEC on sales of Nintendo 64 video game players and related cartridges accounted for approximately 71% of our total revenue for fiscal 1999 and 79% of our total revenue for fiscal 1998. We anticipate that revenue related to sales of Nintendo 64 video game players and related cartridges will continue to represent a significant portion of our total revenue for the next few years. We receive royalties from NEC based on a percentage of the revenue derived by NEC from sales of the processor included in the Nintendo 64 video game player. Current royalties from Nintendo are based on unit sales of Nintendo 64 video game cartridges. We also received royalties from Nintendo with respect to the graphics chip included in Nintendo 64 video game players, and these royalties had a lifetime 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 processors to Nintendo for Nintendo 64 video game players or on royalties from Nintendo with respect to sales of Nintendo 64 video game cartridges.

    The market for home entertainment products is competitive and the introduction of new products or technologies, as well as shifting consumer preferences, could negatively impact the amount and timing of sales of Nintendo 64 video game players and related cartridges. In addition, the eventual introduction of the next generation Nintendo video game system is likely to result in declining sales of Nintendo 64 video game players and related cartridges, although sales of video game cartridges, which account for a significant portion of our royalties, will continue, albeit at a declining rate, for a period of time after the introduction. We developed key elements of the Nintendo 64 system in conjunction with Silicon Graphics. These elements included certain software and graphics technologies which, as a result of our separation from Silicon Graphics and our shift in strategic direction in early 1998, we no longer offer. Accordingly, we will need to generate revenue growth from our stated markets to offset the eventual decline of Nintendo 64 royalties. We understand that the next generation Nintendo video game system will not incorporate any of our technology. We value our relationship with Nintendo; however, there can be no assurance that this relationship will result in any revenues for us other than those generated by the sale of Nintendo 64 video game players and related cartridges. We expect that royalties will continue to represent a significant percentage of our total revenue over the next few years due to our contractual arrangements with Nintendo. The amount, timing and relative mix of royalties and contract revenue is difficult to predict. Factors affecting the amount and timing of our future royalties include:

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the adoption of our technology by digital consumer product and business equipment manufacturers;



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consumer acceptance of products incorporating our technology;



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changes in the average selling prices of semiconductor and digital consumer products and business equipment; and



•

fluctuations in currency exchange rates.

Moreover, our 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.

    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. Factors affecting the amount and timing of our future contract revenue include:

•

the financial terms of our contractual arrangements with our semiconductor licensees, which may provide for significant up-front payments or payments based on the achievement of certain milestones; and



•

the adoption of our technology by semiconductor manufacturers, which is influenced by a number of factors including competitive conditions in the market for processor and core intellectual property.

    Although a substantial portion of our total revenue to date has been derived from royalties and contract revenue relating to sales of Nintendo 64 video game products, we expect that royalties and contract revenue related to sales of other digital consumer products, such as handheld personal computers, cellular telephones and set-top boxes, as well as other video game products, will constitute an increasingly significant portion of our total revenue. Our ability to diversify our revenue base will depend primarily on the number and variety of design wins we obtain from digital consumer product and business equipment manufacturers, and consumer acceptance of products that incorporate our technology. We generally do not have a direct contractual relationship with digital consumer product manufacturers, and the royalty reports submitted by our semiconductor licensees generally do not disclose which consumer products include our RISC technology. As a result, it is difficult for us to identify or predict the extent to which our future revenue will be dependent upon a particular digital consumer product or product manufacturer.

    Because revenue related to sales of digital consumer products is expected to represent a substantial portion of our total revenue over the next several years, we expect to experience seasonal fluctuations in our revenue and operating results. We typically record royalty revenue from our licensees, including Nintendo, in the quarter following the sale of the related digital consumer product. Because a disproportionate amount of Nintendo 64 video game cartridges are typically sold in the second fiscal quarter (which includes the holiday selling season), we have realized a disproportionate amount of our revenue and operating income in our third fiscal quarter. As we increase our focus on processors, cores and related designs for high-volume digital consumer products, similar seasonal fluctuations in our revenue and operating results can be expected to continue.

    A significant portion of our total revenue has been and is expected to continue to be derived from a limited number of semiconductor companies. Revenue from our top two semiconductor company licensees represented an aggregate of 18% of our total revenue in both fiscal 1999 and fiscal 1998 and 29% of our total revenue in fiscal 1997. Although we continue to broaden our base of licensees, it is likely that our revenue will continue to be concentrated at the semiconductor licensee 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 our licensees sell products incorporating our technology. Accordingly, the identity of particular licensees that will account for any such revenue concentration will vary from period to period and may be difficult to predict. The non-renewal of contracts by our semiconductor company licensees could adversely affect our future operating results.

    To date, companies based in Japan have accounted for the substantial majority of our total revenue, and nearly all of our international revenue. International revenue accounted for approximately 90% of our total revenue in both fiscal 1999 and fiscal 1998 and 87% of our total revenue in fiscal 1997. Substantially all of this revenue has been denominated in U.S. dollars. We expect that revenue derived from international licensees, primarily in Asia, will continue to represent a significant portion of our total revenue.

Costs and Expenses

    Our costs and expenses include cost of contract revenue, research and development expenses, sales and marketing expenses and general and administrative expenses.

Cost of Contract Revenue

    Cost of contract revenue presently consists primarily of sublicense fees. We incur an obligation to pay these fees when we sublicense to our customers technology that we have licensed from third parties. Sublicense fees are recognized as cost of contract revenue when the obligation is incurred, which is typically the same period in which the related revenue is recognized. Prior to fiscal 1998, cost of contract revenue also included nonrecurring engineering service costs directly related to a development agreement with a specific licensee, which were expensed as incurred over the period of services. We believe that future cost of contract revenue will be minimal.

Research and Development

    The separation of our business from that of Silicon Graphics and our shift in strategic direction has significantly impacted our research and development cost structure. The markets we presently target allow us to use relatively small design teams and to rely largely on industry standard third-party design tools. By contrast, Silicon Graphics' complex processor requirements and its need to develop and maintain proprietary design tools demanded that the MIPS Group employ large design teams. As a result, we have been able to reduce our staffing requirements and costs.

    At December 31, 1997, our research and development staff totaled 221 persons. In the third quarter of fiscal 1998, we reduced our research and development staff by 185 persons, reflecting the transfer to Silicon Graphics of employees engaged in the development of next generation processors for Silicon Graphics' systems as well as other staff reductions associated with the separation and shift in strategic direction.

    At June 30, 1999, our research and development staff totaled 98 persons, compared to 36 persons at June 30, 1998. This increase reflects in part the addition of 32 employees to staff our research and development activities in a new development center in Copenhagen, Denmark that began operations in December 1998. These employees are engaged in product development and also provide support and design expertise for our European-based customers. We expect that our research and development staff and expenses will increase as we continue to develop new designs for the digital consumer products and business equipment markets.

    The costs we incur with respect to internally developed technology and engineering services are included in research and development expense as they are incurred and are not directly related to any particular licensee, license agreement or license fee.

Sales and Marketing

    Sales and marketing expenses include salaries, travel expenses and costs associated with direct marketing, advertising and other marketing efforts. Costs of technical support are also included in sales and marketing expenses. Our sales and marketing efforts are directed at establishing and supporting licensing relationships with semiconductor manufacturers, fabless semiconductor companies and system OEMs. At June 30, 1999, our sales and marketing staff totaled 25 persons. Our sales and marketing staff and related expenses are expected to increase as we seek to diversify our revenue base.

General and Administrative

    Historically, a significant portion of our general and administrative expenses have reflected an allocation of corporate overhead by Silicon Graphics based on headcount and a percentage allocation based on certain factors including net sales, headcount and relative expenditure levels. Presently, certain facilities services are provided to us pursuant to an agreement with Silicon Graphics. Our general and administrative expenses have grown substantially since the separation due, in part, to costs related to our status as a stand-alone entity such as increased legal and patent related costs and expenses related to compliance with the reporting and other requirements of a publicly traded company. We expect our general and administrative expenses will remain relatively stable in the near future.

Results of Operation—Years Ended June 30, 1999, 1998 and 1997

    Our total revenue in fiscal 1999, 1998 and 1997 were as follows:

    Total revenue consisted of royalty revenue and contract revenue. Total revenue increased by $14.9 million in fiscal 1999 primarily due to an increase in contract revenue as we entered into technology licensing agreements with both new and existing licensees. Royalties for fiscal 1999, 1998 and 1997 consisted of royalties from sale by semiconductor manufacturers of products incorporating our technology and from sales of Nintendo 64 video game players and related cartridges. The significant increase in royalties in fiscal 1998 from fiscal 1997 reflects royalties received from Nintendo and NEC related to sales of Nintendo 64 video game players and related cartridges. We earned our 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 1999 consists of fees generated from new license agreements entered into during fiscal 1999 and included engineering service fees earned upon our achievement of defined milestones. 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.

    Our costs of contract revenue in fiscal 1999, 1998 and 1997 were as follows:

    Cost of contract revenue in fiscal 1999 and 1998 was principally attributable to sublicense fees and in fiscal 1997 was principally attributable to non-recurring engineering fees related to Nintendo 64 video game system development. We believe that future cost of contract revenue will be minimal.

    Research and development expenses in fiscal 1999, 1998 and 1997 were as follows:

    The $22.3 million decrease in fiscal 1999 from fiscal 1998 reflects the separation of our business from that of Silicon Graphics as well as the change in our strategic direction in the second half of fiscal 1998. Research and development expenses for the first half of fiscal 1998 and for all of fiscal 1997 reflect the operations of the MIPS Group, a division of Silicon Graphics, which had a staff of 221 persons at December 31, 1997. Because the markets we have targeted allow us to use relatively small design teams and to rely largely on industry standard third-party design tools, we reduced our research and development staff by approximately 185 persons in connection with the separation during the second half of fiscal 1998.

    Sales and marketing expenses in fiscal 1999, 1998 and 1997 were as follows:

    The increase in fiscal 1999 was primarily due to an increase in our licensing and marketing activities. The decrease in fiscal 1998 was primarily due to a decrease in advertising and promotional spending.

    General and administrative expenses in fiscal 1999, 1998 and 1997 were as follows:

    The increase in fiscal 1999 over both fiscal 1998 and 1997 reflects the existence of legal and administrative costs related to our status as a publicly traded company that we did not incur prior to our separation from Silicon Graphics.

    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 our shift in strategic direction.

    Interest income was $1.6 million in fiscal 1999 compared to interest expense of $7,000 and $50,000 in fiscal 1998 and 1997, respectively. The interest income was earned from the investment of the net cash proceeds of approximately $16.0 million from our July 1998 initial public offering and the cash generated from our operating activities during fiscal 1999.

    On May 13, 1999, the effective date of a secondary offering of our common stock by Silicon Graphics, Silicon Graphics' ownership interest in us was reduced to approximately 67%. Because Silicon Graphics now owns less than 80% of our outstanding Class A and Class B common stock, we will no longer be included in Silicon Graphics' consolidated federal income tax group, but will instead be required to file separate tax returns. While we were a part of Silicon Graphics' consolidated group for federal income tax purposes, we were responsible for our income taxes through a tax sharing agreement with Silicon Graphics. To the extent we produced taxable income, losses or credits, we made or received payments as though we filed separate federal, state and local income tax returns. We recorded a provision for income taxes of $15.1 million in fiscal 1999 based on an estimated federal and state combined rate of 40% on income before taxes. Because our tax sharing agreement provides that we do not receive any benefit for losses incurred or have any tax liability for any income earned up to the closing of our initial public offering in July 1998, no income tax provision or benefit was reflected in fiscal 1998 and 1997.

Impact of Currency

    Certain of our 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 our revenue from international customers has been denominated in U.S. dollars. However, to the extent that sales to digital consumer product manufacturers by our manufacturing licensees are denominated in foreign currencies, royalties we receive on such sales could be subject to fluctuations in currency exchange rates. In addition, if the effective price of the technology we sell to our licensees were to increase as a result of fluctuations in foreign currency exchange rates, demand for technology could fall which would, in turn, reduce our royalties. We are unable to predict the amount of non-U.S. dollar denominated revenue earned by our licensees and, therefore, have not attempted to mitigate the effect that currency fluctuations may have on our royalty revenue.

Liquidity and Capital Resources

    Our principal capital requirements are to fund working capital needs, and to a lesser extent capital expenditures, in order to support our revenue growth. Prior to our initial public offering in July 1998, our capital requirements were satisfied by funds provided by Silicon Graphics through its cash management system. Since the initial public offering, we have not participated in Silicon Graphics' cash management system and Silicon Graphics has not provided additional funds to finance our operations.

    At June 30, 1999, we had cash and cash equivalents of $49.9 million and working capital of $35.0 million. For the fiscal year ended June 30, 1999, our operating activities provided net cash of $38.1 million, primarily reflecting net income and an increase in accounts payable and accrued liabilities, as well as depreciation and other non-cash charges, partially offset by an increase in accounts receivable. The increase in accounts payable and accrued liabilities was the result of accrued income taxes and an increase in accrued compensation related to higher staffing levels, as well as accumulated performance bonuses and increased accrued administrative costs associated with being a public company. The increase in accounts receivable was due to amounts owed to us under new license agreements entered into during the period. For the fiscal year ended June 30, 1998, our operating activities provided net cash of $4.4 million, primarily reflecting approximately $7.1 million of non-cash depreciation and restructuring charges offset in part by a decrease in accounts payable of $2.7 million. For the fiscal year ended June 30, 1997, our operating activities used net cash of $34.7 million, primarily reflecting net loss as well as an increase in other assets and liabilities, offset in part by depreciation and other non-cash charges.