MIPS 10Q 2001 Q2 Quarterly report

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

FORM 10-Q

(Mark One)

/x/	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000

/ /	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from to

Commission file number 000-24487

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

DELAWARE
(State or other jurisdiction of
Incorporation or organization)

77-0322161
(I.R.S. Employer
Identification Number)

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 /x/ No / /

As of February 1, 2001, the number of outstanding shares of the Registrant's Class A common stock, $.001 par value, was 13,730,864. As of February 1, 2001, the number of outstanding shares of the Registrant's Class B common stock, $.001 par value, was 25,064,149.

PART I—FINANCIAL INFORMATION

		Page
Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Results of Operations and Financial Condition	9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	18
Item 4.	Submission of Matters to a Vote of Security Holders	18
Item 6.	Exhibits and Reports on Form 8-K	19
Signatures		20

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

MIPS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

			December 31, 2000			June 30, 2000
			(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	102,296		$	84,359
	Accounts receivable			8,711			9,175
	Prepaid expenses and other current assets			9,174			8,002

		Total current assets		120,181			101,536
Equipment and furniture, net				9,141			6,742
Other assets				1,430			974

			$	130,752		$	109,252

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	4,273		$	2,270
	Accrued liabilities			14,809			10,180
	Deferred revenue			3,380			4,598

		Total current liabilities		22,462			17,048
Stockholders' equity:
	Common stock			39			38
	Additional paid-in capital			158,895			153,627
	Accumulated deficit			(50,644	)		(61,461	)

		Total stockholders' equity		108,290			92,204

			$	130,752		$	109,252

See accompanying notes.

MIPS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(In thousands, except per share data)

			Three Months Ended December 31,				Six Months Ended December 31,
			2000		1999		2000		1999
Revenue:
	Royalties		$	9,234	$	13,642	$	18,098	$	25,472
	Contract revenue			12,008		7,852		24,199		14,969

		Total revenue		21,242		21,494		42,297		40,441
Costs and expenses:
	Cost of contract revenue			250		—		250		500
	Research and development			7,671		7,144		15,324		13,253
	Sales and marketing			3,649		2,084		7,142		4,370
	General and administrative			2,026		1,964		4,244		4,131

		Total costs and expenses		13,596		11,192		26,960		22,254

Operating income				7,646		10,302		15,337		18,187
Other income, net				1,664		824		3,232		1,462

Income before income taxes				9,310		11,126		18,569		19,649
Provision for income taxes				3,724		4,500		7,427		7,909

Net income			$	5,586	$	6,626	$	11,142	$	11,740

Basic net income per share			$	0.14	$	0.17	$	0.29	$	0.31

Diluted net income per share			$	0.14	$	0.17	$	0.27	$	0.30

Shares used in computing basic net income per share				38,680		37,900		38,600		37,763

Shares used in computing diluted net income per share				40,358		39,819		40,746		39,633

See accompanying notes.

MIPS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands)

					Six Months Ended December 31,
					2000			1999
Operating activities:
	Net income				$	11,142		$	11,740
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation				1,646			1,150
		Other non-cash charges				76			135
		Changes in operating assets and liabilities:
			Accounts receivable			464			(4,325	)
			Accounts payable			2,003			494
			Other assets and liabilities, net			1,707			4,056

				Net cash provided by operating activities		17,038			13,250
Investing activities—capital expenditures						(4,045	)		(1,550	)
Financing activities—net proceeds from issuance of common stock						5,020			8,616
Foreign currency translation adjustment						(76	)		(78	)

Net increase in cash and cash equivalents						17,937			20,238
Cash and cash equivalents, beginning of period						84,359			49,916

Cash and cash equivalents, end of period					$	102,296		$	70,154

See accompanying notes.

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). MIPS Technologies' 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, Inc. 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. In order to increase the focus of the MIPS Group on the design and development of processor applications dedicated to the embedded market, in December 1997, Silicon Graphics initiated a plan to separate the business of the MIPS Group from its other operations.

In April 1998, 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. From the closing of our initial public offering on July 6, 1998 and until June 20, 2000, we were a majority owned subsidiary of Silicon Graphics. On June 20, 2000, 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, 2000 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, 2000, included in our 2000 Annual Report on Form 10-K.

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):

		Three Months Ended December 31,						Six Months Ended December 31,
		2000			1999			2000			1999
Numerator:
	Net income available to common stockholders	$	5,586		$	6,626		$	11,142		$	11,740

Denominator:
	Weighted-average shares of common stock outstanding		38,706			37,915			38,628			37,778
	Less: Weighted-average shares subject to repurchase		(26	)		(15	)		(28	)		(15	)

Shares used in computing basic net income per share			38,680			37,900			38,600			37,763
	Effect of dilutive securities—employee stock options and shares subject to repurchase		1,678			1,919			2,146			1,870

Shares used in computing diluted net income per share			40,358			39,819			40,746			39,633

Basic net income per share		$	0.14		$	0.17		$	0.29		$	0.31
Diluted net income per share		$	0.14		$	0.17		$	0.27		$	0.30
Potentially dilutive securities excluded from diluted net income per share computation because they are anti-dilutive			1,570			24			785			25

Note 3. Comprehensive Income

In the first six months of fiscal 2001 and 2000, the currency translation adjustment was not material and, therefore, total comprehensive income closely approximated net income in each period presented.

Note 4. Contingencies

On November 12, 1999, Lexra, Inc. filed counterclaims against us seeking a declaratory judgment that the two asserted patents are invalid and not infringed. Lexra has also asserted claims for common law unfair competition, intentional interference with business relations, and statutory unfair competition, all purportedly based on the allegation that our claims of patent infringement have been made in bad faith. Discovery is currently ongoing in the lawsuit, but a trial date has not yet been set by the Court.

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.

We are not aware of any pending disputes, including those discussed above that we believe would adversely affect our results of operations or financial condition.

Note 5. Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Financial Instruments and for Hedging Activities" (later replaced by SFAS No. 137), which provides comprehensive and consistent standards for the recognition and measurement of derivatives and hedging activities. As a result, we were required to adopt SFAS 133 as of July 1, 2000. The adoption of this statement did not have a material impact on our consolidated financial statements.

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes the SEC staff's views in applying generally accepted accounting principles to revenue recognition. We are currently in the process of evaluating SAB 101 and what effect it may have on our financial statements. We have not yet determined whether the adoption of SAB 101 will have a material impact on our financial position or results of operations. In the event that the adoption of SAB 101 requires us to report a change in accounting principle related to our revenue recognition policy, we would be required to report such change no later than the quarter ending June 30, 2001.

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.

Results of Operations

Revenue. Our revenue consists of royalties and contract revenue earned under contracts with our licensees. We generate royalties from the sale by our licensees of products incorporating our technology including royalties from Nintendo relating to sales of Nintendo 64 video game players and related cartridges. Royalties may be calculated as a percentage of the revenue received by the seller on sales of such products or on a per unit basis. Contract revenue includes technology license fees and engineering service fees. 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. Fees related to engineering services, which are performed on a best effort basis, are recognized as revenue when the defined milestones are achieved and collectibility of the milestone payment is probable. The technology we develop is generally licensed to multiple customers.

Total revenue for the second quarter of fiscal 2001 was $21.2 million and for the first six months of fiscal 2001 was $42.3 million compared to $21.5 million and $40.4 million for the comparable periods in fiscal 2000. Total revenue excluding royalties from Nintendo 64 game products grew 54% during the second quarter of fiscal 2001 and 57% during the first six months of fiscal 2001 over the comparable periods in fiscal 2000. Royalties for the second quarter of fiscal 2001 were $9.2 million and for the first six months of fiscal 2001 were $18.1 million compared to $13.6 million and $25.5 million for the comparable periods in fiscal 2000. The decreases were due primarily to lower royalties derived from sales of Nintendo products. As the Nintendo 64 video game product line continues further into its life cycle, we expect that sales of such products and the related royalties we receive will generally trend downward, subject to seasonal fluctuations and the impact of particular game titles introduced by Nintendo from time to time. Royalties excluding royalties from Nintendo 64 game products grew 56% in the second quarter of fiscal 2001 and 42% in the first six months of fiscal 2001 over the comparable periods in fiscal 2000. Contract revenue for the second quarter of fiscal 2001 was $12.0 million and for the first six months was $24.2 million compared to $7.9 million and $15.0 million for the same periods in fiscal 2000. The increase was the result of technology license fees from new agreements and engineering service fees earned upon our achievement of defined milestones. We expect that contract revenue, except for seasonal fluctuations in royalties, will be greater than 50% of our total revenue for the next several quarters.

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 was $250,000 for both the second quarter and first six months of fiscal 2001, compared to no cost of contract revenue in the second quarter of fiscal 2000 and $500,000 for the first six months of fiscal 2000. We expect that in future periods cost of contract revenue will be minimal.

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 fiscal 2001 were $7.7 million and for the first six months of fiscal 2001 were $15.3 million compared with research and development expenses of $7.1 million and $13.3 million for the comparable periods in fiscal 2000. The increases in research and development expenses were due to the addition of resources and tools to support various project development activities, including the addition of 16 employees to the development team during the past twelve months. These increases were partially offset by lower requirements for contractors needed to meet project milestones. We expect research and development expenses to increase in the foreseeable future as we continue to develop new designs for the digital consumer products market and the market for embedded processors.

Sales and Marketing. Sales and marketing expenses for the second quarter of fiscal 2001 were $3.6 million and for the first six months of fiscal 2001 were $7.1 million compared to $2.1 million and $4.4 million for the comparable periods in fiscal 2000. The increases in sales and marketing expenses were due to additional resources hired to support our increasing licensing and third party tools and applications activities. We increased our sales and marketing staff to 49 persons as of December 31, 2000, from 26 persons as of December 31, 1999, to support this growth.

General and Administrative. General and administrative expenses for the second quarter of fiscal 2001 were $2.0 million and for the first six months of fiscal 2001 were $4.2 million compared to $2.0 million and $4.1 million for the comparable periods in fiscal 2000.

Other Income, Net. For the second quarter of fiscal 2001, other income, net, was $1.7 million and for the first six months of fiscal 2001 was $3.2 million, compared to other income, net, of $824,000 and $1.5 million for the comparable periods in fiscal 2000. The increase was primarily due to interest income earned from the investment of cash generated from our operating activities and from issuance of common stock under our stock plans.

Income Taxes. We recorded a provision for income taxes of $3.7 million for the second quarter of fiscal 2001 and $7.4 million for the first six months of fiscal 2001, compared to $4.5 million and $7.9 million for the same periods in fiscal 2000 based on an estimated combined statutory federal and state income tax rate of 40%.

Financial Condition

At December 31, 2000, we had cash and cash equivalents of $102.3 million and total working capital of $97.7 million.

Our operating activities provided net cash of $17.0 million for the six months ended December 31, 2000 compared to $13.3 million for the comparable period in the prior year. During the six months ended December 31, 2000, net cash provided by operating activities consisted mainly of net income and an increase in accounts payable and other assets and liabilities. The increase in accounts payable was due to the timing of asset purchases and related payments. The increase in other assets and liabilities was primarily due to the tax provision for the first half of fiscal 2001, offset by a decrease in deferred revenue.

Net cash used in investing activities was $4.0 million for the six months ended December 31, 2000 compared to $1.6 million for the comparable period in the prior year. Net cash used in investing activities in both periods represents equipment purchases and licensing of computer aided design tools used in development. Capital expenditures have been, and future expenditures are anticipated to be, primarily for facilities, equipment to support expansion of our operations and licensing of computer aided design tools used in development.

Net cash provided by financing activities was $5.0 million for the six months ended December 31, 2000 compared to $8.6 million for the comparable period in the prior year. Net cash provided in both periods resulted from the exercise of employee stock options.

Our future liquidity and capital requirements are expected to vary significantly from quarter to quarter, depending on numerous factors, including, among others:

•: the cost, timing and success of product development efforts;
•: the cost and timing of sales and marketing activities;
•: the extent to which our existing and new technologies gain market acceptance;
•: the level and timing of contract revenues and royalties;
•: competing technological and market developments; and
•: the cost of maintaining and enforcing patent claims and other intellectual property rights.

We believe that cash generated by our operations, together with our existing cash balance, will be sufficient to meet our projected operating and capital requirements for the foreseeable future. However, we may in the future be required to raise additional funds through public or private financing, strategic relationships or other arrangements. Additional equity financing may be dilutive to holders of our common stock, and debt financing, if available, may involve restrictive covenants. Moreover, strategic relationships, if necessary to raise additional funds, may require that we relinquish our rights to certain of our technologies. Our failure to raise capital when needed could adversely affect our business, results of operations and financial condition.

On June 20, 2000, Silicon Graphics distributed all of the shares of our common stock that it owned in a transaction intended to be tax-free to Silicon Graphics and its stockholders. Our ability to issue additional shares of our common stock in connection with acquisitions or to raise equity capital during the 30 month period following this distribution is limited under the terms of a distribution tax indemnification agreement which we entered into with Silicon Graphics. The agreement contains covenants under which we may not issue capital stock in an acquisition or private or public offering within the 30-month period following the tax-free distribution, except:

•: pursuant to the exercise of employee, director or consultant stock options or awards and
•: for the issuance of up to a cumulative amount of 10% of our outstanding stock at the time of the tax-free distribution unless certain conditions are met.

Factors That May Affect Our Business

Factors negatively affecting sales of Nintendo 64 video game players and related cartridges could adversely affect us. Royalties from Nintendo and NEC Corporation relating to Nintendo 64 video game players and related cartridges accounted for 26% of our total revenue for both the second quarter and first six months of fiscal 2001 compared to 53% and 51% for the comparable periods in the prior year. We anticipate that royalties related to Nintendo 64 game products, while continuing to represent a significant portion of our total revenue for the next year, will continue to decline. If we cannot replace these lost revenues, our revenue will decline. Further, if these royalties decline by an amount

significantly greater than we have estimated our results of operations and financial condition could be adversely affected. 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 game products.

We must diversify our sources of revenue to offset the decline in revenue we derive from sales of Nintendo video game products. The next generation Nintendo video game system will not incorporate our technology. Our ability to diversify our sources of revenue is uncertain and will depend on whether our processors and related designs are selected for design into a broader range of digital consumer products and business equipment, which we refer to as design wins. Our ability to achieve design wins is subject to several risks and uncertainties, including:

•: the potentially limited opportunities for design wins with respect to certain digital consumer products, such as video game products, due to a limited number of product manufacturers and the length of product life cycles; and
•: the risk that the performance, functionality, price and power characteristics of our designs may not satisfy those that are critical to specific digital consumer product applications.

Even if our technology is incorporated into new products, we cannot be certain that any such products will ultimately be brought to market, achieve commercial acceptance or generate meaningful royalties for us.

We depend on semiconductor companies and manufacturers of digital consumer products to adopt our technology and use it in the products they sell. The adoption and continued use of our technology by semiconductor companies and digital consumer product manufacturers is essential to our continued success. We face numerous risks in obtaining agreements with semiconductor companies and digital consumer product manufacturers on terms consistent with our business model, including:

•: investing the time and money required to build a relationship with a potential licensee;
•: potential competition with the internal design teams of semiconductor companies and digital consumer product manufacturers;
•: potential difficulties in persuading large semiconductor companies and digital consumer product manufacturers to work with us, to rely on us for critical technology, and to disclose to us proprietary manufacturing technology; and
•: potential difficulties in persuading potential licensees to bear certain development costs associated with our technology and to produce embedded processors using our technology.

We cannot assure you that we will be able to maintain our current relationships or establish new relationships with additional licensees, and any failure by us to do so could have a material adverse effect on our business.

Moreover, we are subject to risks beyond our control that influence the success or failure of a particular semiconductor company or digital consumer product manufacturer, including:

•: the competition it faces and the market acceptance of its products;
•: its engineering, marketing and management capabilities and the technical challenges unrelated to our technology that it faces in developing its products; and
•: its financial and other resources.

None of our current licensees are obligated to license new or future generations of our processor designs. In addition, because we do not control the business practices of our licensees, we do not

influence the degree to which our licensees promote our technology or set the prices at which the products incorporating our technology are sold.

Our quarterly financial results are subject to significant fluctuations that could adversely affect our stock price. Our quarterly financial results may vary significantly due to a number of factors, many of which are outside of our control. In addition, our revenue components are difficult to predict and may fluctuate significantly from period to period. Because our expenses are largely independent of our revenue in any particular period, it is difficult to accurately forecast our operating results. Our operating expenses are based, in part, on anticipated future revenue and a high percentage of our expenses are fixed in the short term. As a result, if our revenue is below expectations in any quarter, the adverse effect may be magnified by our inability to adjust spending in a timely manner to compensate for the revenue shortfall.

In light of the foregoing, we believe that quarter-to-quarter comparisons of our revenue and operating results may not be a good indication of our future performance. In addition, it is possible that in some future periods our results of operations may be below the expectations of public market analysts and investors. In this event, the price of both our Class A common stock and Class B common stock may fall.

Factors that could cause our revenue and operating results to vary from quarter to quarter include:

•: the demand for and average selling prices of semiconductor products that incorporate our technology;
•: the financial terms and delivery schedule of our contractual arrangements with our licensees, which may provide for significant up-front payments or payments based on the achievement of certain milestones;
•: the relative mix of contract revenue and royalties;
•: competitive pressures resulting in lower contract revenue or royalty rates;
•: our ability to develop, introduce and market new processor intellectual property;
•: the establishment or loss of licensing relationships with semiconductor companies or digital consumer product manufacturers;
•: the timing of new products and product enhancements by us and our competitors;
•: changes in development schedules, research and development expenditure levels and product support by us and digital consumer product manufacturers;
•: seasonal fluctuations; and
•: general economic and market conditions.

We depend on the emerging market for digital consumer products and consumer acceptance of the products that incorporate our technology. The digital consumer products industry is presently the primary market for our processor, core and related designs. The market for digital consumer products is relatively new and emerging, and our success will depend largely on the level of consumer interest in digital consumer products, many of which have only recently been introduced to the market. In addition, the timing and amount of royalties we receive will depend on consumer acceptance of the products that incorporate our technology. We cannot assure you that any products that incorporate our technology will achieve commercial acceptance or generate meaningful royalties for us.

Our dependence on the digital consumer products industry involves several risks and uncertainties, including:

•: changes in consumer requirements and preferences;

•: the introduction of products by our competitors embodying new technologies or features; and
•: the current lack of open industry standards for hardware and software in the digital consumer products industry.

If we are unable to develop enhancements and new generations of our intellectual property, we may be unable to achieve design wins. Our future success will depend on our ability to develop enhancements and new generations of our processors, cores and other intellectual property that satisfy the requirements of specific product applications and introduce these new technologies to the marketplace in a timely manner. If our development efforts are not successful or are significantly delayed, or if the characteristics of our processor and related designs are not compatible with the requirements of specific product applications, our ability to achieve design wins would be limited. Our failure to achieve a sufficient number of design wins could adversely affect our business, results of operations and financial condition.

Technical innovations of the type critical to our success are inherently complex and involve several risks, including:

•: our ability to anticipate and timely respond to changes in the requirements of semiconductor companies, digital consumer product and original equipment manufacturers or OEMs;
•: our ability to anticipate and timely respond to changes in semiconductor manufacturing processes;
•: changing consumer preferences in the digital consumer products market;
•: the emergence of new standards in the semiconductor, digital consumer product or OEM industries;
•: the significant investment that is often required before commercial viability is determined; and
•: the introduction by our competitors of products embodying new technologies or features.

Our failure to adequately address these risks could render our existing processor, core and related designs obsolete and could adversely affect our business, results of operations and financial condition. In addition, we cannot assure you that we will have the financial and other resources necessary to develop processor, core and related designs in the future, or that any enhancements or new generations of the technology that we develop will generate revenue in excess of the costs of development.

Our intellectual property may be misappropriated or subject to claims of infringement. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements and employee and third-party nondisclosure and assignment agreements. 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.

Policing the unauthorized use of our intellectual property is difficult, and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. In addition, we cannot be certain that we will be able to prevent other parties from designing and marketing unauthorized MIPS-based products or that others will not independently develop or otherwise acquire the same or substantially equivalent technologies as ours. Moreover, cross licensing arrangements, in which we license certain of our patents but do not generally transfer know-how or other proprietary information, may facilitate the ability of cross-licensees, either alone or in conjunction with others, to develop competitive products and designs.

We cannot assure you that any of our patent applications will be approved or that any of the patents that we own will not be challenged, invalidated or circumvented by others or be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Significant litigation regarding intellectual property rights exists in our industry. We cannot be certain that third parties will not make a claim of infringement against us or against our licensees or digital consumer product manufacturers in connection with their use of our technology. Any claims, even those without merit, could be time consuming to defend, result in costly litigation and/or require us to enter into royalty or licensing agreements. These royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all. A successful claim of infringement against us or one of our licensees in connection with its use of our technology could adversely affect our business.

If we fail to compete effectively in the market for embedded processors, our business will be adversely affected. Competition in the market for embedded processors is intense. We believe that the principal competitive factors in our industry are performance, functionality, price, customizability and power consumption. We cannot assure you that we will be able to compete successfully with respect to these factors or that competitive pressures will not materially and adversely affect our business, results of operations and financial condition. We compete with other designers and developers of processors and cores, as well as semiconductor manufacturers whose product lines include processors for embedded and non-embedded applications. 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 also differentiate our processors, cores and related designs from those available or under development by the internal design groups of semiconductor companies, including some of our current and prospective licensees. Many of these internal design groups have substantial programming and design resources and are part of larger organizations with substantial financial and marketing resources. These internal design groups may develop products that compete directly with ours or may actively seek to license their own technology to third-party semiconductor companies.

Many of our existing competitors, as well as a number of potential new competitors, have longer operating histories, greater brand recognition, larger customer bases as well as greater financial and marketing resources than we do. This may allow them to respond more quickly than we can to new or emerging technologies and changes in customer requirements. It may also allow them to devote greater resources than we can to the development and promotion of their technologies and products.

We may not be able to recruit and retain the personnel required to succeed. Our future success depends to a significant extent on the continued contributions of our key management, technical, sales and marketing personnel, many of who are highly skilled and difficult to replace. We intend to hire additional highly skilled personnel, particularly technical personnel, for our anticipated research and development activities. Competition for qualified personnel, particularly those with significant experience in the semiconductor and processor design industries, is intense. The loss of the services of any of our key personnel or our inability to attract and retain qualified personnel in the future could adversely affect our business, results of operations and financial condition. In particular, our ability to hire and retain qualified engineering personnel is essential to meet our business goals. Our ability to continue to grow successfully requires an effective planning and management process. Our growth has placed, and the recruitment and integration of additional employees will continue to place, a strain on our resources.

Factors that negatively affect our licensees could adversely affect our business. To date, a significant portion of our total revenue has been derived from a limited number of companies. Accordingly, factors negatively affecting a particular licensee could adversely affect our results of operations and financial condition if such licensee accounts for a significant portion of our revenue at the time. We are subject to many risks beyond our control that influence the success of our licensees,

including, for example, the highly competitive environment in which they operate, the market for their products, their engineering capabilities and their financial and other resources.

Revenue from our top two licensees excluding Nintendo represented an aggregate of 27% of our total revenue in the second quarter and 25% in the first six months of fiscal 2001 compared to 20% and 17% of our total revenue in the comparable periods during the prior year. We may experience similar revenue concentration in the future, although the identity of the particular licensees that will account for this revenue concentration may vary from period to period depending on the addition or expiration of contracts, the nature and timing of payments due under our contracts and the volumes and prices at which our licensees sell products incorporating our technology.

Our revenue is subject to fluctuations in currency exchange rates. A substantial portion of our revenue has been, and is expected to continue to be, derived from customers located outside the United States, primarily in Japan. To date, substantially all of our revenue from international customers has been denominated in U.S. dollars. However, to the extent that the sales by our licensees to their customers are denominated in foreign currencies, the 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 due to fluctuations in foreign currency exchange rates, demand for our technology could fall, which would, in turn, reduce our royalties. Because we cannot predict the amount of non-U.S. dollar denominated revenue earned by our licensees, we have not historically attempted to mitigate the effect that currency fluctuations may have on our revenue, and we do not presently intend to do so in the future.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are exposed to interest rate risk on investments of our excess cash. The primary objective of our investment activities is to preserve capital. To achieve this objective and minimize the exposure due to adverse shifts in interest rates, we invest in high quality short-term maturity commercial paper and money market funds operated by reputable financial institutions in the United States. Due to the nature of our investments, we believe that we do not have a material interest rate risk exposure.

We are exposed to fluctuations in currency exchange rates because a substantial portion of our revenue has been, and is expected to continue to be, derived from customers located outside the United States, primarily in Japan. To date, substantially all of our revenue from international customers has been denominated in U.S. dollars. Because we cannot predict the amount of non-U.S. dollar denominated revenue earned by our licensees, we have not historically attempted to mitigate the effect that currency fluctuations may have on our revenue, and we do not presently intend to do so in the future.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On October 28, 1999, we filed suit against Lexra, Inc. in the United States District Court for the Northern District of California for infringement of two United States patents. We subsequently amended our suit to cover two subsequently released Lexra products. On November 12, 1999, Lexra, Inc. filed counterclaims against us seeking a declaratory judgment that the two asserted patents are invalid and not infringed. Lexra has also asserted claims for common law unfair competition, intentional interference with business relations, and statutory unfair competition, all purportedly based on the allegation that our claims of patent infringement have been made in bad faith. Discovery is currently ongoing in the lawsuit, but a trial date has not yet been set by the Court.

We are not aware of any pending disputes including that discussed above that we believe would adversely affect our business, results of operations or financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)

We held our Annual Meeting of Stockholders on November 8, 2000. Proxies for the meeting were solicited pursuant to Regulation 14A.

(b)

Under the terms of our Amended and Restated Certificate of Incorporation, holders of our Class B common stock are entitled to elect 80% of the members of our board of directors (rounded upwards, if necessary) and holders of our Class A common stock are entitled to elect the remaining directors (but at least one director). Our board of directors has fixed the number of directors at five, one of whom is elected by the holders of our Class A common stock and four of whom are elected by the holders of our Class B common stock. Our board of directors serves staggered three-year terms. Accordingly, not all directors are elected at each Annual Meeting of Stockholders. Fred M. Gibbons was re-elected at the meeting by the holders of our Class B common stock. The other directors whose terms of office continued after the meeting are Anthony B. Holbrook, John E. Bourgoin, Kenneth L. Coleman and William M. Kelly.

(c)

The matters described below were voted on at the Annual Meeting of Stockholders and the number of votes cast with respect to each matter and with respect to the election of a director were as indicated.

(1): Holders of Class B common stock voted to elect one Class B director to serve for a three-year term as follows:

		For		Withheld
Fred M. Gibbons		18,593,815		2,076,135

(2): Holders of Class A common stock and Class B common stock voted to ratify the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending June 30, 2001 as follows:

For		Against		Abstain		Non-Vote
31,423,709		30,406		22,958		—

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits

10.9 The Employee Stock Purchase Plan, as amended.

10.12 Nonqualified Deferred Compensation Plan.

10.13 Letter of Agreement entered into by the Company with Lavi Lev dated October 11, 2000.

(b): Reports on Form 8-K.
None.

ITEMS 2, 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		MIPS Technologies, Inc. a Delaware corporation

		By: /s/ KEVIN C. EICHLER
		Kevin C. Eichler
		Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)