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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACTS OF 1934.
For the fiscal year ended June 30, 1998
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ________ to ________.
Commission file number 000-24487
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MIPS Technologies, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0322161
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
1225 CHARLESTON ROAD, MOUNTAIN VIEW, CA 94043-1353
(Address of principal executive offices)
Registrants' telephone number, including area code: (650) 567-5000
Securities registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.001 Par Value
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |_| No |X|
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. |_|
Aggregate market value of the registrant's Common Stock held by
non-affiliates of the Registrant as of September 1, 1998 was approximately $94.0
million based upon the closing price reported for such date on the Nasdaq
National market. For purposes of this disclosure, shares of Common Stock held by
persons who hold more than 5% of the outstanding shares of Common Stock and
shares held by officers and directors of the Registrant have been excluded
because such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
The number of outstanding shares of the Registrant's Common Stock, $.001
par value, was 37,250,000 as of September 1, 1998.
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PART 1
Item 1. Business
General
On July 6, 1998 the Company completed its initial public offering (the
"Offering"). Prior to the Offering, the Company was a wholly owned subsidiary of
Silicon Graphics. In order to increase the focus of the MIPS Group on the design
and development of microprocessor applications dedicated to the embedded market,
in December 1997, Silicon Graphics initiated a plan to separate the business of
the MIPS Group from its other operations. In April 1998, the Board of Directors
of the Company approved a transaction, pursuant to which, Silicon Graphics
transferred to the Company the assets and liabilities related to the design and
development of microprocessor intellectual property for embedded market
applications (the "Separation"). Prior to the Separation, the Company's business
was conducted by Silicon Graphics primarily through its MIPS Group, a division
of Silicon Graphics. The Company's predecessor, MIPS Computer Systems, Inc., was
founded in 1984 and was engaged in the design and development of RISC
microprocessors for the computer systems and embedded markets. Silicon Graphics
adopted the MIPS architecture for its computer systems in 1988 and acquired MIPS
Computer Systems, Inc. in 1992. Following the acquisition, Silicon Graphics
continued the MIPS microprocessor business through its MIPS Group, which focused
primarily on the development of high-performance microprocessors for Silicon
Graphics' workstations and servers. Until the last few years, cost
considerations limited the broader use of these microprocessors. However, as the
cost to design and manufacture microprocessors based on the MIPS technology
decreased, the MIPS Group sought to penetrate the consumer market, both through
supporting and coordinating the efforts of the MIPS semiconductor partners and
by partnering with Nintendo Co., Ltd. ("Nintendo") in its design of the Nintendo
64 video game player and related cartridges.
The Company is a leading designer and developer of RISC-based
high-performance microprocessor intellectual property for embedded systems
applications. The Company has established a distribution channel for its
intellectual property by licensing its technology to key semiconductor partners.
Each of these partners possesses leading design and/or process technology and
can leverage a strong market position in strategic embedded markets. To date,
the MIPS RISC architecture has been used to create over 60 separate
microprocessor products. These microprocessor products have a cumulative
installed base of over 70 million units and have been embedded into a variety of
products such as video games, color printers and handheld personal computers.
The Company's semiconductor partners reported that approximately 47 million
units based on the Company's RISC architecture were shipped in fiscal year 1998.
The Company's technology focuses on providing cost-effective and
high-performance microprocessor and related designs for high-volume embedded
applications. The MIPS RISC architecture is flexible and allows semiconductor
manufacturers to integrate their intellectual property with the Company's
microprocessor and related designs to develop differentiated and innovative
products for a variety of embedded applications within demanding time-to-market
requirements. The advantages of the MIPS architecture relate primarily to
scalability of die size and performance. Products incorporating the MIPS
architecture range from disk drives using microprocessor cores with a die size
of less than two square millimeters to high-performance workstations using
microprocessors with a die size of 300 square millimeters. In addition, while
designed for high performance, the Company's RISC-based architectures have been
incorporated in low-power applications such as the Philips Velo and the NEC
MobilePro handheld personal computers. The MIPS architecture is designed around
upward compatible instruction sets that enable manufacturers developing products
across a broad range of price/performance points to use common support tools and
software.
The Company was incorporated in Delaware in June 1992. The Company has its
principal executive offices at 1225 Charleston Road, Mountain View, California
94043-1353, and its telephone number at that address is (650) 567-5000.
Industry Background
Rapid advances in semiconductor technology have enabled the development of
higher performance microprocessors at lower cost. As a result, it is now
cost-effective for system OEMs to embed these microprocessors into a wider range
of electronic products and systems, including a new generation of digital
consumer products. At the same time, improvements in semiconductor manufacturing
processes have enabled the integration of entire
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systems onto a single integrated circuit to create complex system-on-a-chip
solutions. However, design tool capabilities and the internal design resources
of semiconductor manufacturers and system OEMs have not kept pace with the
increase in the number of transistors that can be placed on a single chip.
Consequently, a significant and growing "design gap" for semiconductor designers
and manufacturers has developed. To address this "design gap," semiconductor
designers and manufacturers are increasingly licensing proven and reusable
intellectual property components such as microprocessor cores, memories and
logic blocks from third-party suppliers to create differentiated products and
reduce development costs and time-to-market. The availability of low-cost,
high-performance microprocessors and the development of system-on-a-chip
technology have contributed to the emergence and rapid growth of the market for
embedded systems, particularly advanced digital consumer products.
Embedded systems are broadly defined as microcontrollers and
microprocessors plus related software incorporated into devices other than
personal computers, workstations, servers, mainframes and minicomputers. Until
recently, this market was dominated by low-cost 4-, 8- and 16-bit
microcontrollers embedded primarily into low-cost, high-volume consumer products
such as home appliances, facsimile machines, printers, telephone answering
machines and various automobile systems. The use of higher performance 32- and
64-bit microprocessors was common in higher cost but lower volume applications
such as telecommunications switching equipment and data networking routers.
Although microcontrollers are adequate for basic system control functions, they
lack the performance and bandwidth capabilities to implement today's advanced
functions. Recently, however, the price of 32- and 64-bit microprocessors has
reached the point where it is now cost-effective to embed these solutions into
low-cost, high-volume digital consumer products.
Digital consumer products that incorporate high-performance microprocessors
and software can offer advanced functionality such as realistic 3-D graphics
rendering, digital audio and video, and communications and high-speed signal
processing. To meet the demands of the digital consumer products market, system
OEMs rely on semiconductor manufacturers to design and deliver critical
components within rigorous price and performance parameters. In order to supply
products for these markets, semiconductor suppliers are increasingly combining
their own intellectual property with that of third-party suppliers such as the
Company in the form of microprocessor cores and other functional blocks.
The MIPS Network
Through its network of semiconductor partners, independent software vendors
and system OEMs, the Company has developed the infrastructure to support its
architecture as a standard platform for the embedded market.
Semiconductor Partners. The Company currently has seven semiconductor
partners that develop, market and sell silicon solutions based on the MIPS RISC
microprocessor architecture. Because products incorporating the Company's
intellectual property are sold to system OEMs by its semiconductor partners (and
not directly by the Company), these partners operate as a value-added
distribution channel. Several of the Company's partners have had contracts with
the Company and its predecessors since prior to Silicon Graphics' acquisition of
MIPS Computer Systems, Inc. in 1992. The Company's current semiconductor
partners are Integrated Device Technology ("IDT"), LSI Logic Corporation ("LSI
Logic"), NEC Corporation ("NEC"), NKK Corporation ("NKK"), Philips Electronics
N.V. ("Philips"), Quantum Effect Design, Inc. ("QED") and Toshiba Corporation
("Toshiba"). Several of the Company's manufacturing partners have made
significant investments in MIPS technology and market development which has
resulted in multiple design teams around the world engaged in the development of
MIPS-based microprocessors and related designs. The Company's partners and their
associated design teams have developed a broad portfolio of microprocessors and
standard products based on the MIPS RISC architecture as well as application
specific extensions which can be licensed back to the Company and offered to its
other partners
Independent Software Vendors. The Company's RISC architecture is further
enabled by a variety of third-party independent software vendors that provide
operating systems and engineering development tools such as compilers, debuggers
and in-circuit emulation testers. Currently, these companies provide over 150
products in support of the Company's RISC architecture. This software support
allows system OEMs to design the MIPS microprocessor technology into their
products. Software operating systems developed by Microsoft, Wind River Systems,
Inc. and Integrated Systems Inc. are compatible with the Company's RISC
architecture.
System OEMs. Microprocessor products based on the Company's RISC
architecture are used by a variety of system OEMs in the embedded market. A
number of high-profile digital consumer products incorporate the Company's
RISC-based microprocessor intellectual property, including the Nintendo 64 and
Sony PlayStation
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video game systems, the Philips Velo and NEC MobilePro handheld personal
computers and the digital set-top boxes from Echostar and WebTV. The Company
participates in various sales and technical efforts directed to system OEMs and
has launched a promotional campaign aimed at increasing brand awareness of the
MIPS RISC architecture among system OEMs and software vendors.
Markets and Applications
Digital Consumer Products. Together with its existing semiconductor
manufacturing partners and their associated design teams, the Company seeks to
leverage the MIPS RISC architecture into solutions for a wide variety of
sophisticated, high-volume digital consumer products such as video game
products, handheld personal computers and set-top boxes. To date, the Company's
RISC-based microprocessors have been designed into many digital consumer
products, including the Nintendo 64 and Sony PlayStation video game systems.
Revenue related to the video game market presently accounts for a substantial
majority of the Company's total revenue, and such revenue is expected to
continue to account for a significant portion of the Company's total revenue for
at least the next several years.
Video Games. The market for video games, which represented the first
high-volume consumer application for 32- and 64-bit microprocessors,
accounted for approximately 30 million units in 1997, of which an estimated
90% used the Company's technology. The Company's key design wins in this
market include the Nintendo 64 video game system, which was introduced in
1996 and uses a MIPS R4300i microprocessor manufactured by NEC, and the
Sony PlayStation, which was introduced in 1994 and uses a MIPS R3000 class
embedded microprocessor developed by LSI Logic.
Set-Top Boxes. As digital transmission of video signals becomes more
widely utilized, the Company believes that the market for compatible
set-top boxes could represent an area of growth in the use of 32- and
64-bit microprocessors and related designs. The Company's key design wins
in this market include the set-top box used in WebTV's Internet appliance,
introduced in 1996, which uses a MIPS R4000 class microprocessor
manufactured by IDT. Echostar's Dish Network set-top box, introduced in
1996, uses a MIPS R3000 class microprocessor that is also manufactured by
IDT. General Instrument Corporation's DCT-5000+ advanced interactive
digital set-top terminal will also use a MIPS based product.
Handheld Personal Computers. While the market for handheld personal
computers has only recently begun to develop, the Company expects that this
market will continue to grow as these devices become more interactive with
desktop PCs. To date, the Company's RISC-based microprocessor designs have
been incorporated into products such as the Philips Velo and Sharp's
Mobilon, both of which use a MIPS R3000 class microprocessor developed by
Philips. In addition, NEC has incorporated a MIPS R4000 class
microprocessor design into its MobilePro handheld personal computer.
Other Embedded Applications. Significant design wins in more traditional
embedded market applications include networking communications equipment from
Cisco as well as laser printers from Hewlett-Packard Company, Electronics for
Imaging Inc. and Brother Industries, Ltd.
Products
The Company designs, develops and licenses intellectual property for
high-performance microprocessors. The Company's intellectual property is used in
the design of microprocessor cores, instruction set architectures ("ISAs") and
application specific extensions ("ASEs") that enable its semiconductor partners
to manufacture flexible, high-performance microprocessors for embedded systems
within demanding time-to-market requirements. Through licensing and
royalty-based arrangements with its semiconductor partners, the Company seeks to
strengthen the position of the MIPS architecture in the microprocessor industry
and proliferate its designs in embedded systems applications. The Company has
not historically and does not intend to manufacture microprocessors and related
devices.
Basic Cores. The Company currently provides flexible, modular
microprocessor cores covering a range of performance/price points to enable its
manufacturing partners to provide customized semiconductor products more quickly
to system OEMs.
R3000. The R3000 is a 32-bit microprocessor introduced in 1988 that
has served as the basis for many derivatives by the Company's semiconductor
partners and is available from the Company in core form. The
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small die size (less than two square millimeters in one implementation) and
performance characteristics of the R3000 make it well-suited for
applications such as video game consoles, including the Sony PlayStation,
and handheld personal computers, copiers, networking equipment and laser
printers.
R4000. The R4000 is a 64-bit microprocessor introduced in 1992 that
has served as the basis for a variety of derivatives, including the R4300i
which, together with Silicon Graphics' Reality Co-Processor (RCP), is used
in Nintendo 64 video game players. The R4000 was designed for applications
in which high performance is the principle objective, such as video games,
computer systems, network servers and interactive consumer applications
such as set-top boxes.
R5000. The R5000 is a 64-bit microprocessor developed by QED in
January 1996 that is presently licensed to the Company. The R5000, which
can be sublicensed by the Company to its other semiconductor partners, is a
dual instruction issue processor that has served as the microprocessor in
several of Silicon Graphics' workstations. Its performance characteristics
make it an attractive microprocessor for more powerful and sophisticated
embedded applications.
Instruction Set Architectures. Instruction set architectures are
combinations of binary instructions and the hardware to execute them which
together determine the native capability of a microprocessor. ISA standards are
important because, among other things, they become the common points around
which tools are built, software libraries and compilers are written and software
operating systems are developed. Elements of an ISA may be copyrighted or
patented thus preventing unrestricted use without a license. The Company
licenses its ISAs to promote the development and marketing of MIPS compatible
parts by its semiconductor manufacturing partners.
MIPS I/II. The MIPS I/II instruction set architecture is the basic
series of instructions for 32-bit operations. This instruction set, which
is presently used in a wide range of applications, allows the performance
of integer and floating point computation, logical operations, data
movement and a variety of other functions. The MIPS II ISA is implemented
in the R3000 series of products. Full MIPS I/II compatibility is protected
by patents, copyrights and trademarks owned by the Company.
MIPS III. In addition to providing full support for the MIPS II ISA,
the MIPS III instruction set architecture extends the MIPS II ISA to 64-bit
operations, increases the number of floating point registers and adds
certain other functions. The MIPS III ISA is implemented in the R4000
series of products. MIPS III is a patented instruction set that is
necessary to operate 64-bit MIPS microprocessors in 64-bit mode.
MIPS IV. MIPS IV enhances floating point operations and adds
additional instructions that improve performance in a number of engineering
and scientific applications. The MIPS IV ISA is implemented in the R5000
series of products.
MIPS V. MIPS V provides instructions that enhance performance in 3-D
graphics applications. The hardware for the MIPS V ISA has not been
implemented.
Application Specific Extensions. Application specific extensions are
intended to provide design flexibility for application-specific MIPS products
and are offered to the Company's semiconductor manufacturing partners as
optional, additional features to its microprocessor cores.
MIPS16. MIPS16 is an ASE to the Company's RISC architecture introduced
in October 1996 that permits substantially reduced systems costs by
reducing memory requirements through the use of 16-bit instruction
representation.
MIPS Digital Media Extensions (MDMX). MDMX is an ASE designed to
provide enhanced digital media processing including video compression and
decompression and audio and signal processing.
Research and Development
The Company believes that its future competitive position will depend in
large part on its ability to develop new and enhanced microprocessor cores and
related designs in a timely and cost-effective manner. The Company believes that
these capabilities are necessary to meet the evolving and rapidly changing needs
of semiconductor manufacturers and system OEMs in the digital consumer products
industry. To this end, the Company has assembled a team of highly skilled
engineers that possess significant experience in the design and development of
complex microprocessors. The Company intends to build on this base of experience
and the technologies that it has developed to enhance the MIPS RISC architecture
and develop a broader line of microprocessor cores that are optimized for
4
applications in the digital consumer products industry. The Company's strategy
is to use a modular approach that emphasizes re-usable, licensable
microprocessors, cores and software technology. The Company believes that this
increased flexibility and modularity will allow its semiconductor partners to
provide high-performance, customized products more quickly to their customers.
In addition, the Company develops and licenses standardized ISAs and ASEs to
work within and around its RISC architecture to enhance and tailor the
capabilities of its microprocessor designs for specific applications.
Historically, the Company has collaborated with its semiconductor manufacturing
partners to develop these specific product applications and ASEs from its core
microprocessor designs.
The Company develops and licenses its microprocessor designs in two forms.
Initial or "process targeted designs" are designs intended to address the
specific silicon manufacturing process technology of the semiconductor
manufacturer to which it is licensed. For example, details such as transistor
and interconnect dimensions vary from manufacturer to manufacturer and affect
performance. The Company believes that its ability to adjust its microprocessor
designs to work at optimum performance levels for targeted silicon process
technologies is a significant competitive advantage. Because they are designed
with the manufacturing partner's specific silicon process technology in mind, it
is expected that these initial microprocessor cores will have superior
performance levels and high value for the target partner. The Company also
expects to generate both high-level description language representations of
these designs called "soft" cores and intermediate representations with some
process targeting called "firm" cores. Key internal circuits of "firm" cores can
be enhanced to maintain substantially the level of performance of the "process
targeted designs" on which they are based. "Soft" cores and "firm" cores are
flexible and can be licensed to multiple customers and used in multiple
applications.
In anticipation of the Separation and the more limited focus of its
research and development efforts, the Company has significantly reduced its
research and development staff, from 221 persons at December 31, 1997 to 40
persons at June 30, 1998. This decrease principally reflects the transfer to
Silicon Graphics of employees engaged in the development of next generation
microprocessors for Silicon Graphics' systems as well as other staff reductions
associated with the Company's shift in strategic direction. Because the Company
expects to use industry-standard third-party design tools, it will not be
required to develop and maintain the proprietary design tools that were
necessary in connection with the design of high-performance microprocessors for
Silicon Graphics. As a result, the Company expects that its staffing
requirements will be significantly lower than those required prior to the
Separation. For the fiscal years ended June 30, 1998, 1997 and 1996 the
Company's research and development costs were $43.4 million, $68.8 million and
$48.4 million, respectively.
Sales and Marketing
The Company's sales and marketing activities are focused principally on
establishing and maintaining licensing arrangements with semiconductor
manufacturers and participating in marketing, sales and technical efforts
directed to system OEMs. The Company licenses its RISC-based microprocessor and
related design technology on a non-exclusive and worldwide basis to
semiconductor manufacturers who, in turn, sell products incorporating these
technologies to system OEMs. The partnerships established by the Company form a
distribution channel and are an important element of its strategy to proliferate
the MIPS RISC architecture as the standard in the embedded microprocessor
industry. In establishing these partnerships, the Company seeks to license its
technology to those companies it believes can offer value-added design
capabilities in the Company's existing target markets as well as expand the
market for the Company's microprocessor and related designs. By licensing its
technology to multiple semiconductor manufacturers, the Company seeks to ensure
that system access to multiple sources of its RISC-based microprocessors and
related designs. The Company presently has two customers that individually
account for more than 10% of its total revenue: Nintendo and NEC. Substantially
all of the revenue derived from these two customers reflects contract revenue
and royalties related to development and sales of Nintendo 64 video game players
and related cartridges. Revenue related to sales of Nintendo 64 video game
cartridges is expected to continue to account for a significant portion of the
Company's total revenue for the next several years and, therefore, the Company
expects that a significant portion of its total revenue will continue to be
derived from Nintendo and, to a lesser extent, NEC. Because revenue related to
sales of Nintendo 64 video game cartridges is expected to represent a
substantial portion of the Company's total revenue, the Company expects to
experience seasonal fluctuations in its revenue and operating results. See
"Factors That May Affect Our Business--Seasonality" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Revenue." For
financial information regarding revenue derived from the Company's international
licensees, see Note 13 of Notes to Financial Statements.
5
Although the precise terms of the Company's contracts vary from licensee to
licensee, they typically provide for technology license and engineering service
fees which may be payable up-front and/or upon the achievement of certain
milestones such as provision of deliverables by the Company or production of
semiconductor products by the licensee. The Company's contracts also provide for
the payment of royalties to the Company based on a percentage of the net revenue
earned by the licensee from the sale of products incorporating the Company's
technology and, in some cases, based on unit sales of such products. The
Company's contracts with its semiconductors partners are typically subject to
periodic renewal or extension. The Company also offers licensees the option to
license its technology on a single-use or unlimited-use basis, and may provide
licensees with various technical support, training and consulting services and
sales and marketing support.
Certain of the Company's marketing activities are also aimed at system
OEMs. Through targeted advertising and co-marketing programs with its partners,
the Company seeks to increase awareness of the MIPS RISC architecture in popular
digital consumer products.
Because the Company's past microprocessor design efforts have primarily
focused on serving the needs of Silicon Graphics, and although the Company has
always maintained a sales and marketing staff to support its strategic
relationships, its sales and marketing activities have not historically been
central to its operations. The Company's sales and marketing staff and related
expenses are expected to increase as the Company seeks to diversify its revenue
base. The Company's sales and marketing effort is a significant factor to the
Company's future operating success.
Intellectual Property
The Company regards its patents, copyrights, mask work rights, trademarks,
trade secrets and similar intellectual property as critical to its success, and
relies on a combination of patent, trademark, copyright, mask work and trade
secret laws to protect its proprietary rights. Any failure of the Company to
obtain or maintain adequate protection of its intellectual property rights for
any reason could have a material adverse effect on its business, results of
operations and financial condition. The Company owns approximately 51 U.S.
patents on various aspects of its technology, with expiration dates ranging from
2006 to 2015, approximately 24 pending U.S. patent applications, as well as all
foreign counterparts relating thereto. There can be no assurance that patents
will issue from any patent applications submitted by the Company, that any
patents held by the Company will not be challenged, invalidated or circumvented
or that any claims allowed from its patents will be of sufficient scope or
strength to provide meaningful protection or any commercial advantage to the
Company. In addition, there can be no assurance that third parties will not
assert claims of infringement against the Company or against the Company's
semiconductor manufacturing partners in connection with their use of the
Company's technology. Such claims, even those without merit, could be time
consuming, result in costly litigation and/or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, or at all.
Moreover, the laws of certain foreign countries may not protect the Company's
intellectual property to the same extent as do the laws of the United States
and, because of the importance of the Company's intellectual property rights to
its business, this could have a material adverse effect on its business, results
of operations and financial condition.
The Company also uses licensing agreements and employee and third party
nondisclosure and assignment agreements to limit access to and distribution of
its proprietary information and to obtain ownership of technology prepared on a
work-for-hire basis. There can be no assurance that the steps taken by the
Company to protect its intellectual property rights will be adequate to deter
misappropriation of such rights or that the Company will be able to detect
unauthorized uses and take immediate or effective steps to enforce its rights.
There can also be no assurance that the steps taken by the Company to obtain
ownership of contributed intellectual property will be sufficient to assure its
ownership of all proprietary rights. The Company also relies on unpatented trade
secrets to protect its proprietary technology. No assurance can be given that
others will not independently develop or otherwise acquire the same or
substantially equivalent technologies or otherwise gain access to the Company's
proprietary technology or disclose such technology or that the Company can
ultimately protect its rights to such unpatented proprietary technology. In
addition, no assurance can be given that third parties will not obtain patent
rights to such unpatented trade secrets, which patent rights could be used to
assert infringement claims against the Company. From time to time the Company
has entered, and in the future may enter, into cross licensing arrangements with
others, pursuant to which the Company licenses certain of its patents in
exchange for patent licenses from such licensees. Although these types of cross
licensing arrangements are common in the semiconductor and microprocessor
6
industries, and do not generally provide for transfers of know-how or other
proprietary information, such arrangements may facilitate the ability of such
licensees, either alone or in conjunction with others, to develop competitive
products and designs.
The Company and Silicon Graphics have entered into arrangements pursuant to
which certain intellectual property was assigned to the Company, subject to the
grant of a license to Silicon Graphics; certain intellectual property was
retained by Silicon Graphics, subject to the grant of a license to the Company;
and certain intellectual property was retained by Silicon Graphics without any
ongoing interest to the Company. The Company's inability to use Silicon
Graphics' intellectual property in the future could have a material adverse
affect on its business and results of operations. In the past, the MIPS Group
has benefited from its status as a division of Silicon Graphics in its access to
the intellectual property of third parties through licensing arrangements or
otherwise, and in the negotiation of the financial and other terms of any such
arrangements. As a result of the Separation, there can be no assurance that the
Company will be able to negotiate commercially attractive intellectual property
licensing arrangements with third parties in the future, particularly if the
Company ceases to be a majority-owned subsidiary of Silicon Graphics. In
addition, in connection with any future intellectual property infringement
claims, the Company will not have the benefit of asserting counterclaims based
on Silicon Graphics' intellectual property portfolio, nor will the Company be
able to provide licenses to Silicon Graphics' intellectual property in order to
resolve such claims.
Competition
The market for embedded microprocessors is highly competitive and
characterized by rapidly changing technological needs and capabilities. The
Company believes that the principal competitive factors in the embedded
microprocessor market are performance, functionality, price, customizability and
power consumption. The Company competes primarily against ARM Holdings plc and
Hitachi Semiconductor (America) Inc. The Company also competes against certain
semiconductor manufacturers whose product lines include microprocessors for
embedded and non-embedded applications, including Advanced Micro Devices, Inc.,
Intel Corporation, Motorola, Inc. and National Semiconductor Corporation. In
addition, the Company must continue to differentiate its microprocessor and
related designs from those available or under development by the internal design
groups of semiconductor manufacturers, including its current and prospective
manufacturing partners. Many of these internal design groups have substantial
programming and design resources and are part of larger organizations, which
have substantial financial and marketing resources. There can be no assurance
that internal design groups will not develop products that compete directly with
the Company's microprocessor and related designs or will not actively seek to
participate as merchant vendors in the intellectual property component market by
selling to third-party semiconductor manufacturers or, if they do, that the
Company will be able to compete with them successfully. To the extent that these
alternative technologies provide comparable performance at a lower or similar
cost than the Company's technology, semiconductor manufacturers may adopt and
promote these alternative technologies. Certain of the Company's competitors
have greater name recognition and customer bases as well as greater financial
and marketing resources than the Company, and such competition could adversely
affect the Company's business, results of operations and financial condition.
Employees
As of June 30, 1998, the Company had 63 full time employees. Of this total,
40 were in research and development, 16 were in sales and marketing and 7 were
in finance and administration. The Company's future success will depend in part
on its ability to attract, retain and motivate highly qualified technical and
management personnel who are in great demand in the semiconductor industry. The
Company's business plan requires that it identify and hire additional highly
skilled technical personnel during fiscal 1999 to staff its anticipated research
and development activities. None of the Company's employees is represented by a
labor union or subject to a collective bargaining agreement. The Company
believes that its relations with its employees are good.
Item 2. Properties
The Company's executive, administrative and technical offices currently
occupy approximately 27,500 square feet (with an option to increase to 55,000
square feet) in a building subleased from Silicon Graphics in Mountain View,
California. Payments by the Company to Silicon Graphics under this sublease are
equal to amounts payable by Silicon Graphics under its sublease for the property
with a third party. This sublease will expire on May 31, 2002, subject to
earlier termination in certain circumstances. The Company believes that these
facilities are adequate to meets its current needs but that it may need to seek
additional space in the future.
7
Item 3. Legal Proceedings
On April 6, 1998, the Company and Silicon Graphics filed an action against
ArtX, Inc. and certain employees of ArtX, Inc. in the Superior Court of the
State of California alleging, among other things, misappropriation of trade
secrets and breach of contractual and fiduciary duties in connection with the
defendants' actions in developing graphics technology for Nintendo's next
generation video game system. On April 23, 1998, Nintendo notified Silicon
Graphics and the Company of its belief that the disclosure in the Company's
registration statement filed with the Securities and Exchange Commission on
April 21, 1998 of certain information regarding the contract for the development
of the Nintendo 64 video game system constituted a breach of that contract.
Silicon Graphics and the Company strongly disagree that any such breach has
occurred. On May 27, 1998, Silicon Graphics, the Company, Nintendo and ArtX,
Inc. entered into a memorandum of understanding pursuant to which the companies
are engaged in further discussions relating to a possible mutually beneficial
business relationship, including the possible selection of a MIPS-based
microprocessor for the next generation Nintendo video game system. On the basis
of this understanding, Silicon Graphics and the Company have dismissed without
prejudice the pending lawsuit against ArtX, Inc., and Nintendo has agreed that,
in the absence of a lawsuit against Nintendo or ArtX, Inc., it will not assert
any claim that the Nintendo 64 contract has been breached in connection with the
filing of the Company's registration statement.
On April 10, 1998, the Company filed an action against Lexra, Inc., a
Massachusetts company ("Lexra"), in the United States District Court for the
Northern District of California, asserting claims for false advertisement,
trademark infringement, trademark dilution and unfair competition. This lawsuit
arose out of Lexra's claim that its newly introduced product offering is "MIPS
compatible." Lexra does not have a license from the Company to use its
intellectual property in connection with any Lexra products. In the suit, the
Company sought injunctive relief as well as monetary damages. In May 1998, Lexra
filed an answer and counterclaim seeking to cancel certain of the Company's
trademarks. The parties recently reached an agreement in principle to settle
this matter. Among other things, Lexra will no longer state that its products
are "MIPS compatible". Lexra's counterclaims will also be dismissed. The Company
is continuing to evaluate possible patent infringement claims against Lexra and
will assert such claims if appropriate.
In February 1998, the Company received a notice asserting that the R10000
and potentially other microprocessors designed by the Company allegedly infringe
a patent originally assigned to Control Data Corporation. The Company is
evaluating these claims.
The Company believes that the foregoing proceedings are not likely to have
a material adverse effect on its business, results of operations or financial
condition.
From time to time, the Company receives communications from third parties
asserting patent or other rights covering the Company's products and
technologies. Based upon the Company's evaluation, it may take no action or it
may seek to obtain a license. There can be no assurance in any given case that a
license will be available on terms the Company considers reasonable, or that
litigation will not ensue.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) During the fourth quarter of fiscal 1998, Silicon Graphics, Inc., the
Company's sole stockholder, took action by written consent on, May 22, 1998,
June 2, 1998 and June 26, 1998.
(b) On June 26, 1998, the sole stockholder consented to the election of
Anthony B. Holbrook and Fred M. Gibbons as directors of the Company, to be
effective on July 6, 1998, the closing of the Company's initial public offering.
The Directors whose terms of office continued after the stockholder action are
Forest Baskett, John E. Bourgoin, Kenneth L. Coleman, William M. Kelly and
Teruyasu Sekimoto.
(c) Other matters approved by the sole stockholder were the 1998 Long Term
Incentive Plan and the Employee Stock Purchase Plan on May 22, 1998, an increase
in the authorized capital stock of the Company on June 2, 1998 and the
restatement of the Company's Certificate of Incorporation in connection with the
Company's initial public offering on June 26, 1998.
8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) The Company's initial public offering of its Common Stock was declared
effective on June 29, 1998 at a price of $14.00 per share. The Company's Common
Stock is listed on the Nasdaq National Market under the symbol "MIPS." The
ending stock price for the period ended June 30, 1998 as reported by Nasdaq was
$13.437.
On July 6, 1998 the Company completed its initial public offering of
5,500,000 shares of its Common Stock pursuant to a Registration Statement on
Form S-1 (File No. 333-50643) declared effective by the Securities and Exchange
Commission on June 29, 1998. The offering was underwritten by Deutsche Bank
Securities, BancAmerica Robertson Stephens and Hambrecht & Quist. Of the
5,500,000 Common Shares offered, 1,250,000 were offered by the Company and
4,250,000 were offered by Silicon Graphics, Inc. The Company received
approximately $16,035,000 from the initial public offering, net of underwriting
discounts, commissions and other offering costs and expenses.
(b) Prior to June 30, 1998, Silicon Graphics was the only holder of record
of the Company's Common Stock. Subsequent to the closing of the Offering,
Silicon Graphics owns approximately 85.2% of the outstanding common stock of the
Company. As of September 10, 1998, there were 20 holders of record of the
Company's Common Stock.
(c) The Company has never paid or declared any cash dividends on its Common
Stock or other securities and does not anticipate paying cash dividends in the
foreseeable future.
(d) There were no sales by the Company of its equity securities during the
quarter ended June 30, 1998, which were not registered under the Securities Act
of 1933.
No payments constituted direct or indirect payments to directors, officers,
general partners of the issuer or their associates, or to persons owning ten
percent or more of any class of equity securities of the issuer or to affiliates
of the issuer.
The Company has used the net proceeds from the Offering to fund working
capital and general corporate purposes. The funds that are not being used to
fund short-term needs have been placed in temporary investments pending future
use.
9
Item 6. Selected Financial Data.
The following table presents selected financial data of the Company. The
information below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations". The historical
financial information, particularly for periods prior to March 31, 1998 may not
be indicative of the Company's future performance and does not necessarily
reflect what the financial position and results of operations of the Company
would have been had the Company operated as a separate, stand-alone entity
during the periods covered. The historical financial information does not
reflect many significant changes that have occurred in the funding and
operations of the Company and the sources and costs of the Company's revenue as
a result of both the Separation and the Company's recent shift in strategic
direction.
Years Ended June 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands, except per share data)
Statements of Operations Data:
Revenue:
Royalties .................... $ 55,980 $ 37,192 $ 19,716 $ 13,576 $ 8,402
Contract revenue ............. 830 3,115 17,327 13,903 8,962
-------- -------- -------- -------- --------
Total revenue .......... 56,810 40,307 37,043 27,479 17,364
Costs and expenses:
Cost of contract revenue ..... 375 1,345 5,580 7,364 2,768
Research and development ..... 43,446 68,827 48,402 39,033 24,396
Sales and marketing .......... 5,307 6,170 6,026 6,761 5,668
General and administrative ... 4,685 4,750 4,601 4,272 3,692
Restructuring charge ......... 2,614 -- -- -- --
-------- -------- -------- -------- --------
Total costs and expenses 56,427 81,092 64,609 57,430 36,524
-------- -------- -------- -------- --------
Operating income (loss) ........ 383 (40,785) (27,566) (29,951) (19,160)
Interest expense ............... (7) (50) (99) (69) (70)
-------- -------- -------- -------- --------
Net income (loss) .............. $ 376 $(40,835) $(27,665) $(30,020) $(19,230)
======== ======== ======== ======== ========
Net income (loss) per basic and
diluted share ................ $ 0.01 $ (1.13) $ (0.77) $ (0.83) $ (0.53)
======== ======== ======== ======== ========
June 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Working capital deficiency ..... $ (4,530) $ (8,446) $ (8,531) $(16,683) $(11,230)
Total assets ................... 4,696 19,674 15,289 15,744 12,338
Long-term obligations, net of
current maturities ........... -- -- 331 739 457
Total stockholders' equity (deficit) (747) 8,072 3,853 (3,736) (755)
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this report. Except for the
historical information contained in this Annual Report on Form 10-K, the matters
discussed herein may contain forward-looking statements that are subject to
certain risks and uncertainties that could cause the Company's actual results to
differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause such differences include, but are not
limited to, those identified herein under "Factors That May Affect Our
Business," and other risks detailed below and included from time to time in the
Company's other Securities and Exchange Commission ("SEC") reports and press
releases, copies of which are available from the Company upon request. The
forward-looking statements within this Annual Report on Form 10-K are identified
by words such as "believes," "anticipates," "expects," "intends," "may" and
other similar expressions. However, these words are not the exclusive means of
identifying such statements. The Company assumes no obligation to update any
forward-looking statements contained herein.
Overview
The Company's predecessor, MIPS Computer Systems, Inc., was founded in 1984
and was engaged in the design and development of RISC microprocessors for the
computer systems and embedded markets. Silicon Graphics adopted the MIPS
architecture for its computer systems in 1988 and acquired MIPS Computer
Systems, Inc. in 1992. Following the acquisition, Silicon Graphics continued the
MIPS microprocessor business through its MIPS Group (a division of Silicon
Graphics), which focused primarily on the development of high-performance
microprocessors for Silicon Graphics' workstations and servers. Until the last
few years, cost considerations limited the broader use of these microprocessors.
However, as the cost to design and manufacture microprocessors based on the MIPS
technology decreased, the MIPS Group sought to penetrate the consumer market,
both through supporting and coordinating the efforts of the MIPS semiconductor
partners and, most notably, by partnering with Nintendo in its design of the
Nintendo 64 video game player and related cartridges. Revenue related to sales
of Nintendo 64 video game players and related cartridges currently accounts for
the substantial majority of the Company's revenue. Based on reports provided by
the Company's semiconductor partners, sales of MIPS-based devices have grown
from 320,000 units in calendar year 1992 to over 48 million units in calendar
year 1997.
The financial statements discussed below reflect the historical results of
operations, financial position and cash flows of the MIPS Group, certain
portions of which were transferred to the Company by Silicon Graphics in the
Separation. The financial statements contained herein and discussed below have
been carved out from the financial statements of Silicon Graphics using the
historical results of operations and historical basis of the assets and
liabilities of such business, as adjusted to reflect allocations of certain
corporate charges that management believes are reasonable. However, the
financial information included herein may not necessarily reflect the results of
operations, financial position and cash flows of the Company in the future or
what the results of operations, financial position and cash flows would have
been had the MIPS Group been a separate, stand-alone entity during the periods
presented. This is due to the historical operation of the MIPS Group as a part
of the larger Silicon Graphics enterprise. The financial information included
herein, does not reflect the many significant changes that have ocurred in the
funding and operations of the Company and the sources and costs of the Company's
revenue as a result of both the Separation and the Company's recent shift in
strategic direction.
The Company's revenue consists of royalties and contract revenue earned
under contracts with its semiconductor partners and under its agreement with
Nintendo. The Company's contracts with its semiconductor partners are typically
subject to periodic renewal or extension and expire at various dates from
January 1999 through December 2007. The Company generates royalties from the
sale by semiconductor manufacturers of products incorporating the Company's
technology. The Company also receives royalties from Nintendo relating to sales
of Nintendo 64 video game players and related cartridges. Royalties may be
calculated as a percentage of the revenue received by the seller on sales of
such products or on a per unit basis. Contract revenue includes technology
license fees and engineering service fees earned primarily under contracts with
Nintendo and the Company's semiconductor manufacturing partners. Technology
license fees range from several hundred thousand dollars for a single-use
license to millions of dollars for an unlimited license to use the Company's
technology. Part of these fees may be payable up-front and part may be due upon
the achievement of certain milestones such as provision of deliverables by the
Company or production of semiconductor chips by the licensee. In fiscal 1996 the
Company's total revenue was split relatively equally between royalties and
contract revenue. Royalties in fiscal 1996 were earned primarily from NEC, while
contract revenue for those periods primarily reflected engineering service fees
from Nintendo
11
related to the Nintendo 64 video game system prior to its commercial
introduction. In fiscal 1997 and fiscal 1998, the Company's revenue mix changed
significantly, with royalties representing over 90% of the Company's total
revenue during those periods, due primarily to royalties earned from Nintendo,
and to a lesser extent NEC, on sales of Nintendo 64 video game players and
related cartridges.
In the near term, the Company's revenue will consist primarily of royalties
received from Nintendo and NEC on sales of Nintendo 64 video game players and
related cartridges. For the fiscal year ended June 30, 1998, such royalties
accounted for approximately 79% of the Company's total revenue. The Company
receives royalties from NEC based on a percentage of the revenue derived by NEC
from sales of the microprocessor included in the Nintendo 64 video game player.
The Company's agreement with Nintendo provides for the payment of royalties
based on unit sales of Nintendo 64 video game players and unit sales of related
video game cartridges. Total royalties from Nintendo with respect to sales of
Nintendo 64 video game players had a cap based on unit sales that was reached in
the second quarter of fiscal 1998. There is no cap on royalties from NEC with
respect to its sale of microprocessors to Nintendo for Nintendo 64 video game
players or on royalties from Nintendo with respect to sales of Nintendo 64 video
game cartridges. The Company anticipates that revenue related to sales of
Nintendo 64 video game cartridges will represent a substantial portion of its
total revenue for the next several years. However, competition in the market for
home entertainment products is intense and the introduction of new products or
technologies as well as shifting consumer preferences could negatively impact
video game cartridge sales. There can be no assurance as to the amount and
timing of sales of Nintendo 64 video game players and related cartridges and,
consequently, there can be no assurance as to the royalty stream to the Company
from such sales. In particular, the eventual introduction of the next generation
Nintendo video game system is expected to result in declining sales of Nintendo
64 video game players and related cartridges, although sales of video game
cartridges would be likely to continue for some time. In the near term, factors
negatively affecting sales of Nintendo 64 video game cartridges could have a
material adverse effect on the Company's results of operations and financial
condition.
The Company expects that royalties will continue to represent a significant
percentage of its total revenue over the next several years due to its
relationship with Nintendo. The amount, timing and relative mix of royalties and
contract revenue is difficult for the Company to predict. The amount and timing
of future royalties will depend on the adoption of the Company's technology by
digital consumer product manufacturers, consumer acceptance of products
incorporating the Company's technology, changes in the average selling prices of
semiconductor and digital consumer products and fluctuations in currency
exchange rates. Moreover, the Company's royalty arrangements will vary from
licensee to licensee depending on a number of factors, including the amount of
any license fee paid and the marketing and engineering support required by the
licensee. The amount and timing of future contract revenue will depend upon the
financial terms of the Company's contractual arrangements with its semiconductor
partners (which may require significant up-front payments or payments based on
the achievement of certain milestones) and the adoption of the Company's
technology by semiconductor manufacturers, which is influenced by a number of
factors including competitive conditions in the market for microprocessor
intellectual property. In addition, contract revenue may fluctuate significantly
from period to period and any increase or decrease in such revenue will not be
indicative of future period-to-period increases or decreases.
The Company's primary costs and expenses are research and development and
sales and marketing. The Separation has had a significant impact on the
Company's research and development cost structure. Silicon Graphics' design
efforts have required a significant staffing level because its complex
microprocessor requirements and the development and maintenance of proprietary
design tools have demanded large design teams. By contrast, the Company uses
smaller design teams and relies largely on industry standard third-party design
tools, which has reduced staffing requirements and costs. The Company reduced
its research and development staff from 221 persons at December 31, 1997 to 40
persons at June 30, 1998, principally due to the transfer to Silicon Graphics of
employees engaged in the development of next generation microprocessors for
Silicon Graphics' systems as well as other staff reductions associated with the
Company's change in strategic direction.
Sales and marketing expenses include salaries, travel expenses and costs
associated with trade shows, advertising and other marketing efforts. Costs of
technical support are also included in sales and marketing expenses. The
Company's sales and marketing efforts are principally directed at establishing
and supporting strategic relationships with semiconductor manufacturers. At June
30, 1998, the Company's sales and marketing staff totaled 16 persons.
12
Results of Operations -- Years Ended June 30, 1998, 1997 and 1996
Total revenue was $56.8 million, $40.3 million and $37.0 million in fiscal
1998, 1997 and 1996, respectively. Royalties for fiscal 1998 and 1997 consisted
of royalties from sale by semiconductor manufacturers of products incorporating
the Company's technology and from sales of Nintendo 64 video game players and
related cartridges. Revenue for fiscal 1996 consisted of royalties from the sale
by semiconductor manufacturers of products incorporating the Company's
technology. The significant increase in royalties in fiscal 1998 from fiscal
1997 and in fiscal 1997 from fiscal 1996 reflects royalties received from
Nintendo and NEC related to sales of Nintendo 64 video game players and related
cartridges. The Company earned its first significant royalties from Nintendo 64
video game system sales in the third quarter of fiscal 1997, following the
commercial introduction of that system. In the second quarter of fiscal 1998,
royalties from the graphics chip included in the Nintendo game player reached
its cap. Contract revenue for fiscal 1998 consisted principally of license fees
related to code compression technology, and for fiscal 1997 consisted
principally of engineering service fees from Nintendo related to development
efforts for Nintendo 64 video game products. Fiscal 1996 contract revenue
included engineering service fees related to development efforts for the
Nintendo 64 video game system as well as approximately $10.0 million in license
fees from three licensees. The decrease in contract revenue in fiscal 1997
reflected substantial completion in fiscal 1996 of the Nintendo 64 video game
system development prior to its commercial introduction by Nintendo. Under the
terms of the Company's contracts with three of its semiconductor partners, such
partners pay royalties to the Company on sales to Silicon Graphics of certain
products incorporating the Company's technology. For fiscal 1998 the Company
estimates that less than 5% of its total revenue was related to such sales. The
Company expects that revenue related to such sales will decrease in the future.
Cost of contract revenue was $375,000, $1.3 million and $5.6 million in
fiscal 1998, 1997 and 1996, respectively. Cost of contract revenue in fiscal
1998 was principally attributable to sublicense fees and in fiscal 1997 and 1996
was principally attributable to non-recurring engineering fees related to
Nintendo 64 video game system development. The decrease in fiscal 1997 from 1996
was principally attributable to the completion in fiscal 1996 of the Nintendo 64
video game system development. The Company believes that future cost of contract
revenue will be minimal.
Research and development expenses were $43.4 million, $68.8 million and
$48.4 million in fiscal 1998, 1997 and 1996, respectively. The decrease in
research and development expenses in fiscal 1998 was primarily due to the
reduction in the Company's research and development staff from 221 persons at
December 31, 1997 to 40 persons at June 30, 1998. This reduction reflects the
transfer to Silicon Graphics of employees engaged in the development of next
generation microprocessors for Silicon Graphics' systems as well as other staff
reductions associated with the Company's change in strategic direction. The
increase in research and development expenses in fiscal 1997 was attributable to
additional personnel, including consultants, working on next generation
microprocessor development projects.
Sales and marketing expenses were $5.3 million, $6.2 million and $6.0
million in fiscal 1998, 1997 and 1996, respectively. The decrease in fiscal 1998
was primarily due to a decrease in advertising and promotional spending. General
and administrative expenses remained relatively unchanged as such costs were
$4.7 million, $4.8 million and $4.6 million in fiscal 1998, 1997 and 1996,
respectively.
The restructuring charge taken in the second quarter of fiscal 1998
included $500,000 in severance related costs and $2.1 million in asset
write-downs related to the Company's shift in strategic direction.
Prior to the Separation, the Company did not have a tax sharing agreement
in place but, rather, was included in the income tax returns filed by Silicon
Graphics and its subsidiaries in various domestic and foreign jurisdictions.
Pursuant to the tax sharing agreement, the Company will realize no income tax
benefit, nor bear any income tax liability, related to its operations prior to
the completion of its initial public offering. Moreover, in light of historical
losses, on a stand-alone basis, the Company's tax provision for fiscal 1998
would have been immaterial. Therefore, no provision or benefit for income taxes
has been recorded for the periods presented in the accompanying financial
statements.
Impact of Currency
Certain of the Company's international licensees pay royalties based on
revenues that are reported in a local currency (currently yen) and translated
into U.S. dollars at the exchange rate in effect when such revenues are reported
by the licensee. To date, substantially all of the Company's revenue from
international customers has been denominated in U.S. dollars. However, to the
extent that sales to digital consumer product manufacturers by the
13
Company's manufacturing partners are denominated in foreign currencies,
royalties received by the Company on such sales could be subject to fluctuations
in currency exchange rates. In addition, if the effective price of the
technology sold by the Company to its partners were to increase as a result of
fluctuations in foreign currency exchange rates, demand for the Company's
technology could fall which would, in turn, reduce the Company's royalties. The
Company is unable to predict the amount of non-U.S. dollar denominated revenue
earned by its licensees and, therefore, has not attempted to mitigate the effect
that currency fluctuations may have on its royalty revenue.
Liquidity and Capital Resources
On July 6, 1998 the Company completed its initial public offering of
5,500,000 shares ot its common stock. Of the 5,500,000 shares offered, 1,250,000
shares were offered by the Company and 4,250,000 shares were offered by Silicon
Graphics. The Company raised approximately $16M from the initial public
offering. The Company's principal capital requirements are to fund working
capital needs and capital expenditures in order to support the Company's revenue
growth. Prior to its initial public offering and during the periods presented,
these capital requirements have been satisfied by funds provided by Silicon
Graphics. Silicon Graphics historically has performed cash management services
for the Company, whereby the Company's cash flow was directed to Silicon
Graphics and Silicon Graphics provided cash to the Company to fund its operating
expenses and capital expenditures. Subsequent to the Separation, the Company has
not participated in Silicon Graphics' cash management system and Silicon
Graphics has not provided additional funds to the Company to finance its
operations.
The Company's future liquidity and capital requirements are expected to
vary greatly from quarter to quarter, depending on numerous factors, including,
among others, the cost, timing and success of product development efforts, the
cost and timing of sales and marketing activities, the extent to which the
Company's existing and new technologies gain market acceptance, the level and
timing of contract revenues and royalties, competing technological and market
developments and the costs of maintaining and enforcing patent claims and other
intellectual property rights. The Company believes that cash generated by its
operations, together with the net proceeds to the Company from its initial
public offering, will be sufficient to meet its projected operating and capital
requirements. The Company may elect to raise additional funds through public or
private financing, strategic relationships or other arrangements. Additional
equity financing may be dilutive to holders of the Common Stock, and debt
financing, if available, may involve restrictive covenants. Moreover, strategic
relationships, if necessary to raise additional funds, may require that the
Company relinquish its rights to certain of its technologies. As long as Silicon
Graphics desires to maintain its percentage ownership interest in the Company,
the Company may be constrained in its ability to issue Common Stock in
connection with acquisitions or to raise equity capital. Any failure of the
Company to raise capital when needed could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company has had no direct third-party indebtedness. The Company intends
to enter into a revolving credit facility with a bank or other financial
institution to provide for certain of its working capital needs.
Year 2000 Compliance
The Company is currently examining the Year 2000 issue. The Company
believes its products are Year 2000 compliant; however, the Company is
initiating a program to prepare its information technology ("IT") and related
non-IT and processes for the Year 2000 and plans to have changes to critical
systems completed by the third quarter of calendar year 1999 to allow time for
testing.
Management is assessing the Year 2000 project costs and expects the
assessment to be complete by the end of the second quarter of fiscal 1999, but
based on preliminary estimates, the costs of any necessary actions are not
expected to be material to the Company's results of operations or financial
condition.
The Company intends to cooperate with its manufacturing partners and others
with which it does business to coordinate Year 2000 compliance with operational
processes and marketed products, although the Company is unable to evaluate the
Year 2000 compliance of products and technology developed by third parties that
incorporates the Company's technology. To the extent that any such third-party
product or technology fails to be Year 2000 compliant, the Company may be
adversely affected due to its association with such product or technology. The
Company will also be contacting critical suppliers of products and services to
determine that the suppliers' operations and the products and services they
provide are Year 2000 capable or to monitor their progress toward Year 2000
capability. There can be no assurance that another company's failure to ensure
Year 2000 capability would not have an adverse effect on the Company.
14
Factors That May Affect Our Business
Risks Associated with Recent Shift in Strategic Direction. The Company's
research and development efforts historically focused primarily on the
development of high-performance microprocessor and related designs for Silicon
Graphics' workstations and servers. However, as the cost to design and
manufacture microprocessors based on the Company's technology decreased, the
Company has sought to penetrate the market for high-volume, high-performance
embedded applications by supporting and coordinating the efforts of its
semiconductor partners in that area. In connection with the Separation and the
Offering, the Company has formulated a new strategic direction in which its
primary focus is the development of microprocessors and related designs for
applications in the embedded market, including digital consumer products such as
video game products, handheld personal computers and digital set-top boxes. The
design and development of high-performance microprocessors for the next
generation Silicon Graphics' product line is carried out by persons who have
been transferred to Silicon Graphics in connection with the Separation. The
Company's shift in strategic direction involves several risks, including (i)
increased reliance on the evolving and highly competitive digital consumer
products industry; (ii) the need for the Company to refocus its research and
development efforts from microprocessors primarily for high-performance computer
systems to microprocessors and related designs for use in a wide range of
digital consumer products; and (iii) increased importance of the Company's sales
and marketing activities and its limited experience in this area. Any failure by
the Company to adequately address any of these risks could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Limited Relevance of Historical Financial Information. The historical
financial information included herein, particularly for periods prior to the
third quarter of fiscal 1998, does not reflect the many significant changes in
the Company's cost structure that occurred as a result of the Separation and the
Company's recent shift in strategic direction nor the changes that occurred in
the funding and operations of the Company due to its status as a separate,
stand-alone entity. The Company has reduced its research and development staff
from 221 persons at December 31, 1997 to 40 persons at June 30, 1998. This
reduction primarily reflects the transfer to Silicon Graphics of employees
engaged in the development of next generation microprocessors for Silicon
Graphics' systems. Because the employees transferred to Silicon Graphics were
primarily engaged in research and development activities that did not generate
any material revenue for the Company, however, the reduction in the Company's
research and development staff resulting from the Separation and the shift in
strategic direction is not expected to have a material effect on the Company's
revenue in future periods. In addition, sales and marketing activities are
expected to increase as the Company shifts its focus from the design of
microprocessors addressing the needs of Silicon Graphics to the development,
marketing and licensing of microprocessor and related designs for a wide variety
of applications in the digital consumer products industry.
Unpredictable and Fluctuating Operating Results. The Company experiences
significant fluctuations in its quarterly operating results due to a variety of
factors, many of which are outside of its control. Moreover, because many of the
Company's revenue components fluctuate and are difficult to predict and the
Company's expenses are largely independent of its revenue in any particular
period, it is difficult for the Company to accurately forecast operating
results. The Company's revenue in any particular quarter is dependent on a
number of factors, including the demand for and average selling prices of
semiconductor products that incorporate the Company's technology, the financial
terms of the Company's contractual arrangements with its semiconductor partners
(which may require significant up-front payments or payments based on the
achievement of certain milestones), the relative mix of contract revenue and
royalties, and competitive pressures resulting in lower contract revenue or
royalty rates. In addition, contract revenue may fluctuate significantly from
period to period and any increase or decrease in such revenue will not be
indicative of future period-to-period increases or decreases. Because the
Company's expense levels are based, in part, on management's expectations
regarding future revenue, if revenue is below expectations in any quarter, the
adverse effect may be magnified by the Company's inability to adjust spending in
a timely manner to compensate for any such revenue shortfall.
Factors that may adversely affect the Company's quarterly operating results
include the Company's ability to develop, introduce and market new
microprocessor intellectual property, the demand for and average selling prices
of semiconductor products that incorporate the Company's technology, the
establishment or loss of strategic relationships with semiconductor
manufacturing partners or manufacturers of digital consumer products, the timing
of new products and product enhancements by the Company and its competitors,
changes in the Company's and digital consumer product manufacturers' development
schedules and levels of expenditures on research and development and product
support and general economic conditions. As a result, the Company's total
revenue and
15
operating results in any future period cannot be predicted with certainty, and
its operating results in any quarter may not be indicative of its future
performance. Moreover, the Company expects to experience seasonal fluctuations
in its revenue and operating results.
Revenue Concentration. The Company is subject to revenue concentration
risks at both the product and semiconductor manufacturing partner levels. To
date, a substantial portion of the Company's total revenue has been derived from
contract revenue and royalties earned on sales of video game products that use
the Company's RISC-based microprocessor technology. In particular, royalties and
contract revenue from Nintendo and NEC relating to sales of Nintendo 64 video
game players and related cartridges accounted for 79%, 69% and 23% of the
Company's total revenue for the fiscal years ended June 30, 1998, 1997 and 1996,
respectively.
The Company anticipates that royalties related to sales of Nintendo 64
video game cartridges will represent a substantial portion of its total revenue
for the next several years. However, competition in the market for home
entertainment products is intense and the introduction of new products or
technologies, as well as shifting consumer preferences, could negatively impact
Nintendo 64 video game cartridge sales. There can be no assurance as to the
amount and timing of sales of Nintendo 64 video game players and related
cartridges and, consequently, there can be no assurance as to the royalty stream
to the Company from such sales. In particular, the eventual introduction of the
next generation Nintendo video game system is expected to result in declining
sales of Nintendo 64 video game players and related cartridges, although sales
of video game cartridges would be likely to continue for some time. In the near
term, factors negatively affecting sales of Nintendo 64 video game cartridges
could have a material adverse effect on the Company's results of operations and
financial condition.
Although the Company expects that an increasingly significant portion of
its future revenue will be related to sales of digital consumer products such as
handheld personal computers and set-top boxes as well as other video game
products, there can be no assurance that the Company's technology will be
selected for design into any such products. Accordingly, the Company may remain
significantly dependent on revenue related to sales of video game products. The
identity of significant products may vary from period to period depending on the
addition of new contracts and the number of designs using the Company's
technology.
A significant portion of the Company's total revenue has been and is
expected to continue to be derived from a limited number of semiconductor
manufacturers. For the fiscal years ended June 30, 1998, 1997 and 1996, NEC
accounted for approximately 13%, 23% and 31%, respectively, of the Company's
total revenue. The Company believes that NEC will continue to represent in
excess of 10% of its total revenue for at least the next several years, although
NEC is not obligated to continue using the Company's technology in its current
or future products. Because there is a relatively limited number of
semiconductor manufacturers to which the Company could license its technology on
a basis consistent with its business model, it is likely that the Company's
revenue will continue to be concentrated at the semiconductor manufacturing
partner level. This revenue concentration for any given period will vary
depending on the addition or expiration of contracts, the nature and timing of
payments due under such contracts and the volumes and prices at which the
Company's partners sell products incorporating its technology. Accordingly, the
identity of particular manufacturing partners that will account for any such
revenue concentration will vary from period to period and may be difficult to
predict.
Seasonality. Because revenue related to sales of Nintendo 64 video game
cartridges is expected to represent a substantial portion of the Company's total
revenue over the next several years, the Company expects to experience seasonal
fluctuations in its revenue and operating results. The Company records royalty
revenue from Nintendo in the quarter following the sale of the related Nintendo
64 video game cartridge. Because a disproportionate amount of Nintendo 64 video
game cartridges are typically sold in the Company's second fiscal quarter (which
includes the holiday selling season), a disproportionate amount of the Company's
revenue and operating income is expected to be realized in its third fiscal
quarter. In addition, as the Company increases its focus on microprocessor
intellectual property for high-volume digital consumer products, the Company can
be expected to continue to experience similar seasonal fluctuations in its
revenue and operating results.
Intellectual Property Matters. The Company regards its patents, copyrights,
mask work rights, trademarks, trade secrets and similar intellectual property as
critical to its success, and relies on a combination of patent, trademark,
copyright, mask work and trade secret laws to protect its proprietary rights.
Any failure of the Company to obtain or maintain adequate protection of its
intellectual property rights for any reason could have a material adverse effect
on its business, results of operations and financial condition. Subject to the
grant of a license to Silicon Graphics, the Company owns approximately 51 U.S.
patents on various aspects of its technology, with expiration dates ranging
16
from 2006 to 2015, approximately 24 pending U.S. patent applications as well as
all foreign counterparts relating thereto. There can be no assurance that
patents will issue from any patent applications submitted by the Company, that
any patents held by the Company will not be challenged, invalidated or
circumvented or that any claims allowed from its patents will be of sufficient
scope or strength to provide meaningful protection or any commercial advantage
to the Company. In addition, there can be no assurance that third parties will
not assert claims of infringement against the Company or against the Company's
semiconductor manufacturing partners in connection with their use of the
Company's technology. Such claims, even those without merit, could be time
consuming, result in costly litigation and/or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, or at all.
Moreover, the laws of certain foreign countries may not protect the Company's
intellectual property to the same extent as do the laws of the United States
and, because of the importance of the Company's intellectual property rights to
its business, this could have a material adverse effect on its business, results
of operations and financial condition.
The Company also uses licensing agreements and employee and third party
nondisclosure and assignment agreements to limit access to and distribution of
its proprietary information and to obtain ownership of technology prepared on a
work-for-hire basis. There can be no assurance that the steps taken by the
Company to protect its intellectual property rights will be adequate to deter
misappropriation of such rights or that the Company will be able to detect
unauthorized uses and take immediate or effective steps to enforce its rights.
There can also be no assurance that the steps taken by the Company to obtain
ownership of contributed intellectual property will be sufficient to assure its
ownership of all proprietary rights. The Company also relies on unpatented trade
secrets to protect its proprietary technology. No assurance can be given that
others will not independently develop or otherwise acquire the same or
substantially equivalent technologies or otherwise gain access to the Company's
proprietary technology or disclose such technology or that the Company can
ultimately protect its rights to such unpatented proprietary technology. In
addition, no assurance can be given that third parties will not obtain patent
rights to such unpatented trade secrets, which patent rights could be used to
assert infringement claims against the Company. From time to time the Company
has entered, and in the future may enter, into cross licensing arrangements with
others, pursuant to which the Company licenses certain of its patents in
exchange for patent licenses from such licensees. Although these types of cross
licensing arrangements are common in the semiconductor and microprocessor
industries, and do not generally provide for transfers of know-how or other
proprietary information, such arrangements may facilitate the ability of such
licensees, either alone or in conjunction with others, to develop competitive
products and designs.
The Company and Silicon Graphics have entered into arrangements pursuant to
which certain intellectual property was assigned to the Company, subject to the
grant of a license to Silicon Graphics; certain intellectual property was
retained by Silicon Graphics, subject to the grant of a license to the Company;
and certain intellectual property was retained by Silicon Graphics without any
ongoing interest to the Company. The Company's inability to use Silicon
Graphics' intellectual property in the future could have a material adverse
affect on its business and results of operations. In the past, the MIPS Group
has benefited from its status as a division of Silicon Graphics in its access to
the intellectual property of third parties through licensing arrangements or
otherwise, and in the negotiation of the financial and other terms of any such
arrangements. As a result of the Separation, there can be no assurance that the
Company will be able to negotiate commercially attractive intellectual property
licensing arrangements with third parties in the future, particularly if the
Company ceases to be a majority-owned subsidiary of Silicon Graphics. In
addition, in connection with any future intellectual property infringement
claims, the Company will not have the benefit of asserting counterclaims based
on Silicon Graphics' intellectual property portfolio, nor will the Company be
able to provide licenses to Silicon Graphics' intellectual property in order to
resolve such claims.
Lack of Independent Operating History. The Company has never operated as a
stand-alone company. The Company continues to be a majority owned subsidiary of
Silicon Graphics, however, Silicon Graphics will have no obligation to provide
assistance to the Company. The Company will be required to develop and implement
the operational, administrative and other systems and infrastructure necessary
to support its current and future business. There can be no assurance that the
Company will be able to develop the necessary systems and infrastructure and any
failure to do so could have an adverse effect on the Company's business, results
of operations and financial condition.
17
New Product Development and Technological Change. The Company's success is
highly dependent on its ability to develop enhancements and new generations of
its microprocessor intellectual property, introduce them to the marketplace in a
timely manner, and have them incorporated into semiconductor products that are
ultimately selected for design into the products of leading digital consumer
product manufacturers. There can be no assurance that the Company's development
efforts will be successful or that the characteristics of its microprocessor
intellectual property will satisfy those that may be critical to specific
applications in the embedded market. To the extent that the Company's
development efforts are unsuccessful or the characteristics of its
microprocessor intellectual property are not compatible with the requirements of
specific digital consumer product applications, its ability to achieve design
wins may be limited. Failure to achieve sufficient design wins could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Technical innovations of the type critical to the Company's success are
inherently complex. Any failure by the Company to anticipate or respond
adequately to changes in the requirements of digital consumer product
manufacturers or in the semiconductor manufacturing process, or any significant
delays in the development or introduction of new microprocessor intellectual
property, could have a material adverse effect on the Company's business,
results of operations and financial condition. Moreover, significant technical
innovations generally require a substantial investment before their commercial
viability is determined. There can be no assurance that the Company will have
the financial resources necessary to fund the future development of
microprocessor and related designs. In addition, there can be no assurance that
any enhancements or new generations of the Company's technology, even if
successfully developed, will generate revenue in excess of the costs of
development or not be quickly rendered obsolete by changing consumer
preferences, the introduction of products embodying new technologies or features
or other technological developments in the semiconductor and digital consumer
products industries.
Dependence on Digital Consumer Products Industry. The digital consumer
products industry will be the primary market for the Company's microprocessor
and related designs. The Company's success will be dependent upon the level of
consumer acceptance of the products that incorporate its technology, which may
be affected by changing consumer preferences and the introduction of products
embodying new technologies or features. In addition, certain digital consumer
products such as video game products may present limited opportunities for
design wins due to a limited number of product manufacturers and the length of
product life cycles. Many applications in the digital consumer products
industry, such as handheld personal computers and set-top boxes, have only
recently been introduced to the market and the level of consumer interest and
acceptance is difficult to predict. Factors negatively affecting the digital
consumer products industry and the demand for digital consumer products, such as
the failure to develop industry standards for hardware and software or to
achieve adequate product cost reductions, could have a material adverse effect
on the Company's business, results of operations and financial condition.
Moreover, to the extent that the performance, functionality, price and power
characteristics of the Company's microprocessor designs do not satisfy those
that may be critical to specific digital consumer product applications, the
Company's dependence on the digital consumer products industry may be further
confined to a limited segment of that industry.
Reliance on Manufacturing Partners. The Company does not manufacture or
sell microprocessors containing its technology. Rather, the Company licenses its
technology to semiconductor manufacturers that incorporate the Company's
technology into the products they sell. In some cases, these manufacturing
partners also add custom integration services and derivative design technologies
to the Company's microprocessor designs. Accordingly, the Company's success is
substantially dependent on the adoption and continued use of its technology by
semiconductor manufacturers. The Company faces numerous risks in obtaining
agreements with semiconductor manufacturers on terms consistent with its
business model, including, among others, the lengthy and expensive process of
building a relationship with a potential partner before there is any assurance
of an agreement; persuading large semiconductor companies to work with, to rely
for critical technology on, and to disclose proprietary manufacturing technology
to, the Company; and persuading potential partners to bear certain development
costs associated with the Company's technology and to make the necessary
investment to successfully produce embedded microprocessors using the Company's
technology. Moreover, none of the Company's manufacturing partners is obligated
to license new or future generations of the Company's microprocessor designs.
The Company is also subject to many risks beyond its control that influence
the success of its semiconductor manufacturing partners, including, among
others, the highly competitive environment in which its current and any future
partners operate, the market for their products and the engineering capabilities
and financial and other resources of its partners. The Company also believes
that its principal competition may come from semiconductor
18
manufacturers, including its current manufacturing partners that internally
develop products using similar or alternative technologies. Any such competition
may adversely affect the Company's existing relationships and its ability to
establish new relationships. Moreover, the Company's relationships with certain
of its existing partners may be negatively affected by its separation from
Silicon Graphics, insofar as Silicon Graphics' status as a customer of such
partners has been a factor in establishing and maintaining such relationships or
in negotiating the financial and other terms of the contractual arrangements
with such partners.
The Company currently has seven semiconductor manufacturing partners. There
can be no assurance that the Company will be successful in maintaining
relationships with its current manufacturing partners or in entering into new
relationships with additional partners. Any failure by the Company to establish
or maintain such relationships could have a material adverse effect on the
Company's business, results of operations and financial condition.
Dependence on Digital Consumer Product Manufacturers. The timing and amount
of royalties received by the Company is directly affected by sales of consumer
products incorporating the Company's technology. Accordingly, the Company's
success is substantially dependent upon the adoption of its technology by
digital consumer product manufacturers. The Company is subject to many risks
beyond its control that influence the success or failure of a particular digital
consumer product manufacturer, including, among others, competition faced by the
manufacturer in its particular industry; market acceptance of the manufacturer's
products; the engineering, marketing and management capabilities of the
manufacturer; technical challenges unrelated to the Company's technology faced
by the manufacturer in developing its products; and the financial and other
resources of the manufacturer. The process of persuading digital consumer
product manufacturers to adopt the Company's technology can be lengthy and, even
if adopted, there can be no assurance that the Company's technology will be used
in a product that is ultimately brought to market, achieves commercial
acceptance or results in meaningful royalties to the Company. The failure of
manufacturers in the digital consumer products industry to adopt the Company's
technology for incorporation into their products could have a material adverse
effect on the Company's business, results of operations and financial condition.
Furthermore, because the Company does not control the business practices of its
licensees, it has no ability to establish the prices at which the products
incorporating its technology are made available to digital consumer product
manufacturers or the degree to which its licensees promote the Company's
technology to such manufacturers.
Competition. Competition in the market for embedded microprocessors is
intense. The Company believes that the principal competitive factors in the
industry are performance, functionality, price, customizability and power
consumption. The Company competes primarily against ARM Holdings plc. and
Hitachi Semiconductor (America) Inc. The Company also competes against certain
semiconductor manufacturers whose product lines include microprocessors for
embedded and non-embedded applications, including Intel Corporation, National
Semiconductor Corporation, Advanced Micro Devices, Inc. and Motorola, Inc. In
addition, the Company must continue to differentiate its microprocessor and
related designs from those available or under development by the internal design
groups of semiconductor manufacturers, including its current and prospective
manufacturing partners. Many of these internal design groups have substantial
programming and design resources and are part of larger organizations, which
have substantial financial and marketing resources. There can be no assurance
that internal design groups will not develop products that compete directly with
those of the Company or will not actively seek to license their own technology
to third-party semiconductor manufacturers. Certain of the Company's competitors
have greater name recognition and customer bases as well as greater financial
and marketing resources than the Company, and such competition could adversely
affect the Company's business, results of operations and financial condition.
Dependence on Key Personnel. The Company's success depends in part on the
continued contributions of its key management, technical, sales and marketing
personnel, many of whom are highly skilled and difficult to replace. In
addition, the Company's business plan requires, and its future operating results
depend in significant part upon, the identification and hiring of additional
highly skilled personnel, particularly technical personnel for its anticipated
research and development activities. Competition for qualified personnel,
particularly those with significant experience in the semiconductor and
microprocessor design industries, is intense. The loss of the services of any of
the key personnel, the inability to attract and retain qualified personnel in
the future or delays in hiring personnel, particularly technical personnel,
could have a material adverse effect on the Company's business, operating
results and financial condition.
19
Risks Associated with International Operations. A substantial portion of
the Company's revenue is derived from outside the United States. For the fiscal
years ended June 30, 1998, 1997 and 1996, revenue from customers outside the
United States, primarily in Japan, represented approximately 90%, 87% and 83%,
respectively, of the Company's total revenue. The Company anticipates that
revenue from international customers primarily in Asia, will continue to
represent a substantial portion of its total revenue. To date, substantially all
of the Company's revenue from international customers has been denominated in
U.S. dollars. However, to the extent that sales to digital consumer product
manufacturers by the Company's manufacturing partners are denominated in foreign
currencies, royalties received by the Company on such sales could be subject to
fluctuations in currency exchange rates. In addition, if the effective price of
the technology sold by the Company to its partners were to increase as a result
of fluctuations in foreign currency exchange rates, demand for the Company's
technology could fall which would, in turn, reduce the Company's royalties. The
Company is unable to predict the amount of non-U.S. dollar denominated revenue
earned by its licensees. Therefore, the Company has not historically attempted
to mitigate the effect that currency fluctuations may have on its revenue, and
does not presently intend to do so in the future. The relative significance of
the Company's international operations exposes it to a number of additional
risks including political and economic instability, longer accounts receivable
collection periods and greater difficulty in collection of accounts receivable,
reduced or limited protection for intellectual property, export license
requirements, tariffs and other trade barriers and potentially adverse tax
consequences. Several countries in Asia are experiencing a severe economic
crisis, characterized by reduced economic activity, lack of liquidity, highly
volatile foreign currency exchange and interest rates and unstable stock
markets. Several of the Company's semiconductor partners sell products into Asia
that incorporate the Company's microprocessor and related designs. Any negative
impact of the circumstances in Asia on its sales of such products by the
Company's semiconductor partners could have a negative impact on its royalty
revenue. There can be no assurance that the Company will be able to sustain
revenue derived from international customers or that the foregoing factors will
not have a material adverse effect on the Company's business, operating results
and financial condition.
Management of Growth. The Company has limited managerial, financial,
engineering and other resources and may not be equipped to manage successfully
any future periods of rapid growth or expansion. In addition, the Company's
business plan requires that it identify and hire additional highly skilled
technical personnel during fiscal 1999 to staff its anticipated research and
development activities. Recruitment and integration of these additional
employees, as well as any future periods of rapid growth or expansion, can be
expected to place significant strains on the Company's resources, which may be
exacerbated by the Company's recent shift in strategic direction. Digital
consumer product manufacturers as well as the Company's semiconductor
manufacturing partners typically require significant engineering support in the
design, testing and manufacture of products incorporating the Company's
technology. As a result, any increase in the adoption of the Company's
technology will increase the strain on the Company's personnel, particularly its
engineers. The Company's future growth will also depend on its ability to
implement operational, financial and management information and control systems
and procedures necessary to operate as a stand-alone company and without the
financial, operational, managerial and administrative support previously
provided by Silicon Graphics.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not Applicable.
Item 8. Financial Statements and Supplementary Data.
20
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
of MIPS Technologies, Inc.
We have audited the accompanying balance sheets of MIPS Technologies, Inc.
(the "Company") as of June 30, 1998 and 1997, and the related statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MIPS Technologies, Inc. at
June 30, 1998 and 1997, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1998 in conformity with
generally accepted accounting principles.
/S/ Ernst & Young LLP
San Jose, California
July 20, 1998
21
MIPS TECHNOLOGIES, INC.
BALANCE SHEETS
(In thousands, except share data)
June 30,
-----------------------
1998 1997
--------- ---------
ASSETS
Current assets:
Cash ........................................................ $ 45 $ --
Accounts receivable ......................................... 250 381
Prepaid expenses and other current assets ................... 618 2,775
--------- ---------
Total current assets .................................... 913 3,156
Equipment and furniture, net .................................. 2,787 15,190
Employee notes receivable ..................................... 996 1,328
--------- ---------
$ 4,696 $ 19,674
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ............................................ $ 3,087 $ 5,834
Accrued liabilities ......................................... 2,356 5,437
Current portion of capital lease obligations ................ -- 331
--------- ---------
Total current liabilities ............................... 5,443 11,602
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $0.001 par value: 150,000,000 shares
authorized; 36,000,000 shares issued and outstanding ...... 36 36
Additional paid-in capital .................................. 120,041 129,236
Accumulated deficit ......................................... (120,824) (121,200)
--------- ---------
Total stockholders' equity (deficit) .................... (747) 8,072
--------- ---------
$ 4,696 $ 19,674
========= =========
See accompanying notes.
22
MIPS TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended June 30,
----------------------------------
1998 1997 1996
-------- -------- --------
Revenue:
Royalties ............................... $ 55,980 $ 37,192 $ 19,716
Contract revenue ........................ 830 3,115 17,327
-------- -------- --------
Total revenue ....................... 56,810 40,307 37,043
Costs and expenses (see Note 11
regarding related party transactions with
Silicon Graphics):
Cost of contract revenue ................ 375 1,345 5,580
Research and development ................ 43,446 68,827 48,402
Sales and marketing ..................... 5,307 6,170 6,026
General and administrative .............. 4,685 4,750 4,601
Restructuring charge .................... 2,614 -- --
-------- -------- --------
Total costs and expenses ............ 56,427 81,092 64,609
-------- -------- --------
Operating income (loss) ..................... 383 (40,785) (27,566)
Interest expense ............................ (7) (50) (99)
-------- -------- --------
Net income (loss) ........................... $ 376 $(40,835) $(27,665)
======== ======== ========
Net income (loss) per basic and diluted share $ 0.01 $ (1.13) $ (0.77)
======== ======== ========
Common shares outstanding-basic ............. 36,000 36,000 36,000
======== ======== ========
Common shares outstanding-diluted ........... 36,033 36,000 36,000
======== ======== ========
See accompanying notes.
23
MIPS TECHNOLOGIES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
Total
Additional Stockholders'
Common Paid-in- Accumulated Equity
Stock Capital Deficit (Deficit)
--------- --------- --------- ---------
Balances at June 30, 1995 ...... $ 36 $ 48,928 $ (52,700) $ (3,736)
Net loss ................... -- -- (27,665) (27,665)
Net financing provided from
Silicon Graphics ......... -- 35,254 -- 35,254
--------- --------- --------- ---------
Balances at June 30, 1996 ...... 36 84,182 (80,365) 3,853
Net loss ................... -- -- (40,835) (40,835)
Net financing provided from
Silicon Graphics ......... -- 45,054 -- 45,054
--------- --------- --------- ---------
Balances at June 30, 1997 ...... 36 129,236 (121,200) 8,072
Net income ................. -- -- 376 376
Net financing returned to
Silicon Graphics ......... -- (1,965) -- (1,965)
Net equipment transferred to
Silicon Graphics ......... -- (7,230) -- (7,230)
--------- --------- --------- ---------
Balances at June 30, 1998 ...... $ 36 $ 120,041 $(120,824) $ (747)
========= ========= ========= =========
See accompanying notes.
24
MIPS TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
Years ended June 30,
----------------------------------
1998 1997 1996
-------- -------- --------
Operating activities:
Net income (loss) ............................................. $ 376 $(40,835) $(27,665)
Adjustments to reconcile net income to cash
provided by (used in) operations:
Depreciation ................................................ 5,044 7,343 8,201
Restructuring charge ........................................ 2,114 -- --
Other non-cash charges ...................................... 362 99 28
Changes in operating assets and liabilities:
Accounts receivable ....................................... 131 146 (218)
Prepaid expenses and other current assets ................. 2,157 (728) (300)
Employee notes receivable ................................. 92 (1,332) --
Accounts payable and accrued liabilities .................. (5,828) 574 (7,214)
-------- -------- --------
Net cash flow provided by (used in) operating activities,
excluding Silicon Graphics financing .................. 4,448 (34,733) (27,168)
Investing activities-- capital expenditures ..................... (2,107) (9,913) (7,257)
Financing activities:
Payments on capital lease obligations ......................... (331) (408) (829)
Net financing provided from (returned to) Silicon Graphics .... (1,965) 45,054 35,254
-------- -------- --------
Net cash provided by (used in) financing activities ..... (2,296) 44,646 34,425
Net increase in cash ............................................ 45 -- --
Cash, beginning of year ......................................... -- -- --
-------- -------- --------
Cash, end of year ............................................... $ 45 $ -- $ --
======== ======== ========
Supplemental disclosures of cash flow information:
Net equipment transferred to Silicon Graphics ............... $ 7,230 $ -- $ --
======== ======== ========
Interest paid ............................................... $ 13 $ 50 $ 99
======== ======== ========
See accompanying notes.
25
MIPS Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
Note 1. Formation and Description of Business
Formation of MIPS Technologies, Inc. (the "Company"). In June 1992, Silicon
Graphics formed the Company following the merger of MIPS Computer Systems, Inc.
into Silicon Graphics, which was accounted for as pooling of interests. MIPS
Computer Systems, Inc. was founded in 1984 and was engaged in the design and
development of RISC microprocessors for the computer systems and embedded
markets. Silicon Graphics adopted the MIPS architecture for its computer systems
in 1988 and acquired MIPS Computer Systems, Inc. in 1992. Following the
acquisition, Silicon Graphics continued the MIPS microprocessor business through
its MIPS Group (a division of Silicon Graphics), which focused primarily on the
development of high-performance microprocessors for Silicon Graphics'
workstations and servers. Until the last few years, cost considerations limited
the broader use of these microprocessors. However, as the cost to design and
manufacture microprocessors based on the MIPS technology decreased, the MIPS
Group sought to penetrate the consumer market, both through supporting and
coordinating the efforts of the MIPS semiconductor partners and most notably, by
partnering with Nintendo in its design of the Nintendo 64 video game player and
related cartridges. Revenues related to sales of Nintendo 64 game players and
related cartridges currently account for the substantial majority of the
Company's revenue. In order to increase the focus of the MIPS Group on the
design and development of microprocessor applications dedicated to the embedded
market, in December 1997, Silicon Graphics initiated a plan to separate the
business of the MIPS Group from its other operations.
In April 1998, the Board of Directors of the Company approved a
transaction, pursuant to which, Silicon Graphics transferred to the Company the
assets and liabilities related to the design and development of microprocessor
intellectual property for embedded market applications (the "Separation"). In
connection with the Separation, the Company and Silicon Graphics entered into a
Corporate Agreement that provides for certain pre-emptive rights of Silicon
Graphics to purchase shares of the Company's capital stock, registration rights
related to shares of the Company's capital stock owned by Silicon Graphics and
covenants against certain actions by the Company for as long as Silicon Graphics
owns a majority of the Company's outstanding Common Stock. Furthermore, the
Company and Silicon Graphics entered into a Management Services Agreement
pursuant to which Silicon Graphics will provide certain services to the Company
following the Separation on an interim or transitional basis.
As of June 30, 1998, the Company is a wholly owned subsidiary of Silicon
Graphics.
Basis of Presentation. The accompanying financial statements reflect the
operations of the Company's predecessor, the MIPS Group, through June 30, 1998.
The accompanying balance sheets have been prepared using the historical basis of
accounting and include all of the assets and liabilities specifically
identifiable to the Company and, for certain liabilities that are not
specifically identifiable, estimates have been used to allocate a portion of
Silicon Graphics' liabilities to the Company. Cash management for the Company
has been done by Silicon Graphics on a centralized basis and all cash provided
by Silicon Graphics has been recorded as interest-free financing from Silicon
Graphics in these financial statements.
The statements of operations include all revenue and costs attributable to
the Company, including a corporate allocation of the costs of facilities and
employee benefits. Additionally, incremental corporate administration, finance
and management costs are allocated to the Company based on certain methodologies
that management believes are reasonable under the circumstances (see Note 11).
Note 2. Summary of Significant Accounting Policies
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results inevitably will differ from those
estimates, and such differences may be material to the financial statements.
Revenue Recognition. The Company derives revenue from fees for the transfer
of proven and reusable intellectual property components or the performance of
engineering services to customer specifications. The Company enters into
licensing agreements that provide licensees the right to incorporate the
Company's intellectual property
26
MIPS Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
components in their products with terms and conditions that have historically
varied by licensee. Generally these agreements include one or more of the
following elements: (i) royalty payments, which are payable upon the sale of a
licensee's products, (ii) nonrefundable technology license fees, which are
payable upon the transfer of intellectual property and (iii) engineering service
fees, which generally are payable upon the Company's achievement of defined
milestones. No upgrades or modifications to a licensed product are provided.
The Company classifies all revenue that involves the future sale of a
licensee's products as royalty revenue. Royalty revenue generally is recognized
in the quarter in which a report is received from a licensee detailing the
shipments of products incorporating the Company's intellectual property
components (i.e., in the quarter following the sale of licensed product by the
licensee). The Company classifies all revenue that does not involve the future
sale of a licensee's products, primarily license fees and engineering service
fees, as contract revenue. License fees are recognized upon the execution of the
license agreement and transfer of intellectual property, provided no further
significant performance obligations exist. Engineering services, which are
performed on a best efforts basis, are recognized as revenue when the defined
milestones are completed and the milestone payment is probable of collection.
Milestones have historically been formulated to correlate with the estimated
level of effort and related costs have been expensed as incurred.
Certain license agreements provide for limited product support that
consists of an identified customer contact at the Company and telephonic or
e-mail product support. Such support arrangements have been insignificant to
date.
Equipment and Furniture. Equipment and furniture are stated at cost and
depreciation is computed using the straight-line method. Useful lives of three
to seven years are used for equipment and furniture and fixtures.
Prepaid Expenses and Other Current Assets. Prepaid expenses and other
current assets consist principally of amounts paid by the Company in advance for
maintenance contracts on its computer-aided software design tools. These
contracts typically cover a one-year period, over which the cost is amortized.
Stock-Based Compensation. The Company has adopted the disclosure
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-based Compensation" ("SFAS 123"). As allowed by SFAS 123, the Company
accounts for stock-based employee compensation arrangements under the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB25"). As a result, no expense
had been recognized for options to purchase common stock of Silicon Graphics
(prior to the Separation) or of the Company granted with an exercise price equal
to fair market value at the date of grant or in connection with the Silicon
Graphics stock purchase plan prior to the Separation (see Note 10). For Silicon
Graphics stock options that were granted and restricted Silicon Graphics common
stock issued at discounted prices, the Company recognizes compensation expense
over the vesting period for the difference between the exercise or purchase
price and the fair market value on the measurement date.
Earnings per Share. The Company follows the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS
128 requires the presentation of basic and fully diluted earnings per share.
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares that were
outstanding during the period. Diluted earnings per share is computed giving
effect to all dilutive potential common shares that were outstanding for any
periods presented in these financial statements. The Company effected a
360,000-for-one split of its common stock in May 1998 (see Note 10), and
accordingly, the Company has presented share and net income (loss) per share
data in the financial statements giving effect to that split.
27
MIPS Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except per share data):
Years ended June 30,
---------------------------------
1998 1997 1996
-------- -------- --------
Numerator:
Net income (loss) available to common stockholders . $ 376 $(40,835) $(27,665)
======== ======== ========
Denominator:
Shares used in computing basic net income (loss)
per share-weighted-average shares ................ 36,000 36,000 36,000
Effect of dilutive securities-employee stock options 33 -- --
-------- -------- --------
Shares used in computing diluted net income (loss)
per share-adjusted weighted-average shares and
common share equivalents ......................... 36,033 36,000 36,000
======== ======== ========
Basic net income (loss) per share .................. $ 0.01 $ (1.13) $ (0.77)
Diluted net income (loss) per share ................ $ 0.01 $ (1.13) $ (0.77)
Recent Accounting Pronouncements. In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"), and No. 131, "Disclosures
Segments of an Enterprise and Related Information" ("SFAS 131"), collectively
the "Statements." The Company is required to adopt these Statements in fiscal
1999. SFAS 130 establishes new standards for reporting and displaying
comprehensive income and its components. SFAS 131 requires disclosure of certain
information regarding operating segments, products and services, geographic
areas of operation and major customers. Adoption of these Statements is expected
to have no impact on the Company's results of operations or financial condition.
In March 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS 132"). SFAS 132 does not change the recognition or measurement
of pension or postretirement benefit plans, but revises and standardizes
disclosure requirements for pensions and other postretirement benefits. The
adoption of SFAS 132 in fiscal 1999 will have no impact on the Company's results
of operations or financial condition.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Financial Instruments and for Hedging
Activities" ("SFAS 133"), which provides comprehensive and consistent standard
for the recognition and measurement of derivatives and hedging activities. The
Company is required to adopt SFAS 133 in fiscal 2000 and it is not anticipated
to have an impact on the Company's results of operations or financial condition
when adopted.
Note 3. Business Risk and Customer Concentration
The Company operates in the intensely competitive semiconductor industry,
which has been characterized by price erosion, rapid technological change, short
product life cycles, cyclical market patterns and heightened foreign and
domestic competition. Significant technological changes in the industry could
affect operating results adversely. Due to the Company's focus on microprocessor
designs dedicated to the embedded market, including digital consumer products,
the Company expects to experience seasonal fluctuations in its revenue and
operating results.
The Company markets and licenses its technology to a limited number of
customers and generally does not require collateral. At June 30, 1998 and 1997,
one customer accounted for 100% of accounts receivable. During the years ended
June 30, 1998 and 1997, revenue from two customers represented an aggregate of
88% and 85% of total revenue, respectively, and during the year ended June 30,
1996, revenue from three customers represented an aggregate of 72% of total
revenue. The Company expects that a significant portion of its future revenue
will continue to be generated by a limited number of customers. The nonrenewal
or expiration of contracts between the Company and its current customers could
adversely affect near-term future operating results.
28
MIPS Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
A substantial portion of the Company's revenue is derived from customers
outside the United States (see Note 13). The Company anticipates that revenue
from international customers will continue to represent a substantial portion of
its total revenue. To date, substantially all of the revenue from international
customers has been denominated in U.S. dollars. However, to the extent that
sales to digital consumer product manufacturers by the Company's manufacturing
partners are denominated in foreign currencies, royalties received by the
Company on such sales could be subject to fluctuations in currency exchange
rates. In addition, if the effective price of the technology sold by the Company
to its partners were to increase as a result of fluctuations in foreign currency
exchange rates, demand for the Company's technology could fall which would, in
turn, reduce the Company's revenues. The relative significance of the Company's
international operations exposes it to a number of additional risks including
political and economic instability, longer accounts receivable collection
periods and greater difficulty in collection of accounts receivable, reduced or
limited protection for intellectual property, export license requirements,
tariffs and other trade barriers and potentially adverse tax consequences. There
can be no assurance that the Company will be able to sustain revenue derived
from international customers or that the foregoing factors will not have a
material adverse effect on the Company's business, operating results and
financial condition.
Note 4. Restructuring Charge
The restructuring charge recorded in fiscal 1998 includes approximately
$500,000 in severance and related costs (17 employees, a majority of which
supported research and development activities) and $2.1 million in fixed asset
write-downs related to the Company's shift in strategic direction. Substantially
all the severance and related costs were paid and 16 employees were terminated
as of June 30, 1998.
Note 5. Employee Notes Receivable
The Company has loans outstanding to employees and an officer. Such loans
are payable upon maturity and have terms ranging from three to five years.
Approximately $432,000 and $776,000 of these loans at June 30, 1998 and 1997,
respectively, relate to loans that are forgiven by the Company on a periodic
basis as the employees or officer remains employed by the Company. Loan
forgiveness charged to expense was approximately $240,000, $99,000 and $28,000
in fiscal 1998, 1997 and 1996, respectively. Upon termination of employment, the
unamortized balance of the loans becomes due. Such forgivable loans bear no
interest. The remaining employee loans bear interest at rates ranging from 7.19%
to 7.25% and are due on dates ranging from September 1999 to March 2002.
Note 6. Equipment and Furniture
The components of equipment and furniture are as follows (in thousands):
June 30,
------------------------
1998 1997
-------- --------
Equipment ............................ $ 7,990 $ 45,918
Equipment under capital lease ........ -- 1,198
Furniture and fixtures ............... 421 516
-------- --------
8,411 47,632
Accumulated depreciation ............. (5,624) (32,442)
-------- --------
Equipment and furniture, net ......... $ 2,787 $ 15,190
======== ========
Note 7. Accrued Liabilities
The components of accrued liabilities are as follows (in thousands):
June 30,
------------------------
1998 1997
-------- --------
Accrued compensation and
employee-related expenses ......... $ 194 $ 4,163
Development and marketing funds ...... 1,555 1,053
Other accrued liabilities ............ 607 221
-------- --------
$ 2,356 $ 5,437
======== ========
29
MIPS Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
Accrued compensation and employee-related expenses at June 30, 1997 include
approximately $1.6 million in accrued vacation and $1.2 million in accrued
employee relocation expenses. In connection with the Separation, all accrued
vacation amounts as of May 31, 1998 were paid to the Company's employees. The
amount accrued at June 30, 1998 represents accrued vacation costs from June 1,
1998 to June 30, 1998. The development and marketing funds represent amounts
received from certain of the Company's customers to be used in joint development
and marketing programs.
Note 8. Capital Lease Obligations
The Company's capital lease obligations pertaining to leased equipment
matured in fiscal 1998.
Note 9. Income Taxes
The net income and losses incurred in fiscal years 1998, 1997 and 1996 are
primarily attributable to the operations of the Company as a division of Silicon
Graphics and were included in the income tax returns filed by Silicon Graphics.
In light of both historical losses incurred, as well as the fact that, by
operation of the tax sharing agreement, the Company will not receive any benefit
for losses incurred or have any tax liability for any income earned up to the
closing of the initial public offering, no income tax provision or benefit has
been reflected for the periods presented.
Subsequent to the closing of the initial public offering, the Company,
while still a part of Silicon Graphics' consolidated group for federal income
tax purposes, is responsible for its income taxes through a tax sharing
agreement with Silicon Graphics. Therefore, to the extent the Company produces
taxable income, losses or credits, it will make or receive payments as though it
filed separate federal, state and local income tax returns.
The Company and Silicon Graphics have entered into a tax sharing agreement
pursuant to which they will make payments between them such that, with respect
to any period, the amount of taxes to be paid by the Company, subject to certain
adjustments, will be determined as though the Company were to file separate
federal, state and local income tax returns.
In general, the Company will be included in Silicon Graphics' consolidated
group for federal income tax purposes for so long as Silicon Graphics
beneficially owns at least 80% of the total voting power and value of the
outstanding common stock.
At June 30, 1998 and 1997, the Company's deferred tax assets and the
related valuation allowance were immaterial.
Note 10. Stockholders' Equity
In May 1998, the Board of Directors of the Company authorized and the
Company's Stockholder later approved a 360,000-for-one stock split of the
Company's common stock and an amendment to the Company's Certificate of
Incorporation for an increase in the number of authorized shares of common stock
to 150,000,000 shares. All prior year financial statements have been restated to
effect the stock split.
1998 Long-Term Incentive Plan. The 1998 Long-Term Incentive Plan (the
"Plan") was adopted by the Board of Directors of the Company and approved by the
Company's Stockholder in May 1998. The Plan authorized the issuance of various
forms of stock-based awards including incentive and non-qualified stock options,
stock appreciation rights, stock awards and performance unit awards to officers
and other key employees and consultants. Stock options are granted at an
exercise price of not less than the fair value on the date of grant; the prices
of other stock awards are determined by the Board of Directors. Stock options
generally vest over a fifty-month period from the date of grant. An aggregate of
6,600,000 shares of common stock may be issued under the Plan and are reserved
for future issuance.
30
MIPS Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
The stock option activity under the Plan is summarized as follows:
Outstanding Options
------------------------------
Shares available Number of Weighted Average
for Grant Shares Exercise Price
----------- -------- ---------------
Balance at July 1, 1997 .............. -- -- --
Shares authorized for issuance ....... 6,600,000 -- --
Options granted ...................... (2,996,900) 2,996,900 $ 12.00
Balance at June 30, 1998 ............. 3,603,100 2,996,900 $ 12.00
========== =========
At June 30, 1998, the weighted average contractual life of the options
outstanding was 10 years. There are no options exercisable at June 30, 1998.
Employee Stock Purchase Plan. The Employee Stock Purchase Plan (the
"Purchase Plan") was adopted by the Board of Directors of the Company and
approved by the Company's Stockholder in May 1998. The purpose of the Purchase
Plan is to provide employees of the Company who participate in the Purchase Plan
with an opportunity to purchase common stock of the Company through payroll
deductions. Under this Purchase Plan eligible employees may purchase stock at
85% of the lower of the fair market value of the Common Stock (a) on the date of
commencement of the offering period or (b) the applicable exercise date within
such offering period. A 24-month offering period commences every six months,
generally at May 1 and November 1 of each year. The offering period is divided
into four six month exercise periods. The exercise date is the last day of the
particular six month exercise period within the offering period. If the fair
market value of the Company's Common Stock on the first day of any exercise
period is less than on the first day of that offering period, all employees
participating in the Purchase Plan on the first day of such exercise period will
be deemed to have withdrawn from the offering period on the first day of such
exercise period and to have enrolled in the new offering period commencing on
that date. Purchases are limited to 10% of each employee's eligible
compensation. At June 30, 1998 no shares have been issued to employees of the
Company under the Purchase Plan. Presently 600,000 shares of Common Stock are
reserved for future issuances under the Purchase Plan, and in addition there
will be an amount added annually on July 1 of each year equal to the lesser of
one-half of one percent of the outstanding shares of Common Stock on a fully
diluted basis or 600,000 shares or a lesser amount as determined by the Board.
Directors' Stock Option Plan. The Board of Directors of the Company adopted
and the Company's Stockholder approved the Directors' Stock Option Plan (the
"Director Plan") in July 1998. The plan authorizes 600,000 shares of Common
Stock for issuance plus an annual increase each July 1st equal to the lesser of
(i) 100,000 shares, (ii) the number of shares subject to option granted in the
prior one year period, or (iii) a lesser amount determined by the Board. Upon a
non-employee director's election or appointment to the Board, he or she will
automatically receive a non-statutory stock option to purchase 40,000 shares of
Common Stock. Each director who has been a non-employee director for at least
six months will automatically receive a non-statutory stock option to purchase
10,000 shares of Common Stock each year on the date of the annual stockholder
meeting. All stock options are granted an exercise price equal to the fair
market value of the Company's Common Stock on the date of grant. Stock options
generally vest over a 50-month period from the date of the grant. As of June 30,
1998, no shares had been issued to directors of the Company under the Director
Plan.
Non-U.S. Stock Purchase Plan. The Non-U.S. Stock Purchase Plan (the
"Non-U.S. Purchase Plan") was adopted by the Board in July 1998. The purpose of
the Non-U.S. Purchase Plan is to provide employees and consultants of the
Company who do not provide services in the United States and who participate in
the Non-U.S. Purchase Plan with an opportunity to purchase Common Stock of the
Company at the same discount and subject to the same general rules as the
Company's Employees Stock Purchase Plan. The Non-U.S. Purchase Plan, like the
Purchase Plan, has 24-month offering periods commencing every six months and
each offering period is divided into four six-month exercise periods. Purchases
are limited to ten percent of each employee's and consultant's eligible
compensation. As of June 30, 1998, no shares had been issued to employees or
consultants of the Company under the Non-U.S. Purchase Plan and 60,000 shares of
Common Stock are reserved for issuance.
31
MIPS Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
Silicon Graphics Stock Award Plans. While employees of Silicon Graphics,
certain employees of the Company were granted options to purchase Silicon
Graphics common stock and were awarded restricted shares of Silicon Graphics
common stock. In addition, certain employees of the Company purchased Silicon
Graphics common stock through the Silicon Graphics stock purchase plan. In
connection with their acceptance of employment with the Company, employees of
the Company previously employed by Silicon Graphics have mutually agreed with
Silicon Graphics that all unvested options to purchase Silicon Graphics common
stock and unvested restricted shares of Silicon Graphics common stock will be
forfeited. In addition, such individuals have 30 or 90 days from May 29, 1998
(depending on the terms of the option grant) to exercise any vested options to
purchase Silicon Graphics common stock, and any vested options that are not
exercised will be forfeited.
Silicon Graphics has various stock award plans, which provide for the grant
of incentive and nonstatutory stock options and the issuance of restricted stock
to employees. Incentive stock options are granted at not less than the fair
market value on the date of grant; the prices of nonstatutory stock option
grants and restricted stock were determined by the board of directors of Silicon
Graphics. Under the plans, options and restricted stock generally vest over a
fifty-month period from the date of grant.
Silicon Graphics stock option activity related to employees of the Company
is summarized as follows:
Outstanding Options
------------------------------
Number of Weighted Average
Shares Exercise Price
---------- ----------------
Balance at June 30, 1995 ............................ 1,717,720 $17.94
Options granted ................................... 772,440 $26.98
Options exercised ................................. (52,039) $ 9.97
Options canceled .................................. (649,967) $ 7.40
----------
Balance at June 30, 1996 ............................ 1,788,154 $22.26
Options granted ................................... 1,641,064 $21.00
Options exercised ................................. (148,748) $10.56
Options canceled .................................. (1,705,085) $23.90
----------
Balance at June 30, 1997 ............................ 1,575,385 $18.17
Options granted.................................... 161,861 $12.85
Options exercised.................................. (113,427) $10.77
Options canceled................................... (1,493,260) $18.02
----------
Balance at June 30, 1998............................. 130,559 $19.62
==========
Additional information about outstanding options to purchase Silicon
Graphics common stock held by employees of the Company at June 30, 1998 is as
follows:
Options Outstanding and Exercisable
-------------------------------------------------
Weighted-Average
Range of Number of Contractual Life Weighted-Average
Exercise Price Shares (in years) Exercise Price
-------------- ------------ ----------- ----------------
$ 8.06-$11.69...................... 11,577 6.94 $10.99
$12.63-$18.88...................... 53,430 7.86 $18.14
$20.00-$30.13...................... 65,552 8.02 $22.35
-------
$ 8.06-$30.13...................... 130,559 7.86 $19.62
=======
Shares of restricted Silicon Graphics common stock awarded to employees of
the Company in fiscal 1998, 1997 and 1996 were 27,000 shares, 83,500 shares and
40,000 shares, respectively.
At June 30, 1998, 1997 and 1996 there were 130,559, 480,629 and 856,711
exercisable options to purchase Silicon Graphics common stock held by employees
of the Company, respectively. At June 30, 1998, there were no shares of
restricted Silicon Graphics stock held by employees of the Company. At June 30,
1997 and 1996, 50,125
32
MIPS Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
and 35,000 shares of restricted Silicon Graphics stock held by employees of the
Company were subject to repurchase, respectively.
Silicon Graphics Stock Purchase Plan. Silicon Graphics has an employee
stock purchase plan under which eligible employees may purchase stock at 85% of
the lower of the closing prices for the stock at the beginning of a twenty
four-month offering period or the end of each six-month purchase period. The
Purchase periods generally begin in May and November. Purchases are limited to
10% of each employee's compensation. Shares issued to employees of the Company
under this Plan in fiscal 1998, 1997 and 1996 were 101,292 shares, 135,808
shares and 76,084 shares, respectively. Former employees of Silicon Graphics are
not eligible to participate in this Plan after their acceptance of employment
with the Company.
Grant Date Fair Values. The weighted average estimated fair value of
Silicon Graphics employee stock options granted at grant date market prices
during fiscal 1998, 1997 and 1996 was $6.02, $8.08 and $11.32 per share,
respectively. The weighted average exercise price of Silicon Graphics employee
stock options granted at grant date market prices during fiscal 1998, 1997 and
1996 was $14.89, $20.70 and $29.66 per share, respectively. The weighted average
estimated fair value of Silicon Graphics employee stock options granted at below
grant date market prices during fiscal 1997 and 1996 was $13.09 and $17.07 per
share, respectively. The weighted average exercise price of Silicon Graphics
employee stock options granted at below grant date market prices during 1997 and
1996 was $15.65 and $21.35 per share, respectively. There were no Silicon
Graphics options granted at below grant date market price during fiscal 1998.
The weighted average estimated fair value of Silicon Graphics restricted stock
granted during fiscal 1998, 1997 and 1996 was $24.37, $23.37 and $27.30 per
share, respectively. The weighted average estimated fair value of shares granted
under the Silicon Graphics stock purchase plan during fiscal 1998, 1997 and 1996
was $6.88, $7.85 and $15.09 per share, respectively.
The weighted average estimated fair value of the Company's employee stock
options granted at grant date market prices during fiscal 1998 was $8.71 per
share.
The weighted average fair value of Silicon Graphics options granted has
been estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions:
Employee Stock Options Stock Purchase Plan Shares
---------------------------- ----------------------------
Years Ended June 30, Years Ended June 30,
---------------------------- ----------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Expected life (in years) ............... 2.7 2.7 3.8 0.5 0.5 0.5
Risk-free interest rate ................ 5.74% 6.38% 5.18% 5.72% 5.45% 5.49%
Volatility ............................. 0.61 0.50 0.45 0.79 0.57 0.45
Dividend yield ......................... 0% 0% 0% 0% 0% 0%
The weighted average fair value of Company options granted has been
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions for the activity under the Company's
Plans:
Employee Stock Options
Year Ended June 30, 1998
------------------------
Expected life (in years) ...................... 5.0
Risk-free interest rate ....................... 5.66%
Volatility .................................... 0.70
Dividend yield ................................ 0%
Pro Forma Information. The Company has elected to follow APB 25 in
accounting for its employee stock options to purchase both Silicon Graphics and
the Company's common stock. Under APB 25, no compensation expense is recognized
in the Company's financial statements except in connection with the granting of
restricted
33
MIPS Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
stock for nominal consideration and unless the exercise price of the employee
stock options is less than the market price of the underlying stock on the date
of grant. Total compensation expense recognized in the Company's financial
statements for stock-based awards under APB 25 for fiscal 1998, 1997 and 1996
was $1.0 million, $1.7 million and $0.5 million, respectively.
Pro forma information regarding net loss and loss per share has been
determined as if the Company had accounted for Silicon Graphics and its employee
stock options and employee stock purchase plans under the fair value method
prescribed by SFAS 123. For purposes of pro forma disclosures, the estimated
fair value of the stock awards is amortized to expense over the vesting periods
of such awards.
The Company's pro forma information is as follows (in thousands, except per
share data):
Years Ended June 30,
--------------------------------------
1998 1997 1996
--------- --------- ----------
Pro forma net loss ............................ $ (738) $ (46,228) $ (30,041)
Pro forma basic and diluted net loss per share $ (0.02) $ (1.28) $ (0.83)
The historical pro forma impact of applying the fair value method
prescribed by SFAS 123 is not representative of the impact that may be expected
in the future due to changes resulting from the separation from Silicon Graphics
and the establishment of the Company's Plans during 1998.
Note 11. Related Party Transactions
Funding. The Company has utilized Silicon Graphics' centralized cash
management services and processes related to receivables, payables, payroll and
other activities. The Company's net cash requirements have been funded by
Silicon Graphics. Net financing provided to the Company by Silicon Graphics in
fiscal 1997 and 1996 was approximately $45.1 million and $35.3 million,
respectively. There was a net return of capital to Silicon Graphics by the
Company of approximately $9.2 million in fiscal 1998. The average balance due to
Silicon Graphics during fiscal 1998, 1997 and 1996 was approximately $125
million, $107 million and $67 million, respectively.
Corporate Services. Silicon Graphics allocates a portion of its domestic
corporate expenses to its divisions, including the Company. In addition, in
accordance with Staff Accounting Bulletin No. 55, certain additional allocations
have been reflected in these financial statements. These expenses have included
corporate communications, management, compensation and benefits administration,
payroll, accounts payable, income tax compliance, treasury and other
administration and finance overhead. Allocations and charges were based on
either a direct cost pass-through or a percentage allocation for such services
provided based on factors such as net sales, headcount and relative expenditure
levels. Such allocations and corporate charges totaled $8.5 million, $11.0
million and $9.0 million for the years ended June 30, 1998, 1997 and 1996,
respectively.
In June 1998, the Company and Silicon Graphics has entered into the
Management Services Agreement, pursuant to which Silicon Graphics will provide
certain administrative and corporate support services to the Company on an
interim or transitional basis, including accounting, treasury, tax, facilities
and information services. Specified charges for such services are generally
intended to allow Silicon Graphics to recover the fully allocated direct costs
of providing the services, plus all out-of-pocket costs and expenses, but
without any profit. The Management Services Agreement will have a three-year
term and will be subject to automatic termination at such time as Silicon
Graphics' beneficial ownership interest in the Company's outstanding common
stock ceases to exceed 50%. In addition, either Silicon Graphics or the Company
may terminate the Management Services Agreement with respect to one or more of
the services provided thereunder upon giving at least 30 days prior written
notice to the other party.
Management believes that the basis used for allocating corporate services
is reasonable. While the terms of these transactions may differ from those that
would result from transactions among unrelated parties, management does not
believe such differences would be material.
34
MIPS Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
Facilities. The Company's executive, administrative and technical offices
currently occupy space in a building subleased from Silicon Graphics in Mountain
View, California. Payments by the Company to Silicon Graphics under this
sublease are expected to be $611,000, $743,000, $776,000 and $741,000 in fiscal
years 1999, 2000, 2001 and 2002, respectively. The sublease will terminate on
May 31, 2002, subject to earlier termination in certain circumstances.
Note 12. Contingencies
In February 1998, the Company received a notice asserting that the R10000
microprocessor and potentially other microprocessors designed by the Company
allegedly infringe a patent originally assigned to Control Data Corporation. The
Company is evaluating these claims.
From time to time, the Company receives communications from third parties
asserting patent or other rights covering the Company's products and
technologies. Based upon the Company's evaluation, it may take no action or it
may seek to obtain a license. There can be no assurance in any given case that a
license will be available on terms the Company considers reasonable, or that
litigation will not ensue.
Management is not aware of any pending disputes that would be likely to
have a material adverse effect on the Company's business, results of operations
or financial condition.
Note 13. Industry and Geographic Segment Information
The Company operates in one industry segment. The Company's revenue by
geographic area is as follows (in thousands):
Years Ended June 30,
-------------------------------------
1998 1997 1996
------- ------- -------
United States ........... $ 5,621 $ 5,066 $ 6,123
Japan ................... 50,939 35,241 22,620
Europe .................. 250 -- 6,300
Rest of World ........... -- -- 2,000
------- ------- -------
Total revenue ........... $56,810 $40,307 $37,043
======= ======= =======
Note 14. Subsequent Events
On July 6, 1998, the Company completed its initial public offering of
5,500,000 shares of its common stock pursuant to a Registration Statement on
Form S-1 (File No. 333-50643) declared effective by the Securities and Exchange
Commission on June 29, 1998. The offering consisted of the sale of 4,250,000
shares of common stock by Silicon Graphics for net proceeds of approximately
$55.3 million and 1,250,000 shares of common stock by the Company for net
proceeds of $16.0 million. Upon completion of the Offering there were 37,250,000
shares of common stock outstanding.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
35
PART III
Item 10. Directors and Executive Officers of the Registrant.
Executive Officers and Directors
The executive officers and directors of the Company, and their ages as of
June 30, 1998, are as follows:
Name Age Position
---- --- --------
John E. Bourgoin ................ 52 Chief Executive Officer, President and
Director
Lavi Lev ........................ 41 Senior Vice President, Engineering
Kevin C. Eichler ................ 38 Vice President and Chief Financial
Officer
Derek Meyer ..................... 38 Vice President, Sales and Marketing
Sandy Creighton ................. 45 Vice President, General Counsel and
Secretary
Dr. Forest Baskett .............. 55 Director
Kenneth L. Coleman .............. 55 Director
William M. Kelly ................ 44 Director
Teruyasu Sekimoto ............... 58 Director
John E. Bourgoin has served as Chief Executive Officer of the Company since
February 1998 and President of the Company since September 1996, and has been a
director of the Company since May 1997. Mr. Bourgoin has 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 Senior Vice President--Engineering of the Company
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 Vice President and Chief Financial Officer
of the Company since May 1998. Prior to joining the Company 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 and related 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 the Company in May 1996 as Director of Worldwide
Marketing and Sales and became Vice President--Sales and Marketing in March
1998. Prior to joining the Company 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 the Company in June 1998 as Vice President, General
Counsel and Secretary. Prior to joining the Company and since 1991, Ms.
Creighton was Deputy General Counsel at Sun Microsystems, Inc.
Dr. Forest Baskett has served as a director of the Company since January
1998. Since 1990, Dr. Baskett has served as Senior Vice President, Research and
Development of Silicon Graphics, and since 1994, has also served as its Chief
Technology Officer.
Kenneth L. Coleman has served as a director of the Company since January
1998. Since April 1997, Mr. Coleman has been Senior Vice President, Customer and
Professional Services of Silicon Graphics. Prior to that time, he was Senior
Vice President, Administration of Silicon Graphics.
36
William M. Kelly has served as a director of the Company since January
1998. He joined Silicon Graphics in 1994 as Vice President, Business
Development, General Counsel and Secretary and, since 1997, has been Senior Vice
President, Corporate Operations of Silicon Graphics. During 1996, Mr. Kelly also
served as Senior Vice President, Silicon Interactive Group of Silicon Graphics
and he served as acting Chief Financial Officer of Silicon Graphics from May
1997 to February 1998. Prior to joining Silicon Graphics, Mr. Kelly was an
attorney in private practice.
Teruyasu Sekimoto has served as a director of the Company since January
1998. Mr. Sekimoto joined Silicon Graphics in 1987 as representative director of
Silicon Graphics Japan. In 1991, he became Vice President, North Pacific Area
and since 1995 has served as Senior Vice President, East Asia.
Upon completion of the Offering on July 6, 1998, the size of the Board of
Directors has increased by two, and the Company's stockholder has elected the
following two additional directors who are not associated with the Company or
Silicon Graphics:
Anthony B. Holbrook, age 59. Mr. Holbrook retired as Chief Technical
Officer of Advanced Micro Devices, Inc. in August 1994. Mr. Holbrook joined
Advanced Micro Devices, Inc. in 1973 and served in a number of executive
capacities. He was elected a corporate officer in 1978 and in 1982 was named
Executive Vice President and Chief Operating Officer. In 1986, Mr. Holbrook was
named President of Advanced Micro Devices, Inc. and was elected to the board of
directors. In 1989, he moved from Chief Operating Officer to Chief Technical
Officer and in 1990 from President to Vice Chairman, a position he held until
April 1996. Prior to joining Advanced Micro Devices, Inc., Mr. Holbrook held
engineering management positions with Fairchild Semiconductor and Computer Micro
Technology Corporation. Mr. Holbrook is also a director of SDL, Inc., a solid
state laser manufacturer.
Fred M. Gibbons, age 48. Mr. Gibbons has been a partner with Concept Stage
Venture Management, an investment firm based in California, since 1994. From
1995 through 1998, Mr. Gibbons was also a lecturer at the Stanford University
Graduate School of Engineering. In 1981, Mr. Gibbons founded Software Publishing
Corporation based in San Jose, California, a company engaged in the development
of software systems for personal computer applications, and was its Chief
Executive Officer through 1994. Prior to 1981, Mr. Gibbons was employed as a
product and marketing manager for Hewlett-Packard Company.
There is no family relationship between any directors or executive officers
of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Under Section 16(a) of the Securities and Exchange Act of 1934, as amended,
the Company's directors, executive officers, and any persons holding more than
ten percent of the Company's common stock are required to report to the
Securities and Exchange Commission and the Nasdaq National Market their initial
ownership of the Company's stock and any subsequent changes in that ownership.
The Company believes that during fiscal year 1998, its officers, directors and
holders of more than 10 percent of the Company's common stock did not file all
Section 16 (a) reports on a timely basis. Form 3 was not filed timely by any
such persons.
Item 11. Executive Compensation
Director Compensation
Directors who do not receive compensation as officers or employees of the
Company or any of its affiliates will be paid an annual board membership fee.
Directors are reimbursed for reasonable expenses incurred in attending Board or
committee meetings.
The Board of Directors and the Company's Stockholder approved the
Director's Stock Option Plan (the "Director Plan") in July 1998. The plan
authorizes 600,000 shares of Common Stock for issuance plus an annual increase
each July 1st equal to the lesser of (i) 100,000 shares, (ii) the number of
shares subject to option granted in the prior one year period, or (iii) a lesser
amount determined by the Board. Upon a non-employee director's election or
appointment to the Board, he or she will automatically receive a non-statutory
stock option to purchase 40,000 shares of Common Stock. Each director who has
been a non-employee director for at least six months will automatically receive
a non-statutory stock option to purchase 10,000 shares of Common Stock each year
on the date of the annual stockholder meeting. All stock options are granted an
exercise price equal to the fair market value of the Company's Common Stock on
the date of grant. Stock options generally vest over a 50-month period from the
date of the grant. Pursuant to the terms of the Director Plan, Messrs. Holbrook
and Gibbons were each granted 40,000 stock options upon commencement of their
term as members of the Company's Board of Directors.
37
Executive Compensation
The following table sets forth information about the compensation of the
Chief Executive Officer and each of the other two most highly compensated
executive officers of the Company who, based on employment with the Company and
Silicon Graphics were the most highly compensated officers of the Company
(collectively, the "Named Executive Officers"). All of the information set forth
in this table reflects compensation earned by such individuals for services
rendered to the Company and Silicon Graphics and its subsidiaries.
Summary Compensation Table
Long-Term Compensation
Annual Compensation(1) Awards
----------------------------------- ----------------------------------
Securities
Other Annual Restricted Underlying All Other
Name and Principal Compensation Stock Options/SARs LTIP Compensation
Position Year Salary Bonus (2) Award(s) (3) Payouts (4)
------------------ ---- -------- -------- ------------ ---------- ------------ ------- ------------
John E. Bourgoin 1998 $372,053 $ -- $ 21,343 $-- -- $-- $ 2,226
Chief Executive Officer 1997 $280,000 $ 89,086 $ 9,382 $-- 125,000 $-- $ 1,200
and President
Lavi Lev 1998 $245,542 $ -- $309,228 $-- -- $-- $ 1,880
Senior Vice 1997 $215,192 $106,550 $ 83,024 $-- 64,000 $-- $ 2,400
President, Engineering
Derek Meyer 1998 $201,456 $ -- $ 32,210 $-- 4,500 $-- $ 1,793
Vice President, 1997 $182,215 $ 25,987 $ 36,543 $-- 12,000 $-- $ 2,079
Sales and Marketing
- ----------
(1) Silicon Graphics has no pension, retirement, annuity or similar benefit
plan.
(2) In fiscal 1998, "Other Annual Compensation" for the following executives
is: Mr. Bourgoin includes (i) $11,348 club membership fees, (ii) $5,538 car
allowance and (iii) various executive perquisites none of which exceed 25%
of the amount reported as other annual compensation; Mr. Lev includes (i)
$150,000 of gross-up award related to a forgivable loan, (ii) $100,000 of
income reflecting monthly amortization of a forgivable loan from Silicon
Graphics, (iii) $50,538 in relocation expenses and housing allowances and
(iv) various executive perquisites none of which exceed 25% of the amount
reported as other annual compensation and Mr. Meyer includes (i) $32,210 on
the sale of 2,500 shares of restricted stock. In fiscal 1997, "Other Annual
Compensation" for the following executives is: Mr. Bourgoin includes
various executive perquisites none of which exceed 25% of the amount
reported as other annual compensation; Mr. Lev includes (i) $42,000 of
income reflecting monthly amortization of a forgivable loan from Silicon
Graphics, (ii) $34,320 in relocation expenses and housing allowances and
(iii) various executive perquisites none of which exceed 25% of the amount
reported as other annual compensation and Mr. Meyer includes (i) $36,248 on
the sale of 2,500 shares of restricted stock and (ii) various executive
perquisites none of which exceed 25% of the amount reported as other annual
compensation.
(3) In fiscal 1997, Silicon Graphics effected an option exchange program to
allow employees to exchange their out-of-the-money stock options for a
smaller number of new options at a more favorable exercise price. The
numbers in this column include 44,000 options issued to Mr. Lev in the
exchange program for 55,000 options that were granted in fiscal 1997 and
12,000 options issued to Mr. Meyer in the exchange program for 15,000
options that were granted prior to fiscal 1997.
(4) All other compensation includes Silicon Graphics' contribution to savings
plans.
Grants Under the 1998 Long-Term Incentive Plan
In connection with the Offering, the Company has made initial grants of
stock options to the executive officers and certain other employees and
consultants of the Company under the 1998 Long-Term Incentive Plan. An aggregate
of 2,996,900 shares of common stock are issuable upon the exercise of the
options granted at an exercise price of $12.00 per share. In addition, the
Company granted stock awards totalling 15,000 shares of Common Stock. The
following table sets forth the number of shares of common stock underlying
options and the number of shares subject to stock awards that were granted under
the 1998 Long-Term Incentive Plan to (i) each of the executive
38
officers of the Company, (ii) the executive officers of the Company as a group
and (iii) all employees and consultants of the Company as a group other than the
executive officers of the Company.
Grants Under 1998 Long-Term Incentive Plan
Number of Shares Stock
Name and Position Underlying Options Awards
----------------- ----------------- ------
John E. Bourgoin ....................................................... 559,500 15,000
Chief Executive Officer and President
Lavi Lev ............................................................... 298,400 --
Senior Vice President, Engineering
Kevin C. Eichler ....................................................... 223,800 --
Vice President and Chief Financial Officer
Derek Meyer ............................................................ 205,200 --
Vice President, Sales and Marketing
Sandy Creighton ........................................................ 223,800 --
Vice President, General Counsel and Secretary
Executive Officers as a Group .......................................... 1,510,700 15,000
Non-Executive Officer Employee and Consultants Group ................... 1,486,200 --
The following table sets forth information regarding the Company's stock
options granted to the Named Executive Officers during fiscal year 1998.
Option Grants in Fiscal 1998
Individual Grants
----------------------------------------------------
Number of % of Total
Securities Options Potential Realizable Value
Underlying Granted to Exercise at Assumed Annual Rates of
Options Employees Price Expiration Stock Price Appreciation
Name Granted in Fiscal Year per Share Date for Option Term(1)
---- ---------- -------------- --------- ---------- -----------------------
5% 10%
---------- -----------
John E. Bourgoin ........ 559,500 18.67% $12.00 05/22/08 $4,222,399 $10,700,387
Lavi Lev................. 298,400 9.96% $12.00 05/22/08 $2,251,946 $ 5,706,873
Kevin C. Eichler......... 223,800 7.47% $12.00 05/22/08 $1,688,959 $ 4,280,155
Derek Meyer ............. 205,200 6.85% $12.00 05/22/08 $1,548,590 $ 3,924,431
Sandy Creighton.......... 223,800 7.47% $12.00 06/04/08 $1,688,959 $ 4,280,155
- ----------
(1) Potential realizable value assumes that the price of the Company's common
stock increases from the date of grant until the end of the option term (10
years) at the annual rate specified (5% and 10%). The 5% and 10% assumed
annual rates of appreciation are mandated by rules of the Securities and
Exchange Commission and do not represent an estimate or projection of the
future price of the Company's common stock. The Company does not believe
that this method accurately illustrates the potential value of a stock
option.
39
The following table sets forth information regarding stock options granted
to the Named Executive Officers during fiscal year 1998 in respect of shares of
Silicon Graphics common stock under the Silicon Graphics' stock plan.
Option Grants in Fiscal 1998
Individual Grants
---------------------------------------------------
Number of % of Total
Securities Options Potential Realizable Value
Underlying Granted to Exercise at Assumed Annual Rates of
Options Employees Price Expiration Stock Price Appreciation
Name Granted in Fiscal Year per Share Date for Option Term(1)
---- --------- -------------- --------- ---------- ------------------------
5% 10%
--------- ----------
Derek Meyer.............. 4,500 * $12.875 11/13/07 $ 36,437 $ 92,337
- ----------
* Less than 1%.
(1) Potential realizable value assumes that the price of Silicon Graphics'
common stock increases from the date of grant until the end of the option
term (10 years) at the annual rate specified (5% and 10%). The 5% and 10%
assumed annual rates of appreciation are mandated by rules of the
Securities and Exchange Commission and do not represent an estimate or
projection of the future price of Silicon Graphics' common stock. The
Company does not believe that this method accurately illustrates the
potential value of a stock option.
The following table sets forth information regarding options to purchase
the Company's common stock by the Named Executive Officers during fiscal 1998,
and the number and value of unexercised, in-the-money options at June 30, 1998.
Stock Option Exercises and
June 30, 1998 Fiscal Year-End Values
Shares
Acquired Value of Unexercised
on Value Number of Unexercised In-the-Money Options at
Name Exercise Realized Options at June 30, 1998 June 30, 1998 (1)
------ ------- ------ ------------------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
John E. Bourgoin ............. -- -- -- 559,500 -- $804,002
Lavi Lev ..................... -- -- -- 298,400 -- $428,801
Kevin C. Eichler ............. -- -- -- 223,800 -- $321,601
Derek Meyer .................. -- -- -- 205,200 -- $294,872
Sandy Creighton .............. -- -- -- 223,800 -- $321,601
- ----------
(1) The amounts in this column reflect the difference between the closing
market price of the Company's common stock on June 30, 1998, which was
$13.437, and the option exercise price. The actual value of unexercised
options fluctuates with the market price of the Company's common stock.
The following table sets forth information regarding options to purchase
Silicon Graphics common stock by the Named Executive Officers during fiscal
1998, and the number and value of unexercised, in-the-money options at June 30,
1998.
Stock Option Exercises and
June 30, 1998 Fiscal Year-End Values
Shares
Acquired Value of Unexercised
on Value Number of Unexercised In-the-Money Options at
Name Exercise Realized Options at June 30, 1998 June 30, 1998 (1)
------ ------- ------ -------------------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
John E. Bourgoin ............. -- -- 50,000 -- -- --
Lavi Lev ..................... -- -- 21,734 -- $ 3,828 --
Derek Meyer .................. -- -- 4,548 -- -- --
- ----------
(1) The amounts in this column reflect the difference between the closing
market price of the Silicon Graphics' common stock on June 30, 1998, which
was $12.125, and the option exercise price. The actual value of unexercised
options fluctuates with the market price of Silicon Graphics' common stock.
Change in Control Arrangements
Unvested stock options held be the Named Executive Officers at the time of
a change in control of the Company will become immediately vested and
exercisable.
40
Item 12. Security Ownership of Certain Beneficial Owners and Management Stock
Ownership of Directors and Executive Officers
The Company is not aware of any person who, on September 1, 1998, was the
beneficial owner of 5% or more of the Company's outstanding common stock, except
for Silicon Graphics, Inc. The following table sets forth such ownership as of
September 1, 1998. The table also shows the number of shares of the Company
common stock beneficially owned on September 1, 1998 by each of the Company's
directors, the Named Executive Officers and all directors and executive officers
of the Company as a group.
Number of
Shares
Beneficially Percent of
Name Owned Class
----- ------------ ----------
Silicon Graphics, Inc.
2011 North Shoreline Boulevard
Mountain View, CA 94043.............................. 31,750,000 85.2%
John E. Bourgoin .................................... 16,000** *
Lavi Lev ............................................ 1,000 *
Kevin C. Eichler..................................... 1,000 *
Derek Meyer ......................................... 1,300 *
Sandy Creighton...................................... 1,000 *
Dr. Forest Baskett .................................. -- *
Kenneth L. Coleman .................................. 1,285 *
Fred M. Gibbons...................................... -- *
Anthony B. Holbrook.................................. -- *
William M. Kelly .................................... -- *
Teruyasu Sekimoto ................................... -- *
Directors and Executive Officers as a Group (11 persons) 21,585 *
- ----------
* No individual Named Executive Officer or director beneficially owns 1% or
more of the Company's common stock, nor do the Named Executive Officers and
directors as a group.
** Under the 1998 Long-Term Incentive Plan, the Company granted stock awards
totalling 15,000 shares of Common Stock effective upon the completion of
the initial public offering.
(1) The persons named have sole voting and investment power over the shares
shown as being beneficially owned by them, subject to community property
laws, where applicable, except for 1,000 shares held indirectly by Mr. Lev.
Mr. Lev disclaims beneficial ownership of these shares and they are held in
trust for his children. There were no options or other convertible
securities that were exercisable on September 1, 1998 or within 60 days
thereafter.
Silicon Graphics owns approximately 85.2% of the outstanding Common Stock
of the Company. For so long as Silicon Graphics continues to beneficially own in
excess of 50% of the shares of Common Stock outstanding, Silicon Graphics will
be able to direct the election of all directors of the Company and exercise a
controlling influence over the business and affairs of the Company, including
any determinations with respect to mergers or other business combinations
involving the Company, the acquisition or disposition of assets by the Company,
future issuances of Common Stock or other equity securities of the Company, the
incurrence of indebtedness by the Company and the payment of dividends with
respect to the Common Stock. Similarly, Silicon Graphics will have the power to
determine matters submitted to a vote of the Company's stockholders without the
consent of the Company's other stockholders, will have the power to prevent or
cause a change in control of the Company and could take other actions that might
be favorable to Silicon Graphics.
Conflicts of interest may arise between the Company and Silicon Graphics in
a number of areas relating to their past and ongoing relationships, including
potential competitive business activities, indemnity arrangements, tax and
intellectual property matters, registration rights, potential acquisitions or
financing transactions, sales or other dispositions by Silicon Graphics of
shares of Common Stock and the exercise by Silicon Graphics of its ability to
control the management and affairs of the Company. Although Silicon Graphics
does not currently intend to engage in the design and development of
microprocessor intellectual property for embedded systems applications, the
Company's Restated Certificate of Incorporation provides that Silicon Graphics
shall have no duty to refrain from engaging in the same or similar activities or
lines of business as the Company.
41
Ownership interests of directors or officers of the Company in the common
stock of Silicon Graphics or service as both a director of the Company and an
officer or employee of Silicon Graphics could create or appear to create
potential conflicts of interest when directors and officers are faced with
decisions that could have different implications for the Company and Silicon
Graphics. Four of the Company's seven current directors are officers or
employees of Silicon Graphics. The Restated Certificate of Incorporation
includes certain provisions relating to the allocation of business opportunities
that may be suitable for both the Company and Silicon Graphics based on the
relationship to the Company and Silicon Graphics of the individual to whom the
opportunity is presented and the method by which its was presented.
Item 13. Certain Relationships and Related Transactions.
In connection with the Separation and the Offering, the Company and Silicon
Graphics entered into various agreements intended to define the relationship
between them following the Offering. Because these agreements were entered into
at a time when the Company was still a wholly owned subsidiary of Silicon
Graphics, they are not the result of arm's-length negotiations between the
parties. Among these agreements is a Management Services Agreement, under which
Silicon Graphics will provide various, primarily administrative, services to the
Company, including accounting, treasury, tax, facilities and information
services. The Management Services Agreement will have a three-year term and will
be subject to automatic termination at such time as Silicon Graphics ceases to
own more than 50% of the outstanding Common Stock. In addition, either Silicon
Graphics or the Company may terminate the Management Services Agreement with
respect to one or more of the services provided thereunder upon giving at least
30 days prior written notice to the other party.
The Company subleases from Silicon Graphics approximately 27,500 square
feet (with an option to increase to 55,000 square feet) in one building in
Mountain View, California. Payments by the Company to Silicon Graphics under
this sublease are approximately $51,000 per month, increasing to approximately
$67,000 per month by August 2001. The amounts payable by the Company under this
sublease are equal to the 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.
By virtue of its beneficial ownership of over 80% of the total voting power
and value of the outstanding Common Stock, Silicon Graphics will include the
Company in its consolidated group for federal income tax purposes. The Company
and Silicon Graphics entered into a Tax Sharing Agreement pursuant to which the
Company and Silicon Graphics will make payments between them such that, with
respect to any period, the amount of taxes to be paid or received by the
Company, subject to certain adjustments, will be determined as though the
Company were to file separate federal, state and local income tax returns.
However, each member of a consolidated group for federal income tax purposes is
jointly and severally liable for the federal income tax liability of each other
member of the consolidated group. Each member of the Silicon Graphics controlled
group, which includes Silicon Graphics, the Company and Silicon Graphics' other
subsidiaries, is also jointly and severally liable for pension and benefit
funding and termination liabilities of other group members, as well as certain
benefit plan taxes. Accordingly, the Company could be liable under such
provisions if any such liability is incurred, and not discharged, by any other
member of the Silicon Graphics consolidated or controlled group.
In addition, by virtue of its beneficial ownership of over 80% of the total
voting power and value of the outstanding Common Stock and the terms of the Tax
Sharing Agreement entered into between the Company and Silicon Graphics, Silicon
Graphics will effectively control all of the Company's tax decisions. Under the
Tax Sharing Agreement, Silicon Graphics will have the sole authority to respond
to and conduct all tax proceedings (including tax audits) relating to the
Company, to file all returns on behalf of the Company and to determine the
amount of the Company's liability to (or entitlement to payment from) Silicon
Graphics under the Tax Sharing Agreement.
Subject to applicable federal securities laws and the restrictions set
forth below, Silicon Graphics may sell any and all of the shares of Common Stock
beneficially owned by it or distribute any or all of such shares of Common Stock
to its stockholders. Sales or distribution by Silicon Graphics of substantial
amounts of Common Stock in the public market or to its stockholders, or the
perception that such sales or distribution could occur, could adversely affect
the prevailing market prices for the Common Stock. Silicon Graphics has advised
the Company that its current intent is to continue to hold all of the Common
Stock beneficially owned. However, Silicon Graphics is not subject to any
obligation to retain its controlling interest in the Company, except that
Silicon Graphics has agreed not to sell or otherwise dispose of any shares of
Common Stock until June 29, 1999 without the prior written
42
consent of Deutsche Bank Securities Inc. As a result, there can be no assurance
concerning the period of time during which Silicon Graphics will maintain its
beneficial ownership of Common Stock owned by it following the Offering.
Moreover, there can be no assurance that, in any transfer by Silicon Graphics of
a controlling interest in the Company, any holders of Common Stock will be able
to participate in such transaction or will realize any premium with respect to
their shares of Common Stock. Silicon Graphics will have registration rights
with respect to the shares of the Common Stock owned by it following the
Offering, which would facilitate any future disposition.
The Company has three outstanding loans to Mr. Lev. The first loan is a
forgivable, non-interest bearing note with a principal amount outstanding at
June 30, 1998 of approximately $258,000. The principal of this loan is forgiven
(reduced) ratably on a periodic basis through December 2000, subject to Mr.
Lev's continued employment. The second loan is a forgivable, non-interest
bearing (except in certain limited circumstances) note with a principal amount
outstanding at June 30, 1998 of $250,000. The principal of this loan is
forgivable on March 1, 2002, subject to Mr. Lev's continued employment at all
times prior to such date. The third loan bears interest at an annual rate of
7.19% and had a principal amount outstanding at June 30, 1998 of $275,000. The
largest aggregate amount of these loans outstanding during the period since July
1, 1996 was approximately $900,000.
43
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 10-K
(a) The Following documents are filed as a part of this Report:
1. Financial Statements. The following financial statements and
supplementary information of the Company and Report of Independent
Auditors are included in Part II of this Report:
Page
----
Report of Ernst & Young LLP, Independent Auditors........................................ 21
Balance Sheets-- Years Ended June 30, 1998 and 1997...................................... 22
Statements of Operations -Years Ended June 30, 1998, 1997 and 1996....................... 23
Statement of Stockholders' Equity (Deficit) --
Years Ended June 30, 1998, 1997 and 1996 .............................................. 24
Statements of Cash Flows-- Years Ended June 30, 1998, 1997 and 1996....................... 25
Notes to Financial Statements............................................................. 26
2. Schedules not listed above have been omitted because the required
information is not present or not present in amounts sufficient to
require submission of the schedule or because the information required
is included in the consolidated financial statements or notes thereto.
3. Exhibits. The following Exhibits are filed as part of, or incorporated
by reference into, this Report:
Exhibit No. List of Exhibits
----------- ----------------
3.1 Certificate of Incorporation is incorporated herein by reference
to Exhibit 3.1 to the Company's Registration Statement on Form
S-1, Registration No, 333-50643 filed with the Securities and
Exchange Commission (the "Commission") which registration
statement became effective on June 29, 1998.
3.2 The Company's By-Laws, as amended.
10.1 The Separation Agreement between the Company and Silicon
Graphics, Inc. is incorporated herein by reference to Exhibit
10.1 of Amendment No. 2 to the Company's Registration Statement
on Form S-1, Registration No. 333-50643 filed with the
Commission, which registration statement became effective on June
29, 1998.
10.2 The Corporate Agreement between the Company and Silicon Graphics,
Inc. is incorporated herein by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1, Registration No.
333-50643 filed with the Commission, which registration statement
became effective on June 29, 1998.
10.3 The Management Services Agreement between the Company and Silicon
Graphics, Inc. is incorporated herein by reference to Exhibit
10.3 to the Company's Registration Statement on Form S-1,
Registration No. 333-50643 filed with the Commission, which
registration statement became effective on June 29, 1998.
10.4 The Tax Sharing Agreement between the Company and Silicon
Graphics, Inc. is incorporated herein by reference to Exhibit
10.4 to the Company's Registration Statement on Form S-1,
Registration No. 333-50643 filed with the Commission, which
registration statement became effective on June 29, 1998.
10.5 The Technology Agreement between the Company and Silicon
Graphics, Inc. is incorporated herein by reference to Exhibit
10.5 of Amendment No. 5 to the Company's Registration Statement
on Form S-1, Registration No. 333-50643 filed with the
Commission, which registration statement became effective on June
29, 1998.
10.6 The Trademark Agreement between the Company and Silicon Graphics,
Inc. is incorporated herein by reference to Exhibit 10.6 of
Amendment No. 5 to the Company's Registration Statement on Form
S-l, Registration No. 333-50643 filed with the Commission, which
registration statement became effective on June 29, 1998.
10.7.1 The Joint Development and License Agreement between Nintendo Co.,
Ltd. and Nintendo of America Inc. on the one hand and Silicon
Graphics, Inc. and MIPS Technologies, Inc. on the other hand is
incorporated herein by reference to Exhibit 10.7.1 of Amendment
No. 4 to the Company's Registration Statement on Form S-1,
Registration No. 333-50643 filed with the Commission, which
registration statement became effective on June 29, 1998.*
44
Exhibit No. List of Exhibits
----------- ----------------
10.7.2 The First Addendum to the Joint Development and License Agreement
is incorporated herein by reference to Exhibit 10.7.2 of
Amendment No. 4 to the Company's Registration Statement on Form
S-1, Registration No. 333-50643 filed with the Commission, which
registration statement became effective on June 29, 1998.*
10.7.3 The Second Addendum to the Joint Development and License
Agreement is incorporated herein by reference to Exhibit 10.7.3
of Amendment No. 5 to the Company's Registration Statement on
Form S-1, Registration No. 333-50643 filed with the Commission,
which registration statement became effective on June 29, 1998.*
10.7.4 The Fourth Addendum to the Joint Development and License
Agreement is incorporated herein by reference to Exhibit 10.7.4
of Amendment No. 5 to the Company's Registration Statement on
Form S-1, Registration No. 333-50643 filed with the Commission,
which registration statement became effective on June 29, 1998.
10.8 The 1998 Long-Term Incentive Plan, as amended.
10.9 The Employee Stock Purchase Plan, as amended.
10.10 Director's Stock Option Plan.
10.11 Non-U.S. Stock Purchase Plan.
27.1 Financial Data Schedule.
- ----------
* The Company has received confidential treatment of portions of this
Exhibit. Accordingly, portions thereof have been omitted from the public
filing.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
By: /s/ JOHN E. BOURGOIN
-------------------------------------
John E. Bourgoin
Chief Executive Officer
Date: September 22, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ JOHN E. BOURGOIN Chief Executive Officer September 22, 1998
- -------------------------- and Director (Principal
John E. Bourgoin Executive Officer)
/s/ KEVIN C. EICHLER (Principal Financial and September 23, 1998
- -------------------------- Accounting Officer)
Kevin C. Eichler
/s/ WILLIAM M. KELLY Director September 23, 1998
- --------------------------
William M. Kelly
/s/ KENNETH L. COLEMAN Director September 22, 1998
- --------------------------
Kenneth L. Coleman
/s/ TERUYASU SEKIMOTO Director September 22, 1998
- --------------------------
Teruyasu Sekimoto
/s/ FOREST BASKETT Director September 22, 1998
- --------------------------
Forest Baskett
/s/ ANTHONY B. HOLBROOK Director September 22, 1998
- --------------------------
Anthony B. Holbrook
/s/ FRED M. GIBBONS Director September 21, 1998
- --------------------------
Fred M. Gibbons
46