UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACTS OF 1934.
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 000-24487
MIPS Technologies, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 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
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[ ]
The number of outstanding shares of the Registrant's Common Stock, $.001
par value, was 37,292,286 as of
January 31, 1999.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
PAGE
----
Condensed Consolidated Balance Sheets .. . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows .. . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements.. . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition. . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K.. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Signatures.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Index to Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MIPS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, JUNE 30,
1998 1998 (1)
----------- -----------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 26,052 $ 45
Accounts receivable . . . . . . . . . . . . . . . . . . . . 2,602 250
Prepaid expenses and other current assets . . . . . . . . . 453 618
----------- -----------
Total current assets. . . . . . . . . . . . . . . . . . . 29,107 913
Equipment and furniture, net . . . . . . . . . . . . . . . . . . 3,155 2,787
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 1,027 996
----------- -----------
$ 33,289 $ 4,696
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . $ 3,661 $ 3,087
Accrued liabilities . . . . . . . . . . . . . . . . . . . . 6,381 2,356
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . . 10,042 5,443
Deferred revenue, less current portion . . . . . . . . . . . . . 375 --
Stockholders' equity (deficit):
Common stock, $0.001 par value: 150,000,000 shares
authorized; issued and outstanding: 37,292,286 shares at
December 31, 1998 and 36,000,000 shares at June 30,
1998. . . . . . . . . . . . . . . . . . . . . . . . . . . 37 36
Additional paid-in capital. . . . . . . . . . . . . . . . . 136,235 120,041
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (113,400) (120,824)
----------- -----------
Total stockholders' equity (deficit). . . . . . . . . . . 22,872 (747)
----------- -----------
$ 33,289 $ 4,696
----------- -----------
----------- -----------
(1) The balance sheet at June 30, 1998 has been derived from audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
3
MIPS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
Revenue:
Royalties $ 13,243 $ 12,472 $ 24,854 $ 26,759
Contract revenue 1,750 77 2,400 827
------------ ------------ ------------ ------------
Total revenue 14,993 12,549 27,254 27,586
Costs and expenses:
Cost of contract revenue 125 ---- 125 375
Research and development 4,667 17,789 9,223 35,127
Sales and marketing 1,730 1,462 3,019 2,910
General and administrative 1,821 1,038 2,956 2,295
Restructuring charge ---- 2,614 ---- 2,614
------------ ------------ ------------ ------------
Total costs and expenses 8,343 22,903 15,323 43,321
------------ ------------ ------------ ------------
Operating income (loss) 6,650 (10,354) 11,931 (15,735)
Interest income (expense), net 264 (4) 438 (11)
------------ ------------ ------------ ------------
Income (loss) before income taxes 6,914 (10,358) 12,369 (15,746)
Provision for income taxes 2,766 ---- 4,948 ----
------------ ------------ ------------ ------------
Net income (loss) $ 4,148 $ (10,358) $ 7,421 $ (15,746)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income (loss) per share - basic $ 0.11 $ (0.29) $ 0.20 $ (0.44)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income (loss) per share - diluted $ 0.11 $ (0.29) $ 0.19 $ (0.44)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Common shares outstanding - basic 37,267 36,000 37,225 36,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Common shares outstanding - diluted 38,536 36,000 38,239 36,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See accompanying notes.
4
MIPS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
DECEMBER 31,
------------
1998 1997
---- ----
Operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,421 $(15,746)
Adjustments to reconcile net income (loss) to cash provided by (used in)
operations:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 997 3,063
Other non-cash charges . . . . . . . . . . . . . . . . . . . . . . 133 116
Restructuring charges. . . . . . . . . . . . . . . . . . . . . . . ---- 2,614
Changes in operating assets and liabilities: . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . (2,352) ----
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . 574 (381)
Other assets and liabilities. . . . . . . . . . . . . . . . . 4,446 (91)
-------- --------
Net cash flow provided by (used in) operating activities,
excluding Silicon Graphics financing. . . . . . . . . . . 11,219 (10,425)
Investing activities - capital expenditures . . . . . . . . . . . . . . . . (1,365) (452)
Financing activities:
Net proceeds from issuance of common stock. . . . . . . . . . . . . . . 16,150 ----
Payments on capital lease obligations . . . . . . . . . . . . . . . . . ---- (218)
Financing provided from Silicon Graphics. . . . . . . . . . . . . . . . ---- 11,095
-------- --------
Net cash provided by financing activities . . . . . . . . . . 16,150 10,877
Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . . . . 3 ----
-------- --------
Net increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,007 ----
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . 45 ----
--------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . $ 26,052 $ ----
-------- --------
-------- --------
Supplemental disclosures of cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ ---- $ 10
-------- --------
-------- --------
See accompanying notes.
5
MIPS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. FORMATION AND DESCRIPTION OF BUSINESS
FORMATION OF MIPS TECHNOLOGIES, INC. (THE "COMPANY"). MIPS Technologies'
predecessor, MIPS Computer Systems, Inc., was founded in 1984 and was engaged in
the design and development of RISC processors for the computer systems and
embedded markets. Silicon Graphics, Inc. ("Silicon Graphics") adopted the MIPS
architecture for its computer systems in 1988 and acquired MIPS Computer
Systems, Inc. in 1992. Following the acquisition, Silicon Graphics continued
the MIPS processor business through its MIPS Group (a division of Silicon
Graphics), which focused primarily on the development of high-performance
processors for Silicon Graphics' workstations and servers. Until the last few
years, cost considerations limited the broader use of these processors.
However, as the cost to design and manufacture processors based on the MIPS
technology decreased, the MIPS Group sought to penetrate the consumer market,
both through supporting and coordinating the efforts of the MIPS semiconductor
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 processor applications
dedicated to the embedded market, in December 1997, Silicon Graphics initiated a
plan to separate the business of the MIPS Group from its other operations.
In April 1998, 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 processor
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 provides certain services to the Company
following the Separation on an interim or transitional basis.
Since the closing of the Company's initial public offering (the "Offering")
on July 6, 1998, the Company has been a majority owned subsidiary of Silicon
Graphics.
MIPS Technologies International A.G., a wholly owned Swiss subsidiary, was
incorporated on November 20, 1998. MIPS Denmark Development Center, located in
Copenhagen, Denmark, and a branch of the Swiss subsidiary, was opened on
December 1, 1998. The development center will work on product development as
well as provide support and design expertise for the Company's European-based
customers.
BASIS OF PRESENTATION. The accompanying financial statements, through June
30, 1998, reflect the operations of the Company's predecessor, the MIPS Group.
The balance sheet as of June 30, 1998 has been prepared using the historical
basis of accounting and includes 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. Through June 30, 1998, cash
management for the Company had been done by Silicon Graphics on a centralized
basis and all cash provided by Silicon Graphics has been recorded as
interest-free
6
MIPS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
financing from Silicon Graphics. The statement of operations for the six months
ended December 31, 1997 includes all revenue and costs attributable to the
Company, including a corporate allocation from Silicon Graphics of the costs of
facilities and employee benefits. Additionally, incremental corporate
administration, finance and management costs have been allocated to the Company
based on certain methodologies that management believes are reasonable under the
circumstances. Subsequent to June 30, 1998, the Company operated as a
stand-alone company, MIPS Technologies, Inc. The consolidated financial
statements includes the accounts of the Company and its wholly owned Swiss
subsidiary, MIPS Technologies International A.G., after elimination of
intercompany transactions and balances.
The unaudited results of operations for the interim periods shown herein
are not necessarily indicative of operating results for the entire fiscal year.
In the opinion of management, the condensed consolidated financial statements
include all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the financial position, results of operations and cash flow
for each interim period shown.
The condensed consolidated financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission (SEC) applicable to interim financial information. Certain
information and footnote disclosures included in financial statements prepared
in accordance with generally accepted accounting principles have been omitted in
these interim statements pursuant to such SEC rules and regulations. The
unaudited condensed consolidated financial statements included in this Form 10-Q
should be read in conjunction with the audited financial statements and notes
thereto, for the fiscal year ended June 30, 1998, included in the Company's 1998
Annual Report on Form 10-K.
NOTE 2. COMPUTATION OF EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
Three Months Ended Six Months Ended
December 31, December 31,
------------ ------------
1998 1997 1998 1997
-------- -------- -------- --------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,148 $(10,358) $ 7,421 $(15,746)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted - average shares outstanding - basic. . . . . . . . . . . . . 37,267 36,000 37,225 36,000
Effect of dilutive securities-employee stock options . . . . . . . . . 1,269 ---- 1,014 ----
-------- -------- -------- --------
Weighted - average shares outstanding - diluted. . . . . . . . . . . . 38,536 36,000 38,239 36,000
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share - basic. . . . . . . . . . . . . . . . . . $ 0.11 $ (0.29) $ 0.20 $(0.44)
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share - diluted. . . . . . . . . . . . . . . . . $ 0.11 $ (0.29) $ 0.19 $(0.44)
-------- -------- -------- --------
-------- -------- -------- --------
7
MIPS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. NEW ACCOUNTING PRONOUNCEMENTS
During fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"). There was no
impact to the Company as a result of the adoption of SFAS 130, as there is no
material difference between the Company's reported net income (loss) and the
comprehensive net income (loss) under SFAS 130 for the periods presented.
In June 1997, the Financial Accounting and Standards Board issued Statement
of Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 is effective for the
fiscal year ending June 30, 1999 and establishes standards for disclosure about
products, geography and major customers. The adoption of SFAS 131 will have no
impact on the Company's results of operation and financial condition. The
Company expects that implementation of this standard will not have material
effect on its annual financial statement disclosures.
NOTE 4. CONTINGENCIES
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 Form
S-1 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 Silicon
Graphics and the Company 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. In September 1998, the Company entered into a memorandum
of understanding (MOU) with Lexra, Inc. In the MOU, among other things, Lexra
will no longer state that its products are "MIPS compatible". In December
1998, the Company and Lexra entered into a Settlement Agreement, and on January
8, 1999, the lawsuit was dismissed.
In February 1998, the Company received a notice asserting that the R10000
processor and potentially other processors designed by the Company allegedly
infringe a patent originally assigned to Control Data Corporation. Effective
December 15, 1998, Silicon Graphics, the Company, and the holder of the patent
entered into a Settlement and Non-Exclusive License Agreement resolving the
matter.
8
MIPS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. In addition, the Company is continuing to evaluate
possible patent infringement claims against third parties and may assert such
claims, if appropriate.
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 5. RELATED PARTY TRANSACTIONS
At December 31, 1998, accounts payable includes approximately $207,000
payable to Silicon Graphics related to certain administrative and corporate
support services provided by Silicon Graphics on behalf of the Company and
approximately $2.7 million taxes payable to Silicon Graphics in accordance with
the tax sharing agreement pursuant to which the Company and Silicon Graphics
will make payments to each other 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.
During the six months ended December 31, 1997, the Company was operating as
a division of Silicon Graphics and was utilizing its centralized cash management
services and processes relating to accounts payable and accrued liabilities. The
Company's net cash requirements then were funded by Silicon Graphics.
NOTE 6. SUBSEQUENT EVENTS
On January 29, 1999, the Company filed a preliminary proxy statement
with the U.S. Securities and Exchange Commission relating to a special
meeting of its stockholders called for the purpose of approving a proposal to
recapitalize the authorized capital stock of the Company, including (i) the
approval and adoption of an amended and restated certificate of incorporation
and by-laws of the Company pursuant to which each issued and outstanding
share of the Company's common stock, par value $0.001 per share, will be
redesignated as one share of newly created and issued Class A common stock,
par value $0.001 per share, of the Company and (ii) the exchange by Silicon
Graphics, Inc. of each share of Class A Common Stock it will own for one
share of newly created and issued Class B common stock, par value $0.001 per
share, of the Company. The recapitalization was designed to permit an
orderly, multi-step increase in the number of shares of MIPS Technologies
common stock that are publicly traded while preserving Silicon Graphics'
ability to divest of its interest in MIPS Technologies in a transaction
intended to qualify generally as a tax-free distribution under the Internal
Revenue Code.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. Except
for the historical information contained in this quarterly report on Form 10-Q,
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 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 Quarterly Report on Form 10-Q 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.
RESULTS OF OPERATIONS
REVENUE. The Company's revenue consists of royalties and contract
revenue earned under contracts with its licensees. 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 the Company's semiconductor
manufacturing partners. The Company receives license fees for the use of
technology that it has developed internally and, in some cases, that it has
licensed from third parties. Fees related to engineering services, which are
performed on a best efforts basis, are recognized as revenue when the defined
milestones are achieved and collectibility of the milestone payment is
probable. The technology developed is licensed to multiple customers.
Total revenue for the second quarter and first six months of fiscal 1999
increased by $2.4 million to $15.0 million and decreased by $332,000 to $27.3
million, respectively, compared with $12.5 million and $27.6 million for the
comparable periods in fiscal 1998. Royalties for the second quarter and
first six months of fiscal 1999 increased by $771,000 to $13.2 million and
decreased by $1.9 million to $24.9 million, respectively, compared with the
same periods in fiscal 1998. The increase in royalties for the second
quarter was due primarily to higher royalties generated by Nintendo game
cartridge sales. The decrease in royalties for the six months was due to the
absence of royalties from the graphics chips included in the Nintendo 64 game
player, which reached its cap during the first six months of fiscal 1998.
Contract revenue for the second quarter and first six months of fiscal 1999
increased by $1.7 million to $1.8 million and increased by $1.6 million to
$2.4 million, respectively, compared with the same periods in fiscal 1998.
The increase in contract revenue in both the quarter and year-to-date periods
was the result of fees generated primarily from new agreements, and included
engineering service fees of $1.5 million earned upon the Company's
achievement of defined milestones in the second fiscal quarter of 1999.
COST OF CONTRACT REVENUE. The Company's cost of contract revenue consists
mainly of sublicense fees. The Company incurs an obligation to pay these fees
when it sublicenses technology to its customers that it has licensed from third
parties. Sublicense fees are recognized as cost of contract revenue when the
obligation is incurred, which is typically the same period in which the related
revenue is recognized.
Cost of contract revenue was $125,000 for the second quarter of fiscal
1999 compared to zero for the comparable period in fiscal 1998. Cost of
contract revenue in the fiscal 1999 period reflects sublicense fees paid by
the Company. There was no such activity in the second quarter of fiscal 1998.
Cost of contract revenue decreased $250,000 to $125,000 for the first six
10
months of fiscal 1999 compared with the same period in fiscal 1998. The
decrease was attributable to a decrease in the Company's sublicensing activities
which resulted in a decrease in its obligation to pay sublicense fees to its
licensors. The Company expects that the future cost of contract revenue will be
minimal.
RESEARCH AND DEVELOPMENT. Costs incurred by the Company with respect to
internally developed technology and engineering services are included in
research and development expense as they are incurred and are not directly
related to any particular licensee, license agreement or license fee.
Research and development expenses for the second quarter and first six
months of fiscal 1999 decreased by $13.1 million and $25.9 million,
respectively, to $4.7 million and $9.2 million, compared with research and
development expenses of $17.8 million and $35.1 million for the comparable
periods in fiscal 1998. The decreases in research and development expenses
reflect the separation of the Company's business from that of Silicon Graphics
as well as the Company's change in strategic direction in the second half of
fiscal 1998. Research and development expenses for the second quarter and first
six months of fiscal 1998 reflect the operations of the MIPS Group, a division
of Silicon Graphics engaged in the development of high-performance processors
for Silicon Graphics' workstations and servers. Due to the complex nature of
Silicon Graphics' research and development requirements, the MIPS Group had a
staff of 221 persons at December 31, 1997. Because the markets targeted by the
Company allow it to use smaller design teams and to rely largely on industry
standard third-party design tools, the Company reduced its research and
development staff by approximately 185 persons in connection with the separation
and the change in strategic direction. During the first six months of fiscal
1999, the Company increased its research and development staff to 75 persons
reflecting in part the addition of 24 employees to staff its development center
in Copenhagen, Denmark which opened on December 1, 1998. The development center
will work on product development as well as provide support and design expertise
for the Company's European-based customers. The Company expects research and
development expenses to increase during the balance of fiscal 1999 as it
develops new designs for the digital consumer products market.
SALES AND MARKETING, GENERAL AND ADMINISTRATIVE. Sales and marketing and
general and administrative expenses for the second quarter and first six months
of fiscal 1999 increased by $1.1 million and $770,000, respectively, to $3.6
million and $6.0 million, compared to sales and marketing and general and
administrative expenses of $2.5 million and $5.2 million for the comparable
periods in fiscal 1998. The increase in both the quarter and year-to-date
periods was due to an increase in staffing levels, legal and consulting
services. The Company expects sales and marketing and general and
administrative expenses to continue to increase in the remainder of fiscal year
1999 as the Company places additional resources into marketing its technology
and operating as a new public company.
RESTRUCTURING CHARGE. The restructuring charge taken in the second quarter
of fiscal 1998 included $500,000 in severance related costs and $2.1 million in
asset writedowns related to the Company's shift in the strategic direction.
INTEREST INCOME (EXPENSE). Interest income (expense), net, for the
second quarter and first six months of fiscal 1999 increased by $268,000 and
$449,000, respectively, to an interest income of $264,000 and $438,000,
respectively, compared to interest expense of $4,000 and $11,000 for the
comparable periods in fiscal 1998. The increase in both the quarter and
year-to-date periods was primarily due to interest income earned from
investment of the net proceeds of approximately $15.9 million from the
Company's July 1998 initial public offering and subsequent cash generated
from operating activities.
INCOME TAXES. 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 makes or receives payments as
though it filed separate federal, state and local income tax returns. 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.
11
The Company recorded a provision for income taxes of $2.8 million and $4.9
million for the second quarter and first six months of fiscal 1999 compared to
zero for the comparable periods in fiscal 1998. The provision for the second
quarter and the first six months of fiscal 1999 was based on an estimated
federal and state combined rate of 40% on income before taxes. The net losses
incurred for the second quarter and for the first six months of fiscal 1998 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 a 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 second quarter and the first six months of fiscal 1998.
FINANCIAL CONDITION
At December 31, 1998 the Company had cash and cash equivalents of $26.1
million and total working capital of $19.1 million, including a short-term
component of deferred revenue of $77,000.
The Company's operating activities provided net cash of $11.2 million for
the six months ended December 31, 1998 compared to net cash used in operating
activities of $10.4 million for the comparable period in 1997. In the six
months ended December 31, 1998, net cash provided by operating activities
consisted mainly of net income and an increase in accrued liabilities, partially
offset by an increase in accounts receivable. The increase in accounts
receivable was due to amounts owed to the Company under new license agreements
entered into during the period. The increase in accrued liabilities for the six
months ended December 31, 1998 was the result of accrued compensation related to
increased staffing levels, along with accumulated performance bonuses and
accrued administrative costs associated with being a new public company. In the
six months ended December 31, 1997, net cash used in operating activities
consisted mainly of net loss of $15.7 million partially offset by approximately
$5.7 million of non-cash charges of depreciation and restructuring charges.
Net cash used in investing activities was $1.4 million and $452,000 for the
six months ended December 31, 1998 and 1997, respectively. Net cash used in
investing activities in both periods presented consisted of equipment purchases
and licensing of computer aided design tools used in development. Capital
expenditures have been, and future expenditures are anticipated to be, primarily
for facilities and equipment to support expansion of the Company's operations
and licensing of computer aided design tools used in development. The Company
expects that its capital expenditures will increase as its employee base grows.
Net cash provided by financing activities was $16.2 million for the six
months ended December 31, 1998 compared to $10.9 million for the comparable
period in 1997. Net cash provided by financing activities for the six months
ended December 31, 1998 consisted primarily of cash received in connection with
the issuance of common stock through the Company's initial public offering,
which was completed in July 1998. Financing activities for the six months ended
December 31, 1997 consisted primarily of net funds provided by Silicon Graphics.
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 its current cash balance, 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
12
Company may be constrained in its ability to issue common stock in connection
with acquisitions or to raise equity capital.
FACTORS THAT MAY AFFECT OUR BUSINESS
REVENUE CONCENTRATION. Our revenue sources are presently concentrated in a
small number of products and in a small base of semiconductor manufacturing
partners. To date, we have derived a substantial portion of our total revenue
from contract revenue and royalties earned on sales of video game products. In
particular, revenue from Nintendo and NEC relating to Nintendo 64 video game
players and related cartridges for the second quarter and first six months of
fiscal 1999 was 71% and 75%, respectively, of our total revenue compared to 74%
and 76% for the comparable periods in fiscal 1998. We anticipate that royalties
related to sales of Nintendo 64 video game cartridges will continue to
represent a substantial portion of our total revenue for the next several years.
Accordingly, in the near term, factors negatively affecting sales of Nintendo 64
video game cartridges could have a material adverse effect on our results of
operations and financial condition.
Under the terms of the separation of our business from that of Silicon
Graphics, we will receive all royalties payable by Nintendo under its contract
with Silicon Graphics and us with respect to sales of Nintendo 64 video game
products.
The market for home entertainment products is competitive and the
introduction of new products or technologies, as well as shifting consumer
preferences, could negatively impact the amount and timing of sales of Nintendo
64 video game players and cartridges. In addition, the eventual introduction of
the next generation Nintendo video game system is likely to result in declining
sales of Nintendo 64 video game players and related cartridges, although sales
of video game cartridges would be likely to continue for some time. We do not
expect to offset any decline in the royalties we receive on sales of Nintendo 64
video game products with revenue from any next generation Nintendo video game
product.
Although we expect that an increasingly significant portion of our 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, our
technology may not be selected for design into any such products. Accordingly,
we 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 our
technology.
A significant portion of our total revenue has been derived from a limited
number of semiconductor manufacturers and we expect this to continue. For the
second quarter and first six months of fiscal 1999, NEC accounted for
approximately 22% and 16%, respectively, of our total revenue compared to 18%
and 15% for the comparable period in fiscal 1998. We believe that NEC will
continue to represent at least 10% of our total revenue for at least the next
several years, although NEC is not obligated to continue using our technology in
its current or future products. Because there is a relatively limited number of
semiconductor manufacturers to which we could license our technology on a basis
consistent with our business model, it is likely that our revenue sources will
continue to be concentrated among a small number of semiconductor manufacturers.
The identity of particular manufacturing partners that will account for this
revenue concentration may vary from period to period depending on the addition
or expiration of contracts, the nature and timing of payments due under such
contracts and the volumes and prices at which our partners sell products
incorporating our technology.
UNPREDICTABLE AND FLUCTUATING OPERATING RESULTS. Our revenue and
operating results may vary significantly from quarter to quarter due to a number
of factors, many of which are outside of our control. These factors include:
- the demand for and average selling prices of semiconductor products
that incorporate our technology;
- the financial terms of our contractual arrangements with our
semiconductor partners, which may require significant up-front
payments or payments based on the achievement of certain milestones;
13
- the relative mix of contract revenue and royalties;
- competitive pressures resulting in lower contract revenue or royalty
rates;
- our ability to develop, introduce and market new processor
intellectual property;
- the establishment or loss of strategic relationships with
semiconductor manufacturing partners or manufacturers of digital
consumer products;
- the timing of new products and product enhancements by us and our
competitors;
- changes in development schedules, research and development expenditure
levels and product support by us and digital consumer product
manufacturers;
- seasonal fluctuations; and
- general economic and market conditions.
Our revenue components are difficult to predict and may fluctuate
significantly from period to period and, because our expenses are largely
independent of our revenue in any particular period, it is difficult to
accurately forecast our operating results. Our operating expenses are based, in
part, on anticipated future revenue and a high percentage of our expenses are
fixed in the short term. As a result, if our revenue is below expectations in
any quarter, the adverse effect may be magnified by our inability to adjust
spending in a timely manner to compensate for the revenue shortfall. We also
experience seasonal fluctuations in our revenue and operating results.
In light of the foregoing and the other risks discussed in this section, we
believe that quarter-to-quarter comparisons of our revenue and operating results
may not be a good indication of our future performance. It is possible that in
some future periods our results of operations may be below the expectations of
public market analysts and investors. In this event, the price of our common
stock may fall.
RISKS ASSOCIATED WITH SHIFT IN STRATEGIC DIRECTION. Our research and
development efforts historically focused primarily on the development of
high-performance processor and related designs for Silicon Graphics'
workstations and servers. However, as the cost to design and manufacture our
processors has decreased, we have sought to penetrate the market for
high-volume, high-performance embedded applications by supporting and
coordinating the efforts of our semiconductor partners in that area. In
addition, from fiscal 1994 through fiscal 1996, the Company, together with
Silicon Graphics, was engaged in the design and development of the processor and
related graphics chip, together with related software, for the Nintendo 64 video
game system. In connection with the separation of our business from that of
Silicon Graphics in the third quarter of fiscal 1998, we formulated a new
strategic direction in which our primary focus will be the development of
processors 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. This shift in strategic direction
involves several risks, including:
- An increased reliance on the evolving and highly competitive digital
consumer products industry;
- The need for our management team to refocus its research and
development efforts from processors primarily for high-performance
computer systems to processors and related designs for use in a wide
range of digital consumer products; and
- The increased importance of our sales and marketing activities and our
limited experience in this area.
SEASONALITY. Because revenue related to sales of digital consumer
products, such as Nintendo 64 video game cartridges, is expected to constitute a
substantial portion of our total revenue over the next several years, we expect
to experience seasonal fluctuations in our revenue and operating results. In
addition, we record royalty revenue from
14
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 our second fiscal quarter (which includes the
holiday selling season), a disproportionate amount of our revenue and operating
income is expected to be realized in our third fiscal quarter.
NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE. Our future success will
depend on the extent to which our processor and related designs are incorporated
into the products of leading digital consumer product manufacturers ("design
wins"). This requires that we develop enhancements and new generations of our
processor designs that satisfy the requirements of specific digital consumer
product applications and introduce these new technologies to the marketplace in
a timely manner. We cannot assure you that our development efforts will be
successful or that we will not encounter significant delays. If our development
efforts are not successful or are significantly delayed, or if the
characteristics of our processor designs are not compatible with the
requirements of specific digital consumer product applications, our ability to
achieve design wins may be limited. Our failure to achieve a sufficient number
of design wins could have a material adverse effect on our business, results of
operations and financial condition.
Technical innovations of the type critical to our success are inherently
complex and involve several risks, including:
- our ability to anticipate and timely respond to changes in the
requirements of digital consumer product manufacturers;
- our ability to anticipate and timely respond to changes in
semiconductor manufacturing processes;
- changing consumer preferences in the digital consumer products market;
- the emergence of new standards in the semiconductor or digital
consumer products industries;
- the significant investment that is often required before commercial
viability is determined; and
- the introduction by our competitors of products embodying new
technologies or features.
Any failure by us to adequately address these risks could render our
existing processor and related designs obsolete and could have a material
adverse effect on our business, results of operations and financial condition.
In addition, we cannot assure you that we will have the financial and other
resources necessary to develop processor and related designs in the future, or
that any enhancements or new generations of our technology, even if successfully
developed, will generate revenue in excess of the costs of development.
DEPENDENCE ON DIGITAL CONSUMER PRODUCTS INDUSTRY. The digital consumer
products industry is presently the primary market for our processor and related
designs and our success will depend on consumer acceptance of the products that
incorporate our technology. Our dependence on the digital consumer products
industry involves several risks and uncertainties, including:
- changes in consumer requirements and preferences or the introduction
of products by our competitors embodying new technologies or features;
- the potentially limited opportunities for design wins with respect to
certain digital consumer products such as video game products due to a
limited number of product manufacturers and the length of product life
cycles;
15
- the difficulty in predicting the level of consumer interest in and
acceptance of many digital consumer product applications, such as
handheld personal computers and set-top boxes, which have only
recently been introduced to the market; and
- the current lack of open industry standards for hardware and software
in the digital consumer products industry;
Factors negatively affecting the digital consumer products industry could have a
material adverse effect on our business, results of operations and financial
condition. Moreover, to the extent that the performance, functionality, price
and power characteristics of our processor designs do not satisfy those that may
be critical to specific digital consumer product applications, the use of our
processor and related designs may be further confined to a limited segment of
that industry.
The timing and amount of royalties we receive depends on sales by digital
consumer product manufacturers of products incorporating our technology. The
process of persuading digital consumer product manufacturers to adopt our
technology can be lengthy and, even if adopted, we cannot be certain that our
technology will be used in a product that is ultimately brought to market,
achieves commercial acceptance or generates meaningful royalties for us. We are
subject to risks beyond our control that influence the success or failure of a
particular digital consumer product manufacturer, including:
- the competition it faces and the market acceptance of its products;
- the engineering, marketing and management capabilities of the
manufacturer and the technical challenges unrelated to our technology
that it faces in developing its products; and
- the financial and other resources of the manufacturer.
If our technology is not adopted by digital consumer product manufacturers
and incorporated into the products they sell, our business could be materially
and adversely affected. Furthermore, because we do not control the business
practices of our licensees, we do not influence the degree to which our
licensees promote our technology or set the prices at which the products
incorporating our technology are sold to digital consumer product manufacturers.
INTELLECTUAL PROPERTY MATTERS. Our success and ability to compete are
substantially dependent on our internally developed technologies and trade marks
which we attempt to protect under a combination of patent, trademark, copyright
and trade secret laws. We also use licensing agreements and employee and third
party nondisclosure and assignment agreements to limit access to and
distribution of proprietary information and to obtain ownership of technology
prepared on a work-for-hire basis. Despite our efforts to protect our
intellectual property rights, unauthorized parties may attempt to copy or
otherwise obtain and use our technologies. Policing the unauthorized use of our
intellectual property is difficult, and we cannot be certain that the steps we
have taken will prevent the misappropriation of our technologies, particularly
in foreign countries where the laws may not protect our proprietary rights as
fully as in the United States. In addition, we cannot be certain that others
will not independently develop or otherwise acquire the same or substantially
equivalent technologies as ours or obtain patent rights, which patent rights
could be used to assert infringement claims against us. Furthermore, we cannot
be certain that the steps we have taken to obtain ownership of contributed
intellectual property will be sufficient to assure our ownership of all
proprietary rights.
We own approximately 52 U.S. patents on various aspects of our technology,
with expiration dates ranging from 2006 to 2015, and have an additional 14 U.S.
patent applications pending. We also own or have filed corresponding patents
and applications in various foreign jurisdictions. We cannot assure you that
any of our patent applications will be approved or that any of the patents that
we own will not be challenged, invalidated or circumvented by others or be of
sufficient scope or strength to provide us with any meaningful protection or
commercial advantage. Moreover, significant litigation regarding intellectual
property rights exists in the industry in
16
which we operate. We cannot be certain that third parties will not make a claim
of infringement against us or our semiconductor manufacturing partners in
connection with their use of our technology. Any claims, even those without
merit, could be time consuming to defend, result in costly litigation and/or
require us to enter into royalty or licensing agreements. These royalty or
licensing agreements, if required, may not be available to us on acceptable
terms or at all. A successful claim of infringement against us or one of our
semiconductor manufacturing partners in connection with its use of our
technology could adversely affect our business.
We have entered, and in the future may enter, into cross licensing
arrangements with others, including Silicon Graphics. Under these arrangements,
we license certain of our patents in exchange for patent licenses from such
licensees but do not generally transfer know-how or other proprietary
information. Although these types of cross licensing arrangements are common in
the semiconductor and processor industries, these arrangements may facilitate
the ability of such licensees, either alone or in conjunction with others, to
develop competitive products and designs.
As a result of the separation, however, we no longer have full access to
Silicon Graphics' patents and other intellectual property. We have entered into
certain licensing arrangements with Silicon Graphics with respect to certain of
its intellectual property that we use in our business. 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 such arrangements. We cannot assure you that the separation of our
business from that of Silicon Graphics will not adversely affect our ability to
negotiate commercially attractive intellectual property licensing arrangements
with third parties in the future, particularly if we are no longer a
majority-owned subsidiary of Silicon Graphics. Moreover, in connection with
future intellectual property infringement claims, we will not have the benefit
of asserting counterclaims based on Silicon Graphics' intellectual property
portfolio, nor will we be able to provide licenses to Silicon Graphics'
intellectual property in order to resolve such claims.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. A substantial portion of
our revenue has been and is continuing to be derived from outside the United
States, primarily from Japan. For the second quarter and first six months of
fiscal 1999, revenue from customers outside the United States represented
approximately 92% and 90%, respectively, of our total revenue compared to 88%
and 90% for the comparable period in fiscal 1998. To date, substantially all
of our revenue from international customers has been denominated in U.S.
dollars. However, to the extent that sales by our manufacturing partners are
denominated in foreign currencies, the royalties we receive on such sales could
be subject to fluctuations in currency exchange rates. If the effective price
of the technology we sell to our partners were to increase due to fluctuations
in foreign currency exchange rates, demand for our technology could fall which
would, in turn, reduce our royalties. Because we cannot predict the amount of
non-U.S. dollar denominated revenue earned by our licensees, we have not
historically attempted to mitigate the effect that currency fluctuations may
have on our revenue, and we do not presently intend to do so in the future.
The substantial size of our international operations exposes us to a number
of additional risks, including:
- political and economic instability;
- reduced or limited protection for intellectual property;
- export license requirements, tariffs and other trade barriers;
- potentially adverse tax consequences; and
- longer accounts receivable collection periods and greater difficulty
in collection of accounts receivable.
Any negative impact on the worldwide sales of products by our manufacturing
partners could have a negative impact on our royalty revenue. There can be no
assurance that we will be able to sustain revenue derived from international
customers or that the foregoing factors will not have a material adverse effect
on our business, operating results and financial condition.
17
RELIANCE ON MANUFACTURING PARTNERS. We do not manufacture or sell
processors containing our technology. Rather, we license our technology to
semiconductor manufacturers and digital consumer product manufacturers who then
incorporate our technology into the products they sell. In some cases, our
manufacturing partners also add custom integration services and derivative
design technologies to enhance our processor designs. Accordingly, the adoption
and continued use of our technology by manufacturers is critical to our success.
None of our current semiconductor manufacturing partners is obligated to license
new or future generations of our processor designs. We cannot assure you that
we will be able to maintain our current relationships or establish new
relationships with additional manufacturing partners, and any failure by us to
do so could have a material adverse effect on our business. We face numerous
risks in obtaining agreements with manufacturers on terms consistent with our
business model, including:
- the lengthy and expensive process of building a relationship with a
potential partner before there is any assurance of an agreement;
- the fact that we may compete with the internal design teams of
manufacturers in the development of products using technologies that
are similar to or an alternative to ours;
- the potential difficulties in persuading large semiconductor and other
companies to work with us, to rely on us for critical technology, and
to disclose to us proprietary manufacturing technology; and
- the potential difficulties in persuading potential partners to bear
certain development costs associated with our technology and to make
other necessary investments to produce embedded processors using our
technology.
We are also subject to many risks beyond our control that influence the
success of our manufacturing partners, including, for example, the highly
competitive environment in which they operate, the market for their products and
their engineering capabilities and financial and other resources. In addition,
our separation from Silicon Graphics may negatively effect certain of our
existing partner relationships, insofar as Silicon Graphics was a factor in
establishing and maintaining the relationship or in negotiating the financial
and other terms of our contracts with such partners (due to, for example,
Silicon Graphics' status as a customer of such partners).
OUR MARKETS ARE HIGHLY COMPETITIVE. Competition in the market for embedded
processors is intense. We believe that the principal competitive factors in our
industry are performance, functionality, price, customizability and power
consumption. Our primary competitors are ARM Holdings plc. and Hitachi
Semiconductor (America) Inc., although we also compete with semiconductor
manufacturers whose product lines include processors for embedded and
non-embedded applications, including Intel Corporation, National Semiconductor
Corporation, Advanced Micro Devices, Inc. and Motorola, Inc. To remain
competitive, we must also continue to differentiate our processor and related
designs from those available or under development by the internal design groups
of semiconductor manufacturers, including some of our current and prospective
manufacturing partners. Many of these internal design groups have substantial
programming and design resources and are part of larger organizations with
substantial financial and marketing resources. These internal design groups may
develop products that compete directly with ours or may actively seek to license
their own technology to third-party semiconductor manufacturers.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases as well as greater financial and marketing resources than we do.
This may allow them to respond more quickly than we can to new or emerging
technologies and changes in customer requirements. It may also allow them to
devote greater resources than we can to the development and promotion of their
technologies and products. We cannot assure you that we will be able to compete
successfully or that competitive pressures will not materially and adversely
effect our business, results of operations and financial condition.
LACK OF INDEPENDENT OPERATING HISTORY. Prior to the separation of our
business from that of Silicon Graphics in June 1998, we operated as a division
of Silicon Graphics and not as a separate stand-alone company. Although we
continue to be a majority owned subsidiary of Silicon Graphics, Silicon Graphics
has no obligation to assist us, except
18
as provided in the management services agreement between the companies. Since
the separation, we have begun to develop and implement the operational,
administrative and other systems and infrastructure necessary to support our
current and future business as a stand-alone company, although we cannot assure
you that we will ultimately be able to develop all necessary systems and
infrastructure. Any failure to do so could have an adverse effect on our
business, results of operations and financial condition.
NEED TO MANAGE GROWTH. Our ability to continue to grow successfully
requires an effective planning and management process. Since the separation of
our business from that of Silicon Graphics, we have begun to develop the
financial, operational, managerial and administrative capabilities previously
provided by Silicon Graphics, although we will need to continue to improve these
capabilities. In addition, since June 30, 1998, we have increased our headcount
substantially from 63 employees at that date to 110 employees at December 31,
1998. This increase primarily reflects the addition of 24 employees to our
research and development staff in Denmark in December 1998 as well as additional
sales and marketing staff.
Our business plan requires that we hire additional highly skilled technical
personnel during fiscal 1999 to staff our anticipated research and development
activities. Our growth has placed, and the recruitment and integration of
additional employees will continue to place, a significant strain on our
resources. Digital consumer product manufacturers and our semiconductor
manufacturing partners typically require significant engineering support in the
design, testing and manufacture of products incorporating our technology.
Accordingly, increases in the adoption of our technology can be expected to
increase the strain on our personnel, particularly our engineers.
DEPENDENCE ON KEY PERSONNEL. Our future success depends to a significant
extent on the continued contributions of our key management, technical, sales
and marketing personnel, many of whom are highly skilled and difficult to
replace. We do not have employment agreements with any of our officers or key
employees. In addition, our business plan requires that we identify and hire
additional highly skilled personnel, particularly technical personnel for our
anticipated research and development activities. Competition for qualified
personnel, particularly those with significant experience in the semiconductor
and processor design industries, is intense. The loss of the services of any of
the key personnel or our inability to attract and retain qualified personnel in
the future could have a material adverse effect on our business, operating
results and financial condition.
YEAR 2000 COMPLIANCE. Many computer programs and embedded date-reliant
systems use two digits rather than four to define the applicable year. Programs
and systems that record only the last two digits of the calendar year may not be
able to distinguish whether "00" means 1900 or 2000. If not corrected,
date-related information and data could cause such programs or systems to fail
or to generate erroneous information.
Although our processor and related designs have no inherent time or date
function, we initiated a comprehensive assessment of our Year 2000 readiness in
September, 1998. We have recently completed this assessment and have begun to
implement programs to make our information technology ("IT") and related non-IT
and processes Year 2000 compliant. In addition, we recently replaced our
internal computer systems and operating and applications software with equipment
and software that is Year 2000 compliant. We expect to complete changes to
critical systems by the third quarter of calendar 1999. We believe that we have
allocated sufficient resources for our Year 2000 compliance efforts, and we
estimate the total costs connected with our efforts to be less than $200,000.
We intend to cooperate with our manufacturing partners and others with whom
we do business to coordinate Year 2000 compliance with operational processes and
marketed products. However, we are unable to directly assess the Year 2000
compliance of products and technologies developed by others and incorporating
our technology. To the extent that any such third-party product or technology
is not Year 2000 compliant, we may be adversely affected due to our association
with such product or technology. In addition, our revenue and operating results
could become subject to unexpected fluctuations and could be adversely effected
if our partners or manufacturers of digital consumer products encounter Year
2000 compliance problems that affect their ability to distribute products that
incorporate our technology.
We will also be contacting critical suppliers to determine whether the
products and services they provide to us are Year 2000 compliant. We may
develop contingency plans should the need arise. A delay or failure by our
critical
19
suppliers to be Year 2000 compliant could, in a worst case, interrupt our
business and have an adverse effect on our business, financial condition and
results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
NOT APPLICABLE.
20
PART II - OTHER INFORMATION
ITEM 1. 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 Silicon
Graphics and the Company 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. In September 1998, the Company entered into a memorandum
of understanding (MOU) with Lexra, Inc. In the MOU, among other things, Lexra
will no longer state that its products are "MIPS compatible". In December 1998,
the Company and Lexra entered into a Settlement Agreement, and on January 8,
1999, the lawsuit was dismissed.
In February 1998, the Company received a notice asserting that the R10000
processor and potentially other processors designed by the Company allegedly
infringe a patent originally assigned to Control Data Corporation. Effective
December 15, 1998, Silicon Graphics, the Company, the holder of the patent
entered into a Settlement and Non-Exclusive License Agreement resolving the
matter.
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. In addition, the Company is continuing to evaluate
possible patent infringement claims against third parties and may assert such
claims, if appropriate.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K.
None.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MIPS Technologies, Inc.
a Delaware corporation
By: /s/ KEVIN C. EICHLER
---------------------------------
Kevin C. Eichler
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: February 16, 1999
22