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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
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PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): FEBRUARY 26, 1999
MIPS Technologies, Inc.
(Exact Name of Registrant as specified in its Charter)
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Delaware 77-0322161
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Identification No.)
Organization)
000-24487
(Commission File No.)
1225 Charleston Road
Mountain View, CA 94043
(Address of Principal Executive Offices, Including Zip Code)
(650) 567-5000
(Registrant's Telephone Number, Including Area Code)
None
(Former Name or Former Address, if Changed Since Last Report)
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ITEM 5. OTHER EVENTS
In connection with the filing of a Registration Statement on Form S-1,
the Registrant filed this Current Report on Form 8-K in order to update
certain disclosures contained in its Quarterly Report on Form 10-Q for the
quarter ended December 31, 1998 under the caption "Factors that May Affect
our Business." Refer to Exhibit 99.1.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Not applicable
(b) Not applicable
(c) Not applicable
INDEX TO EXHIBITS
Exhibit Decription
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99.1 Press release of the
Registrant dated
February 26, 1999
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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 hereunto duly authorized.
MIPS TECHNOLOGIES, INC.
Date: February 26, 1998 By: /s/ Kevin C. Eichler
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Name: Kevin C. Eichler
Title: Vice President, Chief
Financial Officer and
Treasurer
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REVENUE CONCENTRATION
We have derived a significant portion of our total revenue from a limited
number of semiconductor companies, and we expect this to continue. For the
second quarter and for the first six months of fiscal 1999, NEC accounted for
approximately 22% and 16%, respectively, of our revenue compared to 18% and
15% for the comparable period in fiscal 1998. We believe that NEC will
continue to represent more than 10% of our total revenue for at least the
next several years, although NEC is not obligated to continue using our
technology in current or future products. While we continue to broaden our
base of licensees, it is likely that our revenue will continue to be
concentrated among a small number of semiconductor companies. The identity of
particular licensees that will account for this revenue concentration will
vary from period to period depending on the addition or expiration of
contracts, the nature and timing of payments due under our contracts and the
volumes and prices at which our licensees sell products incorporating our
technology.
Our revenue is also presently concentrated in a small number of products. 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, factors negatively affecting sales of
Nintendo 64 video game cartridges could have a material adverse effect on our
results of operations and financial condition.
The market for home entertainment products is competitive and the
introduction of new products or technologies, as well as shifting consumer
preferences, could negatively impact the amount and timing of sales of
Nintendo 64 video game players and related cartridges. In addition, the
eventual introduction of the next generation Nintendo video game system is
likely to result in declining sales of Nintendo 64 video game players and
related cartridges, although sales of video game cartridges, which account
for a significant portion of our royalties, will continue, albeit at a
declining rate, for a period of time after the introduction. We developed key
elements of the Nintendo 64 system in conjunction with Silicon Graphics.
These elements included certain software and graphics technologies which, as
a result of our separation from Silicon Graphics and our shift in strategic
direction in early 1998, we no longer offer. Accordingly, we will need to
generate revenue growth from our stated markets to offset the eventual
decline of Nintendo 64 royalties. We understand that the next generation
Nintendo video game system will not incorporate any of our technology. We
value our relationship with Nintendo; however, there can be no assurance that
this relationship will result in any revenues for us other than those
generated by the sale of Nintendo 64 video game players and related
cartridges. In May 1998, we entered into a memorandum of understanding with
Silicon Graphics, Nintendo Co. Ltd. and ArtX, Inc. resolving certain disputes
among the parties. See "Business -- Litigation".
Although we expect that an increasingly significant portion of our future
revenue will be related to sales of digital consumer and business equipment
products, our technology
<PAGE>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, which may decline. Our ability to diversify our sources of revenue
is still uncertain and will depend on whether our processors and related
designs are accepted in a broader range of digital consumer products and
business equipment. Our experience in these markets is limited because, prior
to 1998, we were focused primarily on the development of high performance
processors for Silicon Graphics' workstations and related designs. Our new
focus requires us to shift our research and development efforts and places an
increased importance on our sales and marketing efforts. As we shift our
direction, 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.
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
licensees, which may provide for significant up-front payments or payments
based on the achievement of certain milestones;
- the relative mix of contract revenue and royalties;
- competitive pressures resulting in lower contract revenue or royalty
rates;
- our ability to develop, introduce and market new processor intellectual
property;
- the establishment or loss of licensing relationships with semiconductor
manufacturing companies, fabless semiconductor companies or system
original equipment manufacturers;
- the timing of new products and product enhancements by us and our
competitors;
- changes in development schedules, research and development expenditure
levels and product support by us and digital consumer product
manufacturers;
- seasonal fluctuations; and
- general economic and market conditions.
Our revenue components are difficult to predict and may fluctuate
significantly from period to period. Because our expenses are largely
independent of our revenue in any particular period, it is difficult to
accurately forecast our operating results. Our operating expenses are based, in
part, on anticipated future revenue and a high percentage of our expenses are
fixed in the short term. As a result, if our revenue is below expectations in
any quarter, the adverse effect may be magnified by our inability to adjust
spending in a timely manner to compensate for the revenue shortfall.
We also expect to experience seasonal fluctuations in our revenue and
operating results because revenue related to sales of digital consumer
products is expected to constitute a substantial portion of our total revenue
over the next several years. We typically record royalty revenue from our
licensees, including Nintendo, in the quarter following the sale of the
related digital consumer product. Because a disproportionate amount of
Nintendo 64 video game cartridges are typically sold in our second fiscal
quarter (which includes the holiday selling season), we have realized a
disproportionate amount of our revenue and operating income in our third
fiscal quarter. We expect that these seasonal fluctuations will continue as
we increase our focus on processors, cores and related designs for
high-volume digital consumer products.
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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.
DEPENDENCE ON DIGITAL CONSUMER PRODUCTS INDUSTRY
The digital consumer products industry is presently the primary market for
our processor, core and related designs. As a result, our success will depend
largely 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;
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- 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;
- 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 processors, cores 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. Even if our technology is adopted, we cannot be
certain that it 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 the manufacturer 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.
NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE
Our future success will depend on the extent to which our processor, core
and related designs are incorporated into the products of leading digital
consumer product and business equipment manufacturers ("design wins"). This
requires that we develop enhancements and new generations of our processors,
cores and other intellectual property that satisfy the requirements of specific
product applications and introduce these new technologies to the marketplace in
a timely manner. 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 processors, cores and other intellectual property are not
compatible with the requirements of specific 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.
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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 and business equipment
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, digital consumer
product or business equipment 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, core 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, core and related designs in the
future, or that any enhancements or new generations of the technology that we
develop will generate revenue in excess of the costs of development.
INTELLECTUAL PROPERTY MATTERS
Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks which we attempt to protect
through 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 our 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, including in the marketing and sale of unauthorized MIPS-based
clones. We intend to vigorously protect our intellectual property rights through
litigation and other means. However, there can be no assurance that we will be
able to enforce our rights or prevent other parties from designing and marketing
unauthorized MIPS-based products.
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 that the steps we have taken to obtain ownership of contributed
intellectual property and to prevent misappropriation of our intellectual
property will be sufficient.
We own 54 U.S. patents on various aspects of our technology, with expiration
dates ranging from 2006 to 2017, and have an additional 15 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 our industry. We cannot be certain that third parties
will not make a claim of infringement against us or against our semiconductor
manufacturing licensees 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
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available to us on acceptable terms or at all. A successful claim of
infringement against us or one of our semiconductor manufacturing licensees in
connection with its use of our technology could adversely affect our business.
We have entered into, 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.
We have entered into licensing arrangements with Silicon Graphics with
respect to certain of its intellectual property that we use in our business.
As a result of the separation, however, we no longer have full access to
Silicon Graphics' patents and other intellectual property. In the past, the
MIPS Group benefitted 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. The separation of our business from that of
Silicon Graphics could 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.
LACK OF INDEPENDENT OPERATING HISTORY
Prior to the separation of our business from that of Silicon Graphics in
June 1998, we
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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 as provided
in the management services agreement between the companies. If we fail to
implement the operational, administrative and other systems and
infrastructure necessary to support our business as a stand-alone company,
our business, results of operations and financial condition could be
adversely affected.
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 processors
and cores compete with those of ARM Holdings plc, Hitachi Semiconductor
(America) Inc. and PowerPC (an alliance between Motorola, Inc. and IBM
Corporation), 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. In addition, we may face competition
from the producers of unauthorized MIPS-based clones and non-RISC based
technology designs.
To remain competitive, we must also differentiate our processors, cores and
related designs from those available or under development by the internal design
groups of semiconductor manufacturers, including some of our current and
prospective manufacturing licensees. Many of these internal design groups have
substantial programming and design resources and are part of larger
organizations with substantial financial and marketing resources. These internal
design groups may develop products that compete directly with ours or may
actively seek to license their own technology to third-party semiconductor
manufacturers.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater brand recognition, larger
customer bases as well as greater financial and marketing resources than we do.
This may allow them to respond more quickly than we can to new or emerging
technologies and changes in customer requirements. It may also allow them to
devote greater resources than we can to the development and promotion of their
technologies and products. In addition, we may face competition from non-RISC
based designs of technology. 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.
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. We
intend to hire additional highly skilled personnel, particularly technical
personnel, for our anticipated research and development activities.
Competition for qualified personnel, particularly those with significant
experience in the semiconductor and processor design industries, is intense.
The loss of the services of any of our key personnel or our inability to
attract and retain qualified personnel in the future could have a material
adverse effect on our business, results of operations and financial
condition. In particular, our ability to hire and retain qualified
engineering personnel is essential to meet our business goals.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
A substantial portion of our revenue has been, and is expected to
continue to be, derived from customers outside the United States, primarily
in Japan. For the second quarter and for 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 comparative 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 the sales by our
manufacturing licensees to their customers are denominated in foreign
currencies, the royalties we receive on such sales could be subject to
fluctuations in currency exchange rates. If the effective price of the
technology we sell to our licensees were to increase due to fluctuations in
foreign currency exchange rates, demand for our technology could fall which
would, in turn, reduce our royalties. Because we cannot predict the amount of
non-U.S. dollar denominated revenue earned by our licensees, we have not
historically attempted to mitigate the effect that currency fluctuations may
have on our revenue, and we do not presently intend to do so in the future.
The relative significance of our international operations exposes us to a
number of additional risks, including:
- political and economic instability;
<PAGE>
- 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.
NEED TO MANAGE GROWTH
Our ability to continue to grow successfully requires an effective planning
and management process. Although we have developed much of the financial,
operational and administrative capabilities previously provided to us by Silicon
Graphics, we will need to continue to improve these capabilities. 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 includes the addition
of 24 employees in December 1998 to staff research and development activities at
our new development center in Denmark, as well as additional employees in our
sales and marketing staff.
Our growth has placed, and the recruitment and integration of additional
employees will continue to place, a strain on our resources. Digital consumer
product manufacturers and our semiconductor manufacturing licensees 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.
RELIANCE ON SEMICONDUCTOR COMPANY LICENSEES
We do not manufacture or sell processors containing our technology. Rather,
we license our technology to semiconductor companies and digital consumer
product manufacturers who then incorporate our technology into the products they
sell. In some cases, our licensees also add custom integration services and
derivative design technologies to enhance our processor designs. Accordingly,
the adoption and continued use of our technology by semiconductor companies
is important to our continued success. None of our current semiconductor
company licensees 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 licensees,
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 semiconductor
companies on terms consistent with our business model, including:
- the lengthy and expensive process of building a relationship with a
potential licensee before there is any assurance of an agreement;
- the fact that we may compete with the internal design teams of
semiconductor companies in the development of products using
technologies that are similar to or an alternative to ours;
- the potential difficulties in persuading large semiconductor 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 licensees 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 licensees, including, for example, the highly competitive
environment in which they operate, the market for their products, their
engineering capabilities and their financial and other resources. In
addition, our separation from Silicon Graphics may negatively affect certain
of our existing licensee 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 licensees (due to, for
example, Silicon Graphics' status as a customer of such licensees).
YEAR 2000 ISSUE
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.
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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. Each of the
suppliers of these systems and software has indicated to us that it believes
its products are Year 2000 compliant. We expect to complete changes to
critical systems by the third quarter of calendar year 1999. We believe that
we have allocated sufficient resources for our Year 2000 compliance efforts,
and we expect that our total costs associated with these efforts will be less
than $200,000, exclusive of ordinary costs to upgrade and maintain our
equipment.
We intend to cooperate with our licensees 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 licensees or system original equipment manufacturers 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 will
develop contingency plans should the need arise. A delay or failure by our
critical 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.
