<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 21, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
MIPS TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
<TABLE>
<S> <C> <C>
DELAWARE 3571 77-0322161
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
2011 NORTH SHORELINE BLVD.
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 960-1980
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
JOHN E. BOURGOIN
MIPS TECHNOLOGIES, INC.
2011 NORTH SHORELINE BLVD.
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 960-1980
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
<TABLE>
<S> <C>
WILLIAM H. HINMAN, JR. JOSHUA L. GREEN
SHEARMAN & STERLING JEFFREY Y. SUTO
555 CALIFORNIA STREET VENTURE LAW GROUP
SAN FRANCISCO, CALIFORNIA 94104 A PROFESSIONAL CORPORATION
(415) 616-1100 2800 SAND HILL ROAD
MENLO PARK, CALIFORNIA 94025
(650) 854-4488
</TABLE>
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(1)(2) FEE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$0.001 per share.............. 6,325,000 shares $14.00 $88,550,000 $26,123
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes an aggregate of 825,000 shares of Common Stock that the
Underwriters have the option to purchase from the Selling Stockholder to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION OF THE SECURITIES UNDER THE +
+SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 21, 1998
MIPS TECHNOLOGIES, INC.
SHARES
COMMON STOCK
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Of the shares of common stock, par value $0.001 per share (the "Common
Stock"), of MIPS Technologies, Inc. (the "Company") offered hereby (the
"Offering"), are being offered by the Company and are being offered
by Silicon Graphics, Inc. ("Silicon Graphics"). The Company will not receive
any proceeds from the sale of the shares by Silicon Graphics. Silicon Graphics
currently owns all of the outstanding shares of Common Stock. Following the
Offering, Silicon Graphics will own % of the Common Stock ( % if the
Underwriters' over-allotment option is exercised in full).
Prior to the Offering, there has been no public market for the Common Stock. It
is currently estimated that the initial public offering price of the Common
Stock will be between $ and $ per share. See "Underwriting" for a
description of the factors to be considered in determining the initial public
offering price. The Company intends to submit an application for quotation of
the Common Stock on the Nasdaq National Market under the symbol "MIPS".
FOR INFORMATION CONCERNING CERTAIN RISK FACTORS WHICH SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS" COMMENCING ON PAGE 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SILICON
PUBLIC DISCOUNT(1) COMPANY(2) GRAPHICS
<S> <C> <C> <C> <C>
Per Share $ $ $ $
Total(3) $ $ $ $
</TABLE>
(1) The Company and Silicon Graphics have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933. See "Underwriting."
(2) The Company will pay expenses estimated at $ in connection with the
Offering. See "Arrangements Between the Company and Silicon Graphics."
(3) Silicon Graphics has granted the Underwriters a 30-day option to purchase
up to additional shares of Common Stock solely to cover over-
allotments, if any. If such option is exercised in full, the total Price to
Public, Underwriting Discount, Proceeds to Company and Proceeds to Silicon
Graphics will be $ , $ , $ and $ ,
respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by them, and subject to
approval of certain legal matters by counsel and certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. Delivery of the shares of Common Stock
offered hereby to the Underwriters is expected to be made in New York, New York
on or about , 1998.
DEUTSCHE MORGAN GRENFELL
BANCAMERICA ROBERTSON STEPHENS
HAMBRECHT & QUIST
The date of this Prospectus is , 1998.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
Unless otherwise noted, (i) references to the "Company" include the
historical operating results and activities of, and assets and liabilities
assigned to, the businesses and operations which comprise the Company as of
the date hereof, (ii) "Silicon Graphics" means Silicon Graphics, Inc. and its
consolidated subsidiaries (other than the Company), and (iii) numbers and
percentages of shares outstanding assume that the Underwriters' over-allotment
option is not exercised and have been adjusted to reflect a -for-one split
of the Common Stock to be effected in connection with the Offering.
MIPS(R) is a registered trademark of the Company. This Prospectus contains
trademarks and registered trademarks of the Company and other companies.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with and is qualified in
its entirety by the more detailed information and Financial Statements and
Notes thereto appearing elsewhere in this Prospectus.
THE COMPANY
MIPS Technologies, Inc. is a leading designer and developer of RISC-based
high-performance 32- and 64-bit microprocessor intellectual property for
embedded systems applications. The Company licenses its technology to its seven
semiconductor partners: NEC Corporation, Toshiba Corporation, LSI Logic
Corporation, Philips Electronics N.V., Integrated Device Technology, NKK
Corporation and Quantum Effect Design, Inc. These partners in turn design,
market and sell MIPS-based microprocessors to system OEMs. To date, the MIPS
RISC architecture has been used to create over 60 separate microprocessor
products which have a cumulative installed base of over 70 million units.
According to Inside the New Computer Industry, an industry trade publication,
the market for RISC-based microprocessors totaled 98 million units in calendar
year 1997. The Company's semiconductor partners reported that 48 million units
based on the MIPS RISC architecture were shipped in calendar year 1997.
The Company is specifically targeting the emerging market for digital
consumer products. The Company believes that its 32- and 64-bit microprocessor
designs are well suited for this market due to the scalability and performance
of the MIPS RISC architecture and the cost and time-to-market advantages
provided by the Company's intellectual property. The Company has achieved
several significant design wins in this market, including video game systems
such as the Nintendo 64 and Sony PlayStation, handheld personal computers such
as the Phillips Velo and the NEC MobilePro and digital set-top boxes from
Echostar DBS Corporation and Microsoft Corporation.
The Company is currently a wholly owned subsidiary of Silicon Graphics. Prior
to the Separation, the Company's business was conducted by Silicon Graphics
primarily through its MIPS Group, a division of Silicon Graphics. The Company's
predecessor, MIPS Computer Systems, Inc., was founded in 1984 and was engaged
in the design and development of RISC microprocessors for the computer systems
and embedded markets.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered................... shares (including shares by the Company
and shares by Silicon Graphics)
Common Stock to be outstanding after
the Offering(1)....................... shares
Proposed Nasdaq National Market Symbol. MIPS
</TABLE>
- -------
(1) Excludes shares of Common Stock reserved for issuance pursuant to
employee benefit and stock purchase plans. See "Management."
SUMMARY FINANCIAL DATA
(In thousands)
The following historical financial information may not be indicative of the
Company's future performance and does not necessarily reflect what the
financial position and results of operations of the Company would have been had
the Company operated as a separate, stand-alone entity during the periods
covered. In particular, the historical financial information does not reflect
many significant changes that will occur in the funding and operations of the
Company and the future sources and costs of the Company's revenue as a result
of both the Separation and the Company's recent shift in strategic direction.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED JUNE 30, ENDED DECEMBER 31,
------------------------------------------ --------------------
1993 1994 1995 1996 1997 1996 1997
------ ------- ------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Royalties............... $3,643 $ 8,402 $13,576 $17,916 $33,992 $ 7,393 $ 26,759
Contract revenue........ 14,834 10,462 16,103 18,627 3,115 1,981 827
------ ------- ------- ------- ------- --------- ---------
Total revenue........... 18,477 18,864 29,679 36,543 37,107 9,374 27,586
Total costs and
expenses............... 21,920 36,524 57,430 64,609 81,092 37,403 42,121
Net loss................ (3,450) (17,730) (27,820) (28,165) (44,035) (28,059) (14,546)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED(1)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ -- $
Working capital (deficiency)............................ (8,211)
Total assets............................................ 16,724
Total stockholders' and business equity................. 5,266
</TABLE>
- -------
(1) Adjusted to give effect to the sale of the shares of Common Stock offered
by the Company and the application of the net proceeds therefrom.
3
<PAGE>
RELATIONSHIP WITH SILICON GRAPHICS
The Company is currently a wholly owned subsidiary of Silicon Graphics. Upon
completion of the Offering, Silicon Graphics will beneficially own % of the
outstanding Common Stock ( % if the Underwriters' over-allotment option is
exercised in full). Accordingly, Silicon Graphics will continue to have the
ability to direct the election of members of the board of directors of the
Company and exercise a controlling influence over the business and affairs of
the Company. In addition, so long as Silicon Graphics' ownership interest in
the Company exceeds 50%, Silicon Graphics will have the ability to remove
directors with or without cause, call special meetings of stockholders and
effect stockholder action by written consent in lieu of a meeting of
stockholders. These rights will not be available to the Company's other
stockholders, including after Silicon Graphics ceases to own in excess of 50%
of the Company's outstanding Common Stock. See "Description of Capital Stock--
Certificate of Incorporation and By-law Provisions That May Have an Anti-
Takeover Effect."
Silicon Graphics has advised the Company that it currently intends to hold
all of the Common Stock beneficially owned by it following the Offering.
However, Silicon Graphics is not subject to any contractual obligation to
retain its controlling interest, except that Silicon Graphics has agreed not to
sell or otherwise dispose of any shares of Common Stock of the Company for a
period of 365 days after the date of this Prospectus without the prior written
consent of Deutsche Morgan Grenfell Inc. See "Underwriting." As a result, there
can be no assurance concerning the period of time during which Silicon Graphics
will maintain its beneficial ownership of Common Stock following the Offering.
Any disposition by Silicon Graphics of any of the shares of Common Stock it
owns following the Offering may be effected in one or more transactions,
including a public offering, a distribution by Silicon Graphics of such Common
Stock to its stockholders, an offer by Silicon Graphics to exchange such Common
Stock for outstanding Silicon Graphics common stock, or other transactions.
Silicon Graphics will have registration rights with respect to the shares of
Common Stock owned by it following the Offering which would facilitate any
future disposition.
The Company and Silicon Graphics have entered into or will, prior to the
consummation of the Offering, enter into certain agreements governing various
interim and ongoing relationships between them. Among these agreements is a
Corporate Agreement, which will include, among other things, provisions
granting to Silicon Graphics the right to purchase additional shares of capital
stock of the Company under certain circumstances. See "Arrangements Between the
Company and Silicon Graphics." In addition, the Company's Restated Certificate
of Incorporation includes certain provisions regarding the allocation of
business opportunities that may be suitable for both the Company and Silicon
Graphics. See "Description of Capital Stock--Corporate Opportunities."
4
<PAGE>
THE COMPANY
MIPS Technologies, Inc. is a leading designer and developer of RISC-based
high-performance 32- and 64-bit microprocessor intellectual property for
embedded systems applications. The Company licenses its technology to its
seven semiconductor partners: NEC Corporation ("NEC"), Toshiba Corporation
("Toshiba"), LSI Logic Corporation ("LSI Logic"), Philips Electronics N.V.
("Philips"), Integrated Device Technology ("IDT"), NKK Corporation ("NKK") and
Quantum Effect Design, Inc. ("QED"). These partners in turn design, market and
sell MIPS-based microprocessors to system OEMs primarily for embedded
applications. To date, the MIPS RISC architecture has been used to create over
60 separate microprocessor products which have a cumulative installed base of
over 70 million units. According to Inside the New Computer Industry, the
market for RISC-based microprocessors totaled 98 million units in calendar
year 1997. The Company's semiconductor partners reported that 48 million units
based on the MIPS RISC architecture were shipped in calendar year 1997.
Embedded systems are broadly defined as microcontrollers and microprocessors
plus related software incorporated into devices other than personal computers,
workstations, servers, mainframes and minicomputers. Until recently, this
market was dominated by low-cost 4-, 8-, and 16-bit microcontrollers embedded
into low-cost, high-volume consumer products such as home appliances,
facsimile machines, printers, telephone answering machines and various
automobile systems. The use of higher performance 32- and 64-bit
microprocessors was common in higher cost but lower volume applications such
as telecommunications switching equipment and data networking routers.
Although microcontrollers are adequate for basic system control, they lack the
perfomance and bandwidth capabilities to implement today's advanced functions,
including powerful user interfaces such as 3-D graphics. Recently, however,
the price of 32- and 64-bit microprocessors has reached the point where it is
now cost effective to embed these solutions into low-cost, high-volume digital
consumer products.
At the same time, improvements in semiconductor manufacturing processes have
enabled the integration of entire systems onto a single integrated circuit to
create complex systems-on-a-chip. However, design tool capabilities and the
internal design resources of semiconductor manufacturers and system OEMs have
not kept pace with the increase in the number of transistors that can be
placed on a single chip. Consequently a significant and growing "design gap"
has developed for semiconductor designers and manufacturers between what can
be manufactured and what can reasonably be designed by a single company. To
address this "design gap," semiconductor designers and manufacturers are
increasingly licensing proven and reusable intellectual property components,
such as microprocessor cores, memories and logic blocks from third-party
suppliers to create differentiated products and reduce development costs and
time-to-market.
The Company seeks to be the world's leading provider of microprocessor
intellectual property for the embedded market. To establish MIPS RISC-based
microprocessors as the industry standard and to proliferate its microprocessor
technology into multiple markets and applications, the Company has implemented
a business model based on the non-exclusive licensing of its intellectual
property. The Company is specifically targeting the emerging market for
digital consumer products. The Company believes that its 32- and 64-bit
microprocessor designs are well suited for this market due to the scalability
and performance of the MIPS RISC architecture and the cost and time-to-market
advantages provided by the Company's intellectual property. The Company has
achieved several significant design wins in this market, including video game
systems such as the Nintendo 64 and Sony PlayStation, handheld personal
computers such as the Philips Velo and the NEC MobilePro and digital set-top
boxes from Echostar DBS Corporation ("Echostar") and Microsoft Corporation
("Microsoft").
The Company is currently a wholly owned subsidiary of Silicon Graphics.
Prior to the Separation, the Company's business was conducted by Silicon
Graphics primarily through its MIPS Group, a division of Silicon Graphics. The
Company's predecessor, MIPS Computer Systems, Inc., was founded
5
<PAGE>
in 1984 and was engaged in the design and development of RISC microprocessors
for the computer systems and embedded markets. Silicon Graphics adopted the
MIPS architecture for its computer systems in 1988 and acquired MIPS Computer
Systems, Inc. in 1992. Following the acquisition, Silicon Graphics continued
the MIPS microprocessor business through its MIPS Group, which focused
primarily on the development of high-performance microprocessors for Silicon
Graphics' workstations and servers. Until the last few years, cost
considerations limited the broader use of these microprocessors. However, as
the cost to design and manufacture microprocessors based on the MIPS
technology decreased, the MIPS Group sought to penetrate the consumer market,
both through supporting and coordinating the efforts of the MIPS semiconductor
partners and by partnering with Nintendo Co., Ltd. ("Nintendo") in its design
of the Nintendo 64 video game player and related cartridges.
The Company was incorporated in Delaware in June 1992. The Company has its
principal executive offices at 2011 North Shoreline Blvd., Mountain View,
California 94043, and its telephone number at that address is (650) 960-1980.
CERTAIN TRANSACTIONS IN CONNECTION WITH THE OFFERING
In order to increase the focus of the MIPS Group on the design and
development of microprocessor intellectual property for the embedded market,
Sillicon Graphics has initiated a plan to separate the business of the MIPS
Group from its other operations (the "Separation"). To this end, Silicon
Graphics intends to transfer to the Company the assets, liabilities and
intellectual property related to this business. These assets and liabilities
include substantially all of the assets and liabilities of Silicon Graphics'
MIPS Group other than those related to the development of microprocessors for
the next generation of Silicon Graphics' product line. The Separation will
establish the Company as a stand-alone entity with objectives separate from
those of Silicon Graphics. The Company believes that the Separation will be
substantially completed, including the transfer of substantially all of such
assets, liabilities and intellectual property, by the closing date of the
Offering (the "Closing Date"). The Separation, and the transactions being
undertaken in connection therewith, including the Offering, are being effected
pursuant to a Separation Agreement dated , 1998 between the Company and
Silicon Graphics (the "Separation Agreement").
The Company has had no direct third-party indebtedness other than
obligations under capital leases, and historically has relied on internally
generated funds and funds provided by Silicon Graphics to finance its
operations. However, following the Offering, Silicon Graphics will no longer
be obligated, and does not intend, to provide additional funds to the Company
to finance its operations. In addition to the net proceeds from the sale of
the Common Stock by the Company in the Offering, the Company intends to enter
into a revolving credit facility (the "Credit Facility") with a bank or other
financial institution to provide for certain of its working capital needs.
As contemplated by the Separation Agreement, the Company and Silicon
Graphics have also entered into, or will enter into, certain ancillary
agreements which govern various interim and ongoing relationships between the
two companies. These ancillary agreements include agreements with respect to
intellectual property arrangements, the provision of transitional services and
tax sharing. See "Arrangements Between the Company and Silicon Graphics."
6
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the Common Stock offered by this Prospectus. When used in this
Prospectus, the words "expects," "anticipates," "estimates" and similar
expressions are intended to identify forward looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. These risks and
uncertainties include, but are not limited to, those risks discussed below and
elsewhere in this Prospectus. Actual results could differ materially from
those projected in the forward looking statements as a result of the risk
factors discussed below and elsewhere in this Prospectus.
RISKS ASSOCIATED WITH RECENT SHIFT IN STRATEGIC DIRECTION. The Company's
research and development efforts have historically focused on high-performance
microprocessor and related designs intended primarily to serve the needs of
Silicon Graphics. However, the Company has recently devoted an increasing
percentage of its personnel and financial resources to the development of
microprocessor and related designs for high-volume applications in the
embedded market. Revenue derived from embedded market applications has
accounted for an increasingly significant percentage of the Company's total
revenue and presently represents a substantial majority of its total revenue.
In connection with the Separation and the Offering, the Company has formulated
a new strategic direction in which its primary focus will be the development
of microprocessors and related designs for applications in the embedded
market, including digital consumer products such as video game products,
handheld personal computers and digital set-top boxes. This shift in strategic
direction involves several risks, including (i) increased reliance on the
evolving and highly competitive digital consumer products industry; (ii) the
need for the Company to refocus its research and development efforts from
microprocessors primarily for high-performance computer systems to
microprocessors and related designs for use in a wide range of digital
consumer products; and (iii) increased importance of the Company's sales and
marketing activities and its limited experience in this area. Any failure by
the Company to adequately address any of these risks could have a material
adverse effect on the Company's business, results of operations and financial
condition.
This shift in strategic direction will also result in significant changes in
the Company's financial and accounting model, including changes in the nature
and timing of its revenue and expenses. The financial information contained
herein, including the Company's audited financial statements, is presented on
a historical basis and, therefore, does not reflect this recent shift in the
Company's strategic direction. See "--Limited Relevance of Historical
Financial Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
LIMITED RELEVANCE OF HISTORICAL FINANCIAL INFORMATION. The historical
financial information included herein does not reflect the many significant
changes in the Company's financial and accounting model that will occur as a
result of the Separation and the Company's recent shift in strategic direction
nor the changes that will occur in the funding and operations of the Company
due to its status as a separate, stand-alone entity. For example, in
anticipation of the Separation and the more limited focus of its ongoing
research and development activities, the Company reduced its research and
development staff from 221 persons at December 31, 1997 to 36 persons at March
31, 1998. This reduction primarily reflects the transfer to Silicon Graphics
of employees engaged in the development of next generation microprocessors for
Silicon Graphics' systems. In addition, sales and marketing activities are
expected to increase as the Company shifts its focus from the design of
microprocessors addressing the needs of Silicon Graphics to the development,
marketing and licensing of microprocessor and related designs for a wide
variety of applications in the digital consumer products industry. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
7
<PAGE>
UNPREDICTABLE AND FLUCTUATING OPERATING RESULTS. The Company expects to
experience significant fluctuations in its quarterly operating results due to
a variety of factors, many of which are outside of its control. Moreover,
because many of the Company's revenue components fluctuate and are difficult
to predict and the Company's expenses are largely independent of its revenue
in any particular period, it is difficult for the Company to accurately
forecast operating results. The Company's revenue in any particular quarter is
dependent on a number of factors, including the demand for and average selling
prices of semiconductor products that incorporate the Company's technology,
the financial terms of the Company's contractual arrangements with its
semiconductor partners (which may require significant up-front payments or
payments based on the achievement of certain milestones), the relative mix of
contract revenue and royalties, and competitive pressures resulting in lower
contract revenue or royalty rates. In addition, contract revenue may fluctuate
significantly from period to period and any increase or decrease in such
revenue will not be indicative of future period-to-period increases or
decreases. Because the Company's expense levels are based, in part, on
management's expectations regarding future revenue, if revenue is below
expectations in any quarter, the adverse effect may be magnified by the
Company's inability to adjust spending in a timely manner to compensate for
any such revenue shortfall.
Factors that may adversely affect the Company's quarterly operating results
include the Company's ability to develop, introduce and market new
microprocessor intellectual property, the demand for and average selling
prices of semiconductor products that incorporate the Company's technology,
the establishment or loss of strategic relationships with semiconductor
manufacturing partners or manufacturers of digital consumer products, the
timing of new products and product enhancements by the Company and its
competitors, changes in the Company's and digital consumer product
manufacturers' development schedules and levels of expenditures on research
and development and general economic conditions. As a result, the Company's
total revenue and operating results in any future period cannot be predicted
with certainty, and its operating results in any quarter may not be indicative
of its future performance. Moreover, the Company expects to experience
seasonal fluctuations in its revenue and operating results.
In light of the foregoing, the Company's future reported or anticipated
operating results in a given quarter may fail to meet or exceed the
expectations of securities analysts or investors. In such event, the price of
the Common Stock would likely be materially and adversely affected.
REVENUE CONCENTRATION. The Company is subject to revenue concentration risks
at both the product and semiconductor manufacturing partner levels. To date, a
substantial portion of the Company's total revenue has been derived from
contract revenue and royalties earned on sales of video game products that use
the Company's RISC-based microprocessor technology. In particular, royalties
and contract revenue derived from Nintendo 64 video game players and related
cartridges accounted for 45%, 22%, 67% and 76% of the Company's total revenue
for the fiscal years ended June 30, 1995, 1996 and 1997 and the six months
ended December 31, 1997, respectively. The Company anticipates that revenue
related to sales of Nintendo 64 video game cartridges will represent a
substantial portion of its total revenue for the next several years. However,
competition in the market for home entertainment products is intense and the
introduction of new products or technologies, as well as shifting consumer
preferences, could negatively impact video game cartridge sales. There can be
no assurance as to the amount and timing of sales of Nintendo 64 video game
players and related cartridges and, consequently, there can be no assurance as
to the royalty stream to the Company from such sales. In the near term,
factors negatively affecting sales of Nintendo 64 video game cartridges could
have a material adverse effect on the Company's results of operations and
financial condition. Moreover, there can be no assurance that any of the
Company's microprocessor intellectual property will be selected for design
into future generation Nintendo products. The Company and Silicon Graphics
recently commenced litigation against certain third parties seeking to enjoin
their use of Company and Silicon Graphics intellectual property in attempting
to obtain contracts with respect to the next generation Nintendo video game
system. See "Business--Litigation."
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Although the Company expects that an increasingly significant portion of its
future revenue will be related to sales of digital consumer products such as
handheld personal computers and set-top boxes as well as other video game
products, there can be no assurance that the Company's technology will be
selected for design into any such products. Accordingly, the Company may
remain significantly dependent on revenue related to sales of video game
products. The identity of significant products may vary from period to period
depending on the addition of new contracts and the number of designs using the
Company's technology.
A significant portion of the Company's total revenue has been and is
expected to continue to be derived from a limited number of semiconductor
manufacturers. For the fiscal years ended June 30, 1995, 1996 and 1997 and the
six months ended December 31, 1997, NEC accounted for approximately 32%, 32%,
25% and 17%, respectively, and LSI Logic accounted for 3%, 9%, 6% and 6%,
respectively, of the Company's total revenue. The Company believes that these
two partners will continue to represent a significant portion of its total
revenue for at least the next several years, although neither of these
companies is obligated to continue using the Company's technology in its
current or future products. Because there is a relatively limited number of
semiconductor manufacturers to which the Company could license its technology
on a basis consistent with its business model, it is likely that the Company's
revenue will continue to be concentrated at the semiconductor manufacturing
partner level. This revenue concentration for any given period will vary
depending on the addition or expiration of contracts, the nature and timing of
payments due under such contracts and the volumes and prices at which the
Company's partners sell products incorporating its technology. Accordingly,
the identity of particular manufacturing partners that will account for any
such revenue concentration will vary from period to period and may be
difficult to predict.
SEASONALITY. Because revenue related to sales of Nintendo 64 video game
cartridges is expected to represent a substantial portion of the Company's
total revenue over the next several years, the Company expects to experience
seasonal fluctuations in its revenue and operating results. The Company
records royalty revenue from Nintendo in the quarter following the sale of the
related Nintendo 64 video game cartridge. Because a disproportionate amount of
Nintendo 64 video game cartridges are typically sold in the Company's second
fiscal quarter (which includes the holiday selling season), a disproportionate
amount of the Company's revenue and operating income is expected to be
realized in its third fiscal quarter. In addition, as the Company increases
its focus on microprocessor intellectual property for high-volume digital
consumer products, the Company can be expected to continue to experience
similar seasonal fluctuations in its revenue and operating results.
INTELLECTUAL PROPERTY MATTERS. The Company regards its patents, copyrights,
mask work rights, trademarks, trade secrets and similar intellectual property
as critical to its success, and relies on a combination of patent, trademark,
copyright, mask work and trade secret laws to protect its proprietary rights.
Any failure of the Company to obtain or maintain adequate protection of its
intellectual property rights for any reason could have a material adverse
effect on its business, results of operations and financial condition. In
connection with the Offering and the Separation, and subject to the grant of a
license to Silicon Graphics, the Company will own approximately 48 U.S.
patents on various aspects of its technology, with expiration dates ranging
from 2006 to 2015, approximately 37 pending U.S. patent applications as well
as all foreign counterparts relating thereto. There can be no assurance that
patents will issue from any patent applications submitted by the Company, that
any patents held by the Company will not be challenged, invalidated or
circumvented or that any claims allowed from its patents will be of sufficient
scope or strength to provide meaningful protection or any commercial advantage
to the Company. In addition, there can be no assurance that third parties will
not assert claims of infringement against the Company or against the Company's
semiconductor manufacturing partners in connection with their use of the
Company's technology. Such claims, even those without merit, could be time
consuming, result in costly litigation and/or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, or at all.
Moreover, the laws of certain foreign countries may not
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protect the Company's intellectual property to the same extent as do the laws
of the United States and, because of the importance of the Company's
intellectual property rights to its business, this could have a material
adverse effect on its business, results of operations and financial condition.
The Company also uses licensing agreements and employee and third party
nondisclosure and assignment agreements to limit access to and distribution of
its proprietary information and to obtain ownership of technology prepared on
a work-for-hire basis. There can be no assurance that the steps taken by the
Company to protect its intellectual property rights will be adequate to deter
misappropriation of such rights or that the Company will be able to detect
unauthorized uses and take immediate or effective steps to enforce its rights.
There can also be no assurance that the steps taken by the Company to obtain
ownership of contributed intellectual property will be sufficient to assure
its ownership of all proprietary rights. The Company also relies on unpatented
trade secrets to protect its proprietary technology. No assurance can be given
that others will not independently develop or otherwise acquire the same or
substantially equivalent technologies or otherwise gain access to the
Company's proprietary technology or disclose such technology or that the
Company can ultimately protect its rights to such unpatented proprietary
technology. In addition, no assurance can be given that third parties will not
obtain patent rights to such unpatented trade secrets, which patent rights
could be used to assert infringement claims against the Company. The Company
has recently commenced two lawsuits regarding the possible misappropriation of
its trademarks and intellectual property. See "Business--Litigation."
As a result of the Separation and the Offering, the Company will not have
full access to Silicon Graphics' portfolio of intellectual property. Prior to
the Offering, Silicon Graphics allowed the Company to use certain of its
patents and other intellectual property in the Company's business. Such use by
the Company was not documented by a written license agreement. In connection
with the Offering and the Separation, the Company and Silicon Graphics will
enter into arrangements pursuant to which certain intellectual property will
be assigned to the Company, subject to the grant of a license to Silicon
Graphics; certain intellectual property will be retained by Silicon Graphics,
subject to the grant of a license to the Company; and certain intellectual
property will be retained by Silicon Graphics without any ongoing interest to
the Company. There can be no assurance that the Company will continue to have
access to any such licensed intellectual property on commercially attractive
terms, or at all, particularly if the Company ceases to be a majority-owned
subsidiary of Silicon Graphics. The Company's inability to use such
intellectual property in the future could have a material adverse affect on
its business and results of operations. In addition, in the past, the MIPS
Group has benefited from its status as a division of Silicon Graphics in its
access to the intellectual property of third parties through licensing
arrangements or otherwise, and in the negotiation of the financial and other
terms of any such arrangements. As a result of the Separation, there can be no
assurance that the Company will be able to negotiate commercially attractive
intellectual property licensing arrangements with third parties in the future,
particularly if the Company ceases to be a majority-owned subsidiary of
Silicon Graphics. In addition, in connection with any future intellectual
property infringement claims, the Company will not have the benefit of
asserting counterclaims based on Silicon Graphics' intellectual property
portfolio, nor will the Company be able to provide licenses to Silicon
Graphics' intellectual property in order to resolve such claims.
LACK OF INDEPENDENT OPERATING HISTORY. The Company has never operated as a
stand-alone company. Upon completion of the Offering, the Company will
continue to be a majority owned subsidiary of Silicon Graphics, although
Silicon Graphics will have no obligation to provide assistance to the Company
except as described in "Arrangements Between the Company and Silicon
Graphics." See "--Control By and Relationship with Silicon Graphics." The
Company will operate as a stand-alone entity following the Offering and,
accordingly, will be required to develop and implement the operational,
administrative and other systems and infrastructure necessary to support its
current and future business. See "--Management of Growth." There can be no
assurance that the Company will be able to develop the necessary systems and
infrastructure and any failure to do so could have an adverse effect on the
Company's business, results of operations and financial condition.
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NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE. The Company's success is
highly dependent on its ability to develop enhancements and new generations of
its microprocessor intellectual property, introduce them to the marketplace in
a timely manner, and have them incorporated into semiconductor products that
are ultimately selected for design into the products of leading digital
consumer product manufacturers. There can be no assurance that the Company's
development efforts will be successful or that the characteristics of its
microprocessor intellectual property will satisfy those that may be critical
to specific applications in the embedded market. To the extent that the
Company's development efforts are unsuccessful or the characteristics of its
microprocessor intellectual property are not compatible with the requirements
of specific digital consumer product applications, its ability to achieve
design wins may be limited. Failure to achieve a sufficient number of design
wins could have a material adverse effect on the Company's business, results
of operations and financial condition.
Technical innovations of the type critical to the Company's success are
inherently complex. Any failure by the Company to anticipate or respond
adequately to changes in the requirements of digital consumer product
manufacturers or in the semiconductor manufacturing process, or any
significant delays in the development or introduction of new microprocessor
intellectual property, could have a material adverse effect on the Company's
business, results of operations and financial condition. Moreover, significant
technical innovations generally require a substantial investment before their
commercial viability is determined. There can be no assurance that the Company
will have the financial resources necessary to fund the future development of
microprocessor and related designs. In addition, there can be no assurance
that any enhancements or new generations of the Company's technology, even if
successfully developed, will generate revenue in excess of the costs of
development or not be quickly rendered obsolete by changing consumer
preferences, the introduction of products embodying new technologies or
features or other technological developments in the semiconductor and digital
consumer products industries.
DEPENDENCE ON DIGITAL CONSUMER PRODUCTS INDUSTRY. The digital consumer
products industry will be the primary market for the Company's microprocessor
and related designs. The Company's success will be dependent upon the level of
consumer acceptance of the products that incorporate its technology, which may
be affected by changing consumer preferences and the introduction of products
embodying new technologies or features. In addition, certain digital consumer
products such as video game products may present limited opportunities for
design wins due to a limited number of product manufacturers and the length of
product life cycles. Many applications in the digital consumer products
industry, such as handheld personal computers and set-top boxes, have only
recently been introduced to the market and the level of consumer interest and
acceptance is difficult to predict. Factors negatively affecting the digital
consumer products industry and the demand for digital consumer products, such
as the failure to develop industry standards for hardware and software or to
achieve adequate product cost reductions, could have a material adverse effect
on the Company's business, results of operations and financial condition.
Moreover, to the extent that the performance, functionality, price and power
characteristics of the Company's microprocessor designs do not satisfy those
that may be critical to specific digital consumer product applications, the
Company's dependence on the digital consumer products industry may be further
confined to a limited segment of that industry.
RELIANCE ON MANUFACTURING PARTNERS. The Company does not manufacture or sell
microprocessors containing its technology. Rather, the Company licenses its
technology to semiconductor manufacturers that incorporate the Company's
technology into the products they sell. In some cases, these manufacturing
partners also add custom integration services and derivative design
technologies to the Company's microprocessor designs. Accordingly, the
Company's success is substantially dependent on the adoption and continued use
of its technology by semiconductor manufacturers. The Company faces numerous
risks in obtaining agreements with semiconductor manufacturers on terms
consistent with its business model, including, among others, the lengthy and
expensive process of building a relationship with a potential partner before
there is any assurance of an agreement; persuading large semiconductor
companies to work
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with, to rely for critical technology on, and to disclose proprietary
manufacturing technology to, the Company; and persuading potential partners to
bear certain development costs associated with the Company's technology and to
make the necessary investment to successfully produce embedded microprocessors
using the Company's technology. Moreover, none of the Company's manufacturing
partners is obligated to license new or future generations of the Company's
microprocessor designs.
The Company is also subject to many risks beyond its control that influence
the success of its semiconductor manufacturing partners, including, among
others, the highly competitive environment in which its current and any future
partners operate, the market for their products and the engineering
capabilities and financial and other resources of its partners. The Company
also believes that its principal competition may come from semiconductor
manufacturers, including its current manufacturing partners, that internally
develop products using similar or alternative technologies. Any such
competition may adversely affect the Company's existing relationships and its
ability to establish new relationships. Moreover, the Company's relationships
with certain of its existing partners may be negatively affected by its
separation from Silicon Graphics, insofar as Silicon Graphics' status as a
customer of such partners has been a factor in establishing and maintaining
such relationships or in negotiating the financial and other terms of the
contractual arrangements with such partners.
The Company currently has seven semiconductor manufacturing partners. There
can be no assurance that the Company will be successful in maintaining
relationships with its current manufacturing partners or in entering into new
relationships with additional partners. Any failure by the Company to
establish or maintain such relationships could have a material adverse effect
on the Company's business, results of operations and financial condition.
DEPENDENCE ON DIGITAL CONSUMER PRODUCT MANUFACTURERS. The timing and amount
of royalties received by the Company is directly affected by sales of consumer
products incorporating the Company's technology. Accordingly, the Company's
success is substantially dependent upon the adoption of its technology by
digital consumer product manufacturers. The Company is subject to many risks
beyond its control that influence the success or failure of a particular
digital consumer product manufacturer, including, among others, competition
faced by the manufacturer in its particular industry; market acceptance of the
manufacturer's products; the engineering, marketing and management
capabilities of the manufacturer; technical challenges unrelated to the
Company's technology faced by the manufacturer in developing its products; and
the financial and other resources of the manufacturer. The process of
persuading digital consumer product manufacturers to adopt the Company's
technology can be lengthy and, even if adopted, there can be no assurance that
the Company's technology will be used in a product that is ultimately brought
to market, achieves commercial acceptance or results in meaningful royalties
to the Company. The failure of manufacturers in the digital consumer products
industry to adopt the Company's technology for incorporation into their
products could have a material adverse effect on the Company's business,
results of operations and financial condition. Furthermore, because the
Company does not control the business practices of its licensees, it has no
ability to establish the prices at which the products incorporating its
technology are made available to digital consumer product manufacturers or the
degree to which its licensees promote the Company's technology to such
manufacturers.
COMPETITION. Competition in the market for embedded microprocessors is
intense. The Company believes that the principal competitive factors in the
industry are performance, functionality, price, customizability and power
consumption. The Company competes primarily against Hitachi Semiconductor
(America) Inc. and ARM Holdings plc. The Company also competes against certain
semiconductor manufacturers whose product lines include microprocessors for
embedded and non-embedded applications, including Intel Corporation, National
Semiconductor Corporation, Advanced Micro Devices, Inc. and Motorola, Inc. In
addition, the Company must continue to differentiate its microprocessor and
related designs from those available or under development by the internal
design groups of semiconductor
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manufacturers, including its current and prospective manufacturing partners.
Many of these internal design groups have substantial programming and design
resources and are part of larger organizations which have substantial
financial and marketing resources. There can be no assurance that internal
design groups will not develop products that compete directly with those of
the Company or will not actively seek to license their own technology to
third-party semiconductor manufacturers. Certain of the Company's competitors
have greater name recognition and customer bases as well as greater financial
and marketing resources than the Company, and such competition could adversely
affect the Company's business, results of operations and financial condition.
CONTROL BY AND RELATIONSHIP WITH SILICON GRAPHICS. The Company is currently
a wholly owned subsidiary of Silicon Graphics. Upon completion of the
Offering, Silicon Graphics will own approximately % of the outstanding
Common Stock of the Company ( % if the Underwriters' over-allotment option
is exercised in full). For so long as Silicon Graphics continues to
beneficially own in excess of 50% of the shares of Common Stock outstanding,
Silicon Graphics will be able to direct the election of all directors of the
Company and exercise a controlling influence over the business and affairs of
the Company, including any determinations with respect to mergers or other
business combinations involving the Company, the acquisition or disposition of
assets by the Company, future issuances of Common Stock or other equity
securities of the Company, the incurrence of indebtedness by the Company and
the payment of dividends with respect to the Common Stock. Similarly, Silicon
Graphics will have the power to determine matters submitted to a vote of the
Company's stockholders without the consent of the Company's other
stockholders, will have the power to prevent or cause a change in control of
the Company and could take other actions that might be favorable to Silicon
Graphics. In the foregoing situations or otherwise, various conflicts of
interest between the Company and Silicon Graphics could arise. Ownership
interests of directors or officers of the Company in the common stock of
Silicon Graphics or service as a director or officer of both the Company and
Silicon Graphics could create or appear to create potential conflicts of
interest when directors and officers are faced with decisions that could have
different implications for the Company and Silicon Graphics. In addition, the
Company's Restated Certificate of Incorporation will include certain
provisions relating to the allocation of business opportunities that may be
suitable for both the Company and Silicon Graphics. There can be no assurance
that any conflicts that may arise between the Company and Silicon Graphics
will be resolved in a manner that does not have a material adverse effect on
the Company, even if such result is not intended by Silicon Graphics. See
"Description of Capital Stock--Corporate Opportunities."
In connection with the Separation and the Offering, the Company and Silicon
Graphics will enter into various agreements intended to define the
relationship between them following the Offering. See "Arrangements Between
the Company and Silicon Graphics." Because these agreements will be entered
into at a time when the Company is still a wholly owned subsidiary of Silicon
Graphics, they are not the result of arm's-length negotiations between the
parties. Among these agreements is a Management Services Agreement, under
which Silicon Graphics will provide various, primarily administrative,
services to the Company, including accounting, purchasing and facilities
services. The Management Services Agreement may be terminated by Silicon
Graphics at any time after its initial three-year term, and will automatically
terminate at such time as Silicon Graphics ceases to own more than 50% of the
outstanding Common Stock. Consequently, there can be no assurance concerning
the period of time during which Silicon Graphics will continue to provide
services to the Company under the agreement and, if such services are not
provided by Silicon Graphics, whether, or on what terms, such services could
be obtained by the Company. If the Company is unable to perform such services
or obtain them on acceptable terms, the Company's results of operations and
financial condition could be adversely affected.
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By virtue of its beneficial ownership of over 80% of the total voting power
and value of the outstanding Common Stock, Silicon Graphics will include the
Company in its consolidated group for federal income tax purposes. The Company
and Silicon Graphics intend to enter into a Tax Sharing Agreement pursuant to
which the Company and Silicon Graphics will make payments between them such
that, with respect to any period, the amount of taxes to be paid or received
by the Company, subject to certain adjustments, will be determined as though
the Company were to file separate federal, state and local income tax returns.
However, each member of a consolidated group for federal income tax purposes
is jointly and severally liable for the federal income tax liability of each
other member of the consolidated group. Each member of the Silicon Graphics
controlled group, which includes Silicon Graphics, the Company and Silicon
Graphics' other subsidiaries, is also jointly and severally liable for pension
and benefit funding and termination liabilities of other group members, as
well as certain benefit plan taxes. Accordingly, the Company could be liable
under such provisions if any such liability is incurred, and not discharged,
by any other member of the Silicon Graphics consolidated or controlled group.
In addition, by virtue of its beneficial ownership of over 80% of the total
voting power and value of the outstanding Common Stock and the terms of the
Tax Sharing Agreement to be entered into between the Company and Silicon
Graphics, Silicon Graphics will effectively control all of the Company's tax
decisions. Under the Tax Sharing Agreement, Silicon Graphics will have the
sole authority to respond to and conduct all tax proceedings (including tax
audits) relating to the Company, to file all returns on behalf of the Company
and to determine the amount of the Company's liability to (or entitlement to
payment from) Silicon Graphics under the Tax Sharing Agreement. This
arrangement may result in conflicts of interest between the Company and
Silicon Graphics that may not be resolved in the Company's favor.
FUTURE CAPITAL REQUIREMENTS; ABSENCE OF SILICON GRAPHICS FUNDING. 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 royalty revenue, competing technological and market developments and
the costs of maintaining and enforcing patent claims and other intellectual
property rights. In the past, the Company's capital requirements have been
satisfied by Silicon Graphics; however, following the Offering, Silicon
Graphics will have no obligation to provide assistance to the Company except
as described in "Arrangements Between the Company and Silicon Graphics."
The Company believes that cash generated by its operations, together with
the net proceeds to the Company from the Offering, will be sufficient to meet
its operating and capital requirements for at least the next twelve months.
However, it is possible that the Company will require additional financing
within this time frame, and there can be no assurance that any such financing,
if needed, will be available on terms attractive to the Company, or at all.
The Company may be required to raise additional funds through public or
private financing, strategic relationships or other arrangements. Additional
equity financing may be dilutive to holders of 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. Any
failure of the Company to raise capital when needed could have a material
adverse effect on the Company's business, operating results and financial
condition. Finally, as long as Silicon Graphics desires to maintain its
percentage ownership interest in the Company, the Company may be constrained
in its ability to issue Common Stock in connection with acquisitions or to
raise equity capital. See "Arrangements Between the Company and Silicon
Graphics--Corporate Agreement."
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DEPENDENCE ON KEY PERSONNEL. The Company's success depends in part on the
continued contributions of its key management, technical, sales and marketing
personnel, many of whom are highly skilled and difficult to replace. In
addition, the Company's business plan requires, and its future operating
results depend in significant part upon, the identification and hiring of
additional highly skilled personnel, particularly technical personnel for its
anticipated research and development activities. Competition for qualified
personnel, particularly those with significant experience in the semiconductor
and microprocessor design industries, is intense. The loss of the services of
any of the key personnel, the inability to attract and retain qualified
personnel in the future or delays in hiring personnel, particularly technical
personnel, could have a material adverse effect on the Company's business,
operating results and financial condition.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. A substantial portion of the
Company's revenue is derived from outside the United States. For the fiscal
years ended June 30, 1995, 1996 and 1997 and for the first six months of
fiscal 1998, revenue from customers outside the United States, primarily in
Japan, represented approximately 89%, 83%, 86% and 90% of the Company's total
revenue. The Company anticipates that revenue from international customers
will continue to represent a substantial portion of its total revenue. To
date, substantially all of the revenue from international customers has been
denominated in U.S. dollars. However, to the extent that sales to digital
consumer product manufacturers by the Company's manufacturing partners are
denominated in foreign currencies, royalties received by the Company on such
sales could be subject to fluctuations in currency exchange rates. In
addition, if the effective price of the technology sold by the Company to its
partners were to increase as a result of fluctuations in foreign currency
exchange rates, demand for the Company's technology could fall which would, in
turn, reduce the Company's royalties. The relative significance of the
Company's international operations exposes it to a number of additional risks
including political and economic instability, longer accounts receivable
collection periods and greater difficulty in collection of accounts
receivable, reduced or limited protection for intellectual property, export
license requirements, tariffs and other trade barriers and potentially adverse
tax consequences. There can be no assurance that the Company will be able to
sustain revenue derived from international customers or that the foregoing
factors will not have a material adverse effect on the Company's business,
operating results and financial condition.
MANAGEMENT OF GROWTH. The Company has limited managerial, financial,
engineering and other resources and may not be equipped to manage successfully
any future periods of rapid growth or expansion. In addition, the Company's
business plan requires that it identify and hire additional highly skilled
technical personnel during fiscal 1999 to staff its anticipated research and
development activities. Recruitment and integration of these additional
employees, as well as any future periods of rapid growth or expansion, can be
expected to place significant strains on the Company's resources, which may be
exacerbated by the Company's recent shift in strategic direction. Digital
consumer product manufacturers as well as the Company's semiconductor
manufacturing partners typically require significant engineering support in
the design, testing and manufacture of products incorporating the Company's
technology. As a result, any increase in the adoption of the Company's
technology will increase the strain on the Company's personnel, particularly
its engineers. The Company's future growth will also depend on its ability to
implement operational, financial and management information and control
systems and procedures necessary to operate as a stand-alone company and
without the financial, operational, managerial and administrative support
previously provided by Silicon Graphics.
POSSIBLE FUTURE SALES OF COMMON STOCK BY SILICON GRAPHICS. Subject to
applicable federal securities laws and the restrictions set forth below, after
completion of the Offering, Silicon Graphics may sell any and all of the
shares of Common Stock beneficially owned by it or distribute any or all of
such shares of Common Stock to its stockholders. Sales or distribution by
Silicon Graphics of substantial amounts of Common Stock in the public market
or to its stockholders, or the perception that such sales or distribution
could occur, could adversely affect the prevailing market prices for the
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Common Stock. Silicon Graphics has advised the Company that its current intent
is to continue to hold all of the Common Stock beneficially owned by it
following the Offering. However, Silicon Graphics is not subject to any
obligation to retain its controlling interest in the Company, except that
Silicon Graphics has agreed not to sell or otherwise dispose of any shares of
Common Stock for a period of 365 days after the date of this Prospectus
without the prior written consent of Deutsche Morgan Grenfell Inc. See
"Underwriting." As a result, there can be no assurance concerning the period
of time during which Silicon Graphics will maintain its beneficial ownership
of Common Stock owned by it following the Offering. Moreover, there can be no
assurance that, in any transfer by Silicon Graphics of a controlling interest
in the Company, any holders of Common Stock will be able to participate in
such transaction or will realize any premium with respect to their shares of
Common Stock. Silicon Graphics will have registration rights with respect to
the shares of the Common Stock owned by it following the Offering which would
facilitate any future disposition.
NO PRIOR PUBLIC MARKET; VOLATILITY OF STOCK PRICE. Prior to this Offering,
there has been no public market for the Common Stock, and there can be no
assurance that an active public market for the Common Stock will develop or be
sustained after the Offering. The initial public offering price will be
determined through negotiations among the Company, Silicon Graphics (as
selling stockholder) and the Underwriters and may not be indicative of the
market price of the Common Stock after the Offering. The trading price of the
Common Stock could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or
new products by the Company, its semiconductor manufacturing partners, digital
consumer product manufacturers or its competitors, developments with respect
to patents or proprietary rights, changes in financial estimates by securities
analysts and other events or factors. In addition, the equity markets have
experienced volatility that has particularly affected the market prices of
equity securities of many high technology companies and that often has been
unrelated or disproportionate to the operating performance of such companies.
These broad market fluctuations may adversely affect the market price of the
Common Stock.
ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Restated
Certificate of Incorporation and By-laws may render more difficult or have the
effect of discouraging unsolicited takeover bids from third parties or the
removal of incumbent management of the Company. See "Description of Capital
Stock--Certificate of Incorporation and By-law Provisions That May Have an
Anti-takeover Effect." Although such provisions do not have a substantial
practical significance to investors while Silicon Graphics controls the
Company, such provisions could have the effect of depriving stockholders of an
opportunity to sell their shares at a premium over prevailing market prices
should Silicon Graphics' voting power decrease to less than 50%.
DILUTION. Investors participating in the Offering will incur immediate and
substantial dilution in the net tangible book value of their shares of Common
Stock. See "Dilution."
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained herein under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" including, without limitation, those
concerning (i) the Company's strategy, including its recent shift in strategic
direction, (ii) the future sources and costs of the Company's revenue and
(iii) the Company's product development and sales and marketing efforts,
contain certain forward looking statements concerning the Company's
operations, economic performance and financial condition. Because such
statements involve risks and uncertainties, actual results may 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 discussed under "Risk Factors."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby are estimated to be $ assuming the
shares offered hereby are sold at an initial public offering price of $ per
share (the mid-point of the range on the cover page of this Prospectus) and
after deducting estimated underwriting discounts and expenses of the Offering.
The Company expects that the net proceeds of the Offering will be added to
working capital and used for general corporate purposes. The Company will not
receive any proceeds from the sale of the shares of Common Stock by Silicon
Graphics.
DIVIDEND POLICY
The Company has not paid any dividends since its incorporation and currently
intends to retain any earnings to fund the development and growth of its
business, and therefore does not currently anticipate paying cash or stock
dividends on the Common Stock in the foreseeable future. The Company's future
dividend policy will be determined by its board of directors on the basis of
various factors, including the Company's results of operations and financial
condition and any legal and contractual restrictions.
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CAPITALIZATION
The following table sets forth (i) the pro forma capitalization of the
Company reflecting the actual capitalization of the Company at December 31,
1997, giving effect to the -for-one split of the Company's Common Stock in
connection with the Offering and (ii) such capitalization on an as adjusted
basis, giving effect to the sale of the shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $ per share
(the mid-point of the range on the cover page of this Prospectus) and after
deducting estimated underwriting discounts and offering expenses payable by
the Company.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1997
---------------------
PRO FORMA
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term obligations, net of current maturities......... $ -- $ --
Stockholders' and business equity:
Preferred Stock, par value $0.001; 50,000,000 shares
authorized; no shares issued and outstanding .........
Common Stock, par value $0.001; 150,000,000 shares
authorized; shares issued and outstanding
pro forma actual and shares issued and
outstanding as adjusted(1)............................
Additional paid-in capital(1)..........................
Business equity(1)..................................... 5,266
------ ------
Total stockholders' and business equity.............. 5,266
------ ------
Total capitalization..................................... $5,266 $
====== ======
</TABLE>
- --------
(1) Upon the closing of the Offering, the business equity will be transferred
to Common Stock and additional paid-in capital.
18
<PAGE>
DILUTION
The net tangible book value of the Common Stock at December 31, 1997 was
$ , or $ per share. Net tangible book value per share represents
the amount of the Company's stockholders' equity, less intangible assets,
divided by shares of Common Stock outstanding at December 31, 1997.
Without taking into account any changes in such net tangible book value
subsequent to December 31, 1997, other than to give effect to the issuance and
sale of the shares of Common Stock offered by the Company in the
Offering at an assumed initial public offering price of $ per share (the
mid-point of the range on the cover page of this Prospectus) and after
deducting the underwriting discount and estimated expenses of the Offering,
the pro forma net tangible book value of the Company at December 31, 1997
would have been $ , or $ per share. This represents an immediate
increase in the net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to new investors.
Dilution is determined by subtracting adjusted net tangible book value per
share after the Offering from the amount of cash paid by a new investor for
one share of Common Stock. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $
Net tangible book value per share at December 31, 1997........ $
Increase in net tangible book value per share attributable to
new investors................................................
Adjusted pro forma net tangible book value per share after this
Offering.......................................................
Dilution per share to new investors............................. $
=====
</TABLE>
The foregoing table assumes no exercise of any options after December 31,
1997. As of the date of this Prospectus, an aggregate of shares of
Common Stock were issuable upon the exercise of outstanding options at a
weighted average exercise price of $ per share. If all options
outstanding at such date were exercised, the pro forma net tangible book value
per share immediately after completion of the Offering would be $ . This
represents an immediate dilution in net tangible book value of $ per
share to purchasers of Common Stock in the Offering. See "Management--1998
Long-Term Incentive Plan."
19
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected financial data of the Company. The
information below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
historical financial statements and related notes thereto included in this
Prospectus. The following selected financial data at June 30, 1996 and 1997
and December 31, 1997, and for each of the three years in the period ended
June 30, 1997 and for the six months ended December 31, 1997, are derived from
financial statements audited by Ernst & Young LLP, independent auditors, and
included elsewhere herein. The following selected financial data at June 30,
1993, 1994 and 1995, and for each of the two years in the period ended
June 30, 1994 and for the six months ended December 31, 1996, are unaudited
but include all adjustments (consisting only of normal recurring accruals)
that the Company considers necessary for a fair presentation of its financial
position and results of operations for these periods. The interim period
results are not necessarily indicative of results for a full year.
The historical financial information may not be indicative of the Company's
future performance and does not necessarily reflect what the financial
position and results of operations of the Company would have been had the
Company operated as a separate, stand-alone entity during the periods covered.
In particular, the historical financial information does not reflect many
significant changes that will occur in the funding and operations of the
Company and the future sources and costs of the Company's revenue as a result
of both the Separation and the Company's recent shift in strategic direction.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
----------------------------------------------- ------------------
1993 1994 1995 1996 1997 1996 1997
------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA: (In thousands)
Revenue:
Royalties............. $ 3,643 $ 8,402 $ 13,576 $ 17,916 $ 33,992 $ 7,393 $ 26,759
Contract revenue...... 14,834 10,462 16,103 18,627 3,115 1,981 827
------- -------- -------- -------- -------- -------- --------
Total revenue....... 18,477 18,864 29,679 36,543 37,107 9,374 27,586
Costs and expenses:
Cost of contract
revenue.............. 2,212 2,768 7,364 5,580 1,345 1,095 375
Research and
development.......... 9,715 24,396 39,033 48,402 68,827 31,031 35,127
Sales and marketing... 5,351 5,668 6,761 6,026 6,170 3,037 2,910
General and
administrative....... 4,642 3,692 4,272 4,601 4,750 2,240 2,295
Restructuring charge.. -- -- -- -- -- -- 1,414
------- -------- -------- -------- -------- -------- --------
Total costs and
expenses........... 21,920 36,524 57,430 64,609 81,092 37,403 42,121
------- -------- -------- -------- -------- -------- --------
Operating loss.......... (3,443) (17,660) (27,751) (28,066) (43,985) (28,029) (14,535)
Interest expense........ (7) (70) (69) (99) (50) (30) (11)
------- -------- -------- -------- -------- -------- --------
Net loss................ $(3,450) $(17,730) $(27,820) $(28,165) $(44,035) $(28,059) $(14,546)
======= ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997
------- ------- -------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
deficiency............. $(1,130) $(9,730) $(12,983) $(5,331) $(8,446) $(8,211)
Total assets............ 16,768 12,338 15,744 15,289 19,674 16,724
Long-term obligations,
net of current
maturities(1).......... 3,565 457 739 331 -- --
Total stockholders' and
business equity
(deficiency)........... 4,161 745 (36) 7,053 8,072 5,266
</TABLE>
- -------
(1) Long-term obligations consist of deferred revenue (June 30, 1993 only) and
capital lease obligations. See Note 9 of Notes to Financial Statements.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Prospectus. The
Company's recent shift in strategic direction and its lack of operating
history as a stand-alone entity make it difficult for the Company to
accurately predict its future revenue and costs. Certain statements in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" are forward looking statements. The forward looking statements
contained herein are based on current expectations and entail various risks
and uncertainties that could cause actual results to differ materially from
those expressed in such forward looking statements. For a more detailed
discussion of these and other business risks, see "Risk Factors."
OVERVIEW
The Company's predecessor, MIPS Computer Systems, Inc., was founded in 1984
and was engaged in the design and development of RISC microprocessors for the
computer systems and embedded markets. Silicon Graphics adopted the MIPS
architecture for its computer systems in 1988 and acquired MIPS Computer
Systems, Inc. in 1992. Following the acquisition, Silicon Graphics continued
the MIPS microprocessor business through its MIPS Group (a division of Silicon
Graphics), which focused primarily on the development of high-performance
microprocessors for Silicon Graphics' workstations and servers. Until the last
few years, cost considerations limited the broader use of these
microprocessors. However, as the cost to design and manufacture
microprocessors based on the MIPS technology decreased, the MIPS Group sought
to penetrate the consumer market, both through supporting and coordinating the
efforts of the MIPS semiconductor partners and, most notably, by partnering
with Nintendo in its design of the Nintendo 64 video game player and related
cartridges. Revenue related to sales of Nintendo 64 video game players and
related cartridges currently accounts for the substantial majority of the
Company's revenue. The combination of these efforts has led to significant
growth in MIPS-based devices. Based on reports provided by the Company's
semiconductor partners, sales of MIPS-based devices have grown from 320,000
units in calendar year 1992 to over 48 million units in calendar year 1997.
In order to increase the focus of the MIPS Group on the design and
development of microprocessor intellectual property for the embedded market,
Silicon Graphics has initiated a plan to separate the business of the MIPS
Group from its other operations. To this end, Silicon Graphics intends to
transfer to the Company the assets, liabilities and intellectual property
related to this business. The design and development of high-performance
microprocessors for the next generation of Silicon Graphics' product line will
not be conducted by the Company and instead will be carried out by MIPS Group
employees who will remain with Silicon Graphics following the Separation. In
the short term, the Company intends to use its operating cash flow, including
royalties it receives with respect to sales of Nintendo 64 video game players
and related cartridges, to fund microprocessor and related design efforts
aimed at the digital consumer products market and to establish and strengthen
relationships with semiconductor and digital consumer product manufacturers.
As part of these efforts, the Company intends to develop microprocessors with
increased flexibility and modularity that will allow its semiconductor
partners to provide high-performance, customized products more quickly.
The financial statements discussed below reflect the historical results of
operations, financial position and cash flows of the MIPS Group, certain
portions of which are being transferred to the Company by Silicon Graphics in
the Separation. The financial statements contained herein and discussed below
have been carved out from the financial statements of Silicon Graphics using
the historical results of operations and historical basis of the assets and
liabilities of such business. Management believes that the assumptions
underlying the Company's financial statements are reasonable. However, the
financial information included herein may not necessarily reflect the results
of operations, financial position and cash flows of the Company in the future
or what the results of
21
<PAGE>
operations, financial position and cash flows would have been had the MIPS
Group been a separate, stand-alone entity during the periods presented. This
is due to the historical operation of the MIPS Group as a part of the larger
Silicon Graphics enterprise. The financial information included herein does
not reflect the many significant changes that will occur in the funding and
operations of the Company and the future sources and costs of the Company's
revenue as a result of both the Separation and the Company's recent shift in
strategic direction.
REVENUE
The Company's revenue consists of royalties and contract revenue. 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. The Company's royalty arrangements are typically subject to periodic
renewal. Contract revenue includes technology license fees, nonrefundable
prepaid royalties and engineering service fees earned primarily under
contracts with Nintendo and the Company's semiconductor manufacturing
partners. Technology license fees range from several hundred thousand dollars
for a single-use license to millions of dollars for an unlimited license to
use the Company's technology. Part of these fees may be payable up-front and
part may be due upon the achievement of certain milestones such as provision
of deliverables by the Company or production of semiconductor chips by the
licensee. All technology license fees and engineering service fees are
nonrefundable. Prepaid royalties are also included in contract revenue to the
extent that they are nonrefundable. In fiscal 1995 and fiscal 1996, the
Company's total revenue was split relatively equally between contract revenue
and royalties. Royalties in fiscal 1995 and fiscal 1996 were earned primarily
from NEC, while contract revenue for those periods primarily reflected
engineering service fees and prepaid royalties from Nintendo related to the
Nintendo 64 video game system prior to its commercial introduction. In fiscal
1997 and the first six months of fiscal 1998, the Company's revenue mix
changed significantly, with royalties representing over 90% of the Company's
total revenue during those periods, due primarily to royalties earned from
Nintendo, and to a lesser extent NEC, on sales of Nintendo 64 video game
players and related cartridges.
In the near term, the Company's revenue will consist primarily of royalties
received from Nintendo and NEC on sales of Nintendo 64 video game players and
related cartridges. For the six months ended December 31, 1997, such royalties
accounted for approximately 76% of the Company's total revenue. The Company
receives royalties from NEC based on a percentage of the revenue derived by
NEC from sales of the microprocessor included in the Nintendo 64 video game
player. The Company's agreement with Nintendo provides for the payment of
royalties based on unit sales of Nintendo 64 video game players and unit sales
of related video game cartridges. Total royalties from Nintendo with respect
to sales of Nintendo 64 video game players had a cap that was reached in the
second quarter of fiscal 1998. There is no cap on royalties from NEC with
respect to its sale of microprocessors to Nintendo for Nintendo 64 video game
players or on royalties from Nintendo with respect to sales of Nintendo 64
video game cartridges. Based on past industry trends, sales of Nintendo 64
video game cartridges, and therefore related royalties earned by the Company,
could extend beyond the introduction of the next generation Nintendo video
game product. However, competition in the market for home entertainment
products is intense and the introduction of new products or technologies as
well as shifting consumer preferences could negatively impact video game
cartridge sales. There can be no assurance as to the amount and timing of
sales of Nintendo 64 video game players and related cartridges and,
consequently, there can be no assurance as to the royalty stream to the
Company from such sales. In the near term, factors negatively affecting sales
of Nintendo 64 video game cartridges could have a material adverse effect on
the Company's results of operations and financial condition. Moreover, there
can be no assurance that any of the Company's microprocessor designs will be
selected for design into future generation Nintendo products.
22
<PAGE>
The Company expects that royalties will continue to represent a significant
percentage of its total revenue over the next several years due to its
relationship with Nintendo. The Company intends to focus an increasing
percentage of its research and development efforts on the development of new
microprocessor intellectual property for licensing to semiconductor
manufacturers. To the extent the Company is successful in these efforts,
contract revenue will account for an increasingly significant portion of its
total revenue. The amount, timing and relative mix of royalties and contract
revenue is difficult for the Company to predict. The amount and timing of
future royalties will depend on the adoption of the Company's technology by
digital consumer product manufacturers, consumer acceptance of products
incorporating the Company's technology, changes in the average selling prices
of semiconductor and digital consumer products and fluctuations in currency
exchange rates. Moreover, the Company's royalty arrangements will vary from
licensee to licensee depending on a number of factors, including the amount of
any license fee paid and the marketing and engineering support required by the
licensee. The amount and timing of future contract revenue will depend upon
the financial terms of the Company's contractual arrangements with its
semiconductor partners (which may require significant up-front payments or
payments based on the achievement of certain milestones) and the adoption of
the Company's technology by semiconductor manufacturers, which is influenced
by a number of factors including competitive conditions in the market for
microprocessor intellectual property. In addition, contract revenue may
fluctuate significantly from period to period and any increase or decrease in
such revenue will not be indicative of future period-to-period increases or
decreases.
Although a substantial portion of its total revenue to date has been derived
from royalties and contract revenue relating to sales of Nintendo 64 video
game players and related cartridges, the Company expects that royalties and
contract revenue related to sales of other digital consumer products, such as
handheld personal computers and set-top boxes as well as other video game
products, will constitute an increasingly significant portion of its total
revenue. The Company's ability to diversify its revenue base will depend
primarily on the adoption by digital consumer product manufacturers of
semiconductor products incorporating the Company's technology as well as
consumer acceptance of products incorporating the Company's technology. The
Company generally does not have a direct contractual relationship with digital
consumer product manufacturers, and the royalty reports submitted by its
semiconductor partners generally do not disclose the consumer products that
have incorporated the Company's technology. As a result, it is difficult for
the Company to identify or predict the extent to which its future revenue will
be dependent upon a particular digital consumer product or product
manufacturer.
A significant portion of the Company's total revenue has been and is
expected to continue to be derived from a limited number of semiconductor
manufacturers. For the fiscal years ended June 30, 1995, 1996 and 1997 and for
the six months ended December 31, 1997, revenue from the Company's top two
semiconductor manufacturing partners represented an aggregate of 39%, 49%, 31%
and 23% of the Company's total revenue, respectively. Because there is a
relatively limited number of semiconductor manufacturers to which the Company
could license its technology on a basis consistent with its business model, it
is likely that the Company's revenue will continue to be concentrated at the
semiconductor manufacturing partner level. This revenue concentration for any
given period will vary depending on the addition or expiration of contracts,
the nature and timing of payments due under such contracts and the volumes and
prices at which the Company's partners sell products incorporating its
technology. Accordingly, the identity of particular manufacturing partners
that will account for any such revenue concentration will vary from period to
period and may be difficult to predict. The non-renewal of contracts by the
Company's semiconductor manufacturing partners could adversely affect its
future operating results.
To date, companies based in Japan have accounted for the substantial
majority of the Company's total revenue, and nearly all of its international
revenue. In fiscal 1995, 1996 and 1997 and the first six
23
<PAGE>
months of fiscal 1998, international revenue accounted for approximately 89%,
83%, 86% and 90%, respectively, of the Company's total revenue. The Company
expects that revenue derived from international licensees will continue to
represent a significant portion of its total revenue in the future.
Substantially all of the revenue from international licensees to date has been
denominated in U.S. dollars. See Note 3 of Notes to Financial Statements.
COSTS AND EXPENSES
Cost of Contract Revenue. Cost of contract revenue primarily consists of
non-recurring engineering fees and sublicense fees. To date, the majority of
the cost of contract revenue has related to the development of microprocessor
and related designs for Nintendo 64 video game products. Such development
efforts began in the first fiscal quarter of 1994 and were completed in the
second fiscal quarter of 1997. The Company expects that future cost of
contract revenue will be minimal.
Research and Development. Over the last few years, the Company's research
and development efforts have focused primarily on high-performance
microprocessor designs intended principally to serve the needs of Silicon
Graphics and, to a lesser extent, on microprocessor and related designs for
the embedded market (with the exception of the Nintendo 64 designs, the costs
of which are included in cost of contract revenue). See "--Overview." More
recently, the Company has focused its research and development efforts on
microprocessor designs dedicated to the embedded market. The Separation will
have a significant impact on the Company's research and development cost
structure. Silicon Graphics' design efforts have required a significant
staffing level because its complex microprocessor requirements have demanded
large design teams and generally the development and maintenance of
proprietary design tools. By contrast, the Company expects to use smaller
design teams and to rely entirely on industry standard third-party design
tools, which is expected to significantly reduce staffing requirements and
costs. The Company reduced its research and development staff from 221 persons
at December 31,1997 to 36 persons at March 31, 1998, principally due to the
transfer to Silicon Graphics of employees engaged in the development of next
generation microprocessors for Silicon Graphics' systems. The Company expects
to spend approximately $9.0 million on research and development in the second
half of fiscal 1998. The Company is planning to increase research and
development spending during fiscal 1999 as it seeks to develop new designs for
the digital consumer products market. Longer term, the Company's business
model targets annual research and development expense at approximately 30% of
anticipated total revenue, although there can be no assurance that the
Company's revenue will grow at a rate that will support this business model.
Sales and Marketing. Sales and marketing expenses include salaries, travel
expenses and costs associated with trade shows, advertising and other
marketing efforts. Costs of technical support are also included in sales and
marketing expenses. The Company's sales and marketing efforts are principally
directed at establishing and supporting strategic relationships with
semiconductor manufacturers. At December 31, 1997, the Company's sales and
marketing staff totaled 16 persons. Following the Separation, the Company's
initial sales and marketing staff is expected to total 20 persons. The
Company's sales and marketing staff and related expenses are expected to
increase as the Company seeks to diversify its revenue base.
General and Administrative. Historically, a significant portion of the
Company's general and administrative expenses have reflected an allocation of
corporate overhead by Silicon Graphics based on headcount and a percentage
allocation based on certain factors including net sales, headcount and
relative expenditure levels. While the historical allocation of corporate
overhead was based on the more complex infrastructure that exists at Silicon
Graphics, the Company expects that its general and administrative expenses
will increase due, in part, to costs not previously incurred and related to
its status as a stand-alone entity such as increased patent related costs and
expenses related to compliance with the reporting and other requirements of a
publicly-traded company. The Company and
24
<PAGE>
Silicon Graphics intend to enter into the Management Services Agreement
pursuant to which Silicon Graphics will provide certain administrative support
on a transitional basis.
Taxes. Subsequent to the Separation and the Offering, the Company, while
still a part of Silicon Graphics' consolidated group for federal income tax
purposes, will become responsible for its income taxes through the Tax Sharing
Agreement with Silicon Graphics. Therefore, to the extent the Company produces
taxable income, loss or credits, it will make or receive payments as though it
filed separate federal, state and local income tax returns. Pursuant to the
Tax Sharing Agreement, the rights and obligations of the Company and Silicon
Graphics with respect to taxes will terminate at such time as Silicon Graphics
ceases to own at least 80% of the outstanding Common Stock.
RESULTS OF OPERATIONS -- SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997
Revenue increased $18.2 million, or 194%, to $27.6 million for the six
months ended December 31, 1997 from $9.4 million for the six months ended
December 31, 1996. The increase was primarily attributable to a significant
increase in royalties received from Nintendo. In the second quarter of fiscal
1998, royalties from the graphics chip included in the Nintendo game player
reached its cap. The Company anticipates that its ability to generate
royalties for the remainder of fiscal 1998 is largely dependent on video game
cartridge sales by Nintendo and, to a lesser extent, on system sales by
customers of NEC, LSI Logic and IDT. Contract revenue for the six months ended
December 31, 1997 consisted principally of license fees related to code
compression technology, and for the six months ended December 31, 1996
consisted principally of engineering service fees from Nintendo related to
development efforts for Nintendo 64 video game products.
Cost of contract revenue decreased $720,000, or 66%, from $1.1 million for
the six months ended December 31, 1996 to $375,000 for the six months ended
December 31, 1997. This decrease was due primarily to completion of
development efforts for the Nintendo 64 video game system in the fiscal 1997
period. The Company believes that future cost of contract revenue will be
minimal.
Research and development expenses increased $4.1 million, or 13%, to $35.1
million for the six months ended December 31, 1997 from $31.0 million for the
six months ended December 31, 1996. The increase in research and development
expenses was primarily due to an increase in the Company's digital consumer
product development efforts. Following the Separation, Silicon Graphics will
assume the design and development of high-performance microprocessors and,
accordingly, the Company anticipates that its research and development
expenses will decrease significantly in the third quarter of fiscal 1998.
Sales and marketing expenses decreased $127,000, or 4%, to $2.9 million for
the six months ended December 31, 1997 from $3.0 million for the six months
ended December 31, 1996. This decrease was primarily due to a decrease in
advertising and promotional spending. General and administrative expenses
increased $55,000, or 2%, to $2.3 million for the six months ended
December 31, 1997 from $2.2 million for the six months ended December 31,
1996. Sales and marketing and general and administrative expenses were
relatively flat in the comparative periods.
The restructuring charge taken in the second quarter of fiscal 1998 included
$1.1 million in severance related costs and $314,000 in asset write-downs
related to the Company's shift in strategic direction.
Prior to the Separation, the Company did not have a tax sharing agreement in
place but, rather, was included in the income tax returns filed by Silicon
Graphics and its subsidiaries in various domestic and foreign jurisdictions.
Therefore, no provision for income taxes has been recorded for the six month
periods ended December 31, 1996 and 1997. See Note 10 of Notes to Financial
Statements.
25
<PAGE>
RESULTS OF OPERATIONS -- YEARS ENDED JUNE 30, 1995, 1996 AND 1997
Revenue increased 23% in fiscal 1996, from $29.7 million in fiscal 1995 to
$36.5 million in fiscal 1996, and increased 2% to $37.1 million in fiscal
1997. Fiscal 1995 contract revenue consisted principally of engineering
service fees and nonrefundable prepaid royalties related to development for
the Nintendo 64 video game system. Fiscal 1996 contract revenue included
approximately $10.0 million in license fees from three licensees as well as
engineering service fees and nonrefundable prepaid royalties related to
development efforts for the Nintendo 64 video game system. The decrease in
contract revenue in fiscal 1997 reflected substantial completion in fiscal
1996 of the Nintendo 64 video game system development prior to its commercial
introduction by Nintendo in the beginning of fiscal 1997. The significant
increase in fiscal 1997 royalties reflects royalties related to sales of
Nintendo 64 video game players and related cartridges.
Cost of contract revenue decreased 24% from $7.4 million in fiscal 1995 to
$5.6 million in fiscal 1996 and decreased 76% to $1.3 million in fiscal 1997.
Cost of contract revenue in each of the periods was principally attributable
to non-recurring engineering fees related to Nintendo 64 video game system
development. In fiscal 1995, development efforts related to the Nintendo 64
video game system were increased to meet certain milestones and, as these
milestones were achieved in fiscal 1996 and 1997, expenses for consultants
decreased and a reduction in headcount occurred.
Research and development expenses increased 24% from $39.0 million in fiscal
1995 to $48.4 million in 1996 and increased an additional 42% to $68.8 million
in fiscal 1997. The increase in research and development expenses in each of
the periods was attributable to additional personnel, including consultants,
working on next generation microprocessor development projects in each fiscal
year.
Sales and marketing expenses decreased 11% from $6.8 million in fiscal 1995
to $6.0 million in fiscal 1996, and increased slightly to $6.2 million in
fiscal 1997. The decrease in sales and marketing expenses in fiscal 1996
resulted from reduced headcount in the product and technical marketing group.
General and administrative expenses increased 8% from $4.3 million in fiscal
1995 to $4.6 million in fiscal 1996, and increased an additional 3% to $4.8
million in fiscal 1997. The increase in general and administrative expenses in
each of the periods was primarily due to increased spending in recruiting
costs due to growth in the Company's business.
The financial statements of the Company reflect its operations as a division
of Silicon Graphics and, accordingly, its historical losses were included in
the income tax returns filed by Silicon Graphics. Therefore, no provision or
benefit for income taxes has been recorded for the periods presented in the
accompanying financial statements. See Note 10 of Notes to Financial
Statements.
IMPACT OF CURRENCY
Certain of the Company's international licensees pay royalties based on
revenues that are reported in a local currency and translated into U.S.
dollars at the exchange rate in effect when such revenues are reported by the
licensee. To the extent that a licensee's revenue is generated in a currency
other than the U.S. dollar, the Company's royalty revenue can be affected by
fluctuations in exchange rates. The Company is unable to predict the amount of
non-U.S. dollar denominated revenue earned by its licensees and, therefore,
has not attempted to mitigate the effect that currency fluctuations may have
on its royalty revenue.
26
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth the Company's statement of operations data
for each of the six quarters in the period ended December 31, 1997. This
unaudited quarterly information has been prepared on the same basis as the
annual audited financial statements and, in the opinion of the Company's
management, includes all adjustments, consisting only of normal recurring
accruals, necessary to present fairly the information set forth therein. The
operating results for any quarter are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1997 1997 1997 1997
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenue:
Royalties.............. $ 3,608 $ 3,785 $13,476 $13,123 $14,287 $12,472
Contract revenue....... 1,800 181 753 381 750 77
-------- -------- ------- ------- ------- -------
Total revenue......... 5,408 3,966 14,229 13,504 15,037 12,549
Costs and expenses:
Cost of contract
revenue............... 595 500 250 -- 375 --
Research and
development........... 14,651 16,380 17,445 20,351 17,338 17,789
Sales and marketing.... 1,438 1,599 1,730 1,403 1,448 1,462
General and
administrative........ 982 1,258 1,298 1,212 1,257 1,038
Restructuring charge... -- -- -- -- -- 1,414
-------- -------- ------- ------- ------- -------
Total costs and
expenses............. 17,666 19,737 20,723 22,966 20,418 21,703
-------- -------- ------- ------- ------- -------
Operating loss.......... (12,258) (15,771) (6,494) (9,462) (5,381) (9,154)
Interest expense........ (16) (14) (11) (9) (7) (4)
-------- -------- ------- ------- ------- -------
Net loss................ $(12,274) $(15,785) $(6,505) $(9,471) $(5,388) $(9,158)
======== ======== ======= ======= ======= =======
</TABLE>
The significant increase in royalties commencing in the quarter ended March
31, 1997 reflected royalties received from Nintendo following the commercial
introduction of the Nintendo 64 video game system. The decrease in royalties
in the quarter ended December 31, 1997 was due principally to the Company's
reaching the cap on royalties from the graphics chip included in Nintendo 64
video game players. The increase in research and development expenses in the
quarter ended June 30, 1997 was due to project completion bonuses, increased
headcount and higher corporate facilities allocation expenses. The decrease in
research and development expenses in the quarter ended September 30, 1997 was
due to redefining two projects resulting in lower recruiting spending and
reduced headcount. The Company expects to experience significant fluctuations
in its quarterly operating results due to a variety of factors, many of which
are outside of its control. Factors that may adversely affect the Company's
quarterly operating results include the Company's ability to develop,
introduce and market new microprocessor designs and design enhancements, the
demand for and average selling prices of semiconductor products that
incorporate the Company's technology, the establishment or loss of strategic
relationships with semiconductor manufacturing partners or manufacturers of
digital consumer products, the timing of new products and product enhancements
by the Company and its competitors, changes in the Company's and digital
consumer product manufacturers' development schedules and levels of
expenditures on research and development and general economic conditions. As a
result, the Company's total revenue and operating results in any future period
cannot be predicted with certainty, and its operating results in any quarter
may not be indicative of its future performance.
Because revenue related to sales of Nintendo 64 video game cartridges is
expected to represent a substantial portion of the Company's total revenue
over the next several years, the Company expects to experience seasonal
fluctuations in its revenue and operating results. The Company records royalty
revenue from Nintendo in the quarter following the sale of the related
Nintendo 64 video game cartridge. Because a disproportionate amount of
Nintendo 64 video game cartridges are typically sold
27
<PAGE>
in the Company's second fiscal quarter (which includes the holiday selling
season), a disproportionate amount of the Company's revenue and operating
income is expected to be realized in its third fiscal quarter. In addition, as
the Company increases its focus on microprocessor and related designs for
high-volume digital consumer products, the Company can be expected to continue
to experience similar seasonal fluctuations in its revenue and operating
results.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund working capital
needs and capital expenditures in order to support the Company's revenue
growth. During the periods presented, these capital requirements have
generally been satisfied by internally generated funds and funds provided by
Silicon Graphics. Silicon Graphics historically has performed cash management
services for the Company, whereby the Company's cash flow was directed to
Silicon Graphics and Silicon Graphics provided cash to the Company to fund its
operating expenses and capital expenditures. Following the Separation, the
Company will no longer participate in Silicon Graphics' cash management system
and Silicon Graphics will no longer be obligated, and does not intend, to
provide additional funds to the Company to finance its operations.
The Company's future liquidity and capital requirements are expected to vary
greatly from quarter to quarter, depending on numerous factors, including,
among others, the cost, timing and success of product development efforts, the
cost and timing of sales and marketing activities, the extent to which the
Company's existing and new technologies gain market acceptance, the level and
timing of contract revenues and royalties, competing technological and market
developments and the costs of maintaining and enforcing patent claims and
other intellectual property rights. The Company believes that cash generated
by its operations, together with the net proceeds to the Company from the
Offering, will be sufficient to meet its operating and capital requirements
for at least the next twelve months. However, it is possible that the Company
will require additional financing within this time frame, and there can be no
assurance that any such financing, if needed, will be available on terms
attractive to the Company, or at all. The Company may be required to raise
additional funds through public or private financing, strategic relationships
or other arrangements. Additional equity financing may be dilutive to holders
of 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. The Company's ability to raise additional equity capital may be
limited by its relationship with Silicon Graphics. See "Risk Factors--Future
Capital Requirements; Absence of Silicon Graphics Funding." Any failure of the
Company to raise capital when needed could have a material adverse effect on
the Company's business, results of operations and financial condition.
The Company has had no direct third-party indebtedness other than
obligations under capital leases. In addition to the net proceeds from the
sale of the Common Stock by the Company in the Offering, the Company intends
to enter into a revolving credit facility with a bank or other financial
institution to provide for certain of its working capital needs.
YEAR 2000
The Company is currently examining the Year 2000 issue. The Company believes
its products are Year 2000 compliant; however, the Company is currently
undertaking a review of its internal systems and, based on preliminary
estimates, the costs of any necessary action are not expected to be material
to the Company's results of operations or financial condition. The Company
intends to cooperate with its manufacturing partners and others with which it
does business to coordinate Year 2000 compliance, although the Company is
unable to evaluate the Year 2000 compliance of products and technology
developed by third parties that incorporate the Company's technology. To the
extent that any such third-party product or technology fails to be Year 2000
compliant, the Company may be adversely affected due to its association with
such product or technology.
28
<PAGE>
BUSINESS
INDUSTRY BACKGROUND
Rapid advances in semiconductor technology have enabled the development of
higher performance microprocessors at lower cost. As a result, it is now cost-
effective for system OEMs to embed these microprocessors into a wider range of
electronic products and systems, including a new generation of digital
consumer products. At the same time, improvements in semiconductor
manufacturing processes have enabled the integration of entire systems onto a
single integrated circuit to create complex systems-on-a-chip. However, design
tool capabilities and the internal design resources of semiconductor
manufacturers and system OEMs have not kept pace with the increase in the
number of transistors that can be placed on a single chip. Consequently, a
significant and growing "design gap" for semiconductor designers and
manufacturers has developed. To address this "design gap," semiconductor
designers and manufacturers are increasingly licensing proven and reusable
intellectual property components such as microprocessor cores, memories and
logic blocks from third-party suppliers to create differentiated products and
reduce development costs and time-to-market. The availability of low-cost,
high-performance microprocessors and the development of system-on-a-chip
technology have contributed to the emergence and rapid growth of the market
for embedded systems, particularly advanced digital consumer products.
Embedded systems are broadly defined as microcontrollers and microprocessors
plus related software incorporated into devices other than personal computers,
workstations, servers, mainframes and minicomputers. Until recently, this
market was dominated by low-cost 4-, 8- and 16-bit microcontrollers embedded
primarily into low-cost, high-volume consumer products such as home
appliances, facsimile machines, printers, telephone answering machines and
various automobile systems. The use of higher performance 32- and 64-bit
microprocessors was common in higher cost but lower volume applications such
as telecommunications switching equipment and data networking routers.
Although microcontrollers are adequate for basic system control functions,
they lack the performance and bandwidth capabilities to implement today's
advanced functions, including powerful user interfaces such as 3-D graphics.
Recently, however, the price of 32- and 64-bit microprocessors has reached the
point where it is now cost-effective to embed these solutions into low-cost,
high-volume digital consumer products. According to Inside the New Computer
Industry, the market for RISC microprocessors increased from approximately 55
million units in calendar year 1996 to 98 million units in calendar year 1997.
This increase was due in large part to growth in the market for digital
consumer products, including video games with 3-D interactive capabilities.
Digital consumer products that incorporate high-performance microprocessors
and software can offer advanced functionality such as realistic 3-D graphics
rendering, digital audio and video, and communications and high-speed signal
processing. A prominent example is the home video game console, in which the
use of 32- and 64-bit embedded microprocessors enables the processing of
realistic graphic images in products that retail for less than $200. Other
examples of digital consumer products that incorporate high-performance
microprocessors include digital cable set-top boxes, Internet appliances such
as WebTV and the emerging market for handheld personal computers. These
battery-powered devices, such as the Philips Velo and the NEC MobilePro, are
targeted at retail price points ranging from $449 to $899 and are designed to
allow consumers to access electronic mail, connect to the Internet and run
software applications such as word processors and spreadsheets.
As the lower cost of processing power has enabled higher functioning
microprocessors for these digital consumer products, multiple software
operating systems have been developed to establish the user interface and
control for these products. Many companies, including Microsoft, Wind River
Systems, Inc. and Integrated Systems Inc., currently provide operating systems
software that support embedded systems applications. Microsoft created the
WindowsCE operating system specifically for new generation digital consumer
products as well as the mobile computing and Windows-based terminals
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<PAGE>
markets. The widespread adoption of the WindowsCE operating system could
accelerate the growth of the digital consumer products market and hence the
demand for embedded microprocessors.
To meet the demands of the digital consumer products market, system OEMs
rely on semiconductor manufacturers to design and deliver critical components
within rigorous price and performance parameters. To ensure availability in
these high-volume markets, these OEMs prefer multiple sources of supply. In
order to supply products for these markets, semiconductor suppliers are
increasingly combining their own intellectual property with that of third-
party suppliers in the form of microprocessor cores and other functional
blocks. This intellectual property must be customizable to allow the
semiconductor manufacturer to adapt it for specific applications and to meet
stringent time-to-market requirements. It must also be scalable to enable the
manufacturer to design a wide breadth of products. Finally, as the
requirements to implement advanced functionality such as 3-D graphics
escalates, this intellectual property must meet more demanding performance
standards.
THE MIPS SOLUTION
The Company is a leading designer and developer of high-performance
microprocessor intellectual property for embedded systems applications. The
Company has established a distribution channel for its intellectual property
by licensing its technology to key semiconductor partners. Each of these
partners possesses leading design and/or process technology and can leverage a
strong market position in strategic embedded markets. To date, the MIPS RISC
architecture has been used to create over 60 separate microprocessor products.
These microprocessor products have a cumulative installed base of over 70
million units and have been embedded into a variety of products such as video
games, color printers and handheld personal computers. According to Inside the
New Computer Industry, the market for RISC-based microprocessors totaled 98
million units in calendar year 1997. The Company's semiconductor partners
reported that approximately 48 million units based on the Company's RISC
architecture were shipped in calendar year 1997.
The Company's technology focuses on providing cost-effective and high-
performance microprocessor and related designs for high-volume embedded
applications. This technology is a flexible architecture that allows
semiconductor manufacturers to integrate their intellectual property with the
Company's microprocessor and related designs to develop differentiated and
innovative products for a variety of embedded applications within demanding
time-to-market requirements. The advantages of the MIPS architecture relate
primarily to scalability of die size and performance. Products incorporating
the MIPS architecture range from disk drives using microprocessor cores with a
die size of less than two square millimeters to high-performance workstations
using microprocessors with a die size of 300 square millimeters. In addition,
while designed for high performance, the Company's RISC-based architectures
have been incorporated in low-power applications such as the Philips Velo and
the NEC MobilePro handheld personal computers. The MIPS architecture is
designed around upward compatible instruction sets that enable manufacturers
developing products across a broad range of price/performance points to use
common support tools and software.
Through its network of semiconductor partners, independent software vendors
and system OEMs, the Company has developed the infrastructure necessary to
support its architecture as a standard platform for the embedded market.
Semiconductor Partners. The Company currently has seven semiconductor
partners that develop, market and sell silicon solutions based on the MIPS
RISC microprocessor architecture. Because products incorporating the Company's
intellectual property are sold to system OEMs by its semiconductor partners
(and not directly by the Company), these partners operate as a value-added
distribution channel. Several of the Company's partners have had contracts
with the Company and its
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<PAGE>
predecessors since prior to Silicon Graphics' acquisition of MIPS Computer
Systems, Inc. in 1992. The Company's current semiconductor partners are NEC,
Toshiba, LSI Logic, Philips, IDT, NKK and QED. NEC, Toshiba and Philips, which
have been licensees of the Company since 1989, 1989 and 1995, respectively,
are among the world's largest semiconductor suppliers to the consumer
electronics market and are investing significant resources to address the
emerging digital consumer products market. LSI Logic, a licensee of the
Company since 1987, is a leading supplier of custom systems-on-a-chip
solutions for consumer computing devices, such as the Sony PlayStation, and
the communications equipment market. IDT, a licensee of the Company since
1988, is a supplier of MIPS-based microprocessors for set-top boxes such as
WebTV devices and communications equipment such as routers from Cisco Systems,
Inc. ("Cisco"). Several of the Company's manufacturing partners have made
significant investments in MIPS technology and market development which has
resulted in multiple design teams around the world engaged in the development
of MIPS-based microprocessors and related designs.
Using the Company's flexible microprocessor intellectual property, these
partners, and the multiple design teams within these companies, are able to
design optimized semiconductor products for multiple segments of the embedded
market. The Company's partners and their associated design teams have
developed a broad portfolio of microprocessors and standard products based on
the MIPS RISC architecture as well as application specific extensions which
can be licensed back to the Company and offered to its other partners. For
example, MIPS16, an extension to the instruction set architecture that reduces
memory requirements and costs by allowing instructions to be expressed with 16
rather than 32 bits, was developed jointly by the Company and LSI Logic and is
presently licensed by the Company to several of its semiconductor partners.
Independent Software Vendors. The Company's RISC architecture is further
enabled by a variety of third-party independent software vendors that provide
operating systems and engineering development tools such as compilers,
debuggers and in-circuit emulation testers. Currently, these companies provide
over 150 products in support of the Company's RISC architecture. This
substantial software support gives system OEMs the confidence to design the
MIPS microprocessor technology into their products. In particular, software
operating systems developed by Microsoft, Wind River Systems, Inc. and
Integrated Systems Inc. are compatible with the Company's RISC architecture.
The Company intends to work with Microsoft to optimize its microprocessor
designs for products running on the WindowsCE operating system.
System OEMs. Microprocessor products based on the Company's RISC
architecture have become the preferred design for certain system OEMs in the
embedded market. A number of high-profile digital consumer products
incorporate the Company's RISC-based microprocessor intellectual property,
including the Nintendo 64 and Sony PlayStation video game systems, the Philips
Velo and NEC MobilePro handheld personal computers and the Echostar and
Microsoft WebTV set-top boxes. The Company participates in various sales and
technical efforts directed to system OEMs and has launched a promotional
campaign aimed at increasing brand awareness of the MIPS RISC architecture
among system OEMs and software vendors.
STRATEGY
The Company seeks to be the world's leading provider of microprocessor
intellectual property for the embedded market. To establish MIPS RISC-based
microprocessors as the industry standard and to proliferate its microprocessor
technology into multiple markets and applications, the Company has implemented
a business model based on the non-exclusive licensing of its intellectual
property. Key elements of the Company's strategy include:
Target Emerging Market for Digital Consumer Products. As the price of high-
performance 32- and 64-bit microprocessors has declined, system OEMs have
embedded these microprocessors into next generation digital consumer products.
The Company believes that its 32- and 64-bit
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<PAGE>
microprocessor designs are well suited for this market due to the scalability
and performance of the MIPS RISC architecture and the cost and time-to-market
advantages provided by the Company's intellectual property. The Company has
achieved several significant design wins in this market, including video game
systems such as Nintendo 64 and Sony PlayStation, handheld personal computers
such as the Philips Velo and NEC MobilePro and digital set-top boxes from
Echostar (Dish Network) and Microsoft (WebTV).
Increase Value through Advanced Modular Designs. The Company will focus its
research and development efforts on enhancing its existing technology to
create microprocessor cores and related designs that are optimized for
specific embedded applications. The Company's strategy is to use a modular
approach that emphasizes reusable and licensable microprocessor and software
technologies. The Company believes that this increased flexibility and
modularity will allow its semiconductor partners to provide high-performance,
customized products more quickly to their customers. In addition to advancing
its microprocessor technology, the Company also intends to leverage its
expertise in high-performance/high bandwidth computer systems architecture and
3-D graphics to develop intellectual property aimed at improving the
performance and cost-effectiveness of next generation digital consumer
products.
Leverage Relationships with Strategic Partners. The Company's strategy has
been to license the MIPS architecture to a relatively limited set of world-
class semiconductor manufacturing and design companies. The Company believes
that these long-term relationships have been fundamental to the proliferation
of MIPS-based products. The Company presently licenses its technology to seven
key semiconductor partners, each of which possesses leading design and/or
process technology and can leverage a strong market position in a variety of
embedded market applications. This strategy also seeks to ensure that there
are multiple sources of supply for MIPS-based microprocessors. The Company may
establish licenses with additional partners that it believes can offer value-
added design capabilities in the Company's existing target markets as well as
expand the market for the Company's microprocessor and related designs.
Strengthen MIPS' Position as the Industry Standard. According to Inside the
New Computer Industry, the market for RISC-based microprocessors totaled 98
million units in calendar year 1997. The Company's semiconductor partners
reported that approximately 48 million units based on the Company's RISC
architecture were shipped in calendar year 1997. The Company's products have a
cumulative installed base of over 70 million units. As an early entrant in the
intellectual property market, the Company has established a strong brand
awareness and a network of semiconductor partners, independent software
vendors and system OEMs to support its microprocessor and related design
efforts. The Company's flexible architecture has enabled the development of
over 60 MIPS-based products from standard microprocessors to highly
customized, application specific components. The Company seeks to expand the
industry's support of the MIPS architecture by continuing to focus on its
relationships with semiconductor manufacturers, software vendors and system
OEMs. The Company also intends to further enhance the MIPS brand and create
market "pull" through targeted advertising and co-marketing with its partners
and participation in standards setting for the microprocessor industry.
MARKETS AND APPLICATIONS
Digital Consumer Products. Together with its existing semiconductor
manufacturing partners and their associated design teams, the Company seeks to
leverage the MIPS RISC architecture into solutions for a wide variety of
sophisticated, high-volume digital consumer products such as video game
products, handheld personal computers and set-top boxes. To date, the
Company's RISC-based microprocessors have been designed into numerous digital
consumer products, of which the principal applications have been the Nintendo
64 and Sony PlayStation video game systems. Revenue related
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<PAGE>
to the video game market presently accounts for a substantial majority of the
Company's total revenue, and such revenue is expected to continue to account
for a significant portion of the Company's total revenue for at least the next
several years. See "Risk Factors--Revenue Concentration" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Video Games. The market for video games, which represented the first
high-volume consumer application for 32- and 64-bit microprocessors,
accounted for over 50 million units in 1997 and is expected to continue to
grow as more sophisticated video games are introduced. The Company's key
design wins in this market include the Nintendo 64 video game system, which
was introduced in 1996 and uses a MIPS R4300l microprocessor manufactured
by NEC, and the Sony PlayStation, which was introduced in 1994 and uses a
MIPS R3000 class embedded microprocessor developed by LSI Logic.
Set-Top Boxes. As digital transmission of video signals becomes more
widely utilized, the Company believes that the market for compatible set-
top boxes could represent an area of significant growth in the use of 32-
and 64-bit microprocessors and related designs. Digital set-top boxes
convert incoming digital video signals into an analog form. The Company has
achieved key design wins in this market. Microsoft's WebTV, introduced in
1996, uses a MIPS R4000 class microprocessor manufactured by IDT.
Echostar's Dish Network set-top box, introduced in 1996, uses a MIPS R3000
class microprocessor that is also manufactured by IDT. In addition, one of
the Company's partners, QED, has announced its intention to develop a MIPS-
based product for General Instrument Corporation's DCT-5000+ advanced
interactive digital set-top terminal.
Handheld Personal Computers. While the market for handheld personal
computers has only recently begun to develop, several products in this
market have shown a potential for growth, and the Company expects that this
market will continue to grow as these devices become more interactive with
desktop PCs. The Company's RISC-based microprocessor designs have been well
received in this market and, to date, have been incorporated into products
such as the Philips Velo and Sharp's Mobilon, both of which use a MIPS
R3000 class microprocessor developed by Philips. In addition, NEC has
incorporated a MIPS R4000 class microprocessor design into its MobilePro
handheld personal computer.
Other Digital Consumer Products. Other potential digital consumer product
applications for the Company's 32- and 64-bit microprocessors include
Windows-based terminals, Digital Versatile Disk players (DVD), digital
televisions and the Auto PC, a product that provides drivers with a variety
of services, including directions, using voice recognition and voice
synthesis.
Other Embedded Applications. The Company also expects that its future
microprocessor and related designs will continue to be effective for use in
more traditional embedded market applications such as telecommunication
switching equipment and data networking routers. These markets have
historically been an area of strength for the Company's microprocessor and
related designs. Significant design wins in these markets include networking
communications equipment from Cisco as well as laser printers from Hewlett-
Packard Company, Electronics for Imaging and Brother Industries, Ltd.
PRODUCTS
The Company designs, develops and licenses intellectual property for high-
performance microprocessors. The Company's intellectual property is used in
the design of microprocessor cores, instruction set architectures ("ISAs") and
application specific extensions ("ASEs") that enable its semiconductor
partners to manufacture flexible, high-performance microprocessors for
embedded systems at competitive prices within demanding time-to-market
requirements. Through licensing and royalty-based arrangements with its
semiconductor partners, the Company seeks to strengthen the position of the
MIPS architecture in the microprocessor industry and proliferate its designs
in embedded systems applications. The Company has not historically and does
not intend to manufacture microprocessors and related devices.
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<PAGE>
Basic Cores. The Company currently provides flexible, modular microprocessor
cores covering a range of performance/price points to enable its manufacturing
partners to provide customized semiconductor products more quickly to system
OEMs.
R3000. The R3000 is a 32-bit microprocessor introduced in 1988 that has
served as the basis for many derivatives by the Company's semiconductor
partners and is available from the Company in core form. The small die size
(less than two square millimeters in one implementation) and performance
characteristics of the R3000 make it well-suited for applications such as
video game consoles, including the Sony PlayStation, and handheld personal
computers, copiers, networking equipment and laser printers.
R4000. The R4000 is a 64-bit microprocessor introduced in 1992 that has
served as the basis for a variety of derivatives, including the R4300i
which, together with Silicon Graphics' Reality Co-Processor (RCP), is used
in Nintendo 64 video game players. The R4000 was designed for applications
in which high performance is the principle objective, such as video games,
computer systems, network servers and interactive consumer applications
such as set-top boxes.
R5000. The R5000 is a 64-bit microprocessor developed by QED in January
1996 that is presently licensed to the Company. The R5000 is a dual
instruction issue processor that has served as the microprocessor in
several of Silicon Graphics' workstations. Its performance characteristics
make it an attractive microprocessor for more powerful and sophisticated
embedded applications.
Instruction Set Architectures. Instruction set architectures ("ISAs") are
combinations of binary instructions and the hardware to execute them which
together determine the native capability of a microprocessor. ISA standards
are important because, among other things, they become the common points
around which tools are built, software libraries and compilers are written and
software operating systems are developed. Elements of an ISA may be
copyrighted or patented thus preventing unrestricted use without a license.
The Company licenses its ISAs to promote the development and marketing of MIPS
compatible parts by its semiconductor manufacturing partners.
MIPS I/II. The MIPS I/II instruction set architecture is the basic series
of instructions for 32-bit operations developed between 1984 and 1990. This
instruction set, which is presently used in a wide range of applications,
allows the performance of integer and floating point computation, logical
operations, data movement and a variety of other functions. The MIPS II ISA
is implemented in the R3000 series of products. Full MIPS I/II
compatibility is protected by patents, copyrights and trademarks owned by
the Company.
MIPS III. In addition to providing full support for the MIPS II ISA, the
MIPS III instruction set architecture extends the MIPS II ISA to 64-bit
operations, increases the number of floating point registers and adds
certain other functions. The MIPS III ISA is implemented in the R4000
series of products. MIPS III is a patented instruction set that is
necessary to operate 64-bit MIPS microprocessors in 64-bit mode.
MIPS IV. MIPS IV enhances floating point operations and adds additional
instructions that improve performance in a number of engineering and
scientific applications. The R5000, R8000 and R10000 MIPS microprocessors
implement the MIPS IV ISA.
MIPS V. MIPS V provides instructions that enhance performance in 3-D
graphics applications. The hardware for the MIPS V ISA has not been
implemented.
Application Specific Extensions. Application specific extensions ("ASEs")
are intended to provide design flexibility for application-specific MIPS
products and are offered to the Company's semiconductor manufacturing partners
as optional, additional features to its microprocessor cores.
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<PAGE>
MIPS16. MIPS16 is an ASE to the Company's RISC architecture introduced in
October 1996 that permits substantially reduced systems costs by reducing
memory requirements through the use of 16-bit instruction representation.
MIPS Digital Media Extensions (MDMX). MDMX is an ASE designed to provide
enhanced digital media processing including video compression and
decompression and audio and signal processing.
The Company's current microprocessor cores and other products incorporate
the technologies and intellectual property used by the MIPS Group in designing
microprocessors for Silicon Graphics' high-performance computer systems,
servers and workstations. These high-end microprocessor designs include the
Company's R8000 and R10000 microprocessors. The R8000 microprocessor,
introduced in 1994, has floating-point and computational capabilities that are
valuable in engineering and scientific markets. The R10000 microprocessor,
introduced in 1995, is a sophisticated 64-bit microprocessor capable of using
dynamic instruction scheduling (out-of-order execution) and speculative
branches. Applications using the highly scalable R10000 microprocessor include
supercomputers and high-performance servers for commercial applications,
including database management and transaction processing. R10000
microprocessors are used in many of the products presently sold by Silicon
Graphics. Although the R8000 and R10000 were not specifically designed for
embedded market applications, they contain sophisticated and valuable
technology and intellectual property that has been, and will continue to be,
available to the Company for incorporation into microprocessor and related
designs for the embedded market.
RESEARCH AND DEVELOPMENT
The Company believes that its future competitive position will depend in
large part on its ability to develop new and enhanced microprocessor cores and
related designs in a timely and cost-effective manner. The Company believes
that these capabilities are necessary to meet the evolving and rapidly
changing needs of semiconductor manufacturers and system OEMs in the digital
consumer products industry. To this end, the Company has assembled a team of
highly skilled engineers that possess significant experience in the design and
development of complex microprocessors. The Company intends to build on this
base of experience and the technologies that it has developed in creating
sophisticated microprocessor designs for high-performance computer systems,
servers and workstations to enhance the MIPS RISC architecture and develop a
broader line of microprocessor cores that are optimized for applications in
the digital consumer products industry. The Company's strategy is to use a
modular approach that emphasizes re-usable, licensable microprocessors, cores
and software technology. The Company believes that this increased flexibility
and modularity will allow its semiconductor partners to provide high-
performance, customized products more quickly to their customers. In addition,
the Company intends to continue to develop and license standardized ISAs and
ASEs to work within and around its RISC architecture to enhance and tailor the
capabilities of its microprocessor designs for specific applications.
Historically, the Company has collaborated with its semiconductor
manufacturing partners to develop these specific product applications and ASEs
from its core microprocessor designs.
The Company expects to develop and license its microprocessor designs in two
forms. Initial or "process targeted designs" are designs intended to address
the specific silicon manufacturing process technology of the semiconductor
manufacturer to which it is licensed. For example, details such as transistor
and interconnect dimensions vary from manufacturer to manufacturer and affect
performance. The Company believes that its ability to adjust its
microprocessor designs to work at optimum performance levels for targeted
silicon process technologies is a significant competitive advantage. Because
they are designed with the manufacturing partner's specific silicon process
technology in mind, it is expected that these initial microprocessor cores
will have superior performance levels and high value for the target partner.
The Company also expects to generate high-level description language
representations of the "process targeted designs" optimized to specific
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<PAGE>
manufacturing processes, referred to as "firm" cores. While having performance
comparable to a "process targeted design," a "firm" core can be integrated by
the licensee into an application-specific product to meet its specific
application requirements. As a result, "firm" cores can be licensed to
multiple customers, and used in multiple applications, and the Company expects
that revenue from such cores will represent an increasingly significant
portion of its total revenue.
The Company also intends to work with Microsoft to optimize the Company's
RISC-based microprocessor designs for products running on the WindowsCE
operating system. The WindowsCE operating system, which was developed using
the MIPS RISC architecture, targets the general embedded and digital consumer
products markets as well as the mobile computing and Windows-based terminals
markets. The WindowsCE operating system has the advantage of a flexible and
modular system and a large installed base of developers who are experienced
with Windows API development tools. This could provide system OEMs with a
familiar software platform and could accelerate the growth of the digital
consumer products market.
In anticipation of the Separation and the more limited focus of its research
and development efforts, the Company has significantly reduced its research
and development staff, from 221 persons at December 31, 1997 to 36 persons at
March 31, 1998. This decrease principally reflects the transfer to Silicon
Graphics of employees engaged in the development of next generation
microprocessors for Silicon Graphics' systems. Because the Company expects to
use industry-standard third-party design tools, it will not be required to
develop and maintain the proprietary design tools that were necessary in
connection with the design of high-performance microprocessors for Silicon
Graphics. As a result, the Company expects that its staffing requirements will
be significantly lower than those required prior to the Separation. For the
fiscal years ended June 30, 1995, 1996 and 1997, the Company's research and
development costs were $39.0 million, $48.4 million and $68.8 million,
respectively, and for the six months ended December 31, 1997, such costs were
$35.1 million. Reflecting the reduction in the Company's research and
development staff following the Separation, the Company expects its research
and development expenses to approximate $9.0 million for the second half of
fiscal 1998. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Despite this reduction in the Company's initial
research and development staffing requirements and expenditures, the Company's
business plan requires that it identify and hire additional highly skilled
technical personnel in fiscal 1999 to staff its anticipated research and
development activities. See "Risk Factors--Management of Growth."
SALES AND MARKETING
The Company's sales and marketing activities are focused principally on
establishing and maintaining licensing arrangements with semiconductor
manufacturers and participating in marketing, sales and technical efforts
directed to system OEMs. The Company licenses its RISC-based microprocessor
and related design technology on a non-exclusive and worldwide basis to
semiconductor manufacturers who, in turn, sell products incorporating these
technologies to system OEMs. The partnerships established by the Company form
a distribution channel and are an important element of its strategy to
proliferate the MIPS RISC architecture as the standard in the embedded
microprocessor industry. In establishing these partnerships, the Company seeks
to license its technology to those companies it believes can offer value-added
design capabilities in the Company's existing target markets as well as expand
the market for the Company's microprocessor and related designs. By licensing
its technology to multiple semiconductor manufacturers, the Company seeks to
ensure that system access to multiple sources of its RISC-based
microprocessors and related designs. The Company presently has two customers
that individually account for more than 10% of its total revenue: Nintendo and
NEC. Substantially all of the revenue derived from these two customers
reflects contract revenue and royalties related to development and sales of
Nintendo 64 video game players and related cartridges. Revenue related to
sales of Nintendo 64 video game cartridges is expected to
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continue to account for a significant portion of the Company's total revenue
for at least the next several years and, therefore, the Company expects that a
significant portion of its total revenue will continue to be derived from
Nintendo and NEC. See "Risk Factors--Revenue Concentration." For financial
information regarding revenue derived from the Company's international
licensees, see Note 15 of Notes to Financial Statements.
Although the precise terms of the Company's contracts vary from licensee to
licensee, they typically provide for technology license and engineering
service fees which may be payable up-front and/or upon the achievement of
certain milestones such as provision of deliverables by the Company or
production of semiconductor products by the licensee. The Company's contracts
also provide for the payment of royalties to the Company based on a percentage
of the net revenue earned by the licensee from the sale of products
incorporating the Company's technology and, in some cases, based on unit sales
of such products. The Company also offers licensees the option to license its
technology on a single-use or unlimited-use basis, and may provide licensees
with various technical support, training and consulting services and sales and
marketing support.
Certain of the Company's marketing activities are also aimed at system
OEMs. Through targeted advertising and co-marketing programs with its
partners, the Company seeks to increase awareness of the MIPS RISC
architecture in popular digital consumer products. The Company believes that
these efforts will provide product differentiation that will generate demand
for its technology from digital consumer product manufacturers, thereby
increasing demand from semiconductor manufacturers for the Company's designs
in their products.
Because the Company's past microprocessor design efforts have primarily
focused on serving the needs of Silicon Graphics, and although the Company has
always maintained a sales and marketing staff to support its strategic
relationships, its sales and marketing activities have not historically been
central to its operations. Following the Separation, however, the Company's
sales and marketing efforts will become significantly more critical to the
Company's future operating success. See "Risk Factors--Risks Associated with
Recent Shift in Strategic Direction." At December 31, 1997, the Company's
sales and marketing staff totaled 16 persons. The Company expects to increase
its sales and marketing staff following the Separation, although such staff is
not expected to initially exceed 20 persons. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
INTELLECTUAL PROPERTY
The Company regards its patents, copyrights, mask work rights, trademarks,
trade secrets and similar intellectual property as critical to its success,
and relies on a combination of patent, trademark, copyright, mask work and
trade secret laws to protect its proprietary rights. Any failure of the
Company to obtain or maintain adequate protection of its intellectual property
rights for any reason could have a material adverse effect on its business,
results of operations and financial condition. In connection with the Offering
and the Separation, and subject to the grant of a license to Silicon Graphics,
the Company will own approximately 48 U.S. patents on various aspects of its
technology, with expiration dates ranging from 2006 to 2015, approximately 37
pending U.S. patent applications as well as all foreign counterparts relating
thereto. There can be no assurance that patents will issue from any patent
applications submitted by the Company, that any patents held by the Company
will not be challenged, invalidated or circumvented or that any claims allowed
from its patents will be of sufficient scope or strength to provide meaningful
protection or any commercial advantage to the Company. In addition, there can
be no assurance that third parties will not assert claims of infringement
against the Company or against the Company's semiconductor manufacturing
partners in connection with their use of the Company's technology. Such
claims, even those without merit, could be time consuming, result in costly
litigation and/or require the Company to enter into royalty or licensing
agreements. Such royalty
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or licensing agreements, if required, may not be available on terms acceptable
to the Company, or at all. Moreover, the laws of certain foreign countries may
not protect the Company's intellectual property to the same extent as do the
laws of the United States and, because of the importance of the Company's
intellectual property rights to its business, this could have a material
adverse effect on its business, results of operations and financial condition.
The Company also uses licensing agreements and employee and third party
nondisclosure and assignment agreements to limit access to and distribution of
its proprietary information and to obtain ownership of technology prepared on
a work-for-hire basis. There can be no assurance that the steps taken by the
Company to protect its intellectual property rights will be adequate to deter
misappropriation of such rights or that the Company will be able to detect
unauthorized uses and take immediate or effective steps to enforce its rights.
There can also be no assurance that the steps taken by the Company to obtain
ownership of contributed intellectual property will be sufficient to assure
its ownership of all proprietary rights. The Company also relies on unpatented
trade secrets to protect its proprietary technology. No assurance can be given
that others will not independently develop or otherwise acquire the same or
substantially equivalent technologies or otherwise gain access to the
Company's proprietary technology or disclose such technology or that the
Company can ultimately protect its rights to such unpatented proprietary
technology. In addition, no assurance can be given that third parties will not
obtain patent rights to such unpatented trade secrets, which patent rights
could be used to assert infringement claims against the Company.
As a result of the Separation and the Offering, the Company will not have
full access to Silicon Graphics' portfolio of intellectual property. Prior to
the Offering, Silicon Graphics allowed the Company to use certain of its
patents and other intellectual property in the Company's business. Such use by
the Company has not been documented by a written license agreement. In
connection with the Offering and the Separation, the Company and Silicon
Graphics will enter into arrangements pursuant to which certain intellectual
property will be assigned to the Company, subject to the grant of a license to
Silicon Graphics; certain intellectual property will be retained by Silicon
Graphics, subject to the grant of a license to the Company; and certain
intellectual property will be retained by Silicon Graphics without any ongoing
interest to the Company. There can be no assurance that the Company will
continue to have access to any such licensed intellectual property on
commercially attractive terms, or at all, particularly if the Company ceases
to be a majority-owned subsidiary of Silicon Graphics. The Company's inability
to use such intellectual property in the future could have a material adverse
affect on its business and results of operations. In addition, in the past,
the MIPS Group has 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 any such arrangements. As a result of the Separation, there
can be no assurance that the Company will be able to negotiate commercially
attractive intellectual property licensing arrangements with third parties in
the future, particularly if the Company ceases to be a majority-owned
subsidiary of Silicon Graphics. In addition, in connection with any future
intellectual property infringement claims, the Company will not have the
benefit of asserting counterclaims based on Silicon Graphics' intellectual
property portfolio, nor will the Company be able to provide licenses to
Silicon Graphics' intellectual property in order to resolve such claims.
COMPETITION
The market for embedded microprocessors is highly competitive and
characterized by rapidly changing technological needs and capabilities. The
Company believes that the principal competitive factors in the embedded
microprocessor market are performance, functionality, price, customizability
and power consumption. The Company competes primarily against Hitachi
Semiconductor (America) Inc. and ARM Holdings plc. The Company also competes
against certain semiconductor manufacturers whose product lines include
microprocessors for embedded and non-embedded
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applications, including Intel Corporation, National Semiconductor Corporation,
Advanced Micro Devices, Inc. and Motorola, Inc. In addition, the Company must
continue to differentiate its microprocessor and related designs from those
available or under development by the internal design groups of semiconductor
manufacturers, including its current and prospective manufacturing partners.
Many of these internal design groups have substantial programming and design
resources and are part of larger organizations which have substantial
financial and marketing resources. There can be no assurance that internal
design groups will not develop products that compete directly with the
Company's microprocessor and related designs or will not actively seek to
participate as merchant vendors in the intellectual property component market
by selling to third-party semiconductor manufacturers or, if they do, that the
Company will be able to compete with them successfully. To the extent that
these alternative technologies provide comparable performance at a lower or
similar cost than the Company's technology, semiconductor manufacturers may
adopt and promote these alternative technologies. Certain of the Company's
competitors have greater name recognition and customer bases as well as
greater financial and marketing resources than the Company, and such
competition could adversely affect the Company's business, results of
operations and financial condition.
EMPLOYEES
As of March 31, 1998, the Company had 52 full time employees. Of this total,
36 were in research and development, 13 were in sales and marketing and 3 were
in administration. Overall, approximately 73% of the Company's employees have
technical degrees and more than 37% have advanced technical degrees. The
Company's future success will depend in part on its ability to attract, retain
and motivate highly qualified technical and management personnel who are in
great demand in the semiconductor industry. The Company's business plan
requires that it identify and hire additional highly skilled technical
personal during fiscal 1999 to staff its anticipated research and development
activities. See "--Research and Development" and "Risk Factors--Management of
Growth." None of the Company's employees is represented by a labor union or
subject to a collective bargaining agreement. The Company believes that its
relations with its employee are good.
LITIGATION
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 arises 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. The Company
intends to seek access to Lexra's products to evaluate possible patent
infringement claims and will expand the lawsuit if appropriate. The Company is
seeking injunctive relief as well as monetary damages.
On April 6, 1998, Silicon Graphics and the Company filed an action against
ArtX, Inc. ("ArtX") and certain employees of ArtX in the Superior Court of the
State of California alleging, among other things, misappropriation of trade
secrets and interference with Silicon Graphics' and the Company's relationship
with Nintendo. This lawsuit arises out of the defendants' actions in
attempting to obtain a contract with respect to the next generation Nintendo
video game system. The Company is seeking injunctive relief as well as
monetary damages.
The Company believes that the foregoing proceedings are not likely to have a
material adverse effect on its business, results of operations or financial
condition.
FACILITIES
The Company's executive, administrative and technical offices currently
occupy approximately 20,000 square feet in a building leased by Silicon
Graphics in Mountain View, California. Following the
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Separation, the Company intends to sublease from Silicon Graphics
approximately 27,500 square feet (with an option to increase to 55,000 square
feet) in one building in Mountain View, California. Payments by the Company to
Silicon Graphics under this sublease are expected to be equal to amounts
payable by Silicon Graphics under its sublease for the property with a third
party. This sublease will expire on May 31, 2002, subject to earlier
termination in certain circumstances. The Company believes that these
facilities are adequate to meets its current needs but that it may need to
seek additional space in the future.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John E. Bourgoin......... 52 Chief Executive Officer, President and Director
Lavi Lev................. 41 Senior Vice President--Engineering
Derek Meyer.............. 38 Vice President--Sales and Marketing
Kenneth Coleman.......... 55 Director
William M. Kelly......... 44 Director
Teruyasu Sekimoto........ 58 Director
Dr. Forest Baskett....... 54 Director
</TABLE>
John E. Bourgoin has served as Chief Executive Officer of the Company since
February 1998 and President of the Company since September 1996, and has been
a director of the Company since May 1997. Mr. Bourgoin has also served as a
Senior Vice President of Silicon Graphics since September 1996. Prior to
joining Silicon Graphics, Mr. Bourgoin was Vice President, Computation
Products Group at Advanced Micro Devices, Inc.
Lavi Lev has served as Senior Vice President--Engineering of the Company
since March 1998, and was Vice President--Engineering of Silicon Graphics from
1996 to March 1998. From 1995 to 1996, he served as Vice President,
Engineering at MicroUnity Systems Engineering and between 1992 and 1995 he was
a manager at Sun Microsystems, Inc.
Derek Meyer joined the Company in May 1996 as Director of Worldwide
Marketing and Sales and became Vice President--Sales and Marketing in March
1998. Prior to joining the Company, Mr. Meyer served as marketing director for
the TriMedia division of Philips Semiconductors and prior to that time he was
director of SPARC marketing for Sun Microsystems, Inc.
Kenneth Coleman has served as a director of the Company since January 1998.
Since April 1997, Mr. Coleman has been Senior Vice President, Customer and
Professional Services of Silicon Graphics. Prior to that time, he was Senior
Vice President, Administration of Silicon Graphics.
William M. Kelly has served as a director of the Company since January 1998.
He joined Silicon Graphics in 1994 as Vice President, Business Development,
General Counsel and Secretary and, since 1997, has been Senior Vice President,
Corporate Operations of Silicon Graphics. During 1996, Mr. Kelly also served
as Senior Vice President, Silicon Interactive Group of Silicon Graphics and he
served as acting Chief Financial Officer of Silicon Graphics from May 1997 to
February 1998. Prior to joining Silicon Graphics, Mr. Kelly was an attorney in
private practice.
Teruyasu Sekimoto has served as a director of the Company since January
1998. Mr. Sekimoto joined Silicon Graphics in 1987 as representative director
of Silicon Graphics Japan. In 1991, he became Vice President, North Pacific
Area and since 1995 has served as Senior Vice President, East Asia.
Dr. Forest Baskett has served as a director of the Company since January
1998. Since 1990, Dr. Baskett has served as Senior Vice President, Research
and Development of Silicon Graphics, and since 1994, has also served as its
Chief Technology Officer.
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BOARD COMPOSITION
Upon completion of the Offering, the Company will have a board of directors
consisting of the five current members of the Board of Directors identified
above. After completion of the Offering, the Company anticipates that the size
and composition of the Board of Directors will be changed and will include one
director who is an officer of the Company, four directors who are officers of
Silicon Graphics and two directors who will be persons not associated with the
Company or Silicon Graphics. Silicon Graphics will have the ability to change
the size and composition of the Company's Board of Directors and committees of
the Board of Directors. See "Arrangements Between the Company and Silicon
Graphics--Relationship with Silicon Graphics." Upon consummation of the
Offering, the Company's Board of Directors will be divided into three classes
of directors serving staggered three-year terms.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors will have two committees: an Audit
Committee and a Compensation Committee. The responsibilities of the Audit
Committee include recommending to the Board of Directors the independent
public accountants to be selected to conduct the annual audit of the accounts
of the Company; reviewing the proposed scope of such audit and approving the
audit fees to be paid; and reviewing the adequacy and effectiveness of the
internal auditing, accounting and financial controls of the Company with the
independent public accountants and the Company's financial and accounting
staff. The Audit Committee will be comprised of non-management directors. The
responsibilities of the Compensation Committee include administering the 1998
Long-Term Incentive Plan and selecting the officers and key employees to whom
Awards will be granted. The Compensation Committee will be comprised of non-
management directors.
The Board of Directors may, from time to time, establish certain other
committees to facilitate the management of the Company.
DIRECTOR COMPENSATION
It is anticipated that directors who do not receive compensation as officers
or employees of the Company or any of its affiliates will be paid an annual
board membership fee. Directors are reimbursed for reasonable expenses
incurred in attending Board or committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In fiscal 1997, the Company did not have a Compensation Committee or any
other committee serving a similar function. Decisions as to the compensation
of executive officers were made by Silicon Graphics.
EXECUTIVE COMPENSATION
Following the Separation, the executive officers and all other employees of
the Company will be compensated solely by the Company and will no longer
participate in any of Silicon Graphics' compensation or benefit plans. Because
the executive officers and employees of the Company will cease to be employees
of Silicon Graphics as of the Closing Date, such individuals will, in
accordance with Silicon Graphics' stock plans, have 60 or 90 days (depending
on the terms of the option grant) to exercise any vested options to purchase
Silicon Graphics common stock, and any vested options that are not exercised,
as well as all unvested options, will terminate.
1998 LONG-TERM INCENTIVE PLAN
Prior to the consummation of the Offering, the Company intends to adopt the
1998 Long-Term Incentive Plan (the "Plan"). The purposes of the Plan are to
attract, retain and motivate officers and
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other key employees and consultants of the Company, to compensate them for
their contributions to the growth and profits of the Company and to encourage
ownership by them of Common Stock. The Plan authorizes the issuance of various
forms of stock-based awards (the "Awards") to such individuals.
Administration. Following the consummation of the Offering, the Plan will be
administered by the Compensation Committee of the Company's Board of
Directors. The Compensation Committee will have full authority to: administer
the Plan, select participants from among eligible individuals, make factual
interpretations in connection with the administration or interpretation of the
Plan, determine the type of Award and the number of shares pursuant to each
Award, and set forth the terms and conditions of Awards, including those
related to vesting, forfeiture, payment and exercisability. Subject to certain
limitations, the Compensation Committee may from time to time delegate some or
all of its authority to one or more officers of the Company. The Compensation
Committee may also determine the effect, if any, that a participant's
termination of employment will have on the vesting, exercisability, payment or
lapse of restrictions applicable to an Award.
Number of Shares. In connection with the Offering, an aggregate of
shares of Common Stock will be authorized for issuance under the Plan. The
number of shares available for issuance under the Plan will be proportionately
adjusted in the event of certain changes in the Company's capitalization or a
similar transaction. Shares issued pursuant to the Plan may be authorized but
unissued shares, treasury shares or any combination thereof. In addition to
the overall share limit, some special limits apply. In accordance with the
requirements under the regulations promulgated under Section 162(m) of the
Internal Revenue Code (the "Code"), no eligible individual may receive stock
options or stock appreciation rights with respect to an aggregate of more than
shares of Common Stock in any one-year period or stock awards subject
to performance requirements and performance shares with respect to more than
shares of Common Stock per performance period. Aggregate stock Awards
made under the Plan that are not subject to performance goals may not exceed
. In accordance with the requirements under Section 422 of the Code
pertaining to incentive stock options, the fair market value of the number of
shares of Common Stock that may be issued pursuant to incentive stock options
which are exercisable for the first time by a participant under any Company
plan may not exceed, in the aggregate, $100,000 during any calendar year.
Eligible Employees. The Compensation Committee intends to grant Awards under
the Plan to employees or consultants of the Company (or a subsidiary) with the
potential to contribute to the future success of the Company or its
subsidiaries. Members of the Compensation Committee are not eligible to
receive awards under the Plan.
Award Agreement. Each Award granted pursuant to the Plan will be evidenced
by an Award agreement between the Company and the participant. In addition to
certain of the terms herein set forth, such agreements may contain such other
terms as the Compensation Committee shall prescribe. Such additional terms may
vary among Award agreements.
Awards Generally. The Compensation Committee may authorize the following
Awards based upon the Common Stock: (i) stock options, (ii) stock appreciation
rights, which may be granted in tandem with or independently of stock options,
(iii) stock awards, (iv) performance unit awards and (v) other forms of awards
which the Compensation Committee determines to be consistent with the purposes
of the Plan and the interests of the Company.
Stock Options. In connection with the Offering, the Company will issue stock
options under the Plan. The Company intends to award both nonqualified stock
options ("NSOs") and incentive stock options ("ISOs") within the meaning of
Section 422 of the Code in connection with the Offering. Under the terms of
the Plan, the per share exercise price of such stock options shall be no less
than 100%
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of the fair market value of the Common Stock on the date of grant: provided,
however, that ISOs granted to a participant who owns more than ten percent of
the voting power of the Company's stock will be priced at 110% of fair market
value on the date of grant. The term of a stock option will be fixed by the
Compensation Committee upon grant, and the term of an ISO may not exceed ten
years. The vesting schedules of the stock options will be determined by the
Compensation Committee and will be governed by the individual stock option
agreements; provided, however, that no stock option may vest prior to 10
months from the date of grant. At the discretion of the Compensation
Committee, the exercise price of a stock option may be paid in cash, by
withholding shares of Common Stock from the exercise, or in previously owned
stock or a combination thereof.
Stock Appreciation Rights. Stock appreciation rights entitle a participant
to receive upon exercise an amount equal to the excess, if any, of the fair
market value on the date of exercise of the number of shares of Common Stock
subject to the stock appreciation right over the applicable exercise price.
The exercise price will be determined by the Award agreement but in no case
may be less than 100% of the fair market value of the underlying Common Stock
at the date of grant. The term of the stock appreciation right will be
governed by the Award agreement; provided, however, that no stock appreciation
right may vest prior to 10 months from the date of grant. At the discretion of
the Compensation Committee, payments to a participant upon exercise of a stock
appreciation right may be made in cash, shares of Common Stock or a
combination thereof. Stock appreciation rights may be granted alone or in
tandem with other Awards. The Compensation Committee does not intend to grant
any stock appreciation rights in connection with the Offering.
Stock Awards. Stock Awards may consist of one or more shares of Common Stock
granted or offered for sale to a participant subject to terms and conditions,
including vesting requirements or restrictions on transferability, as
determined by the Compensation Committee and specified in the Award agreement.
The Compensation Committee does not intend to grant any stock Awards in
connection with the Offering.
Performance Unit Awards. Performance unit Awards entitle a participant to
receive fixed or variable share or dollar-denominated units of Common Stock
upon satisfaction of certain specified performance criteria and subject to
such other terms and conditions as the Compensation Committee deems
appropriate. Payment in settlement of a performance unit Award will be made as
soon as practicable following the conclusion of the applicable performance
period in shares of Common Stock, in an equivalent amount of cash or in a
combination of Common Stock and cash, as the Compensation Committee
determines. The Compensation Committee does not intend to grant any
performance unit Awards in connection with the Offering.
Other Awards. The Compensation Committee may specify the terms and
provisions of other forms of equity based or equity-related Awards not
described above which the Compensation Committee determines to be consistent
with the purpose of the Plan and the interests of the Company, which Awards
may provide for deferral of compensation through equity based units, for cash
payments based in whole or in part on the value or future value of Common
Stock, for the acquisition or future acquisition of Common Stock, or any
combination thereof. Other Awards may also include cash payments based on one
or more criteria determined by the Committee which are unrelated to the value
of Common Stock. Other than stock options, the Compensation Committee does not
intend to grant any other equity based awards in connection with the Offering.
Amendment. The Board of Directors or the Compensation Committee may amend or
terminate the Plan at any time, except that stockholder approval is required
to increase the maximum number of shares issuable under the plan or to reduce
the exercise price of any outstanding stock option or stock appreciation
right. No amendment or termination may adversely affect a participant's rights
with respect to previously granted Awards without his or her consent.
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Effect of Reorganization. In the event of termination of a participant's
employment by the Company without Cause or, in certain cases, by a participant
for Good Reason (as such terms may be defined in the applicable Award
agreements) following a change in control, the Compensation Committee may
allow for the following: (i) all such participant's outstanding stock options
and stock appreciation rights may become fully exercisable, (ii) all
restrictions and conditions of all stock Awards then held by such participant
may lapse, and (iii) all performance share Awards held by such participant may
be deemed to have been fully earned.
Change of Control. For purposes of the Plan, a change of control shall be
deemed to have occurred upon the occurrence of either of the following:
(i) the acquisition by any person (as such term is used in Sections 13(d)
and 14(d) of the 1934 Act) of beneficial ownership (within the meaning of
Rule 3d-3 promulgated under the Exchange Act), directly or indirectly, of
30% or more of the combined voting power of the Common Stock then
outstanding, but shall not include any such acquisition by:
(A) the Company;
(B) Silicon Graphics;
(C) any employee benefit plan of the Company; and
(D) any person or entity organized, appointed or established by the
Company for or pursuant to the terms of any such plan.
(ii) commencing on the closing date of the initial public offering of the
Common Stock, during any period of thirty-six consecutive months,
individuals who constitute the Board of Directors, and subsequently elected
members of the Board of Directors whose election is approved or recommended
by at least a majority of such current members or their successors whose
election was so approved or recommended (other than any subsequently
elected members whose initial assumption of office occurs as a result of an
actual or threatened election contest with respect to the election or
removal of directors or other actual or threatened solicitation of proxies
or consents by or on behalf of a person other than the Board of Directors),
cease for any reason to constitute at least a majority of such Board of
Directors.
Adjustments. In the event of any change in the outstanding Common Stock by
reason of a stock dividend, recapitalization, reorganization, merger,
consolidation, stock split, combination or exchange of shares or any other
significant corporate event affecting the Common Stock, the Compensation
Committee, in its discretion, may make (i) such proportionate adjustments as
it considers appropriate (in the form determined by the Compensation Committee
in its sole discretion) to prevent diminution or enlargement of the rights of
Participants under the Plan with respect to the aggregate number of shares of
Common Stock for which Awards in respect thereof may be granted under the
Plan, the number of shares of Common Stock covered by each outstanding Award,
and the exercise or Award prices in respect thereof and/or (ii) such other
adjustments as it deems appropriate.
Termination of the Plan. By its terms, the Plan will remain in effect until
terminated by the Board. No awards may be granted under the Plan after the
tenth anniversary of its effective date.
U.S. Federal Income Tax Effects. Certain of the federal income tax
consequences to participants and the Company of Awards granted under the Plan
should generally be as set forth in the following summary.
An employee to whom an ISO which qualifies under Section 422 of the Code is
granted will not recognize income at the time of grant or exercise of such
option. No federal income tax deduction will be allowable to the employee's
employer upon the grant or exercise of such ISO. However, upon the exercise of
an ISO, any excess in the fair market price of the Common Stock over the
option price
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constitutes a tax preference item which may have alternative minimum tax
consequences for the employee. When the employee sells such shares more than
one year after the date of transfer of such shares and more than two years
after the date of grant of such ISO, the employee will normally recognize a
long-term capital gain or loss equal to the difference, if any, between the
sale prices of such shares and the option price. If the employee does not hold
such shares for the required period, when the employee sells such shares, the
employee will recognize ordinary compensation income and possibly capital gain
or loss in such amounts as are prescribed by the Code and the regulations
thereunder and the Company will generally be entitled to a federal income tax
deduction in the amount of such ordinary compensation income.
A participant to whom a NSO is granted will not recognize income at the time
of grant of such option. When such participant exercises such NSO, the
participant will recognize ordinary compensation income equal to the
difference, if any, between the option price paid and the fair market value,
as of the date of option exercise, of the shares the participant receives. The
tax basis of such shares to such participant will be equal to the option price
paid plus the amount includible in the participant's gross income, and the
participant's holding period for such shares will commence on the date on
which the participant recognized taxable income in respect of such shares.
Subject to the applicable provisions of the Code and regulations thereunder,
the Company will generally be entitled to a federal income tax deduction in
respect of a NSO in an amount equal to the ordinary compensation income
recognized by the participant.
A participant who receives a grant of stock appreciation rights or
performance unit Awards will recognize ordinary compensation income at the
time such Award is settled in cash or stock in an amount equal to the cash or
the fair market value of the stock received. Subject to the applicable
provisions of the Code and regulations thereunder, the Company will generally
be entitled to a federal income tax deduction in respect of a grant of stock
appreciation rights and performance unit Awards in an amount equal to the
ordinary compensation income recognized by the participant.
No income will be recognized by a participant who is granted a stock Award
if the Award is subject to a substantial risk of forfeiture or restrictions on
transferability, unless the participant makes a special election with the
Internal Revenue Service pursuant to Section 83(b) of the Code to be taxed at
the time of grant. Upon lapse of the risk of forfeiture or restrictions on
transferability, the participant will be taxed at ordinary income tax rates on
the then fair market value of the Common Stock and a corresponding deduction
will be allowable. The participant's basis in the Common Stock will be equal
to the ordinary income so recognized. Upon subsequent disposition of such
Common Stock, the participant will realize capital gain or loss (long-term or
short-term, depending upon the holding period of the stock sold).
Pursuant to Section 83(b) of the Code, a participant may elect within 30
days of receipt of the stock Award to be taxed at ordinary income tax rates on
the fair market value of the Common Stock comprising the stock Award at the
time of award. If the election is made, the Company will be entitled to a
corresponding deduction. No income will be recognized, and no deduction will
be allowed the Company, upon lapse of the risk of forfeiture or restrictions
on transferability.
ANTICIPATED GRANTS TO EXECUTIVE OFFICERS
In connection with the Offering, the Company will make initial grants of
stock options to the executive officers of the Company under the 1998 Long-
Term Incentive Plan. The Company anticipates that upon consummation of the
Offering (i) options to purchase shares of Common Stock will be granted
to Mr. Bourgoin, (ii) options to purchase shares of Common Stock will be
granted to Mr. Lev and (iii) options to purchase shares of Common Stock
will be granted to Mr. Meyer.
45
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN
General. The purpose of the MIPS Technologies, Inc. Employee Stock Purchase
Plan (the "Purchase Plan") is to provide employees of the Company who
participate in the Purchase Plan with an opportunity to purchase Common Stock
of the Company through payroll deductions.
The Board believes that the equity incentive opportunity represented by the
Purchase Plan is an important factor in attracting, retaining and motivating
the best available talent. Accordingly, to provide for the future issuance of
shares under the Purchase Plan, the Board has reserved shares of common
stock for issuance under the Purchase Plan.
Administration. The Purchase Plan, and the rights of the participants to
make purchases thereunder, are intended to qualify under the provisions of
Sections 421 and 423 of the Internal Revenue Code. The Purchase Plan may be
administered by the Board or by a committee of the Board. All questions of
interpretation of the Purchase Plan are determined by the Board or the
committee designated by the Board. No charges for administrative or other
costs may be made against the payroll deductions of a participant in the
Purchase Plan.
Members of the Board who are eligible employees are permitted to participate
in the Purchase Plan. Members of the Board who are eligible to participate in
the Purchase Plan may not vote on any matters affecting the Purchase Plan. No
member of the Board who is eligible to participate in the Purchase Plan may be
a member of a committee established to administer the Purchase Plan.
Eligibility. Any individual who is customarily employed by the Company (or
any of its majority-owned subsidiaries) for at least 20 hours per week and
more than five months in a calendar year is eligible to participate in the
Purchase Plan, provided that the individual is employed on the first day of an
offering period and subject to certain limitations imposed by Section 423(b)
of the Code.
Offering Periods. The Purchase Plan is implemented by overlapping month
offering periods ("Offering Periods"), each divided into exercise periods.
Shares are issued on the last day of each exercise period (the "Exercise
Date"). A new Offering Period commences every , generally at January 1 and
July 1 of each year.
Employees may commence their participation in the Purchase Plan only at the
beginning of an Offering Period and may participate in only one Offering
Period at one time. The Purchase Plan provides that the Board or the committee
may set the duration of the Offering Periods at any period of time in its
discretion, without stockholder approval.
Participation in the Plan. Eligible employees become participants in the
Purchase Plan by delivering to the Company a subscription agreement
authorizing payroll deductions for the purchase of shares under the Plan not
less than 15 days prior to the beginning of an Offering Period, unless a later
time for filing the subscription agreement has been set by the Board for all
eligible employees with respect to a given Offering Period. A person who
becomes employed after the commencement of an Offering Period may not
participate in the Plan until the commencement of the next Offering Period.
Unless the participant's participation is discontinued, the purchase of shares
occurs automatically on the next Exercise Date in the Offering Period.
Purchase Price. The purchase price per share at which shares are sold under
the Purchase Plan is 85% of the lower of the fair market value of the Common
Stock (a) on the date of commencement of the Offering Period or (b) on the
applicable Exercise Date within such Offering Period. The applicable "Exercise
Date" is the last day of the particular six-month exercise period within the
Offering Period. The fair market value of the Common Stock on a given date is
the closing sales price on the Nasdaq National Market as of such date.
46
<PAGE>
Payment of Purchase Price; Payroll Deductions. The purchase price of the
shares is accumulated by payroll deductions during the Offering Period. The
deductions may not exceed 10% of a participant's eligible compensation. The
Board currently has defined eligible compensation to mean base pay, plus all
other amounts attributable to overtime, shift premium, incentive compensation,
regular bonuses and commissions, exclusive of "spot bonuses" and any other
such similar items. A participant may discontinue his or her participation in
the Purchase Plan or may increase or decrease the rate of payroll deductions
at any time during the Offering Period. Payroll deductions generally commence
on the first payday following the commencement of the Offering Period, and
continue at the same rate until the end of the Offering Period unless sooner
terminated as provided in the Purchase Plan. All payroll deductions are
credited to the participant's account under the Purchase Plan and are
deposited with the general funds of the Company. All payroll deductions
received or held by the Company may be used by the Company for any corporate
purpose.
The maximum number of shares issuable to a participant in an Offering Period
is the lesser of (i) the number of shares purchasable by dividing $50,000 by
the fair market value of the Company's Common Stock on the first day of the
Offering Period, or (ii) to the extent such limit is imposed by law, the
number of shares purchasable without allowing a participant to accrue the
right to purchase shares under the Purchase Plan at a rate exceeding $25,000
of fair market value of such shares (determined at the first day of the
Offering Period) for each calendar year in which the option is outstanding at
any time. See discussion below under "Withdrawal."
Notwithstanding the foregoing, no participant will be permitted to subscribe
for shares under the Purchase Plan if, immediately after the grant of the
option, the participant would own 5% or more of the combined voting power or
value of all classes of stock of the Company or of any of its subsidiaries
(including stock which may be purchased under the Purchase Plan or pursuant to
any other options). Furthermore, if the total number of shares issuable on an
Exercise Date exceeds the number of shares then available under the Purchase
Plan, a pro rata allocation of the available shares will be made in as uniform
a manner as is practicable.
Withdrawal. A participant's interest in a given offering may be terminated
in whole, but not in part, at any time during an Offering Period by signing
and delivering to the Company a notice of withdrawal from the Purchase Plan.
Any withdrawal by the participant of accumulated payroll deductions for a
given Offering Period automatically terminates the participant's participation
in that Offering Period. The failure to remain in the continuous employ of the
Company for at least 20 hours per week during an Offering Period will be
deemed to be a withdrawal from that Offering Period.
A participant's withdrawal from an Offering Period does not have any effect
upon such participant's eligibility to participate in subsequent Offering
Periods under the Purchase Plan.
Automatic Transfer to Lower Price Offering Period. If the fair market value
of the Company's Common Stock on the first day of any exercise period is less
than on the first day of that Offering Period, all employees participating in
the Purchase Plan on the first day of such exercise period will be deemed to
have withdrawn from the Offering Period on the first day of such exercise
period and to have enrolled in the new Offering Period commencing on that
date. A participant may elect to remain in the previous Offering Period by
delivery of a written notice to the Company declaring such election prior to
the time of the automatic change to the new Offering Period.
Adjustment on Changes in Capitalization. In the event any change is made in
the Company's capitalization, such as a stock split or stock dividend, which
results in an increase or decrease in the number of outstanding shares of
Common Stock without receipt of consideration by the Company, appropriate
adjustments will be made by the Board in the shares subject to purchase under
the Purchase Plan and in the purchase price per share. In the event of the
proposed dissolution or
47
<PAGE>
liquidation of the Company, the offering periods will terminate immediately
prior to such dissolution or liquidation, unless the Board provides otherwise.
The Board may also, in the exercise of its sole discretion, adjust the number
of shares of Common Stock available for issuance under the Purchase Plan as
well as the purchase price per share for outstanding options in the event the
Company effects a reorganization, recapitalization, rights offering or other
increase or reduction of shares of outstanding Common Stock, and in the event
of the Company being consolidated with or merged into any other corporation.
Acceleration of Options. In the event of a proposed sale of all or
substantially all of the assets of the Company or the merger of the Company
with or into another corporation, each option under the Purchase Plan will be
assumed or an equivalent option substituted by the successor corporation or a
parent or subsidiary of such successor corporation unless the Board
determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, that the participant will have the right to
exercise the option as to all of the optioned stock, including shares as to
which the option would not otherwise be exercisable.
Non-assignability. No rights or accumulated payroll deductions of a
participant under the Purchase Plan may be pledged, assigned or transferred
for any reason, and any such attempt may be treated by the Company as an
election to withdraw from the Purchase Plan.
Amendment and Termination of the Plan. The Purchase Plan may be amended by
the Board of Directors without prior approval of the stockholders of the
Company unless such approval is required by applicable law or regulation,
including the rules of the Nasdaq National Market (such as an amendment that
would increase the number of shares reserved under the Purchase Plan).
Certain Federal Income Tax Considerations. The Purchase Plan, and the right
of participants to make purchases thereunder, is intended to qualify under the
provisions of Section 421 and 423 of the Code. Under these provisions, no
income will be taxable to a participant at the time of purchase of shares.
Upon disposition of the shares, the participant will be subject to tax and the
amount of the tax will depend on the holding period. If the shares are
disposed of by the participant at least two years after the beginning of the
Offering Period and at least one year from the date the shares are purchased,
the lesser of (a) the excess of the fair market value of the shares at the
time of such disposition over the purchase price, or (b) 15% of the fair
market value of the shares on the first day of the Offering Period will be
treated as ordinary income and any further gain will be taxed at long-term
capital gain rates. If the shares are sold after such time and the sales price
is less than the purchase price, the participant recognizes no ordinary income
but instead a capital loss.
If the shares are sold or otherwise disposed of before the expiration of
such two-year and one-year periods, the excess of the fair market value of the
shares on the exercise date over the purchase price will be treated as
ordinary income. Any additional gain or loss on such sale or disposition shall
be long-term or short-term capital gain or loss, depending on the holding
period. The Company is not entitled to a deduction for amounts taxed as
ordinary income or capital gain to a participant except to the extent of
ordinary income recognized by participants upon disposition of shares within
two years from the date of grant or within one year of the date of purchase.
The foregoing is only a summary of the effect of federal income taxation
upon the participant and the Company with respect to the shares purchased
under the Purchase Plan. Reference should be made to the applicable provisions
of the Code. In addition, the summary does not discuss the tax consequences of
a participant's death or the income tax laws of any state or foreign country
in which the participant may reside.
New Plan Benefits. It is not presently possible to determine the benefits or
amounts that will be received by any particular employees or groups in the
future.
48
<PAGE>
COMPENSATION OF THE NAMED EXECUTIVE OFFICERS IN FISCAL 1997
The following table sets forth certain compensation information for the
Chief Executive Officer and the other two executive officers of the Company
(collectively, the "Named Executive Officers") for the fiscal year ended June
30, 1997. All of the information set forth in this table reflects compensation
earned by such individuals for services rendered to Silicon Graphics and its
subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1) LONG-TERM COMPENSATION AWARDS
-------------------------- ----------------------------------
RESTRICTED SECURITIES ALL OTHER
NAME AND POSITION SALARY BONUS OTHER(2) STOCK AWARDS UNDERLYING OPTIONS(3) COMPENSATION(4)
----------------- -------- -------- -------- ------------ --------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
John E. Bourgoin........ $280,000 $ 89,086 $ 9,382 -- 125,000 $1,200
Chief Executive Officer
Lavi Lev................ $215,192 $106,550 $83,024 -- 64,000 $2,400
Vice President--
Engineering
Derek Meyer............. $182,215 $ 2,250 $ 296 -- 12,000 $1,772
Vice President--Sales
and Marketing
</TABLE>
- -------
(1) Silicon Graphics has no pension, retirement, annuity or similar benefit
plan.
(2) Other compensation includes relocation costs, executive perquisites and,
for Mr. Lev only, imputed income related to a below market interest rate
loan from Silicon Graphics.
(3) In fiscal 1997, Silicon Graphics effected an option exchange program to
allow employees to exchange their out-of-the-money stock options for a
smaller number of new options at a more favorable exercise price. The
numbers in this column reflect 44,000 options issued to Mr. Lev in the
exchange program for 55,000 options that were granted in fiscal 1997 and
12,000 options issued to Mr. Meyer in the exchange program for 15,000
options that were granted prior to fiscal 1997.
(4) All other compensation includes Silicon Graphics' contribution to savings
plans.
The following table sets forth information regarding stock options granted
to the Named Executive Officers in respect of shares of Silicon Graphics
common stock under Silicon Graphics' stock plans.
OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
--------------------------------------------
% OF
TOTAL POTENTIAL REALIZABLE
OPTIONS VALUE AT ASSUMED
NUMBER OF GRANTED ANNUAL RATES OF STOCK
SECURITIES TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM(2)
OPTIONS IN FISCAL PRICE EXPIRATION ---------------------
NAME GRANTED YEAR ($/SHARE)(3) DATE 5% 10%
---- ---------- --------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John E. Bourgoin........ 125,000 * $21.875 09/16/06 $1,719,634 $4,357,890
Lavi Lev................ 20,000 * 11.69 07/31/06 527,708 978,775
32,000 * 18.875 07/31/06 341,685 846,094
12,000 * 18.875 01/28/07 136,817 343,603
Derek Meyer............. 12,000 * 18.875 05/03/06 123,938 304,793
</TABLE>
- -------
* Less than 1%.
(1) The options in this table, other than 20,000 shares granted to Mr. Lev in
July 1996, were granted under Silicon Graphics 1993 Long-Term Incentive
Stock Plan and have exercise prices equal to the fair market value on the
date of grant. The option to purchase 20,000 shares at an exercise price
of $11.69 per share granted to Mr. Lev in July 1996 was granted under
Silicon Graphics 1985 Stock Incentive Program and has an exercise price of
50% of the fair market value on the date of grant. The options become
exercisable at a rate of 2% per month over a period of fifty months and
expire ten years from the date of grant.
(2) Potential realizable value assumes that the price of Silicon Graphics'
common stock increases from the date of grant until the end of the option
term (10 years) at the annual rate specified (5% and 10%). The 5% and 10%
assumed annual rates of appreciation are mandated by rules of the
Securities and Exchange Commission and do not represent an estimate or
projection of the future price of Silicon Graphics' common stock. The
Company does not believe that this method accurately illustrates the
potential value of a stock option.
(3) In fiscal 1997, Silicon Graphics effected an option exchange program to
allow employees to exchange their out-of-the-money stock options for a
smaller number of new options at a more favorable exercise price. Option
grants to Messrs. Lev and Meyer that are priced at $18.875 per share are
new options that were issued in the exchange program for options
previously granted which totaled (i) 55,000 options for Mr. Lev with an
exercise price of between $23.375 and $27.375 per share and (ii) 15,000
options for Mr. Meyer with an exercise price of $28.375.
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<PAGE>
The following table sets forth information regarding options to purchase
Silicon Graphics common stock that were exercised by the Named Executive
Officers during fiscal 1997, and the number and value of unexercised, in-the-
money options at June 30, 1997.
STOCK OPTION EXERCISES AND
JUNE 30, 1997 FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
SHARES
ACQUIRED VALUE OF UNEXERCISED
ON VALUE NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
NAME EXERCISE REALIZED OPTIONS AT JUNE 30, 1997 JUNE 30, 1997 (1)
---- -------- -------- ------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John E. Bourgoin........ -- -- 0 125,000 $ 0 $ 0
Lavi Lev................ -- -- 4,400 59,600 14,564 51,636
Derek Meyer............. -- -- 0 12,000 0 0
</TABLE>
- --------
(1) The amounts in this column reflect the difference between the closing
market price of Silicon Graphics' common stock on June 30, 1997, which was
$15.00, and the option exercise price. The actual value of unexercised
options fluctuates with the market price of Silicon Graphics' common
stock.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
No present or future officer or director currently owns any shares of Common
Stock, all of which are currently owned by Silicon Graphics. The following
table sets forth the number of shares of Silicon Graphics common stock
beneficially owned on December 31, 1997 by each of the Company's directors,
the executive officers named in the Summary Compensation Table and all
directors and executive officers of the Company as a group. Except as
otherwise noted, the individual director or executive officer or their family
members had sole voting and investment power with respect to such securities.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY
NAME OWNED
---- ------------
<S> <C>
John E. Bourgoin................................................ 55,479
Lavi Lev........................................................ 19,287
Derek Meyer..................................................... 2,659
Kenneth L. Coleman.............................................. 382,845
William M. Kelly................................................ 188,464
Teruyasu Sekimoto............................................... 222,489
Dr. Forest Baskett.............................................. 535,977
</TABLE>
- --------
(1) No individual Named Executive Officer or director beneficially owns 1% or
more of Silicon Graphics' common stock, nor do the Named Executive
Officers and directors as a group.
(2) The persons named have sole voting and investment power over the shares
shown as being beneficially owned by them, subject to community property
laws, where applicable. The table includes the following shares issuable
on exercise of options or other convertible securities that were
exercisable on December 31, 1997; Mr. Bourgoin, 37,500 shares; Mr. Lev,
6,800 shares; Mr. Meyer, 90 shares; Mr. Coleman, 339,980 shares; Mr.
Kelly, 135,380 shares; Mr. Sekimoto, 203,180 shares; and Dr. Baskett,
476,764 shares.
RELATED TRANSACTIONS
Silicon Graphics has outstanding two loans to Mr. Lev. One loan is a
forgivable, non-interest bearing note with a principal amount outstanding at
December 31, 1997 of approximately $310,000. The other loan bears interest at
an annual rate of 7.13% and had a principal amount outstanding at December 31,
1997 of approximately $510,000. The largest aggregate amount of these loans
outstanding during the period since July 1, 1996 was approximately $900,000.
In connection with the Separation and the Offering, it is anticipated that
certain terms of these loans will be amended and that the loans will be
assigned to the Company by Silicon Graphics.
50
<PAGE>
ARRANGEMENTS BETWEEN THE COMPANY AND SILICON GRAPHICS
RELATIONSHIP WITH SILICON GRAPHICS
Immediately prior to the Offering, Silicon Graphics will be the sole
stockholder of the Company. Upon completion of the Offering, Silicon Graphics
will beneficially own % of the outstanding shares of Common Stock ( % if
the Underwriters' over-allotment option is exercised in full). For as long as
Silicon Graphics continues to beneficially own more than 50% of the
outstanding shares of Common Stock, Silicon Graphics will be able to direct
the election of all of the members of the Company's Board of Directors and
exercise a controlling influence over the business and affairs of the Company,
including any determinations with respect to mergers or other business
combinations involving the Company, the acquisition or disposition of assets
by the Company, the incurrence of indebtedness by the Company, the issuance of
any additional Common Stock or other equity securities, and the payment of
dividends with respect to the Common Stock. Similarly, Silicon Graphics will
have the power to determine matters submitted to a vote of the Company's
stockholder's without the consent of the Company's other stockholders, will
have the power to prevent a change in control of the Company and could take
other actions that might be favorable to Silicon Graphics.
Silicon Graphics has advised the Company that its current intent is to
continue to hold all of the Common Stock beneficially owned by it following
the Offering. However, Silicon Graphics is not subject to any contractual
obligation to retain its controlling interest, except that Silicon Graphics
has agreed not to sell or otherwise dispose of any shares of Common Stock of
the Company for a period of 365 days after the date of this Prospectus without
the prior written consent of Deutsche Morgan Grenfell Inc. See "Underwriting."
As a result, there can be no assurance concerning the period of time during
which Silicon Graphics will maintain its beneficial ownership of Common Stock
owned by it following the Offering. Any disposition by Silicon Graphics of any
of the shares of Common Stock it owns following the Offering may be effected
in one or more transactions, including a public offering, a distribution by
Silicon Graphics of such Common Stock to its stockholders, an offer by Silicon
Graphics to exchange such Common Stock for outstanding Silicon Graphics common
stock, or other transaction. Beneficial ownership of at least 80% of the total
voting power of the Company and 80% of each class of nonvoting capital stock
of the Company is required in order for Silicon Graphics to be able to effect
a tax free spin off of the shares of Common Stock or certain other tax free
transactions.
For a description of certain provisions of the Company's Restated
Certificate of Incorporation concerning the allocation of business
opportunities that may be suitable for both the Company and Silicon Graphics,
see "Description of Capital Stock--Corporate Opportunities."
For the purposes of governing certain of the relationships between the
Company and Silicon Graphics following the Separation and the Offering, the
Company and Silicon Graphics have entered into, or will enter into, the
Separation Agreement and the Ancillary Agreements. The Ancillary Agreements
include the Corporate Agreement, the Technology Agreement, the Trademark
Agreement, the Tax Sharing Agreement and the Management Services Agreement.
Because these agreements will be entered into at a time when the Company is
still a wholly owned subsidiary of Silicon Graphics, they are not the result
of arm's-length negotiations between the parties. Certain of the Ancillary
Agreements summarized below have been filed as exhibits to the Registration
Statement of which this Prospectus forms a part and the summaries of such
agreements are qualified in their entirety by reference to the full text of
such agreements. See "Additional Information."
SEPARATION AGREEMENT
To effect the Separation, Silicon Graphics has transferred or agreed to
transfer, or to cause its subsidiaries to transfer, the Company Assets to the
Company. The Company has assumed or agreed to assume and has agreed to
faithfully perform and fulfill all the Company Liabilities in accordance with
their respective terms. Except as expressly set forth in the Separation
Agreement or in any Ancillary
51
<PAGE>
Agreement, neither Silicon Graphics nor the Company is making any
representation or warranty as to the business, assets or liabilities
transferred or assumed as part of the Separation, as to any consents or
approvals required in connection therewith, as to the value or freedom from
any security interests of any of the assets transferred or as to the absence
of any defenses or freedom from counterclaim with respect to any claim of any
party, or as to the legal sufficiency of any assignment, document or
instrument delivered to convey title to any asset transferred. Except as
otherwise expressly set forth in the Separation Agreement or in an Ancillary
Agreement, all assets are being transferred on an "as is," "where is" basis,
and the Company has agreed to bear the economic and legal risks that the
conveyance is insufficient to vest in the transferee good and marketable
title, free and clear of any security interest.
Releases and Indemnification. The Separation Agreement provides for a full
and complete release and discharge as of the Closing Date of all Liabilities
existing or arising from all acts or events occurring or failing to occur or
alleged to have occurred or to have failed to occur and all conditions
existing or alleged to have existed on or prior to the Closing Date, between
the Company or any of its subsidiaries on the one hand and Silicon Graphics or
any member of the Silicon Graphics Group on the other hand (including any
contractual arrangements or arrangements existing or alleged to exist between
the Company and Silicon Graphics on or before the Closing Date), except as
expressly set forth in the Separation Agreement.
Except as provided in the Separation Agreement, the Company has agreed to
indemnify, defend and hold harmless Silicon Graphics, each member of the
Silicon Graphics Group, and each of their directors, officers and employees,
from and against any and all Liabilities relating to, arising out of or
resulting from (i) the failure of the Company or any other person to pay,
perform or otherwise promptly discharge any Company Liabilities or any Company
Contract in accordance with its terms; (ii) the Company Business, any Company
Liability or any Company Contract; (iii) any breach by the Company of the
Separation Agreement or any of the Ancillary Agreements; and (iv) any untrue
statement or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, with respect to all
information contained in this Prospectus or the Registration Statement of
which it forms a part.
Silicon Graphics has agreed to indemnify, defend and hold harmless the
Company, each of its subsidiaries, and each of their directors, officers and
employees, from and against any and all Liabilities relating to, arising out
of or resulting from (i) the failure of Silicon Graphics or any other person
to pay, perform or otherwise promptly discharge any liabilities of Silicon
Graphics other than the Company Liabilities; (ii) any Liability other than the
Company Liabilities; and (iii) any breach by Silicon Graphics of the
Separation Agreement or any of the Ancillary Agreements.
Dispute Resolution. The Separation Agreement contains provisions that
govern, except as otherwise provided in the Ancillary Agreements, the
resolution of disputes, controversies or claims that may arise between them.
These provisions contemplate that efforts will be made to resolve disputes,
controversies and claims by escalation of the matter to senior management (or
other mutually agreed) representatives of the parties. If such efforts are not
successful, any party may submit the dispute, controversy or claim to
mandatory, binding arbitration, subject to the provisions of the Separation
Agreement. The Separation Agreement contains procedures for the selection of a
sole arbitrator of the dispute, controversy or claim and for the conduct of
the arbitration hearing, including certain limitations on the discovery rights
of the parties. These procedures are intended to produce an expeditious
resolution of any such dispute, controversy or claim.
In the event that any dispute, controversy or claim is, or is reasonably
likely to be, in excess of $ million, or in the event of an arbitration
award in excess of $ million is issued in any arbitration proceeding
commenced under the Separation Agreement, subject to certain conditions, any
party may submit such dispute, controversy or claim to a court of competent
jurisdiction and the arbitration
52
<PAGE>
provisions contained in the Separation Agreement will not apply. In the event
that the parties do not agree that the amount in controversy exceeds $
million, the Separation Agreement provides for arbitration of such
disagreement.
Proceeds; Expenses of the Offering. The Separation Agreement provides that
the Offering will include a primary offering of Common Stock by the Company
and a secondary offering of Common Stock by Silicon Graphics and that each of
the Company and Silicon Graphics will retain the net proceeds from the sale of
the Common Stock offered by it in the Offering. Except for underwriting
discounts and commissions attributable to the shares of Common Stock sold by
Silicon Graphics in the Offering, the Company has agreed to pay all third-
party costs, fees and expenses relating to the Offering, including all of the
costs of producing, printing and distributing this Prospectus, and all of the
reimbursable expenses of the Underwriters pursuant to the Underwriting
Agreement.
Termination; Further Assurances. The Separation Agreement may be terminated
at any time prior to the Closing Date by Silicon Graphics and, if so
terminated, neither the Company nor Silicon Graphics (or any of their
respective directors or officers) will have any liability or further
obligation to any party. In addition to the actions specifically provided
elsewhere in the Separation Agreement, each of the Company and Silicon
Graphics has agreed to use its reasonable best efforts, prior to, on and after
the Closing Date, to take all actions, and to do all things, reasonably
necessary, proper or advisable under applicable laws, regulations and
agreements, to consummate and make effective the transactions contemplated by
the Separation Agreement and the Ancillary Agreements.
Set forth below are certain defined terms contained in the Separation
Agreement.
Company Assets means (i) any and all assets, rights and claims of any kind
and nature held immediately prior to the Closing Date by Silicon Graphics and
its subsidiaries (including the Company) and used primarily in the Company
Business, (ii) all of the Company Contracts (as defined in the Separation
Agreement) and (iii) any assets reflected in the Company Balance Sheet as
"Assets" of the Company, subject to any dispositions of such assets subsequent
to the date of the Company Balance Sheet.
Notwithstanding the foregoing, the Company Assets shall not in any event
include any and all assets that are expressly contemplated by the Separation
Agreement or any Ancillary Agreement as Assets to be retained by Silicon
Graphics or any member of the Silicon Graphics Group.
Company Liabilities means:
(i) any and all Liabilities that are expressly contemplated by the
Separation Agreement or any Ancillary Agreement as Liabilities to be
assumed by the Company, and all agreements, obligations and Liabilities of
the Company under the Separation Agreement or any of the Ancillary
Agreements;
(ii) all Liabilities (other than Taxes based on, or measured by reference
to, net income), including any employee-related Liabilities, primarily
relating to, arising out of or resulting from:
(A) the operation of the Company Business, as conducted at any time
prior to, on or after the Closing Date (including any Liability
relating to, arising out of or resulting from any act or failure to act
by any director, officer, employee, agent or representative (whether or
not such act or failure to act is or was within such Person's
authority));
(B) the operation of any business conducted by the Company or any of
its subsidiaries at any time after the Closing Date (including any
Liability relating to, arising out of or resulting from any act or
failure to act by any director, officer, employee, agent or
representative (whether or not such act or failure to act is or was
within such Person's authority)); and
(C) any Company Assets; and
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(iii) all Liabilities reflected as "Liabilities" or obligations of the
Company in the Company Balance Sheet, subject to any discharge of such
Liabilities subsequent to the date of the Company Balance Sheet.
Notwithstanding the foregoing, the Company Liabilities shall not in any
event include any and all Liabilities that are expressly contemplated by the
Separation Agreement or any Ancillary Agreement as Liabilities to be retained
or assumed by Silicon Graphics or any member of the Silicon Graphics Group,
and all agreements and obligations of any member of the Silicon Graphics Group
under the Separation Agreement or any of the Ancillary Agreements.
Company Business means the business and operations of the various divisions
and subsidiaries of Silicon Graphics engaged in the development and licensing
of microprocessor and related designs for the embedded market based on RISC
architecture, consisting principally of Silicon Graphics' MIPS Group.
Silicon Graphics Group means Silicon Graphics and each Person (other than
the Company and its subsidiaries) that is an Affiliate of Silicon Graphics
immediately after the Closing Date.
CORPORATE AGREEMENT
Pre-emptive Right of Silicon Graphics to Purchase Shares of Capital
Stock. Pursuant to the Corporate Agreement, the Company will grant to Silicon
Graphics a continuing option, assignable to any of its subsidiaries, to
purchase, under certain circumstances, additional shares of Common Stock or
shares of non-voting capital stock of the Company (the "Stock Option"). The
Stock Option may be exercised by Silicon Graphics simultaneously with the
issuance of any equity security of the Company (other than in the Offering or
upon the exercise of the Underwriters' over-allotment option), with respect to
the Common Stock, only to the extent necessary for Silicon Graphics to
maintain (a) control of the Company (within the meaning of Section
368(a)(2)(H) and (c) of the Internal Revenue Code of 1986, as amended (the
"Code")), provided such control has theretofore been maintained; (b) the
status of the Company as a member of the affiliated group of corporations
(within the meaning of Section 1504 of the Code) of which Silicon Graphics is
the common parent, provided such status has theretofore been maintained or (c)
its then-existing percentage of the total voting power and value of the
Company, whichever percentage is highest, and, with respect to shares of non-
voting capital stock, to the extent necessary to own 80% of each outstanding
class of such stock. The purchase price of the shares of Common Stock
purchased upon any exercise of the Stock Option will be based on the market
price of the Common Stock at the time of such exercise, and the purchase price
of non-voting capital stock will be the price at which such stock may be
purchased by third parties. The Stock Option expires in the event that Silicon
Graphics reduces its beneficial ownership of Common Stock to less than % of
the outstanding shares of Common Stock.
Registration Rights. The Corporate Agreement will further provide that, upon
request of Silicon Graphics, the Company will use its best efforts to effect
the registration under the applicable federal and state securities laws of any
of the shares of Common Stock and non-voting capital stock (and any other
securities issued in respect of or in exchange for either of such securities)
beneficially owned by Silicon Graphics for sale in accordance with Silicon
Graphics' intended method of disposition thereof, and will take such other
actions as may be necessary to permit the sale thereof in other jurisdictions,
subject to certain specified limitations. Silicon Graphics will also have the
right which, subject to certain limitations, it may exercise at any time and
from time to time, to include the shares of Common Stock and non-voting
capital stock (and any other securities issued in respect of or in exchange
for either of such securities) beneficially owned by it in certain other
registrations of common equity securities of the Company initiated by the
Company on its own behalf or on behalf of its other stockholders. The Company
will agree to pay all out-of-pocket costs and expenses in connection with each
such registration that Silicon Graphics requests or in which Silicon Graphics
participates, except for
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underwriting discounts and commissions attributable to the shares of Common
Stock sold by Silicon Graphics.
Until such time as Silicon Graphics ceases to beneficially own in excess of
50% of the outstanding Common Stock, Silicon Graphics may request or
participate in an unlimited number of such registrations. After such time,
Silicon Graphics will be limited to a total of four demand and an unlimited
number of "piggyback" registrations. Subject to certain limitations specified
in the Corporate Agreement, such registration rights will be assignable by
Silicon Graphics and its assigns. The Corporate Agreement will contain
indemnification and contribution provisions by the Company for the benefit of
Silicon Graphics in connection with such registrations.
Covenant Against Certain Actions. The Corporate Agreement will also provide
that for so long as Silicon Graphics maintains beneficial ownership of a
majority of the number of outstanding shares of Common Stock, the Company may
not take any action or enter into any commitment or agreement which may
reasonably be anticipated to result, with or without notice and with or
without lapse of time, or otherwise, in a contravention (or an event of
default) by Silicon Graphics of: (i) any provision of applicable law or
regulation, including but not limited to provisions pertaining to the Internal
Revenue Code or the Employee Retirement Income Security Act of 1974, as
amended; (ii) any provision of Silicon Graphics' certificate of incorporation
or by-laws; (iii) any credit agreement or other material instrument binding
upon Silicon Graphics or any of its assets or (iv) any judgment, order or
decree of any governmental body, agency or court having jurisdiction over
Silicon Graphics or any of its assets.
TECHNOLOGY AGREEMENT
The Company and Silicon Graphics intend to enter into a Technology
Agreement, effective as of the Closing Date, pursuant to which Silicon
Graphics will assign and license certain intellectual property rights to the
Company, and the Company will license back certain rights to Silicon Graphics.
Silicon Graphics will assign to the Company all right, title and interest in
and to approximately 48 United States patents with expiration dates ranging
from 2006 through 2015, approximately 37 pending United States patent
applications, and all foreign counterpart rights to the foregoing. In addition
to these patent rights, Silicon Graphics will assign to the Company related
intellectual property rights, including certain copyrights, certain mask work
rights, and certain trade secrets. The assignment will provide the Company
with all of Silicon Graphics' intellectual property related to the MIPS RISC
microprocessor architecture for use in embedded applications. As part of the
Technology Agreement, Silicon Graphics will also license other intellectual
property rights to the Company that may be necessary for the Company's
business. This license will consist of two parts. Certain rights will be
licensed on a worldwide, royalty-free and exclusive basis solely for the
Company's use in the development and licensing of microprocessor and related
designs for embedded applications. A second set of rights will be licensed to
the Company on a worldwide, royalty-bearing and non-exclusive basis solely for
the Company's use in specified applications relating to the development and
licensing of microprocessor and related designs for embedded applications
subject to Silicon Graphics' reasonable approval. years after the Closing
Date, the restrictions on the Company's use of the licensed intellectual
property will cease, and both parts of the license will become perpetual,
worldwide, paid-up and royalty-free. The license back to Silicon Graphics will
concern only the intellectual property assigned by Silicon Graphics to the
Company, for which the Company will grant to Silicon Graphics a worldwide,
royalty-free, non-exclusive license. This license back to Silicon Graphics
will be solely for Silicon Graphics' use other than in the development and
licensing of microprocessor and related designs for embedded applications for
years from the Closing Date, and will thereafter be perpetual and
unrestricted as to field of use. Neither Silicon Graphics nor the Company will
undertake any indemnification obligations or warranties as to the intellectual
property as part of the Technology Agreement. The Technology Agreement will
specifically exclude trademarks and trademark-related intellectual property,
which will be covered by the Trademark Agreement.
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TRADEMARK AGREEMENT
The Company and Silicon Graphics intend to enter into a Trademark Agreement,
effective as of the Closing Date, pursuant to which Silicon Graphics will
assign certain trademark and trademark-related rights to the Company, and the
Company will license back certain rights to Silicon Graphics. Silicon Graphics
will assign to the Company all trademarks, service marks, trade dress, logos
and related goodwill concerning the MIPS marks for processors and other
semiconductor devices. This assignment will include all domestic and foreign
registrations as well as common law rights throughout the world. The Company
will grant back to Silicon Graphics a worldwide, royalty-free, and non-
exclusive license to use the MIPS marks in connection with Silicon Graphics'
products that exclusively use processors embodying the MIPS architecture and
that are offered in markets other than embedded applications. This license
will terminate years after the Closing Date, whether or not Silicon
Graphics continues to use microprocessors embodying the MIPS architecture or
its equivalent after that date. The Trademark Agreement will require Silicon
Graphics' compliance with reasonable quality standards. Neither Silicon
Graphics nor the Company will undertake any indemnification obligations or
warranties as to the trademarks and trademark-related rights as part of the
Trademark Agreement.
TAX SHARING AGREEMENT
The Company is, and after the Offering will continue to be, included in
Silicon Graphics' consolidated federal income tax group, and the Company's
federal income tax liability will be included in the consolidated federal
income tax liability of Silicon Graphics. The Company and Silicon Graphics
intend to enter into a Tax Sharing Agreement pursuant to which the Company and
Silicon Graphics will make payments between them such that, with respect to
any period, the amount of taxes to be paid or received by the Company, subject
to certain adjustments, will be determined as though the Company were to file
separate federal, state and local income tax returns (including, except as
provided below, any amounts determined to be due as a result of a
redetermination of the tax liability of Silicon Graphics arising from an audit
or otherwise) as the common parent of an affiliate group of corporations
filing combined, consolidated or unitary (as applicable) federal, state and
local returns rather than a consolidated subsidiary of Silicon Graphics with
respect to federal, state and local income taxes. Under the terms of the Tax
Sharing Agreement, the Company, in computing its stand alone tax liability or
tax refund, will not be able to utilize certain tax items, such as net
operating losses, foreign tax credits and other tax credits (collectively,
"Tax Attributes"), that were in existence prior to the Closing Date. In
addition, with respect to Tax Attributes of the Company that come into
existence after the Closing Date, under the terms of the Tax Sharing
Agreement, Silicon Graphics will not be required to make any payment to the
Company (even if such Tax Attributes of the Company are utilized by the
Silicon Graphics consolidated federal income tax group), unless the Company
would be entitled to a tax refund on a stand alone basis (based on the
assumption that it was a new corporation as of the Closing Date) for any
taxable period that ends (i) after the Closing Date and (ii) before the
Company leaves the Silicon Graphics consolidated federal income tax group.
Furthermore, the Company will be required to compensate Silicon Graphics to
the extent that the Company receives any benefit from the use of pre-Offering
Tax Attributes after the Company is no longer a part of the Silicon Graphics
consolidated federal income tax group. Pursuant to the Tax Sharing Agreement,
Silicon Graphics' obligation to make any payment to the Company relating to
the Company's Tax Attributes will terminate at such time as the Company ceases
to be a member of Silicon Graphics consolidated federal income tax group. The
amount of the Company's Tax Attributes utilized by the Silicon Graphics
consolidated federal income tax group for which the Company does not receive
any payment from Silicon Graphics could be substantial.
Silicon Graphics will continue to have all the rights of a parent of a
consolidated group (and similar rights provided for by applicable state and
local law with respect to a parent of a combined, consolidated or unitary
group), will be the sole and exclusive agent for the Company in any and all
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matters relating to the income, franchise and similar liabilities of the
Company, will have sole and exclusive responsibility for the preparation and
filing of consolidated federal and consolidated or combined state and local
income tax returns (or amended returns), and will have the power, in its sole
discretion, to contest or compromise any asserted tax adjustment or deficiency
and to file, litigate or compromise any claim for refund on behalf of the
Company. In addition, Silicon Graphics has agreed to undertake to provide the
aforementioned services with respect to the Company's separate state and local
returns and the Company's foreign returns.
In general, the Company will be included in Silicon Graphics' consolidated
group for federal income tax purposes for so long as Silicon Graphics
beneficially owns at least 80% of the total voting power and value of the
outstanding Common Stock. Each member of a consolidated group is jointly and
severally liable for the federal income tax liability of each other member of
the consolidated group. Accordingly, although the Tax Sharing Agreement
allocates tax liabilities between the Company and Silicon Graphics, during the
period in which the Company is included in Silicon Graphics' consolidated
group, the Company could be liable in the event that any federal tax liability
is incurred, but not discharged, by any other member of Silicon Graphics'
consolidated group. See "Risk Factors--Control by and Relationship with
Silicon Graphics."
MANAGEMENT SERVICES AGREEMENT
The Company and Silicon Graphics will enter into the Management Services
Agreement, effective as of the Closing Date, pursuant to which Silicon
Graphics will provide certain administrative and corporate support services to
the Company on an interim or transitional basis, including accounting,
purchasing and facilities services. Specified charges for such services are
generally intended to allow Silicon Graphics to recover the fully allocated
direct costs of providing the services, plus all out-of-pocket costs and
expenses, but without any profit. The Management Services Agreement provides
that Silicon Graphics will provide the services thereunder to the Company
through the same or similarly qualified personnel and the same or similar
facilities as it has in the past, but the selection of personnel to perform
the various services shall be within the sole control of Silicon Graphics. In
addition, Silicon Graphics is not required to increase the volume or quality
of the services provided beyond the level at which they were performed for the
Company in the past. The Management Services Agreement is for an initial
three-year term, and may be renewed annually at the option of the Company. The
Company will have the right to terminate any particular service provided under
the Management Services Agreement upon at least 30 days prior written notice
to Silicon Graphics and, after the expiration of the initial three-year term,
Silicon Graphics will have the right to terminate any service upon 60 days
prior written notice to the Company. The Management Services Agreement will
automatically terminate at such time as Silicon Graphics' beneficial ownership
interest in the outstanding Common Stock ceases to exceed 50%.
FACILITIES LEASE ARRANGEMENTS
Following the Separation, the Company intends to sublease from Silicon
Graphics approximately 27,500 square feet (with an option to increase to
55,000 square feet) in one building in Mountain View, California. Payments by
the Company to Silicon Graphics under this sublease are initially expected to
be approximately $51,000 per month, increasing to $67,000 per month in August
2001. The amounts payable by the Company under this sublease will be equal to
the amounts payable by Silicon Graphics under its sublease for the property
with a third party. This sublease will expire on May 31, 2002, subject to
earlier termination in certain circumstances.
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PRINCIPAL AND SELLING STOCKHOLDER
Prior to the Offering, all of the outstanding shares of Common Stock will be
owned by Silicon Graphics. Upon completion of the Offering, Silicon Graphics
will own approximately % of the Common Stock then outstanding ( % if the
Underwriters' over-allotment option is exercised in full). The principal
executive offices of Silicon Graphics are located at 2011 North Shoreline
Blvd., Mountain View, California 94043. See "Arrangements Between the Company
and Silicon Graphics."
Other than as described in the preceding paragraph, the Company is not aware
of any person or group that will beneficially own more than 5% of the
outstanding shares of Common Stock following the Offering.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 150,000,000 shares
of Common Stock, par value $0.001 per share, and 50,000,000 shares of
Preferred Stock, par value $0.001 per share, issuable in series. After giving
effect to the sale of Common Stock in the Offering, there will be shares
of Common Stock outstanding. All of the shares of Common Stock that will be
outstanding immediately following the Offering, including the Common Stock
sold in the Offering, will be validly issued, fully paid and nonassessable.
COMMON STOCK
The holders of shares of Common Stock will be entitled to one vote for each
share on all matters voted on by stockholders, including elections of
directors and, except as otherwise required by law or provided in any
resolution adopted by the Company's Board of Directors with respect to any
series of Preferred Stock, the holders of such shares will possess all voting
power. The Certificate of Incorporation does not provide for cumulative voting
in the election of directors. Subject to any preferential rights of any
outstanding series of Preferred Stock created by the Company's Board of
Directors from time to time, the holders of shares of Common Stock will be
entitled to such dividends as may be declared from time to time by the Board
of Directors from funds legally available therefor; and upon liquidation will
be entitled to receive pro rata all assets of the Company available for
distribution to such holders. Holders of shares of Common Stock will have no
liability to further calls or to assessment by the Company, and have no
conversion, redemption or preemptive rights to purchase additional shares of
any class of shares of the Company, except that Silicon Graphics will have
certain rights to purchase additional shares of Common Stock as described
under "Arrangements Between the Company and Silicon Graphics--Corporate
Agreement."
PREFERRED STOCK
The Preferred Stock is issuable from time to time in one or more series and
with such designation, rights, privileges, restrictions and conditions for
each series as shall be stated in the resolutions providing for designation
and issue of each such series adopted by the Board of Directors of the
Company. The Board of Directors of the Company is authorized by the
Certificate of Incorporation to determine, among other things, the voting,
dividend, redemption, conversion and liquidation powers, rights and
preferences and the limitations thereon of such series. The Company believes
that the ability of the Board of Directors of the Company to issue one or more
series of Preferred Stock will provide the Company with flexibility in
structuring possible future financings and acquisitions, and in meeting other
corporate needs that may arise. The authorized shares of Preferred Stock, as
well as shares of Common Stock, will be available for issuance without further
action by the Company's stockholders, unless such action is required by
applicable law or the rules of any stock exchange or automated quotation
system on which the Company's securities may be listed or traded.
Although the Board of Directors of the Company has no present plans to issue
any Preferred Stock, it could issue a series of Preferred Stock that could,
depending on the terms of such series, impede the completion of a merger,
tender offer or other takeover attempt. The Board of Directors of the Company
will make any determination to issue such shares based on its judgment as to
the best interests of the Company and its stockholders. The Board of Directors
could issue Preferred Stock with voting and other rights that could adversely
effect the voting power of the holders of the Common Stock and that could
discourage an acquisition attempt through which an acquiror may be able to
change the composition of the Company's Board of Directors, including a tender
offer or other transaction that some, or a majority, of the Company's
stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then current
market price of such stock.
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CORPORATE OPPORTUNITIES
The Company's Restated Certificate of Incorporation will provide that
Silicon Graphics shall have no duty to refrain from engaging in the same or
similar activities or lines of business as the Company, and neither Silicon
Graphics nor any officer or director thereof (except as provided below) shall
be liable to the Company or its stockholders for breach of any fiduciary duty
by reason of any such activities of Silicon Graphics. In the event that
Silicon Graphics acquires knowledge of a potential transaction or matter which
may be a corporate opportunity for both Silicon Graphics and the Company,
Silicon Graphics shall have no duty to communicate or offer such corporate
opportunity to the Company and shall not be liable to the Company or its
stockholders for breach of any fiduciary duty as a stockholder of the Company
by reason of the fact that Silicon Graphics pursues or acquires such corporate
opportunity for itself, directs such corporate opportunity to another person,
or does not communicate information regarding such corporate opportunity to
the Company.
In the event that a director or officer of the Company who is also a
director or officer of Silicon Graphics acquires knowledge of a potential
transaction or matter which may be a corporate opportunity for both the
Company and Silicon Graphics, such director or officer of the Company shall
have fully satisfied and fulfilled the fiduciary duty of such director or
officer to the Company and its stockholders with respect to such corporate
opportunity if such director or officer acts in a manner consistent with the
following policy:
(i) a corporate opportunity offered to any person who is an officer of
the Company, and who is also a director but not an officer of Silicon
Graphics, shall belong to the Company;
(ii) a corporate opportunity offered to any person who is a director but
not an officer of the Company, and who is also a director or officer of
Silicon Graphics, shall belong to the Company if such opportunity is
expressly offered to such person in writing solely in his or her capacity
as a director of the Company, and otherwise shall belong to Silicon
Graphics; and
(iii) a corporate opportunity offered to any person who is an officer of
both the Company and Silicon Graphics shall belong to the Company if such
opportunity is expressly offered to such person in writing solely in his or
her capacity as an officer of the Company, and otherwise shall belong to
Silicon Graphics.
For purposes of the foregoing:
(i) A director of the Company who is chairman of the board of directors
of the Company or of a committee thereof shall not be deemed to be an
officer of the Company by reason of holding such position (without regard
to whether such position is deemed an office of the Company under the By-
laws of the Company), unless such person is a full-time employee of the
Company; and
(ii) (a) the term "Company" shall mean the Company and all corporations,
partnerships, joint ventures, associations and other entities in which the
Company beneficially owns (directly or indirectly) fifty percent or more of
the outstanding voting stock, voting power, partnership interest or similar
voting interests, and (b) the term "Silicon Graphics" shall mean Silicon
Graphics, Inc. and all corporations, partnerships, joint ventures,
associations and other entities (other than the Company, defined in
accordance with clause (a) of this section (ii)) in which Silicon Graphics
beneficially owns (directly or indirectly) fifty percent or more of the
outstanding voting stock, voting power, partnership interests or similar
voting interests.
The foregoing provisions of the Company's Restated Certificate of
Incorporation shall expire on the date that Silicon Graphics ceases to own
beneficially Common Stock representing at least 20% of the total voting power
of all classes of outstanding Common Stock and no person who is a director or
officer of the Company is also a director or officer of Silicon Graphics or
any of its subsidiaries (other than the Company).
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In addition to any vote of the stockholders required by the Company's
Restated Certificate of Incorporation, until the time that Silicon Graphics
ceases to own beneficially Common Stock representing at least 20% of the total
voting power of all classes of outstanding Common Stock, the affirmative vote
of the holders of more than 80% of the total voting power of all classes of
outstanding Common Stock shall be required to alter, amend or repeal in a
manner adverse to the interests of Silicon Graphics and its subsidiaries
(other than the Company), or adopt any provision adverse to the interests of
Silicon Graphics and its subsidiaries (other than the Company), or
inconsistent with, the corporate opportunity provisions described above.
Accordingly, so long as Silicon Graphics beneficially owns Common Stock
representing at least 20% of the total voting power of all classes of
outstanding Common Stock, it can prevent any such alteration, amendment,
repeal or adoption.
Any person purchasing or otherwise acquiring Common Stock will be deemed to
have notice of, and to have consented to, the foregoing provisions of the
Company's Restated Certificate of Incorporation.
CERTIFICATE OF INCORPORATION AND BY-LAW PROVISIONS THAT MAY HAVE AN ANTI-
TAKEOVER EFFECT
Board of Directors. The Company's Certificate of Incorporation will provide
that, subject to any rights of holders of Preferred Stock to elect additional
directors under specified circumstances, the number of directors of the
Company will be not more than 10 and not less than three, with the exact
number to be fixed from time to time as provided in the By-laws. The By-laws
will provide that, subject to any rights of holders of Preferred Stock to
elect additional directors under specified circumstances, the number of
directors will be fixed from time to time exclusively by resolution of the
Company's Board of Directors adopted by the affirmative vote of directors
constituting not less than a majority of the total number of directors that
the Company would have if there were no vacancies on the Board of Directors,
but shall consist of not more than 10 nor less than three directors. The
directors, other than those who may be elected by the holders of Preferred
Stock, will be classified, with respect to the time for which they severally
hold office, into three classes, as nearly equal in number as possible. Each
director will hold office until such person's successor is duly elected and
qualified. In addition, the Certificate of Incorporation and By-laws will
provide that, subject to any rights of holders of Preferred Stock, and unless
the Company's Board of Directors otherwise determines, newly created
directorships resulting from any increase in the number of directors and any
vacancies on the Company's Board of Directors resulting from death,
resignation, disqualification, removal or other cause will be filled by the
affirmative vote of a majority of the remaining directors then in office, even
though less than a quorum, and not by the stockholders. Any director elected
in accordance with the preceding sentence will hold office for the remainder
of the full term of the class of directors in which the new directorship was
created or the vacancy occurred and until such director's successor shall have
been duly elected and qualified. No decrease in the number of directors
constituting the Company's Board of Directors will shorten the term of any
incumbent director. Subject to the rights of holders of Preferred Stock, any
director may be removed from office only for cause by the affirmative vote of
the holders of at least a majority of the Common Stock; provided, however,
that prior to the Trigger Date (as defined below), any director may be removed
from office, with or without cause, by the affirmative vote of the holders of
at least a majority of the Common Stock.
These provisions would preclude a third-party from removing incumbent
directors and simultaneously gaining control of the Company's Board of
Directors by filling the vacancies created by removal with its own nominees.
Under the classified board provision described above, it would take at least
two elections of directors for any individual or group to gain control of the
Company's Board of Directors. Accordingly, these provisions could discourage a
third party from initiating a proxy contest, making a tender offer or
otherwise attempting to gain control of the Company.
No Stockholder Action by Written Consent; Special Meetings. The Certificate
of Incorporation will provide that as of the time at which Silicon Graphics
and its affiliates cease to beneficially own an
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aggregate of at least a majority of the then outstanding shares of Common
Stock (the "Trigger Date"), any action required or permitted to be taken by
the stockholders may be effected only at a duly called annual or special
meeting of stockholders and may not be effected by a written consent in lieu
of such a meeting. Effective as of the Trigger Date, except as otherwise
required by law and subject to the rights of the holders of any Preferred
Stock, special meetings of stockholders of the Company for any purpose may be
called only by certain specified officers of the Company or by any officer at
the request in writing of a majority of the Board of Directors and, effective
as of the Trigger Date, the power of stockholders to call a special meeting is
specifically denied. In addition, prior to the Trigger Date, the Company will
call a special meeting of stockholders promptly upon the request of Silicon
Graphics. These provisions may have the effect of delaying consideration of a
stockholder proposal until the next annual meeting unless a special meeting is
called by the Board of Directors or certain specified officers.
Advance Notice Procedures. The By-laws will provide for an advance notice
procedure for the nomination, other than by or at the direction of the
Company's Board of Directors, of candidates for election as directors as well
as for other stockholder proposals to be considered at annual meetings of
stockholders. In general, notice of intent to nominate a director or raise
matters at such meetings will have to be received in writing by the Company
not less than 60 nor more than 90 days prior to the anniversary of the
previous year's annual meeting of stockholders, and must contain certain
information concerning the person to be nominated or the matters to be brought
before the meeting and concerning the stockholder submitting the proposal. If
the chairman of a meeting determines that an individual was not nominated, or
other business was not brought before the meeting, in accordance with the
advance notice procedures, such individual will not be eligible for election
as a director, or such business will not be conducted at such meeting, as the
case may be.
The advance notice procedures do not apply to Silicon Graphics and its
affiliates prior to the time at which Silicon Graphics and its affiliates
cease to be the beneficial owner of an aggregate of at least a majority of the
then outstanding shares of Common Stock.
Charter Amendments. The Certificate of Incorporation will provide that the
affirmative vote of the holders of at least 80% of the outstanding Common
Stock is required to amend, repeal or adopt any provision inconsistent with
the foregoing provisions of the Certificate of Incorporation. The Certificate
of Incorporation will further provide that the By-laws may be altered, amended
or repealed by the affirmative vote of directors constituting not less than a
majority of the entire Board of Directors (if effected by action of the Board
of Directors) or by the affirmative vote of the holders of at least 80% of the
voting power of all classes of outstanding capital stock, voting together as a
single class (if effected by action of the stockholders).
SECTION 203 OF DELAWARE GENERAL CORPORATION LAW
Section 203 of the Delaware General Corporation Law provides that, subject
to certain exceptions specified therein, an "interested stockholder" of a
Delaware corporation shall not engage in any business combination, including
mergers or consolidations or acquisitions of additional shares of the
corporation, with the corporation for a three-year period following the date
that such stockholder becomes an interested stockholder unless (i) prior to
such date, the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interest stockholder, (ii) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (excluding
certain shares), or (iii) on or subsequent to such date, the business
combination is approved by the board of directors of the corporation and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock of the corporation
which is not owned by the interested stockholder. Except as otherwise
specified in
62
<PAGE>
Section 203, an interested stockholder is defined to include (x) any person
that is the owner of 15% or more of the outstanding voting securities of the
corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within three years immediately prior to the date of determination and (y)
the affiliates and associates of any such person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period. The Company has not
elected to be exempt from the restrictions imposed under Section 203. However,
Silicon Graphics and its affiliates are excluded from the definition of
"interested stockholder" pursuant to the terms of Section 203. The provisions
of Section 203 may encourage persons interested in acquiring the Company to
negotiate in advance with the Company's Board of Directors, since the
stockholder approval requirement would be avoided if a majority of the
directors then in office approves either the business combination or the
transaction which results in any such person becoming an interested
stockholder. Such provisions also may have the effect of preventing changes in
the management of the Company. It is possible that such provisions could make
it more difficult to accomplish transactions which the Company's stockholders
may otherwise deem to be in their best interests.
LIMITATION OF LIABILITY
The Certificate of Incorporation provides that a director of the Company
will not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except, if required by the
Delaware General Corporation Law as amended from time to time, for liability
(i) for breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the Delaware General Corporation Law, which concerns unlawful payments of
dividends, stock purchases or redemptions, of (iv) for any transaction from
which the director derived an improper personal benefit. Neither the amendment
or repeal of such provision will eliminate or reduce the effect of such
provision in respect of any matter occurring, or any cause of action, suit or
claim that, but for such provision, would accrue or arise prior to such
amendment or repeal. While the Certificate of Incorporation provides directors
with protection from monetary damages for breaches from their duty of care, it
does not eliminate such duty. Accordingly, the Certificate of Incorporation
will have no effect on the availability of equitable remedies such as an
injunction or rescission based on a director's breach of his or her duty of
care.
LISTING
Application will be made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "MIPS".
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
63
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have shares of Common
Stock issued and outstanding. All of the shares of Common Stock to be sold in
the Offering will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), unless purchased by an "affiliate" of the Company (as that term is
defined in Rule 144 under the Securities Act ("Rule 144")), in which case such
shares will be subject to the resale limitations of Rule 144. All of the
shares of Common Stock beneficially owned by Silicon Graphics following the
Offering will not have been registered under the Securities Act and may not be
sold in the absence of an effective registration statement under the
Securities Act other than in accordance with Rule 144 or another exemption
from registration. Silicon Graphics has certain rights to require the Company
to effect registration of the shares of Common Stock owned by Silicon
Graphics, which rights may be assigned. See "Arrangements Between the Company
and Silicon Graphics."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned shares
of Common Stock for at least one year, including a person who may be deemed an
"affiliate", is entitled to sell in any three-month period, a number of shares
that does not exceed the greater of 1% of the class of stock being sold or the
average weekly trading volume of the class of stock being sold during the four
calendar weeks immediately preceding such sale. A person who is not deemed an
"affiliate" of the Company at any time during the three months preceding a
sale and who has beneficially owned shares for at least two years is entitled
to sell such shares under Rule 144 without regard to the volume limitations
described above. As defined in Rule 144, an "affiliate" of an issuer is a
person that directly or indirectly through the use of one or more
intermediaries controls, is controlled by, or is under common control with,
such issuer. Rule 144A under the Securities Act ("Rule 144A") provides a non-
exclusive safe harbor exemption from the registration requirements of the
Securities Act for specified resales of restricted securities to certain
institutional investors. In general, Rule 144A allows unregistered resales of
restricted securities to a "qualified institutional buyer", which generally
includes an entity, acting for its own account or for the account of other
qualified institutional buyers, that in the aggregate owns or invests at least
$100 million in securities of unaffiliated issuers. Rule 144A does not extend
an exemption to the offer or sale of securities that, when issued, were of the
same class as securities listed on a national securities exchange or quoted on
an automated quotation system. The shares of Common Stock outstanding as of
the date of this Prospectus would be eligible for resale under Rule 144A
because such shares, when issued, were not of the same class as any listed or
quoted securities. The foregoing summary of Rule 144 and Rule 144A is not
intended to be a complete description thereof.
Prior to the Offering, there has been no public market for the Common Stock,
and no prediction can be made as to the effect, if any, that market sales of
outstanding shares of Common Stock owned by Silicon Graphics, or the
availability of such shares for sale, will have on the market price of the
Common Stock prevailing from time to time. Nevertheless, sales of substantial
amounts of Common Stock beneficially owned by Silicon Graphics in the public
market, or the perception that such sales could occur, could adversely affect
the prevailing market price of the Common Stock offered in the Offering.
Although Silicon Graphics may in the future effect or direct sales or other
dispositions of Common Stock that would reduce its beneficial ownership
interest in the Company, Silicon Graphics has advised the Company that its
current intent is to continue to hold all of the Common Stock beneficially
owned by it following the Offering. However, Silicon Graphics is not subject
to any contractual obligation to retain its controlling interest, except that
Silicon Graphics has agreed not to sell or otherwise dispose of any shares of
Common Stock for a period of 365 days after the date of this Prospectus
without the prior written consent of Deutsche Morgan Grenfell Inc. As a
result, there can be no assurance concerning the period of time during which
Silicon Graphics will maintain its beneficial ownership of Common Stock owned
by it following the Offering.
64
<PAGE>
CERTAIN UNITED STATES FEDERAL TAX
CONSIDERATIONS FOR NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock applicable to Non-U.S. Holders. In general, a "Non-U.S. Holder" is any
holder of Common Stock other than (i) a citizen or resident of the United
States, (ii) a corporation or partnership created or organized in the United
States or under the laws of the United States or of any state (other than any
partnership treated as foreign under U.S. Treasury regulations), (iii) an
estate, the income of which is includable in gross income for United States
federal income tax purposes regardless of its source or (iv) a trust if (a) a
court within the United States is able to exercise primary supervision over
the administration of the trust and (b) one or more United States persons have
the authority to control all substantial decisions of the trust. This
discussion is based on current law and is for general information only. This
discussion does not address aspects of United States federal taxation other
than income and estate taxation and does not address all aspects of income and
estate taxation, nor does it consider any specific facts or circumstances that
may apply to a particular Non-U.S. Holder (including certain U.S.
expatriates). ACCORDINGLY, OFFEREES OF COMMON STOCK ARE URGED TO CONSULT THEIR
TAX ADVISERS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND NON-
UNITED STATES INCOME AND OTHER TAX CONSEQUENCES OF HOLDING AND DISPOSING OF
SHARES OF COMMON STOCK.
An individual may, subject to certain exceptions, be deemed to be a resident
alien (as opposed to a non-resident alien) by virtue of being present in the
United States for at least 31 days in the calendar year and for an aggregate
of at least 183 days during a three-year period ending in the current calendar
year (counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year, and one-sixth
of the days present in the second preceding year). In addition to the
"substantial presence test" described in the immediately preceding sentence,
an alien may be treated as a resident alien if he or she (i) meets a lawful
permanent residence test (a so-called "green card" test) or (ii) elects to be
treated as a U.S. resident and meets the "substantial presence test" in the
immediately following year. Resident aliens are subject to U.S. federal tax as
if they were U.S. citizens.
DIVIDENDS
In general, dividends paid to a Non-U.S. Holder will be subject to United
States withholding tax at a 30% rate (or a lower rate prescribed by an
applicable tax treaty) unless the dividends are either (i) effectively
connected with a trade or business carried on by the Non-U.S. Holder within
the United States, or (ii) attributable to a permanent establishment in the
United States maintained by the Non-U.S. Holder if certain income tax treaties
apply. Dividends effectively connected with such a United States trade or
business or attributable to such a United States permanent establishment
generally will not be subject to United States withholding tax if the Non-U.S.
Holder files the appropriate U.S. Internal Revenue Service ("IRS") form with
the payor of the dividend (which form, under U.S. Treasury regulations
generally effective for payments made after December 31, 1998 ("Final
Regulations"), will require such Non-U.S. Holder to provide a U.S. taxpayer
identification number) and generally will be subject to United States federal
income tax on a net income basis, in the same manner as if the Non-U.S. Holder
were a resident of the United States. A non-U.S. Holder that is a corporation
may be subject to an additional branch profits tax at a rate of 30% (or such
lower rate as may be specified by an applicable treaty) on the deemed or
actual repatriation from the United States of its "effectively connected
earnings and profits" subject to certain adjustments. Under currently
effective United States Treasury regulations (the "Current Regulations"), if
the Company has no definitive knowledge regarding the tax status of a
stockholder, the Company must withhold tax at the rate of 30% on all dividend
payments if such stockholder's address is outside the United States.
65
<PAGE>
To determine the applicability of a tax treaty providing for a lower rate of
withholding, dividends paid to an address in a foreign country generally are
presumed, under current Internal Revenue Service guidelines, to be paid to a
resident of that country absent knowledge to the contrary. Under the Final
Regulations, however, a Non-U.S. Holder of Common Stock who wishes to claim
the benefit of an applicable treaty rate generally will be required to satisfy
applicable certification and other requirements. In addition, under the Final
Regulations, in the case of Common Stock held by a foreign partnership, (x)
the certification requirement will generally be applied to the partners of the
partnership and (y) the partnership will be required to provide certain
information, including a United States taxpayer Identification number. The
Final Regulations also provide look-through rules for tiered partnerships. A
Non-U.S. Holder that is eligible for a reduced rate of U.S. withholding tax
pursuant to a tax treaty may obtain a refund of any excess amounts withheld by
filing an appropriate claim for refund with the IRS.
SALE OF COMMON STOCK
In general, a Non-U.S. Holder will not be subject to United States federal
income tax on any gain realized upon the disposition of such holder's shares
of Common Stock unless: (i) the gain is effectively connected with a trade or
business carried on by the Non-U.S. Holder within the United States, or
alternatively, if certain tax treaties apply, is attributable to a permanent
establishment in the United States maintained by the Non-U.S. Holder (and in
either case, the branch profits tax discussed above may also apply if the Non-
U.S. Holder is a corporation); (ii) the Non-U.S. Holder is an individual who
holds shares of Common Stock as a capital asset and is present in the United
States for 183 days or more in the taxable year of disposition, and either (a)
such individual has "tax home" (as defined for United States federal income
tax purposes) in the United States (unless the gain from the disposition is
attributable to an office or other fixed place of business maintained by such
Non-U.S. Holder in a foreign country and such gain has been subject to a
foreign income tax equal to at least 10% of the gain derived from such
disposition), or (b) the gain is attributable to an office or other fixed
place of business maintained by such individual in the United States; or (iii)
the Company is or has been a United States real property holding corporation
(a "USRPHC") for United States federal income tax purposes (which the Company
does not believe that it is or is likely to become) at any time within the
shorter of the five-year period preceding such disposition or such Non-U.S.
Holder's holding period. If the Company were or were to become a USRPHC at any
time during this period, gains realized upon a disposition of Common Stock by
a Non-U.S. Holder which did not directly or indirectly own more than 5% of the
Common Stock during this period generally would not be subject to United
States federal income tax, provided that the Common Stock had been regularly
traded on an established securities market.
ESTATE TAX
Common Stock owned or treated as owned by an individual who is not a citizen
or resident (as defined for United States federal estate tax purposes) of the
United States at the time of death will be includable in the individual's
gross estate for United States federal estate tax purposes (unless an
applicable estate tax treaty provides otherwise), and therefore may be subject
to United States federal estate tax.
BACKUP WITHHOLDING, INFORMATION REPORTING AND OTHER REPORTING REQUIREMENTS
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to, and the tax withheld with respect to, each Non-
U.S. Holder. These reporting requirements apply regardless of whether
withholding was reduced or eliminated by an applicable tax treaty. Copies of
this information also may be made available under the provisions of a specific
treaty or agreement with the tax authorities in the country in which the Non-
U.S. Holder resides or is established.
66
<PAGE>
Under the Current Regulations, United States backup withholding tax (which
generally is imposed at the rate of 31% on certain payments to persons that
fail to furnish the information required under the United States information
reporting requirements) and information reporting requirements (other than
those discussed above) generally will not apply to dividends paid on Common
Stock to a Non-U.S. Holder at an address outside the United States. Backup
withholding and information reporting generally will apply to dividends paid
on shares of Common Stock to a Non-U.S. Holder at an address in the United
States, if such holder fails to establish an exemption or to provide certain
other information to the payor. Under the Final Regulations, however, a Non-
U.S. Holder of Common Stock that fails to certify its Non-U.S. Holder status
in accordance with the requirements of the Final Regulations may be subject to
United States backup withholding on payments of dividends.
The payment of proceeds from the disposition of Common Stock to or through a
United States office of a broker will be subject to information reporting and
backup withholding unless the owner, under penalties of perjury, certifies,
among other things, such owner's status as a Non-U.S. Holder or otherwise
establishes an exemption. The payment of proceeds from the disposition of
Common Stock to or through a non-U.S. office of a non-U.S. broker generally
will not be subject to backup withholding and information reporting, except as
noted below. In the case of proceeds from a disposition of Common Stock paid
to or through a non-U.S. office of a broker that is (i) a United States
person, (ii) a "controlled foreign corporation" for United States federal
income tax purposes or (iii) a foreign person 50% or more of whose gross
income from certain periods is effectively connect with a United States trade
or business, information reporting (but not backup withholding) will apply
unless the broker has documentary evidence in its files that the owner is a
Non-U.S. Holder (and the broker has no actual knowledge of the country).
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to a Non-U.S. Holder will be refunded
or credited against the Non-U.S. United States federal income tax liability,
if any, provided that the required information is furnished to the IRS.
67
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Deutsche Morgan Grenfell Inc.,
BancAmerica Robertson Stephens and Hambrecht & Quist LLC are acting as
representatives (the "Representatives") have severally agreed, subject to the
terms and conditions contained in the Underwriting Agreement (the form of
which will be filed as an exhibit to the Company's Registration Statement, of
which this Prospectus is a part), to purchase from the Company and Silicon
Graphics the respective number of shares of Common Stock indicated below
opposite their respective names. The Underwriters are committed to purchase
all of the shares, if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Deutsche Morgan Grenfell Inc. .....................................
BancAmerica Robertson Stephens.....................................
Hambrecht & Quist LLC..............................................
-------
Total............................................................
=======
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions.
The Representatives have advised the Company and Silicon Graphics that the
Underwriters propose initially to offer the Common Stock to the public at the
initial public offering price set forth on the cover page of this Prospectus.
The Underwriters may allow selected dealers (who may include the Underwriters)
a concession of not more than $ per share. The selected dealers may reallow
a concession of not more than $ per share to certain other dealers. After
the initial public offering, the price and concessions and reallowances to
dealers and other selling terms may be changed by the Representatives. The
Common Stock is offered subject to receipt and acceptance by the Underwriters,
and to certain other conditions, including the right to reject orders in whole
or in part. The Underwriters have informed the Company that they do not intend
to sell any of the shares of Common Stock offered hereby to accounts over
which they exercise discretionary authority.
Silicon Graphics has granted an option to the Underwriters to purchase up to
a maximum of additional shares of Common Stock to cover over-allotments,
if any, at the initial public offering price, less the underwriting discount
set forth on the cover page of this Prospectus. Such option may be exercised
at any time until 30 days after the date of this Prospectus. To the extent the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase such additional shares
in approximately the same proportion as set forth in the above table, and
Silicon Graphics will be obligated to sell such shares to the Underwriters.
In connection with this Offering, the Company, the officers and directors of
the Company, and Silicon Graphics have agreed, subject to certain exceptions,
not to offer or sell or otherwise transfer any Common Stock until the
expiration of 365 days following the closing of this Offering without the
prior written consent of Deutsche Morgan Grenfell Inc.
The Underwriting Agreement will provide that the Company and Silicon
Graphics will indemnify the several Underwriters and their controlling persons
against certain liabilities, including civil liabilities under the Securities
Act, or will contribute to payments the Underwriters may be required to make
in respect thereof.
68
<PAGE>
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiations
among the Company, Silicon Graphics (as selling stockholder) and the
Representatives. The principal factors to be considered in determining the
public offering price of the Common Stock will include the information set
forth in this Prospectus and otherwise available to the Representatives; the
history and the prospects for the industry in which the Company will compete;
the ability of the Company's management; the prospects for future earnings of
the Company; the present state of the Company's development and its current
financial condition; the general condition of the securities markets at the
time of the Offering; and the recent market prices of, and the demand for,
publicly traded common stock of generally comparable companies. Each of the
Representatives has informed the Company that it currently intends to make a
market in the Common Stock subsequent to the effectiveness of the Offering,
but there can be no assurance that the Representatives will take any action to
make a market in any securities of the Company.
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase for the purpose of pegging,
fixing or maintaining the price of the Common Stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created
in connection with this Offering. A penalty bid means an arrangement that
permits the Underwriters to reclaim a selling concession from a syndicate
member in connection with this offering when shares of Common Stock sold by
the syndicate member are purchased in syndicate covering transactions Such
transactions may be effected on the Nasdaq Stock Market, in the over-the-
counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
The Underwriters have reserved for sale, at the initial public offering
price, shares of Common Stock for certain employees and semiconductor
manufacturing partners of the Company and certain other persons in the United
States and, subject to local laws, internationally, who have expressed an
interest in purchasing such shares in the Offering. Such employees,
manufacturing partners and other persons are expected to purchase, in the
aggregate, not more than % of the Common Stock offered in the Offering. The
number of shares available for sale to the general public in the Offering will
be reduced to the extent such persons purchase such reserved shares. Any
reserved shares not so purchased will be offered to the public on the same
basis as the other shares offered hereby.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Shearman & Sterling, San Francisco, California, and for the
Underwriters by Venture Law Group, A Professional Corporation, Menlo Park,
California.
EXPERTS
The financial statements of the Company at June 30, 1996 and 1997 and
December 31, 1997 and for each of the three years in the period ended June 30,
1997 and for the six months ended December 31, 1997, appearing in this
Prospectus and in the Registration Statement, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.
69
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, a Registration Statement (together with
all amendments and exhibits, the "Registration Statement") on Form S-1 under
the Securities Act with respect to the Common Stock offered in the Offering.
This Prospectus, filed as part of that Registration Statement, does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock, reference is made to the Registration Statement
and the exhibits and schedules filed as a part thereof. Statements contained
in this Prospectus regarding the contents of any contract or any other
document are not necessarily complete and, in each instance, reference is
hereby made to the copy of such contract or document filed as an exhibit to
the Registration Statement. The Registration Statement, including exhibits and
schedules thereto, may be inspected at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549; 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and
7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material may be obtained from the Public Reference Section of the Commission
located at 450 Fifth Street, N.W., Washington, D.C.,20549 at prescribed rates.
The Registration Statement is also publicly available through the Commission's
web site at http://www.sec.gov.
The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934 (the "Exchange Act"). As a result of the
Offering, the Company will become subject to the informational requirements of
the Exchange Act. The Company will fulfill its obligations with respect to
such requirements by filing periodic reports and other information with the
Securities and Exchange Commission. In addition, the Company intends to
furnish to its stockholders annual reports containing consolidated financial
statements audited by an independent public accounting firm and quarterly
reports for the first three quarters of each fiscal year containing unaudited
consolidated financial information.
70
<PAGE>
MIPS TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................. F-2
Balance Sheets ............................................................ F-3
Statements of Operations .................................................. F-4
Notes to Financial Statements.............................................. F-5
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
MIPS Technologies, Inc.
We have audited the accompanying balance sheets of MIPS Technologies, Inc.
(the "Company") as of June 30, 1996 and 1997 and December 31, 1997, and the
related statements of operations for each of the three years in the period
ended June 30, 1997 and the six months ended December 31, 1997. The financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MIPS Technologies, Inc. at
June 30, 1996 and 1997 and December 31, 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1997 and for the six months ended December 31, 1997, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
January 29, 1998, except
for Note 16, as to which
the date is May ,1998
- -------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon completion of the
events described in Note 16 to the financial statements.
/s/ ERNST & YOUNG LLP
Palo Alto, California
April 17, 1998
F-2
<PAGE>
MIPS TECHNOLOGIES, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
STOCKHOLDERS' AND
BUSINESS EQUITY
JUNE 30, (NOTE 1)
--------------- DECEMBER 31, DECEMBER 31,
1996 1997 1997 1997
------- ------- ------------ -----------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.......................... $ -- $ -- $ --
Accounts receivable........... 527 381 381
Prepaid expenses and other
current assets............... 2,047 2,775 2,866
------- ------- -------
Total current assets........ 2,574 3,156 3,247
Equipment and furniture, net.... 12,620 15,190 12,265
Employee notes receivable....... 95 1,328 1,212
------- ------- -------
$15,289 $19,674 $16,724
======= ======= =======
LIABILITIES AND STOCKHOLDERS'
AND BUSINESS EQUITY
Current liabilities:
Accounts payable.............. $ 3,935 $ 5,834 $ 4,119
Accrued liabilities........... 3,562 5,437 7,226
Current portion of capital
lease obligations............ 408 331 113
------- ------- -------
Total current liabilities... 7,905 11,602 11,458
Capital lease obligations, less
current portion................ 331 -- --
Commitments and contingencies
Stockholders' and business
equity:
Preferred stock, $0.001 par
value; 50,000,000 shares
authorized pro forma; no
shares issued and outstanding
pro forma....................
Common stock, $0.001 par
value; 1,000 shares
authorized actual;
150,000,000 shares authorized
pro forma; 100 shares issued
and outstanding actual,
shares issued and outstanding
pro forma.................... -- -- -- $
Additional paid-in capital.... -- -- --
Business equity............... 7,053 8,072 5,266
------- ------- ------- -------
Total stockholders' and
business equity............ 7,053 8,072 5,266 $
------- ------- ------- =======
$15,289 $19,674 $16,724
======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
MIPS TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
---------------------------- --------------------
1995 1996 1997 1996 1997
-------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Royalties................ $ 13,576 $ 17,916 $ 33,992 $ 7,393 $ 26,759
Contract revenue......... 16,103 18,627 3,115 1,981 827
-------- -------- -------- -------- --------
Total revenue.......... 29,679 36,543 37,107 9,374 27,586
Costs and expenses:
Cost of contract revenue. 7,364 5,580 1,345 1,095 375
Research and development. 39,033 48,402 68,827 31,031 35,127
Sales and marketing...... 6,761 6,026 6,170 3,037 2,910
General and
administrative.......... 4,272 4,601 4,750 2,240 2,295
Restructuring charge..... -- -- -- -- 1,414
-------- -------- -------- -------- --------
Total costs and
expenses.............. 57,430 64,609 81,092 37,403 42,121
-------- -------- -------- -------- --------
Operating loss............. (27,751) (28,066) (43,985) (28,029) (14,535)
Interest expense........... (69) (99) (50) (30) (11)
-------- -------- -------- -------- --------
Net loss................... $(27,820) $(28,165) $(44,035) $(28,059) $(14,546)
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. FORMATION AND DESCRIPTION OF BUSINESS
FORMATION OF MIPS TECHNOLOGIES, INC. (THE "COMPANY"). In June 1992, Silicon
Graphics formed the Company following the merger of MIPS Computer Systems,
Inc. into Silicon Graphics which was accounted for as pooling of interests.
MIPS Computer Systems, Inc. was founded in 1984 and was engaged in the design
and development of RISC microprocessors for the computer systems and embedded
markets. Silicon Graphics adopted the MIPS architecture for its computer
systems in 1988 and acquired MIPS Computer Systems, Inc. in 1992. Following
the acquisition, Silicon Graphics continued the MIPS microprocessor business
through its MIPS Group (a division of Silicon Graphics), which focused
primarily on the development of high-performance microprocessors for Silicon
Graphics' workstations and servers. Until the last few years, cost
considerations limited the broader use of these microprocessors. However, as
the cost to design and manufacture microprocessors based on the MIPS
technology decreased, the MIPS Group sought to penetrate the consumer market,
both through supporting and coordinating the efforts of the MIPS semiconductor
partners and, most notably, by partnering with Nintendo in its design of the
Nintendo 64 video game player and related cartridges. Revenues related to
sales of Nintendo 64 video game players and related cartridges currently
account for the substantial majority of the Company's revenue. In order to
increase the focus of the MIPS Group on the design and development of
microprocessor applications dedicated to the embedded market, in December
1997, Silicon Graphics initiated a plan to separate the business of the MIPS
Group from its other operations. To this end, Silicon Graphics intends to
transfer to the Company all assets, liabilities and intellectual property
related to this business (see Note 16).
BASIS OF PRESENTATION. The accompanying financial statements reflect the
operations of the Company's predecessor, the MIPS Group, through December 31,
1997. The accompanying balance sheets have been prepared using the historical
basis of accounting and include all of the assets and liabilities specifically
identifiable to the Company and, for certain liabilities that are not
specifically identifiable, estimates have been used to allocate a portion of
Silicon Graphics' liabilities to the Company. Silicon Graphics' corporate
accounting systems are not designed to track cash receipts and payments and
liabilities on a business specific basis. Cash management and processes
related to receivables, payables, payroll and other activities for the Company
are done by Silicon Graphics on a centralized basis. Given these constraints,
certain supplemental cash flow information is presented in lieu of a statement
of cash flows (see Note 13).
The statements of operations include all revenue and costs attributable to
the Company, including a corporate allocation of the costs of facilities and
employee benefits. Additionally, incremental corporate administration, finance
and management costs are allocated to the Company based on certain assumptions
(see Note 11).
All of the allocations and estimates in the financial statements are based
on assumptions that management believes are reasonable under the
circumstances. However, these allocations and estimates are not necessarily
indicative of the costs that would have resulted if the Company had been
operated on a stand-alone basis nor are they indicative of future costs to
support the operations of the Company.
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY. Upon the closing of the Offering,
shares of the Company's common stock will be outstanding, of which
will be held by Silicon Graphics, and the carrying value of Silicon Graphics'
investment in the Company (the business equity) will be transferred to common
stock and additional paid-in capital of the Company. At December 31, 1997, the
unaudited pro forma balance sheet is adjusted for the transfer as disclosed on
the face of the accompanying balance sheets.
F-5
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS. In the opinion of management, the unaudited
financial statements include all adjustments, consisting only of normal,
recurring accruals, necessary to present fairly the Company's results of
operations for the six months ended December 31, 1996. The results of
operations for the six months ended December 31, 1997 are not necessarily
indicative of the results to be expected for the entire fiscal year.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
REVENUE RECOGNITION. The Company's revenue consists of royalties and
contract revenue. Contract revenue includes technology license fees,
nonrefundable prepaid royalties and engineering service fees. Certain license
agreements provide for product support which typically cover periods of less
than three months. The Company typically recognizes contract revenue upon the
execution of a license agreement and transfer of the technology, or upon the
delivery of engineering service milestones, as appropriate. The Company
recognizes royalties from a licensee in the quarter in which it receives the
report detailing shipments of devices incorporating the Company's technology
by such licensee in the prior quarter.
EQUIPMENT AND FURNITURE. Equipment and furniture is stated at cost and
depreciation is computed using the straight-line method. Useful lives of three
to seven years are used for equipment and furniture and fixtures.
STOCK COMPENSATION. The Company will follow the disclosure requirements of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("SFAS 123"). As allowed by SFAS 123, the Company will
account for stock-based employee compensation arrangements under the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and will provide pro
forma disclosures of net income and earnings per share as if the fair value
basis method prescribed by SFAS 123 had been applied in measuring employee
compensation expense.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting
Standards Board issued Statement No. 130, Reporting Comprehensive Income
("SFAS 130"), and Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"). The Company is required to
adopt these Statements in fiscal 1999. SFAS 130 establishes new standards for
reporting and displaying comprehensive income and its components. SFAS 131
requires disclosure of certain information regarding operating segments,
products and services, geographic areas of operation and major customers.
Adoption of these Statements is expected to have no impact on the Company's
financial position, results of operations or cash flows.
F-6
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. BUSINESS RISK AND CUSTOMER CONCENTRATION
The Company operates in the intensely competitive semiconductor industry
which has been characterized by price erosion, rapid technological change,
short product life cycles, cyclical market patterns and heightened foreign and
domestic competition. Significant technological changes in the industry could
affect operating results adversely. Due to the Company's focus on
microprocessor designs dedicated to the embedded market, including digital
consumer products, the Company can be expected to experience seasonal
fluctuations in its revenue and operating results.
The Company markets and licenses its technology to a limited number of
customers and generally does not require collateral. At June 30, 1996 and
1997, one customer accounted for 100% of accounts receivable and at December
31, 1997, one customer accounted for 62% of accounts receivable. During the
year ended June 30, 1995, revenue from two customers represented an aggregate
of 77% of total revenue; during the year ended June 30, 1996, revenue from
three customers represented an aggregate of 71% of total revenue and during
the year ended June 30, 1997 and the six-month period ended December 31, 1997,
revenue from two customers represented an aggregate of 83% and 87% of total
revenue, respectively. The Company expects that a significant portion of its
future revenue will continue to be generated by a limited number of customers.
The nonrenewal or expiration of contracts between the Company and its current
customers could adversely affect near-term future operating results.
A substantial portion of the Company's revenue is derived from outside the
United States (see Note 15). The Company anticipates that revenue from
international customers will continue to represent a substantial portion of
its total revenue. To date, substantially all of the revenue from
international customers has been denominated in U.S dollars. However, to the
extent that sales to digital consumer product manufacturers by the Company's
manufacturing partners are denominated in foreign currencies, royalties
received by the Company on such sales could be subject to fluctuations in
currency exchange rates. In addition, if the effective price of the technology
sold by the Company to its partners were to increase as a result of
fluctuations in foreign currency exchange rates, demand for the Company's
technology could fall which would, in turn, reduce the Company's royalties.
The relative significance of the Company's international operations exposes it
to a number of additional risks including political and economic instability,
longer accounts receivable collection periods and greater difficulty in
collection of accounts receivable, reduced or limited protection for
intellectual property, export license requirements, tariffs and other trade
barriers and potentially adverse tax consequences. There can be no assurance
that the Company will be able to sustain revenue derived from international
customers or that the foregoing factors will not have a material adverse
effect on the Company's business, operating results and financial condition.
NOTE 4. RESTRUCTURING CHARGE
The restructuring charge recorded in the six months ended December 31, 1997
includes $1.1 million in severance and related costs (approximately 35
employees, a majority of which supported research and development activities)
and $314,000 in fixed asset write-downs related to the Company's shift in
strategic direction. Cash outlays for severance and related costs are expected
to be $1.1 million in the second half of fiscal 1998.
NOTE 5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
The significant portion of prepaid expenses and other current assets for all
periods presented represents amounts paid by the Company in advance for
maintenance contracts on its computer-aided design tools. These contracts
typically cover a one-year period, over which time the cost is amortized.
F-7
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. EMPLOYEE NOTES RECEIVABLE
The Company has loans outstanding to employees and an officer. Such loans
are payable upon maturity, which ranges from three to five years from
issuance. Approximately $95,000, $777,000 and $660,000 of these loans at June
30, 1996 and 1997 and December 31, 1997, respectively, relate to loans which
are forgiven by the Company on a monthly basis as the employee or officer
remains employed by the Company. Upon termination of employment, the
unamortized balance of the loan becomes due. Such forgivable loans bear no
interest. The balance of the loans bear interest at rates ranging from 7.13%
to 7.25%.
NOTE 7. EQUIPMENT AND FURNITURE
The components of equipment and furniture are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------ DECEMBER 31,
1996 1997 1997
-------- -------- ------------
<S> <C> <C> <C>
Equipment................................... $ 34,700 $ 45,918 $ 43,861
Equipment under capital lease............... 2,560 1,198 1,198
Furniture and fixtures...................... 458 516 461
-------- -------- --------
37,718 47,632 45,520
Accumulated depreciation.................... (25,098) (32,442) (33,255)
-------- -------- --------
Net equipment and furniture................. $ 12,620 $ 15,190 $ 12,265
======== ======== ========
</TABLE>
NOTE 8. ACCRUED LIABILITIES
The components of accrued liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Accrued compensation and employee related
expenses....................................... $3,318 $4,163 $6,057
Development and marketing funds................. 159 1,053 788
Other accrued liabilities....................... 85 221 381
------ ------ ------
$3,562 $5,437 $7,226
====== ====== ======
</TABLE>
Accrued compensation and employee related expenses at December 31, 1997
include $1.1 million in accrued severance. The development and marketing funds
represent amounts received from certain of the Company's licensees to be used
in joint development and marketing programs.
NOTE 9. CAPITAL LEASE OBLIGATIONS
The Company has leased equipment under capital lease obligations maturing in
fiscal 1998.
NOTE 10. INCOME TAXES
The net losses incurred for the fiscal years ended June 30, 1995, 1996, and
1997, as well as for the six-month periods ended December 31, 1996 and 1997,
are 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 the Company will not receive any benefit for losses incurred up to the
Closing Date, no income tax benefit has been reflected for the periods
presented.
F-8
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Subsequent to the Separation and the Offering, the Company, while still a
part of Silicon Graphics' consolidated group for federal income tax purposes,
will become responsible for its income taxes through a tax sharing agreement
with Silicon Graphics. Therefore, to the extent the Company produces taxable
income, loss or credits, it will make or receive payments as though it filed
separate federal, state, and local income tax returns.
The Company and Silicon Graphics intend to enter into a tax sharing
agreement pursuant to which they will make payments between them such that,
with respect to any period, the amount of taxes to be paid by the Company,
subject to certain adjustments, will be determined as though the Company were
to file separate federal, state and local income tax returns.
In general, the Company will be included in Silicon Graphics' consolidated
group for federal income tax purposes for so long as Silicon Graphics
beneficially owns at least 80% of the total voting power and value of the
outstanding Common Stock.
At June 30, 1996 and 1997, the Company's net deferred tax assets and
liabilities were immaterial.
NOTE 11. RELATED PARTY TRANSACTIONS
CASH. The Company has utilized Silicon Graphics' centralized cash management
services and processes related to receivables, payables, payroll and other
activities. The Company's net cash requirements have been funded through the
business equity account.
CORPORATE SERVICES. Silicon Graphics allocates a portion of its domestic
corporate expenses to its divisions, including the Company. In addition, in
accordance with Staff Accounting Bulletin No. 55, certain additional
allocations have been reflected in these financial statements. These expenses
have included corporate communications, management, compensation and benefits
administration, payroll, accounts payable, income tax compliance, treasury and
other administration and finance overhead. Allocations and charges were based
on either a direct cost pass-through or a percentage allocation for such
services provided based on factors such as net sales, headcount and relative
expenditure levels. Such allocations and corporate charges totaled $7.8
million, $9.0 million, $11.0 million, $4.6 million and $6.2 million for the
years ended June 30, 1995, 1996 and 1997, and the six-month periods ended
December 31, 1996 and December 31, 1997, respectively.
Management believes that the basis used for allocating corporate services is
reasonable. However, the terms of these transactions may differ from those
that would result from transactions among unrelated parties.
NOTE 12. BUSINESS EQUITY
Business equity represents Silicon Graphics' ownership interest in the
recorded net assets of the Company. All cash transactions and intercompany
transactions are reflected in this amount. A summary of activity is as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, SIX MONTHS ENDED
---------------------------- DECEMBER 31,
1995 1996 1997 1997
-------- -------- -------- ----------------
<S> <C> <C> <C> <C>
Beginning balance............. $ 745 $ (36) $ 7,053 $ 8,072
Net loss...................... (27,820) (28,165) (44,035) (14,546)
Net intercompany funding...... 27,039 35,254 45,054 11,740
-------- -------- -------- --------
Ending balance................ $ (36) $ 7,053 $ 8,072 $ 5,266
======== ======== ======== ========
</TABLE>
F-9
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13. SUPPLEMENTAL CASH FLOW INFORMATION
As described in Note 1, the Company's cash management system is not designed
to trace centralized cash and related financing transactions to the specific
cash requirements of the business. In addition, the Company's corporate
transaction systems are not designed to track certain liabilities and cash
receipts and payments on a business specific basis. Given these constraints,
the following data are presented to facilitate analysis of key components of
cash flow activity (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
---------------------------- --------------------
1995 1996 1997 1996 1997
-------- -------- -------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss................. $(27,820) $(28,165) $(44,035) $(28,059) $(14,546)
Depreciation............. 6,092 8,201 7,344 3,305 3,479
Decrease (increase) in
accounts receivable..... (309) (218) 146 (404) --
Decrease (increase) in
prepaid expenses and
other current assets.... (343) (300) (728) 52 (91)
Decrease (increase) in
employee notes
receivable.............. (123) 28 (1,233) (295) 116
Increase (decrease) in
accounts payable and
accrued liabilities..... 3,548 (6,714) 3,773 3,787 74
-------- -------- -------- -------- --------
Cash flow used in
operating activities,
excluding Silicon
Graphics financing.... (18,955) (27,168) (34,733) (21,614) (10,968)
Investing activities:
Capital expenditures..... (8,084) (7,257) (9,913) (2,468) (554)
Financing activities:
Payments on capital lease
obligations............. -- (829) (408) (200) (218)
-------- -------- -------- -------- --------
Net financing provided from
Silicon Graphics*......... $(27,039) $(35,254) $(45,054) $(24,282) $(11,740)
======== ======== ======== ======== ========
Interest paid.............. $ 69 $ 99 $ 50 $ 30 $ 11
======== ======== ======== ======== ========
</TABLE>
- --------
* The cash flows from operating activities, investing activities and financing
activities do not necessarily represent the cash flows of the Company, or
the timing of such cash flows, had it operated on a stand-alone basis, nor
are they indicative of future cash flows.
NOTE 14. CONTINGENCIES
From time to time, the Company receives communications from third parties
asserting patent or other rights covering the Company's products and
technologies. Based upon the Company's evaluation, it may take no action or it
may seek to obtain a license. There can be no assurance in any given case that
a license will be available on terms the Company considers reasonable, or that
litigation will not ensue.
Management is not aware of any pending disputes that would be likely to have
a material adverse effect on the Company's business, results of operations or
financial condition.
F-10
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15. INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION
The Company operates in one industry segment. The Company's revenue by
geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
----------------------- -------------------
1995 1996 1997 1996 1997
------- ------- ------- ---------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States....................... $ 3,140 $ 6,123 $ 5,066 $2,128 $ 2,827
Export:
Japan............................. 26,539 22,120 32,041 7,246 24,509
Europe............................ -- 6,300 -- -- 250
Rest of World..................... -- 2,000 -- -- --
------- ------- ------- ------ -------
Total revenue................... $29,679 $36,543 $37,107 $9,374 $27,586
======= ======= ======= ====== =======
</TABLE>
NOTE 16. SUBSEQUENT EVENTS
In April 1998, the Board of Directors of the Company approved (i) the filing
of a registration statement by the Company under the Securities Act of 1933,
as amended, relating to an initial public offering of the Company's Common
Stock and (ii) an amendment and restatement of the Company's Certificate of
Incorporation providing for, among other things, an increase in the number of
authorized shares of Common Stock to 150,000,000 shares and the authorization
of 50,000,000 shares of Preferred Stock. The Restated Certificate of
Incorporation will become effective upon its approval by the Company's
stockholder and its filing with the Secretary of State of the State of
Delaware.
In April 1998, the Board of Directors of the Company approved a transaction
whereby Silicon Graphics will transfer to the Company the assets and
liabilities related to the design and development of microprocessor
intellectual property for the embedded market (the "Separation"). In
connection with the Separation, the Company and Silicon Graphics will enter
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 so
long as Silicon Graphics owns a majority of the Company's outstanding Common
Stock. Furthermore, the Company and Silicon Graphics will enter into a
Management Services Agreement pursuant to which Silicon Graphics will provide
certain services to the Company following the Separation on an interim or
transitional basis.
F-11
<PAGE>
NO DEALER, SALESPERSON OR OTHER
INDIVIDUAL HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR MAKE
ANY REPRESENTATION NOT CONTAINED
IN THIS PROSPECTUS IN CONNECTION
WITH THE OFFERING MADE BY THIS
PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTA-
TION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL, OR A SO-
LICITATION OF AN OFFER TO BUY,
THE COMMON STOCK IN ANY JURIS-
DICTION WHERE, OR TO ANY PERSON
TO WHOM, IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY SALE MADE HERE-
UNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE ANY IMPLICATION
THAT THERE HAS NOT BEEN ANY
CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AF-
FAIRS OF THE COMPANY SINCE THE
DATE AS OF WHICH SUCH INFORMA-
TION IS GIVEN.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................................................... 3
The Company............................................................. 5
Risk Factors............................................................ 7
Use of Proceeds......................................................... 17
Dividend Policy......................................................... 17
Capitalization.......................................................... 18
Dilution................................................................ 19
Selected Financial Data................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 21
Business................................................................ 29
Management.............................................................. 40
Arrangements Between the Company and Silicon Graphics................... 51
Principal and Selling Stockholder....................................... 58
Description of Capital Stock............................................ 59
Shares Eligible for Future Sale......................................... 64
Certain United States Federal Tax Considerations for Non-United States
Holders................................................................ 65
Underwriting............................................................ 68
Legal Matters........................................................... 69
Experts................................................................. 69
Additional Information.................................................. 70
Index to Financial Statements........................................... F-1
</TABLE>
UNTIL , 1998 (25
DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE
COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
MIPS TECHNOLOGIES, INC.
SHARES
COMMON STOCK
DEUTSCHE MORGAN GRENFELL
BANCAMERICA ROBERTSON STEPHENS
HAMBRECHT & QUIST
PROSPECTUS
, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Company in connection with the sale
of the Common Stock being registered. All of the amounts shown are estimates
except for the SEC registration fee, the NASD filing fee and the Nasdaq
National Market Application Fee.
<TABLE>
<S> <C>
SEC Registration Fee......................................... $ 26,123
NASD Filing Fee.............................................. 8,090
Nasdaq National Market Application Fee....................... 95,000
Blue Sky Qualification Fees and Expenses..................... 5,000
Printing and Engraving Expenses.............................. 175,000
Legal Fees and Expenses...................................... 450,000
Accounting Fees and Expenses................................. 275,000
Miscellaneous................................................ 15,787
----------
Total...................................................... $1,050,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") empowers a
Delaware corporation to indemnify any persons who are, or are threatened to be
made, parties to any threatened, pending or completed legal action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of such corporation), by reason of the fact
that such person is or was an officer or director of such corporation or is or
was serving at the request of such corporation as a director, officer,
employee or agent of another corporation or enterprise. The indemnity may
include expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that such officer or
director acted in good faith and in a manner he or she reasonably believed to
be in or not opposed to the best interests of the corporation, and, in the
case of criminal proceedings, had no reasonable cause to believe his or her
conduct was illegal. A Delaware corporation may indemnify officers and
directors against expenses (including attorneys' fees) in connection with the
defense or settlement of an action by or in the right of the corporation under
the same conditions, except that no indemnification is permitted without
judicial approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him or her against expenses which such officer or director actually
and reasonably incurred. The Restated Certificate of Incorporation of the
Company provides for indemnification of the officers and directors of the
Company to the full extent permitted by applicable law.
In accordance with Delaware law, the Restated Certificate of Incorporation
of the Company contains a provision to limit the personal liability of
directors of the Company for violations of their fiduciary duty. This
provision eliminates each director's liability to the Company or its
stockholders for monetary damages except (i) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL, providing for liability
of directors for unlawful payment of dividends or unlawful stock purchases or
redemptions or (iv) for any transaction from which a director derived an
improper personal benefit. The effect of this provision is to eliminate the
personal liability of directors for monetary damages for actions involving a
breach of their fiduciary duty of care, including any such actions involving
gross negligence.
II-1
<PAGE>
Pursuant to the underwriting agreement between the Company, Silicon Graphics
and the underwriters filed as an exhibit to this Registration Statement, the
underwriters a party thereto have agreed to indemnify each officer and
director of the Company and Silicon Graphics, Inc. and each person, if any,
who controls the Company and Silicon Graphics, Inc. within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), against certain
liabilities, including liabilities under said Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Within the past three years, the Company has not issued or sold any
unregistered securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Form of Certificate of Incorporation of the Registrant
3.2 Form of By-Laws of the Registrant
4.1 Form of Common Stock Certificate
5.1 Opinion of Shearman & Sterling
10.1 Form of Separation Agreement*
10.2 Form of Corporate Agreement
10.3 Form of Management Services Agreement
10.4 Form of Tax Sharing Agreement
10.5 Form of Technology Agreement*
10.6 Form of Trademark Agreement*
10.7.1 Joint Development and License Agreement between Nintendo Co., Ltd.
and Nintendo of America Inc. on the one hand and Silicon
Graphics, Inc. and MIPS Technologies, Inc. on the other hand (the
"Joint Development and License Agreement")*+
10.7.2 First Addendum to the Joint Development and License Agreement*+
10.7.3 Second Addendum to the Joint Development and License Agreement*+
10.7.4 Third Addendum to the Joint Development and License Agreement*+
10.8.1 Technology License Agreement between NEC Corporation and MIPS
Computer Systems, Inc. (predecessor to MIPS Technologies, Inc.)
(the "Technology License Agreement")*+
10.8.2 Supplemental Agreement--I to the Technology License Agreement*+
10.8.3 Supplemental Agreement--II to the Technology License Agreement*+
10.8.4 Amendment No. 1 to Supplemental Agreement--II to the Technology
License Agreement*+
10.8.5 Supplemental Agreement--III to the Technology License Agreement*+
10.8.6 Supplemental Agreement--IV to the Technology License Agreement*+
10.8.7 Supplemental Agreement--V to the Technology License Agreement*+
10.8.8 Supplemental Agreement--VI to the Technology License Agreement*+
10.8.9 Addendum to the Supplemental Agreement--VI to the Technology
License Agreement*+
10.8.10 Supplemental Agreement--VII to the Technology License Agreement*+
10.8.11 Supplemental Agreement--VIII to the Technology License Agreement*+
10.8.12 Renewal Agreement of Supplemental Agreement--VIII to the
Technology License Agreement*+
10.8.13 Renewal Agreement of Supplemental Agreement--IX to the Technology
License Agreement*+
10.8.14 Supplemental Agreement--X to the Technology License Agreement*+
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.8.15 VRX Supplemental Agreement to the Technology License Agreement*+
10.8.16 Amendment No. 1 to VRX Supplemental Agreement to the Technology
License Agreement*+
10.8.17 Supplemental Agreement XI to the Technology License Agreement*+
10.9 Form of MIPS Technologies, Inc. 1998 Long-Term Incentive Plan*
10.10 Form of Employee Stock Purchase Plan*
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.3 Consent of Shearman & Sterling (included in Exhibit 5.1)
24.1 Power of Attorney (included on Page II-4)
27.1 Financial Data Schedule
</TABLE>
- --------
*To be filed by amendment.
+ The Company intends to apply for confidential treatment of portions of this
Exhibit. Accordingly, portions thereof will be omitted and filed
separately.
(b) Financial Statement Schedules
Schedules have been omitted because the information required to be set forth
therein is not applicable or is shown in the Consolidated Financial Statements
or the Notes thereto.
ITEM 17. UNDERTAKINGS
(a) The Registrant hereby undertakes to provide to the underwriter at the
closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the Registrant
of expenses incurred or paid by a director, officer or controlling person of
the Registrant in the successful defense of any action, suit or proceeding )
is asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(ii) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Mountain View, State of California, on the 21st day
of April, 1998.
MIPS Technologies, Inc.
/s/ John E. Bourgoin
By: _________________________________
Name: John E. Bourgoin
Title: Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of MIPS Technologies, Inc. do
hereby constitute and appoint John E. Bourgoin and William M. Kelly, and each
of them, our true and lawful attorneys-in-fact and agents, each with full
power of substitution and resubstitution, in any and all capacities, to sign
any and all amendments to this Registration Statement, and any and all
registration statements on Form 462(b) filed by the Company, and to file the
same, with exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each of said attorneys-in-
fact and agents, or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John E. Bourgoin
___________________________________
John E. Bourgoin Chief Executive Officer and April 21, 1998
Director (Principal Executive
Officer)
/s/ Ron Curtola, Jr.
___________________________________
Ron Curtola, Jr. (Principal Financial and April 21, 1998
Accounting Officer)
/s/ William M. Kelly
___________________________________
William M. Kelly Director April 21, 1998
/s/ Kenneth Coleman
___________________________________
Kenneth Coleman Director April 21, 1998
/s/ Teruyasu Sekimoto
___________________________________
Teruyasu Sekimoto Director April 21, 1998
/s/ Forest Baskett
___________________________________
Forest Baskett Director April 21, 1998
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement*
3.1 Form of Certificate of Incorporation of the Registrant
3.2 Form of By-Laws of the Registrant
4.1 Form of Common Stock Certificate
5.1 Opinion of Shearman & Sterling
10.1 Form of Separation Agreement*
10.2 Form of Corporate Agreement
10.3 Form of Management Services Agreement
10.4 Form of Tax Sharing Agreement
10.5 Form of Technology Agreement*
10.6 Form of Trademark Agreement*
10.7.1 Joint Development and License Agreement between Nintendo Co.,
Ltd. and Nintendo of America Inc. on the one hand and Silicon
Graphics, Inc. and MIPS Technologies, Inc. on the other hand
(the "Joint Development and License Agreement")*+
10.7.2 First Addendum to the Joint Development and License Agreement*+
10.7.3 Second Addendum to the Joint Development and License
Agreement*+
10.7.4 Third Addendum to the Joint Development and License Agreement*+
10.8.1 Technology License Agreement between NEC Corporation and MIPS
Computer Systems, Inc. (predecessor to MIPS Technologies,
Inc.) (the "Technology License Agreement")*+
10.8.2 Supplemental Agreement--I to the Technology License Agreement*+
10.8.3 Supplemental Agreement--II to the Technology License
Agreement*+
10.8.4 Amendment No. 1 to Supplemental Agreement--II to the Technology
License Agreement*+
10.8.5 Supplemental Agreement--III to the Technology License
Agreement*+
10.8.6 Supplemental Agreement--IV to the Technology License
Agreement*+
10.8.7 Supplemental Agreement--V to the Technology License Agreement*+
10.8.8 Supplemental Agreement--VI to the Technology License
Agreement*+
10.8.9 Addendum to the Supplemental Agreement--VI to the Technology
License Agreement*+
10.8.10 Supplemental Agreement--VII to the Technology License
Agreement*+
10.8.11 Supplemental Agreement--VIII to the Technology License
Agreement*+
10.8.12 Renewal Agreement of Supplemental Agreement--VIII to the
Technology License Agreement*+
10.8.13 Renewal Agreement of Supplemental Agreement--IX to the
Technology License Agreement*+
10.8.14 Supplemental Agreement--X to the Technology License Agreement*+
10.8.15 VRX Supplemental Agreement to the Technology License
Agreement*+
10.8.16 Amendment No. 1 to VRX Supplemental Agreement to the Technology
License Agreement*+
10.8.17 Supplemental Agreement XI to the Technology License Agreement*+
10.9 Form of MIPS Technologies, Inc. 1998 Long-Term Incentive Plan*
10.10 Form of Employee Stock Purchase Plan*
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.3 Consent of Shearman & Sterling (included in Exhibit 5.1)
24.1 Power of Attorney (included on Page II-4)
27.1 Financial Data Schedule
</TABLE>
- --------
*To be filed by amendment.
+ The Company intends to apply for confidential treatment of portions of this
Exhibit. Accordingly, portions thereof will be omitted and filed separately.
<PAGE>
EXHIBIT 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF
MIPS TECHNOLOGIES, INC.
MIPS TECHNOLOGIES, INC., a Delaware corporation, hereby certifies as
follows:
1. The name of the corporation is MIPS Technologies, Inc. (the
"Corporation"). The date of filing of its original Certificate of Incorporation
with the Secretary of State of the State of Delaware was June 8, 1992. The
original name of the Corporation was MIPS Technologies, Inc.
2. This Restated Certificate of Incorporation amends and restates
the provisions of the Certificate of Incorporation of the Corporation and was
duly adopted in accordance with the provisions of Sections 228, 242 and 245 of
the General Corporation Law of the State of Delaware.
3. The text of the Certificate of Incorporation is hereby amended
and restated in its entirety to read as follows:
ARTICLE I
NAME
The name of the corporation is MIPS Technologies, Inc. (the "Corporation").
ARTICLE II
REGISTERED AGENT
The address of the Corporation's registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle. The name of the Corporation's registered agent at such
address is The Corporation Trust Company.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended.
<PAGE>
ARTICLE IV
CAPITAL STOCK
Section 1. The total number of shares of all classes of capital stock
----------
that the Corporation shall have the authority to issue is 200,000,000 shares,
of which (i) 150,000,000 shares shall be common stock, par value $0.01 per
share ("Common Stock"), and (ii) 50,000,000 shares shall be preferred stock,
par value $0.01 per share ("Preferred Stock").
Section 2. Each holder of Common Stock shall have one vote on each
----------
matter submitted to a vote at a meeting of stockholders, including the election
of directors, for each share of Common Stock held of record by such holder as of
the record date for such meeting. Except as otherwise required by law or
provided in any resolution adopted by the Corporation's Board of Directors (the
"Board of Directors") with respect to any series of Preferred Stock, the holders
of shares of Common Stock will possess all voting power, and holders of shares
of Preferred Stock shall not be entitled to receive notice of any meeting of
stockholders at which they are not entitled to vote. No provision herein should
be interpreted as providing for cumulative voting in the election of directors.
Section 3. Subject to any preferential rights of any outstanding
----------
series of Preferred Stock created by the Board of Directors from time to time,
when, as and if dividends or distributions are declared on outstanding shares of
Common Stock, whether payable in cash, in property or in securities of the
Corporation, each holder of outstanding shares of Common Stock shall be entitled
to share ratably in such dividends and distributions in proportion to the number
of shares of Common Stock held by such holder.
Section 4. Subject to any preferential rights of any outstanding
----------
series of Preferred Stock created by the Board of Directors from time to time,
upon any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, each holder of outstanding shares of Common Stock
shall be entitled to share ratably in the assets of the Corporation to be
distributed among the holders of shares of Common Stock in proportion to the
number of shares of Common Stock held by such holder.
Section 5. The holders of shares of Common Stock shall have no
----------
preemptive or preferential rights of subscription to any shares of any class of
capital stock of the Corporation or any securities convertible into or
exchangeable for shares of any class of capital stock of the Corporation.
Section 6. The Preferred Stock may be issued, if so determined by the
----------
Board of Directors, either as a class without series or from time to time in one
or more series and with such designation for such class or each issue of such
class or each such series adopted by the Board of Directors. The Board of
Directors in any such resolution or resolutions is expressly authorized to state
and express for such class or each such series:
2
<PAGE>
(a) Voting rights, if any, including, without limitation, the
authority to confer multiple votes per share, voting rights as to specified
matters or issues or, subject to the provisions of this Restated
Certificate of Incorporation, voting rights to be exercised either together
with the holders of Common Stock as a single class, or independently as a
separate class;
(b) The rate per annum and the times at and conditions upon which the
holders of shares of such class or series shall be entitled to receive
dividends, the conditions and dates upon which such dividends shall be
payable and whether such dividends shall be cumulative or noncumulative,
and, if cumulative, the terms upon which such dividends shall be
cumulative;
(c) Redemption, repurchase, retirement and sinking fund rights,
preferences and limitations, if any, the amount payable on shares of such
class or series in the event of such redemption, repurchase or retirement,
the terms and conditions of any sinking fund, the manner of creating such
fund or funds and whether any of the foregoing shall be cumulative or
noncumulative;
(d) The rights to which the holders of the shares of such class or
series shall be entitled upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation;
(e) The terms, if any, upon which the shares of such class or series
shall be convertible into or exchangeable for shares of stock of any other
class or classes or of any other series of the same or any other class or
classes, including the price or prices or the rate or rates of conversion
or exchange and the terms of adjustment, if any; and
(f) Any other designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or
restrictions thereof so far as they are not inconsistent with the
provisions of this Restated Certificate of Incorporation (as it may be
amended from time to time) and to the full extent now or hereafter
permitted by the laws of the State of Delaware.
Section 7. All shares of Preferred Stock, if issued as a class
----------
without series, or all shares of the Preferred Stock of any one series, if
issued in series, shall be identical to each other in all respects and shall
entitle the holders thereof to the same rights and privileges, except that
shares of any one series issued at different times may differ as to the dates
from which dividends thereon, if cumulative, shall be cumulative.
3
<PAGE>
ARTICLE V
BOARD OF DIRECTORS
Section 1. The business and affairs of the Corporation shall be
----------
managed by or under the direction of the Board of Directors, which may exercise
all the powers of the Corporation and do all such lawful acts and things that
are not conferred upon or reserved to the stockholders by law, by this Restated
Certificate of Incorporation or by the By-laws of the Corporation.
Section 2. Election of directors need not be by written ballot unless
----------
the By-laws of the Corporation so provide.
Section 3. The following provisions are inserted for the management
----------
of the business and for the conduct of the affairs of the Corporation, and for
further definition, limitation and regulation of the powers of its directors and
stockholders:
(a) The By-laws of the Corporation may be altered, amended or repealed
and new By-laws may be adopted by the affirmative vote of directors
constituting not less than a majority of the total number of directors
which the Corporation would have if there were no vacancies.
(b) The Board of Directors shall consist of not less than three (3)
and not more than ten (10) directors, the exact number of directors to
be determined as set forth in, or in the manner provided in, the By-laws of
the Corporation. The directors shall be divided into three classes,
designated Class I, Class II and Class III. Each class shall consist, as
nearly as possible, of one-third of the total number of directors
constituting the entire Board of Directors. The term of the initial Class
I directors shall terminate on the date of the 1999 annual meeting of
stockholders; the term of the initial Class II directors shall terminate on
the date of the 2000 annual meeting of stockholders; and the term of the
initial Class III directors shall terminate on the date of the 2001 annual
meeting of stockholders. At each annual meeting of stockholders, beginning
with the 1999 annual meeting of stockholders, successors to the class of
directors whose terms expire at that annual meeting shall be elected for a
three year term. If the number of directors is changed, any increase or
decrease shall be apportioned among the classes so as to maintain the
number of directors in each class as nearly equal as possible, but in no
case will a decrease in the number of directors shorten the term of any
incumbent director. A director shall hold office until the annual meeting
for the year in which his or her term expires and until his or her
successor shall be elected and shall qualify, subject, however, to prior
death, resignation, retirement, disqualification or removal from office.
Subject to the rights, if any, of the holders of any series of Preferred
Stock then outstanding, any vacancy on the Board of Directors that results
from an increase in the number of directors and any
4
<PAGE>
other vacancy occurring on the Board of Directors, howsoever resulting, may
be filled only by a majority of the directors then in office, even if less
than quorum, or by the sole remaining director. Except as otherwise
provided by law, any such vacancy may not be filled by the stockholders of
the Corporation. Any director so elected to fill a vacancy shall hold
office for a term that shall coincide with the term of the class to which
such director shall have been elected.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of Preferred Stock issued by the Corporation shall have
the right, voting separately by class or series, to elect directors at an
annual or special meeting of stockholders, the election, term of office,
filling of vacancies and other features of such directorships shall be
governed by the terms of this Restated Certificate of Incorporation (as it
may be amended from time to time) or the resolution or resolutions adopted
by the Board of Directors pursuant to Section 6 of Article Fourth hereof,
and such directors so elected shall not be divided into classes pursuant to
this Section 3(b) of Article Fifth unless expressly provided by such terms.
(c) Advance notice of stockholder nominations for the election of
directors and of the proposal of business by stockholders shall be given in
the manner provided in the By-laws of the Corporation, as amended and in
effect from time to time.
(d) Subject to any preferential rights of any outstanding series of
Preferred Stock created by the Board of Directors from time to time, prior
to the date on which Silicon Graphics, Inc., a Delaware corporation
("Silicon Graphics"), and its affiliates cease to be the beneficial owner
of an aggregate of at least a majority of the then outstanding shares of
Common Stock (the "Trigger Date"), any director or the entire Board of
Directors may be removed from office, with or without cause, by the
affirmative vote of the holders of at least a majority of the voting power
of all shares of the Corporation entitled to vote generally at an election
of directors (the "Voting Stock") then outstanding, voting together as a
single class. Effective as of the Trigger Date, any director may be
removed from office only for cause by the affirmative vote of the holders
of at least a majority of the voting power of all Voting Stock then
outstanding, voting together as a single class.
(e) Notwithstanding anything contained in this Restated Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at
least 80% of the voting power of all Voting Stock then outstanding, voting
together as a single class, shall be required to amend, repeal or adopt any
provision inconsistent with this Article V.
5
<PAGE>
ARTICLE VI
STOCKHOLDER ACTION
(a) Any corporate action required or permitted to be taken at any
annual or special meeting of stockholders may be taken without a meeting,
without prior notice and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by the holders
of outstanding stock having not less than the minimum number of votes that
would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted and shall be
delivered to the Corporation (either by hand or by certified or registered
mail, return receipt requested) at its registered office in the State of
Delaware or its principal place of business, or to an officer or agent of
the Corporation having custody of the book in which proceedings of meetings
of stockholders are recorded; provided, however, that effective as of the
Trigger Date, any corporate action required or permitted to be taken at any
annual or special meeting of stockholders may be taken only at a duly
called annual or special meeting of stockholders and may not be taken by
written consent in lieu of such a meeting.
(b) Effective as of the Trigger Date, unless otherwise prescribed by
law and subject to any preferential rights of any outstanding series of
Preferred Stock created by the Board of Directors from time to time,
special meetings of the stockholders of the Corporation for any purpose or
purposes may be called at any time by [the Chairman of the Board of
Directors, the President] or, at the request in writing of a majority of
the members of the Board of Directors, any officer of the Corporation, and
effective as of the Trigger Date, any power of the stockholders of the
Corporation to call a special meeting is specifically denied.
(c) Notwithstanding anything contained in this Restated Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at
least 80% of the voting power of all Voting Stock then outstanding, voting
together as a single class, shall be required to amend, repeal or adopt any
provision inconsistent with this Article VI.
ARTICLE VII
INDEMNIFICATION
Section 1. Each person who was or is made a party or is threatened to
----------
be made a party to or is involved in any action, suit or proceeding, whether
civil, criminal, administrative, investigative or otherwise (hereinafter a
"proceeding"), by reason of the fact that he or she, or a person of whom he or
she is the legal representative, is or was a director, officer [or employee] of
the Corporation or is or was serving at the request of the Corporation as a
director, officer [or employee] of another corporation or of a partnership,
joint venture,
6
<PAGE>
trust or other enterprise, including service with respect to employee benefit
plans, whether the basis of such proceeding is alleged action in an official
capacity as a director, officer [or employee] or in any other capacity while
serving as a director, officer [or employee], shall be indemnified to the
fullest extent authorized by the Delaware General Corporation Law, as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to provide prior
to such amendment), against all expense, liability and loss (including
attorney's fees, amounts paid or to be paid in settlement and excise taxes or
penalties imposed on fiduciaries with respect to (i) employee benefit plans,
(ii) charitable organizations or (iii) similar matters) reasonably incurred or
suffered by such person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director, officer [or employee]
and shall inure to the benefit of such person's heirs, executors and
administrators; provided, however, that the Corporation shall indemnify any such
person seeking indemnity in connection with a proceeding (or part thereof)
initiated by such person (other than pursuant to Section 2 of this Article VII)
only if such proceeding (or part thereof) was authorized by the Board of
Directors. The right to indemnification conferred in this Section 1 of Article
VII shall be a contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in advance of
its final disposition; provided, however, that if the Delaware General
Corporation Law requires, the payment of such expenses incurred by a director or
officer in his or her capacity as a director or officer (and not in any other
capacity in which service was or is rendered by such person while a director or
officer, including, without limitation, service to an employee benefit plan) in
advance of the final disposition of a proceeding shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such director
or officer, to repay all amounts so advanced if it shall be ultimately be
determined that such director or officer is not entitled to be indemnified under
this Section 1 of Article VII or otherwise.
Section 2. If a claim the Corporation is obligated to pay under
----------
Section 1 of this Article VI is not paid in full by the Corporation within [60]
days after a written claim has been received by the Corporation, the claimant
may at any time thereafter bring suit against the Corporation to recover the
unpaid amount of the claim and, if successful in whole or in part, the claimant
shall be entitled to be paid also the expense of prosecuting such claim against
the Corporation. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in defending any proceeding in
advance of its final disposition where the required undertaking, if any is
required, has been tendered to the Corporation) that the claimant has not met
the standards of conduct which make it permissible under the Delaware General
Corporation Law for the Corporation to indemnify the claimant for the amount
claimed, but the burden of proving such defense shall be on the Corporation.
Neither the failure of the Corporation (including its Board of Directors,
independent legal counsel or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he or she has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal
7
<PAGE>
counsel or its stockholders) that the claimant has not met such applicable
standard of conduct, shall be a defense to the action or create a presumption
that the claimant has not met the applicable standard of conduct.
Section 3. The right to indemnification and the payment of expenses
----------
incurred in defending a proceeding in advance of its final disposition conferred
in this Article VII shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, provision of this Restated
Certificate of Incorporation, By-law of the Corporation, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
or her official capacity and as to action in another capacity while holding such
office.
Section 4. The Corporation may purchase and maintain insurance on
----------
behalf of any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, against any expense, liability or
loss, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under the Delaware General
Corporation Law.
Section 5. The Corporation may, to the extent authorized from time to
----------
time by the Board of Directors, grant rights to indemnification, and rights to
be paid by the Corporation the expenses incurred in defending any proceeding in
advance of its final disposition, to any [employee or] agent of the Corporation
to the fullest extent of the provisions in this Article VII with respect to the
indemnification and advancement of expenses of directors, officers [and
employees] of the Corporation.
Section 6. If any part of this Article VII should be found to be
----------
invalid or ineffective in any proceeding, the validity and effect of the
remaining provisions shall not be affected. Any repeal or modification of this
Article VII by the stockholders of the Corporation shall not adversely affect
any rights to indemnification and to advancement of expenses that any person may
have at the time of such repeal or modification with respect to any acts or
omissions occurring prior to such repeal or modification.
ARTICLE VIII
BY-LAWS
The By-laws of the Company may be altered, amended or repealed and new
By-laws may be adopted (i) at any annual or special meeting of stockholders, by
the affirmative vote of the holders of a majority of the voting power of the
Voting Stock entitled to vote thereat, provided, however, that any proposed
alteration, amendment or repeal of, or the adoption of any By-law inconsistent
with, Sections 3, 5 or 10 of Article II of the By-laws or Sections 1 or 5 of
Article III of the By-laws, by the stockholders shall require the affirmative
vote of the holders of at least 80% of the voting power of all Voting Stock then
outstanding,
8
<PAGE>
voting together as a single class, or (ii) by the affirmative vote of directors
constituting not less than a majority of the total number of directors which the
Corporation would have if there were no vacancies.
Notwithstanding anything contained in this Restated Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at least
80% of the voting power of all Voting Stock then outstanding, voting together as
a single class, shall be required to amend, repeal or adopt any provision
inconsistent with this Article VIII.
ARTICLE IX
LIMITATION ON LIABILITY OF DIRECTORS
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit.
ARTICLE X
CORPORATE OPPORTUNITIES
Section 1. In anticipation that the Corporation will cease to be an
----------
indirect, wholly-owned subsidiary of Silicon Graphics, but that Silicon Graphics
will remain a substantial stockholder of the Corporation, and in anticipation
that the Corporation and Silicon Graphics may engage in the same or similar
activities or lines of business and have an interest in the same areas of
corporate opportunities, and in recognition of the benefits to be derived by the
Corporation through its continued contractual, corporate and business relations
with Silicon Graphics (including possible service of officers and directors of
Silicon Graphics as officers and directors of the Corporation), the provisions
of this Article are set forth to regulate and define the conduct of certain
affairs of the Corporation as they may involve Silicon Graphics and its officers
and directors, and the powers, rights, duties and liabilities of the Corporation
and its officers, directors and stockholders in connection therewith.
Section 2. Silicon Graphics shall have no duty to refrain from
----------
engaging in the same or similar activities or lines of business as the
Corporation, and neither Silicon Graphics nor any officer or director thereof
(except as provided in Section 3 below) shall be liable to the Corporation or
its stockholders for breach of any fiduciary duty by reason of any such
activities of Silicon Graphics. In the event that Silicon Graphics acquires
knowledge of a potential transaction or matter which may be a corporate
opportunity for both Silicon Graphics and the Corporation, Silicon Graphics
shall have no duty to communicate or offer such corporate opportunity to the
Corporation and shall not be liable to the Corporation or its stockholders for
breach of any fiduciary duty as a stockholder of the Corporation by reason of
9
<PAGE>
the fact that Silicon Graphics pursues or acquires such corporate opportunity
for itself, directs such corporate opportunity to another person, or does not
communicate information regarding such corporate opportunity to the Corporation.
Section 3. In the event that a director or officer of the Corporation
----------
who is also a director or officer of Silicon Graphics acquires knowledge of a
potential transaction or matter which may be a corporate opportunity for both
the Corporation and Silicon Graphics, such director or officer of the
Corporation shall have fully satisfied and fulfilled the fiduciary duty of such
director or officer to the Corporation and its stockholders with respect to such
corporate opportunity, if such director or officer acts in a manner consistent
with the following policy: (i) A corporate opportunity offered to any person
who is an officer of the Corporation, and who is also a director but not an
officer of Silicon Graphics, shall belong to the Corporation; (ii) a corporate
opportunity offered to any person who is a director but not an officer of the
Corporation, and who is also a director or officer of Silicon Graphics shall
belong to the Corporation if such opportunity is expressly offered to such
person in writing solely in his or her capacity as a director of the
Corporation, and otherwise shall belong to Silicon Graphics; and (iii) a
corporate opportunity offered to any person who is an officer of both the
Corporation and Silicon Graphics shall belong to the Corporation if such
opportunity is expressly offered to such person in writing solely in his or her
capacity as an officer of the Corporation, and otherwise shall belong to Silicon
Graphics.
Section 4. Any person purchasing or otherwise acquiring any interest
----------
in shares of the capital stock of the Corporation shall be deemed to have notice
of and to have consented to the provisions of this Article.
Section 5. For purposes of this Article only:
----------
(1) A director of the Corporation who is Chairman of the Board of
Directors of the Corporation or of a committee thereof shall not be deemed to be
an officer of the Corporation by reason of holding such position (without regard
to whether such position is deemed an office of the Corporation under the By-
laws of the Corporation), unless such person is a full-time employee of the
Corporation; and
(2) (A) The term "corporation" shall mean the Corporation and all
corporations, partnerships, joint ventures, associations and other entities in
which the Corporation beneficially owns (directly or indirectly) 50% or more of
the outstanding voting stock, voting power, partnership interests or similar
voting interests, and (B) the term "Silicon Graphics," for the purpose of this
Article only, shall mean Silicon Graphics and all corporations, partnerships,
joint ventures, associations and other entities (other than the Corporation,
defined in accordance with clause (A) of this paragraph Section 5(2)) in which
Silicon Graphics beneficially owns (directly or indirectly) 50% or more of the
outstanding voting stock, voting power, partnership interests or similar voting
interests.
10
<PAGE>
Section 6. Notwithstanding anything in this Restated Certificate of
----------
Incorporation to the contrary, (i) the foregoing provisions of this Article
shall expire on the date that Silicon Graphics ceases to own beneficially Common
Stock representing at least 20% of the total voting power of all classes of
outstanding Common Stock of the Corporation and no person who is a director or
officer of the Corporation is also a director or officer of Silicon Graphics;
and (ii) in addition to any vote of the stockholders required by this Restated
Certificate of Incorporation, until the time that Silicon Graphics ceases to own
beneficially Common Stock representing at least 20% of the total voting power of
all classes of outstanding Common Stock of the Corporation, the affirmative vote
of the holders of more than 80% of the total voting power of all classes of
outstanding Common Stock of the Corporation shall be required to alter, amend or
repeal in a manner adverse to the interests of Silicon Graphics, or adopt any
provision adverse to the interests of Silicon Graphics and inconsistent with,
any provision of this Article. Neither the alteration, amendment or repeal of
this Article nor the adoption of any provision of this Restated Certificate of
Incorporation inconsistent with this Article shall eliminate or reduce the
effect of this Article in respect of any matter occurring, or any cause of
action, suit or claim that, but for this Article, would accrue or arise, prior
to such alteration, amendment, repeal or adoption.
ARTICLE XI
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right to amend, alter, restate, change or
repeal an provision contained in this Restated Certificate of Incorporation, in
the manner now or hereafter prescribed by the laws of the State of Delaware, and
all rights of the stockholders herein are granted subject to this reservation.
This Restated Certificate of Incorporation shall become effective at
[____] a.m. (Wilmington, Delaware time), [_________], 1998.
11
<PAGE>
IN WITNESS WHEREOF, MIPS TECHNOLOGIES, INC. has caused this
certificate to be signed by [_________], its [______________], and attested by
[_________], its [__________________], on this [__] day of [_________], 1998.
MIPS TECHNOLOGIES, INC.
By:_________________________________________
Name:
Title:
ATTEST:
________________________________________
Name:
Title:
12
<PAGE>
EXHIBIT 3.2
BY-LAWS
OF
MIPS TECHNOLOGIES, INC.
ARTICLE I
OFFICES
The registered office of the Corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The Corporation may also
have one or more offices at such other places, either inside or outside of the
State of Delaware, as the Board of Directors may from time to time determine or
as the business of the Corporation may require. The books and records of the
Corporation may be kept (subject to the provisions of the laws of the State of
Delaware) at any place, either inside or outside of the State of Delaware, as
from time to time may be determined by the Board of Directors.
ARTICLE II
STOCKHOLDERS
Section 1. Place of Meetings. Meetings of stockholders (whether annual or
---------- ------------------
special) shall be held at such place, either inside or outside of the State of
Delaware, as the Board of Directors shall from time to time determine.
Section 2. Annual Meeting. The annual meeting of the stockholders of the
---------- ---------------
Corporation shall be held on such date and at such time as may be fixed by
resolution of the Board of Directors.
Section 3. Special Meetings. Unless otherwise prescribed by law or by the
---------- -----------------
Corporation's Restated Certificate of Incorporation, as amended from time to
time (the "Charter"), and subject to any preferential rights of any outstanding
series of Preferred Stock (as defined in the Charter), special meetings of
stockholders of the Corporation for any purpose or purposes may be called only
by [the Chairman of the Board of Directors, the President], or, at the request
in writing of a majority of the Board of Directors, any officer. Such request
shall state the purpose or purposes of the proposed meeting. In addition, prior
to the Trigger Date (as defined in the Charter), the Corporation shall call a
special meeting of stockholders of the Corporation promptly upon request by
Silicon Graphics, Inc., a Delaware corporation, or any of its affiliates, in
each case if such entity is a stockholder of the Corporation.
<PAGE>
2
Section 4. Notice of Meetings. Except as otherwise provided by law,
---------- -------------------
written or printed notice, stating the place, day and hour of the meeting and
the purpose or purposes for which the meeting is called shall be delivered by
the Corporation not less than ten (10) calendar days nor more than sixty (60)
calendar days before the date of the meeting, either personally or by mail, to
each stockholder of record entitled to vote at such meeting. Meetings may be
held without notice if all stockholders entitled to vote are present, or if
notice is waived by those not present in accordance with Section 2 of Article X
of these By-laws. Any previously scheduled meeting of the stockholders may be
postponed, and any special meeting of the stockholders may be canceled, by
resolution of the Board of Directors upon public notice given prior to the date
previously scheduled for such meeting of stockholders.
Section 5. Notice of Stockholder Business and Nominations.
---------- -----------------------------------------------
(a) Annual Meetings of Stockholders.
(i) Nominations of persons for election to the Board of Directors and
the proposal of business to be considered by the stockholders may be made
at an annual meeting of stockholders (A) pursuant to the Corporation's
notice of meeting delivered pursuant to Section 4 of this Article II, (B)
by or at the direction of the Board of Directors, (C) by any stockholder of
the Corporation who was a stockholder of record at the time of the giving
of the notice provided for in this Section 5, who is entitled to vote at
the meeting and who complies with the notice procedures set forth in this
Section 5, or (D) prior to the Trigger Date, by Silicon Graphics, Inc., a
Delaware corporation, or any of its affiliates that is a stockholder of the
Corporation.
(ii) For nominations or other business to be properly brought before
an annual meeting by a stockholder pursuant to clause (C) of paragraph
(a)(i) of this Section 5, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation and such other
business must be a proper subject for stockholder action. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not less than sixty (60) days nor more
than ninety (90) days prior to the first anniversary of the preceding
year's annual meeting; provided, however, that in the event that the date
of the annual meeting is advanced by more than thirty (30) days or delayed
by more than sixty (60) days from such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the
ninetieth day prior to such annual meeting and not later than the close of
business on the later of the sixtieth day prior to such annual meeting or
the tenth day following the day on which public announcement of the date of
such meeting is first made by the Corporation. For purposes of determining
whether a stockholder's notice shall have been delivered in a timely manner
for the annual meeting of stockholders in 1999, the first anniversary of
the previous year's meeting shall be deemed to be
<PAGE>
3
________, 1999. In no event shall the public announcement of an
adjournment of an annual meeting commence a new time period for the giving
of a stockholder's notice as described above. Such stockholder's notice
shall set forth (A) as to each person whom the stockholder proposes to
nominate for election or reelection as a director all information relating
to such person that is required to be disclosed in solicitations of proxies
for election of directors in an election contest, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and Rule 14a-11 thereunder
(including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); (B) as to
any other business that the stockholder proposes to bring before the
meeting, a brief description of the business desired to be brought before
the meeting, the reasons for conducting such business at the meeting and
any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (C) as
to the stockholder giving the notice and the beneficial owner, if any, on
whose behalf the nomination or proposal is made, (1) the name and address
of such stockholder, as they appear on the Corporation's books, and of such
beneficial owner and (2) the class and number of shares of the Corporation
which are owned beneficially and of record by such stockholder and such
beneficial owner.
(iii) Notwithstanding anything in the second sentence of paragraph
(a)(ii) of this Section 5 to the contrary, in the event that the number of
directors to be elected to the Board of Directors is increased and there is
no public announcement by the Corporation naming all of the nominees for
director or specifying the size of the increased Board of Directors made by
the Corporation at least seventy (70) days prior to the first anniversary
of the preceding year's annual meeting, a stockholders's notice required by
this Section 5 shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall be
delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the tenth day following
the day on which such public announcement is first made by the Corporation.
(b) Special Meetings of Stockholders. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting pursuant to Section
4 of this Article II. Nominations of persons for election to the Board of
Directors may be made at a special meeting of stockholders at which directors
are to be elected pursuant to the Corporation's notice of meeting (i) by or at
the direction of the Board of Directors, (ii) by any stockholder of the
Corporation who was a stockholder of record at the time of the giving of the
notice provided for in this Section 5, who is entitled to vote at the meeting
and who complies with the notice procedures set forth in this Section 5, or
(iii) prior to the Trigger Date, by Silicon Graphics,
<PAGE>
4
Inc., a Delaware corporation, or any of its affiliates that is a stockholder of
the Corporation. In the event that the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the Board of
Directors, any stockholder may nominate such person or persons (as the case may
be), for election to the Board of Directors, if the stockholder's notice
required by paragraph (a)(ii) of this Section 5 shall be delivered to the
Secretary of the Corporation at the principal executive offices of the
Corporation not earlier than the ninetieth day prior to such special meeting and
not later than the close of business on the later of the sixtieth day prior to
such special meeting or the tenth day following the day on which public
announcement by the Corporation is first made of the date of the special meeting
and of the nominees proposed by the Board of Directors to be elected at such
meeting.
(c) General.
(i) Only persons who are nominated in accordance with the procedures
set forth in this Section 5 shall be eligible to serve as directors and
only such business shall be conducted at a meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set
forth in this Section 5. Except as otherwise provided by law, the Charter
or these By-laws, the chairman of the meeting shall have the power and duty
to determine whether a nomination or any business proposed to be brought
before the meeting was made in accordance with this Section 5 and, if any
proposed nomination or business is not in compliance with this Section 5,
to declare that such defective proposal or nomination shall be disregarded.
(ii) For purposes of this Section 5, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document
publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(iii) Notwithstanding the foregoing provisions of this Section 5, a
stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this Section 5. Nothing in this Section 5 shall be
deemed to affect any rights (A) of stockholders to request inclusion of
proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under
the Exchange Act or (B) of the holders of any series or Preferred Stock to
elect directors.
Section 6. Quorum. Except as otherwise provided by law or in the Charter,
---------- -------
the holders of a majority of the voting power of all outstanding shares of the
Corporation entitled to vote generally in the election of directors (the "Voting
Stock"), represented in person or by proxy, shall constitute a quorum at a
meeting of stockholders, except that when specified
<PAGE>
5
business is to be voted on by a class or series of stock voting as a class, the
holders of a majority of the shares of such class or series shall constitute a
quorum of such class or series for the transaction of such business. At any
meeting of stockholders at which a quorum is not present, the person serving as
chairman of the meeting or the holders of a majority in interest of the
stockholders present in person or by proxy and who are entitled to vote on every
matter that is to be voted on without regard to class at such meeting may
adjourn the meeting from time to time. No notice of the time and place of
adjourned meetings need by given except as required by law.
Section 7. Organization and Conduct of Business. The Chairman of the
---------- -------------------------------------
Board of Directors shall act as chairman of meetings of the stockholders. The
Board of Directors may designate any other officer or director of the
Corporation to act as chairman of any meeting in the absence of the Chairman of
the Board of Directors, and the Board of Directors may further provide for
determining who shall act as chairman of any stockholder's meeting in the
absence of the Chairman of the Board of Directors and such designee. The person
serving as chairman of any meeting of stockholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of discussion as seem to him or her in order.
The Secretary of the Corporation shall act as secretary of all meetings of
the stockholders, but in the absence of the Secretary the presiding officer may
appoint any other person to act as secretary of any meeting.
Section 8. Proxies and Voting. At any meeting of stockholders, every
---------- -------------------
stockholder entitled to vote may vote in person or by proxy authorized by an
instrument executed in writing (or in such manner prescribed by the General
Corporation Law of the State of Delaware) by the stockholder, or by such
person's duly authorized attorney in fact.
Election of directors at all meeting of the stockholders at which directors
are to be elected shall be by ballot, and, subject to the rights of the holders
of any series of Preferred Stock to elect directors, a plurality of the votes
cast thereat shall elect directors. Except as otherwise provided by law, the
Charter and these By-laws and subject to the rights of the holders of any series
of Preferred Stock, in all matters other than the election of directors, the
affirmative vote of a majority of the voting power of the shares present in
person or represented by proxy at the meeting and entitled to vote on the matter
shall be the act of the stockholders.
Section 9. Inspectors of Election. The Board of Directors may, and to the
---------- -----------------------
extent required by law, shall, in advance of any meeting of stockholders,
appoint one or more inspectors to act at the meeting, decide upon the
qualification of voters, count the votes, decide the results and make a written
report thereof in accordance with the General Corporation Law
<PAGE>
6
of the State of Delaware. The Board of Directors may designate one or more
persons as alternate inspectors to replace any inspector who fails to act. If no
inspector or alternate is able to act at a meeting of stockholders, the person
presiding at the meeting shall appoint one or more inspectors to act at the
meeting. Each inspector, before entering upon the discharge of his or her
duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspector(s) shall have the duties prescribed by law.
Section 10. No Stockholder Action by Written Consent. Effective as of the
----------- -----------------------------------------
Trigger Date, any action required or permitted to be taken by the stockholders
of the Corporation must be effected at a duly called annual or special meeting
of such holders and may not be effected by any consent in writing by such
holders.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Number and Term of Office. Subject to the rights, if any, of
---------- --------------------------
holders of preferred stock of the Corporation, the number of directors of the
Corporation shall be fixed from time to time exclusively by resolution of the
Board of Directors adopted by the affirmative vote of directors constituting
not less than a majority of the Whole Board, but shall consist of not more
than ten (10) nor less than three (3) directors. The directors, other than
those who may be elected by the holders of any class or series of preferred
stock of the Corporation, shall be classified, with respect to the time they
severally hold office, into three classes, as nearly equal in number as
possible, one class to be initially elected for a term expiring at the annual
meeting of stockholders to be held in 1999, another class to be initially
elected for a term expiring at the annual meeting of stockholders to be held
in 2001, and another class to be initially elected for a term expiring at the
annual meeting of stockholders to be held in 2001, with each director to serve
until his or her successor shall have been elected and shall have qualified.
At each succeeding annual meeting of stockholders, directors elected to
succeed those directors whose terms then expire shall be elected for a term of
office to expire at the third succeeding annual meeting of stockholders after
their election, with each director to serve until his or her successor shall
have been elected and shall have qualified.
For purposes of these By-laws, the term "Whole Board" shall mean the total
number of directors that the Corporation would have if there were no vacancies
on the Corporation's Board of Directors.
Section 2. Meetings. Regular meetings of the Board of Directors may be
---------- ---------
held at such place, either inside or outside of the State of Delaware, and at
such time, as may from time to time be designated by the Chairman of the Board
of Directors or resolution of the Board of Directors or as may be specified in
the call of any meeting. An annual meeting of the Board of
<PAGE>
7
Directors shall be held on the same day as, and as soon as practicable
following, the annual meeting of stockholders or at such other time or place as
shall be determined by the Board of Directors at its regular meeting next
preceding said annual meeting of stockholders.
Special meetings of the Board of Directors may be held at any time on the
call of the Chairman of the Board of Directors, the President or a majority of
the Board of Directors then in office. The person or persons authorized to call
special meetings of the Board of Directors may fix the time and place of the
meetings. Meetings may be held at any time or place without notice if all the
directors are present or if those not present waive notice of the meeting in
writing.
Section 3. Notice of Meetings. Notice of the time and place of meetings
---------- -------------------
of the Board of Directors (excepting the annual meeting of directors) shall be
given to each director by the Secretary or an Assistant Secretary of the
Corporation by (i) mailing or sending via courier such notice not later than
during the second day preceding the day on which such meeting is to be held, or
(ii) by (a) sending a facsimile transmission or other form of electronic
communication containing such notice or (b) delivering such notice personally or
by telephone, in each case, not later than during the first day preceding the
day on which such meeting is to be held. Unless otherwise stated in the notice
thereof, any and all business may be transacted at any meeting.
Section 4. Quorum and Organization of Meetings. Subject to Section 5 of
---------- ------------------------------------
this Article III, a whole number of directors equal to at least a majority of
the Whole Board shall constitute a quorum for the transaction of business, but
if at any meeting of the Board of Directors there shall be less than a quorum
present, a majority of the directors present may adjourn the meeting from time
to time without further notice. The act of a majority of the directors present
at a meeting at which a quorum is present shall be the act of the Board of
Directors. The directors present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
directors to leave less than a quorum.
Meetings shall be presided over by the Chairman of the Board of Directors
or, in his or her absence, by such other person as the Board of Directors may
designate or the members present may select.
Section 5. Vacancies. Subject to the rights, if any, of holders of
---------- ----------
preferred stock of the Corporation, and unless the Board of Directors otherwise
determines, any vacancy occurring in the Board of Directors caused by death,
resignation, increase in number of directors or otherwise may be filled by the
affirmative vote of a majority of the remaining members of the Board of
Directors, though less than a quorum, or by a sole remaining director, and
except as otherwise provided by law, any such vacancy may not be filled by the
stockholders of the Company. Any director elected in accordance with the
preceding sentence
<PAGE>
8
shall hold office for the remainder of the full term of the class of directors
in which the new directorship was created or the vacancy occurred and until such
director's successor shall have been duly elected and qualified. No decrease in
the number of directors constituting the Board of Directors shall shorten the
term of any incumbent director.
Section 6. Powers. In addition to the powers and authorities by these By-
---------- -------
laws expressly conferred upon them, the Board of Directors shall have and may
exercise all such powers of the Company and do all such lawful acts and things
that are not by statute, the Charter or these By-laws directed or required to be
exercised or done by the stockholders.
Section 7. Reliance upon Books, Reports and Records. Each director, each
---------- -----------------------------------------
member of any committee designated by the Board of Directors and each officer,
in the performance of his or her duties, shall be fully protected in relying in
good faith upon such information, opinions, reports or statements presented to
the Corporation by any of its officers or employees, or by committees of the
Board of Directors, or by any other person, as to matters such director, member
or officer, as the case may be, reasonably believes are within such person's
professional or expert competence and who has been selected with reasonable care
by the Board of Directors or by any such committee, or in relying in good faith
upon other records of the Corporation.
Section 8. Compensation of Directors. Directors, as such, may receive,
---------- --------------------------
pursuant to resolution of the Board of Directors, fixed fees and other
compensation for their services as directors, including, without limitation,
services as members of committees of the Board of Directors; provided, however,
that nothing herein contained shall be construed to preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor.
Section 9. Meetings by Means of Conference Telephone. Unless otherwise
---------- ------------------------------------------
provided by the Charter or these By-laws, members of the Board of Directors, or
any committee designated by the Board of Directors, may participate in a meeting
of the Board of Directors or such committee by means of a conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear each other, and participation in a meeting pursuant to
this Section 8 shall constitute presence in person at such meeting.
Section 10. Actions by Written Consent. Any action required or permitted
----------- ---------------------------
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
ARTICLE IV
<PAGE>
9
COMMITTEES OF THE BOARD OF DIRECTORS
Section 1. Committees of the Board of Directors. There are hereby
---------- -------------------------------------
established as committees of the Board of Directors [an Executive Committee,] an
Audit Committee and a Compensation Committee, each of which shall have the
powers and functions set forth in Sections 2 and 3 [and 4] hereof, respectively,
and such additional powers as may be delegated to it by the Board of Directors.
The Board of Directors may from time to time establish additional standing
committees or special committees of the Board of Directors, each of which shall
have such powers and functions as may be delegated to it by the Board of
Directors. The Board of Directors may abolish any committee established by or
pursuant to this Section 1 as it may deem advisable. Each such committee shall
consist of two or more directors, the exact number being determined from time to
time by the Board of Directors. Designations of the chairman and members of each
such committee, and, if desired, a vice chairman and alternates for members,
shall be made by the Board of Directors. In the absence or disqualification of
any member of any committee and any alternate member in his or her place, the
member or members of the committee present at the meeting and not disqualified
from voting whether or not he or she or they constitute a quorum, may by
unanimous vote appoint another member of the Board of Directors to act at the
meeting in the place of the absent or disqualified member. Each committee shall
have a secretary who shall be designated by its chairman. A vice chairman of a
committee shall act as the chairman of the committee in the absence or
disability of the chairman. Nothing herein shall be deemed to prevent the Board
of Directors from appointing one or more committees consisting in whole or in
part of persons who are not directors of the Corporation; provided, however,
that no such committee shall have or may exercise any authority of the Board of
Directors.
Section 2. Audit Committee. The Audit Committee shall select and engage,
---------- ----------------
on behalf of the Corporation, independent public accountants to (a) audit the
books of account and other corporate records of the Corporation and (b) perform
such other duties as the Audit Committee may from time to time prescribe. The
Audit Committee shall transmit financial statements certified by such
independent public accountants to the Board of Directors after the close of each
fiscal year. The selection of independent public accountants for each fiscal
year shall be made in advance of the annual meeting of stockholders in such
fiscal year and shall be submitted for ratification or rejection at such
meeting. The Audit Committee shall confer with such accountants and review and
approve the scope of the audit of the books of account and other corporate
records of the Company. The Audit Committee shall have the power to confer with
and direct the officers of the Corporation to the extent necessary to review the
internal controls, accounting practices, financial structure and financial
reporting of the Corporation. From time to time the Audit Committee shall
report to and advise the Board of Directors concerning the results of its
consultation and review and such other matters relating to the internal
controls, accounting practices, financial structure and financial reporting of
the Corporation as the Audit Committee believes merit review by the Board of
Directors. The
<PAGE>
10
Audit Committee also shall perform such other functions and exercise such other
powers as may be delegated to it from time to time by the Board of Directors.
Section 3. Compensation Committee. The Compensation Committee shall fix
---------- -----------------------
from time to time the salaries of members of the Board of Directors who are
officers or employees of the Corporation and of all Senior Executive Vice
Presidents, Executive Vice Presidents and Senior Vice Presidents of the
Corporation. It also shall perform such functions as may be delegated to it
under the provisions of any bonus, supplemental compensation, special
compensation or stock option plan of the Corporation.
Section 4. Executive Committee.
---------- --------------------
Section 5. Rules and Procedures. Each committee may fix its own rules and
---------- ---------------------
procedures and shall meet at such times and places as may be provided by such
rules, by resolution of the committee or by call of the chairman or vice
chairman of such committee. Notice of meeting of each committee, other than of
regular meetings provided for by its rules or resolutions, shall be given to
committee members. The presence of a majority of its members, but not less than
two, shall constitute a quorum of any committee, and all questions shall be
decided by a majority vote of the members present at the meeting. All action
taken at each committee meeting shall be recorded in minutes of the meeting.
Section 6. Application of Article. Whenever any provision of any other
---------- -----------------------
document relating to any committee of the Corporation named therein shall be in
conflict with any provision of this Article IV, the provisions of this Article
IV shall govern, except that if such other document shall have been approved by
the stockholders or by the Board of Directors, the provisions of such other
document shall govern.
ARTICLE V
OFFICERS
Section 1. Officers. The officers of the Company shall include a Chairman
---------- ---------
of the Board of Directors, who shall be chosen from among the directors, a
President, a Chief Financial Officer, one or more Executive Vice Presidents, one
or more Senior Vice Presidents, one or more Vice Presidents, a Treasurer, a
General Counsel and a Secretary, each of whom shall be elected by the Board of
Directors to hold office until his or her successor shall have been chosen and
shall have qualified. The Board of Directors, the Chairman of the Board of
Directors and the Chief Executive Officer may elect or appoint one or more
Controllers, one or more Assistant Vice Presidents, one or more Assistant
Treasurers, one or more Assistant General Counsels and one or more Assistant
Secretaries, and the Board of Directors may elect or appoint such other officers
as it may deem necessary, or desirable, each of whom shall have such authority,
shall perform such duties and shall hold office for such term as may be
<PAGE>
11
prescribed by the Board of Directors from time to time. Any person may hold at
one time more than one office, excepting that the duties of the President and
Secretary shall not be performed by one person.
Section 2. Chairman of the Board of Directors. The Chairman of the Board
---------- -----------------------------------
of Directors shall be the Chief Executive Officer of the Corporation. Subject
to the provisions of these By-laws and to the direction of the Board of
Directors, he or she shall have ultimate authority for decisions relating to the
general management and control of the affairs and business of the Corporation
and shall perform all other duties and exercise all other powers commonly
incident to the position of Chief Executive Officer or which are or from time to
time may be delegated to him or her by the Board of Directors, or which are or
may at any time be authorized or required by law. He or she shall preside at
all meetings of the Board of Directors. He or she shall make reports to the
Board of Directors and stockholders, and shall see that all orders and
resolutions of the Board of Directors and any committee thereof are carried into
effect. The Chairman of the Board may also serve as President, if so elected by
the Board of Directors. The Board of Directors may also elect a Vice-Chairman
to act in the place of the Chairman upon his or her absence or inability to act.
Section 3. President. Subject to the provisions of these By-laws and to
---------- ----------
the direction of the Board of Directors and of the Chief Executive Officer, the
President shall have such powers and shall perform such duties as from time to
time may be delegated to him or her by the Board of Directors or by the Chief
Executive Officer, or which are or may at any time be authorized or required by
law.
Section 4. Executive Vice Presidents, Senior Vice Presidents and Vice
---------- ----------------------------------------------------------
Presidents. Each of the Executive Vice Presidents, each of the Senior Vice
- -----------
Presidents and each of the other Vice Presidents shall have such powers and
shall perform such duties as may be delegated to him or her by the Board of
Directors, the Chairman of the Board of Directors, the President or such other
officer or officers to whom he or she is directly responsible.
Section 5. Treasurer and Assistant Treasurer. The Treasurer, subject to
---------- ----------------------------------
the direction of the Board of Directors, shall have the care and custody of all
funds and securities of the Corporation. When necessary or proper he or she
shall endorse on behalf of the Corporation, for collection, checks, notes and
other obligations, and shall deposit all funds of the Corporation in such banks
or other depositaries as may be designated by the Board of Directors or by such
officers or employees as may be authorized by the Board of Directors so to
designate. He or she shall perform all acts incident to the office of
Treasurer, subject to the control of the Board of Directors and such other
officer or officers to whom he or she is directly responsible. He or she may be
required to give a bond for the faithful discharge of his or her duties, in such
sum and upon such conditions as the Board of Directors may require.
<PAGE>
12
At the request and direction of the Treasurer or, in the case of his or her
absence or inability to act, any Assistant Treasurer may act in his or her
place. In the case of the death of the Treasurer, or in the case of his or her
absence or inability to act without having designated an Assistant Treasurer to
act temporarily in his or her place, the Assistant Treasurer so to perform the
duties of the Treasurer shall be designated by the Chairman of the Board of
Directors, the President or an Executive Vice President.
Section 6. Secretary and Assistant Secretary. The Secretary shall keep
---------- ----------------------------------
full and accurate minutes of the meetings of the stockholders and of the Board
of Directors in the proper record book of the Corporation provided therefor,
and, when required, the minutes of meetings of the committees, and shall be
responsible for the custody of all such minutes. Subject to the direction of
the Board of Directors, the Secretary shall have custody of the stock ledgers
and documents of the Corporation. He or she shall have custody of the corporate
seal of the Corporation and shall affix and attest such seal to any instrument
whose execution under seal shall have been duly authorized. He or she shall
give due notice of meetings and, subject to the direction of the Board of
Directors, shall perform all other duties commonly incident to his or her office
or as properly required of him or her by the Chairman of the Board of Directors
and such other officer or officers to whom he or she is directly responsible and
shall enjoy all other powers commonly incident to his or her office.
At the request and direction of the Secretary or, in the case of his or her
absence or inability to act, any Assistant Secretary may act in his or her
place. In the case of the death of the Secretary, or in the case of his or her
absence or inability to act without having designated an Assistant Secretary to
act temporarily in his or her place, the Assistant Secretary or other person so
to perform the duties of the Secretary shall be designated by the Chairman of
the Board of Directors, the President or an Executive Vice President.
Section 7. Assistant Vice Presidents and Other Officers. Each assistant
---------- ---------------------------------------------
vice president and other officers shall perform such duties commonly incident to
his or her office or as properly required of him or her by the Chairman of the
Board of Directors and such other officer or officers to whom he or she is
directly responsible.
Section 8. General Counsel. The General Counsel shall have general
---------- ----------------
supervision of all matters of a legal nature concerning the Corporation. He or
she shall perform all such duties commonly incident to his or her office or as
properly required of him or her by the Chairman of the Board of Directors and
such other officer or officers to whom he or she is directly responsible.
Section 9. Salaries. Salaries of officers, agents or employees shall be
---------- ---------
fixed from time to time by the Board of Directors or by such committee or
committees, or person or persons, if any, to whom such power shall have been
delegated by the Board of Directors. An
<PAGE>
13
employment contract, whether with an officer, agent or employee, if expressly
approved or specifically authorized by the Board of Directors, may fix a term of
employment thereunder; and such contract, if so approved or authorized, shall be
valid and binding upon the Corporation in accordance with the terms thereof,
provided that this provision shall not limit or restrict in any way the right of
the Corporation at any time to remove from office, discharge or terminate the
employment of any such officer, agent or employee prior to the expiration of the
term of employment under any such contract.
Section 10. Vacancies. A vacancy in any office filled by election of the
----------- ----------
Board of Directors may be filled by the Board of Directors by the election of a
new officer who shall hold office, subject to the provisions of this Article V,
until the regular meeting of the directors following the next annual meeting of
the stockholders and until his or her successor is elected.
Section 11. Removal or Discharge. Any officer may be removed or
----------- ---------------------
discharged by the Chairman of the Board of Directors at any time excepting an
officer who is also a director. Any officer who also is a director may be
discharged at any time by the Board of Directors.
ARTICLE VI
RESIGNATIONS
Any director or officer of the Corporation, whether elected or appointed,
may resign at any time by giving written notice of such resignation to the
Chairman of the Board of Directors, the President, or the Secretary, and such
resignation shall be deemed effective as of the close of business on the date
said notice is received by the Chairman of the Board of Directors, the
President, or the Secretary, or at such later time as is specified therein. No
formal action shall be required of the Board of Directors or the stockholders to
make any such resignation effective.
ARTICLE VII
CAPITAL STOCK; DIVIDENDS; SEAL
Section 1. Stock Certificates and Transfers. The interest of each
---------- ---------------------------------
stockholder of the Corporation shall be evidenced by certificates for shares of
stock in such form as the appropriate officers of the Corporation may from time
to time prescribe. The shares of the stock of the Corporation shall be
transferred on the books of the Corporation by the holder thereof in person or
by such person's attorney, upon surrender for cancellation of certificates for
at least the same number of shares, with an assignment and power of transfer
endorsed thereon or attached thereto, duly executed, with such proof of the
authenticity of the signature as the Corporation or its agents may reasonably
require. The certificates of stock shall be numbered and signed by the Chairman
of the Board of Directors, the President, an Executive
<PAGE>
14
Vice President, a Senior Vice President or a Vice President, and also by the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary.
Any and all signatures may be facsimiles. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate has ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the Corporation with the same
effect as if he or she were such officer, transfer agent or registrar at the
date of issue.
Section 2. Lost, Destroyed or Stolen Certificate. Any person claiming a
---------- --------------------------------------
stock certificate in lieu of one lost, destroyed or stolen, shall give the
Corporation an affidavit as to his, her or its ownership of the certificate and
of the facts which go to prove that it has been lost, destroyed or stolen. If
required by the Board of Directors or any financial officer of the Corporation,
he, she or it also shall give the Corporation a bond, in such form as may be
approved by the Board of Directors or such financial officer, sufficient to
indemnify the Corporation against any claim that may be made against it on
account of the alleged loss of the certificate or the issuance of a new
certificate. A new certificate shall be issued upon receipt of such an
affidavit and, if required, upon the giving of such a bond.
Section 3. Record of holder of Shares. The Corporation shall be entitled
---------- ---------------------------
to treat the holder of record of any share or shares as the holder in fact
thereof, and accordingly shall not be bound to recognize any equitable or other
claims to or interest in such shares on the part of any other person, whether or
not it shall have express or other notice thereof, save as expressly provided by
the General Corporation Law of the State of Delaware. The Corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends and to vote as such owner.
Section 4. Dividends. The Board of Directors may from time to time
---------- ----------
declare, and the Corporation may pay, dividends on its outstanding shares of
capital stock in the manner and upon the terms and conditions provided by law
and the Charter.
Section 5. Corporate Seal. The corporate seal shall be in such form as
---------- ---------------
shall from time to time be approved by the Board of Directors. If and when so
authorized by the Board of Directors, a duplicate of the seal may be kept and
used by the Secretary or Treasurer or by any Assistant Secretary or Assistant
Treasurer.
ARTICLE VIII
EXECUTION OF CONTRACTS AND OTHER DOCUMENTS
Section 1. Contracts, etc. Except as otherwise required by law, the
---------- ---------------
Charter or these By-laws, such officers, employees or agents of the Corporation
as shall be specified by the Board of Directors shall sign, in the name and on
behalf of the Corporation, all deeds, bonds, contracts, mortgages and other
instruments or documents, the execution of which shall be
<PAGE>
15
authorized by the Board of Directors; and such authority may be general or
confined to specific instances. Except as so authorized by the Board of
Directors, no officer, agent or employee of the Corporation shall have power or
authority to bind the Corporation by any contract or engagement or to pledge,
mortgage, sell or otherwise dispose of its credit or any of its property or to
render it pecuniarily liable for any purpose or in any amount.
Section 2. Checks, Drafts, etc. Except as otherwise provided in these By-
---------- --------------------
laws, all checks, drafts, notes, bonds, bills of exchange or other orders,
instruments or obligations for the payment of money shall be signed by such
officer or officers, employee or employees, or agent or agents, as the Board of
Directors shall by resolution direct. The Board of Directors may, in its
discretion, also provide by resolution for the countersignature or registration
of any or all such orders, instruments or obligations for the payment of money.
Section 3. Proxies. Unless otherwise prescribed by resolution adopted by
---------- --------
the Board of Directors, the Chairman of the Board of Directors, the President or
any Executive Vice President, Senior Vice President or Vice President may from
time to time appoint an attorney or attorneys or agent or agents of the
Corporation, in the name and on behalf of the Corporation, to cast the votes
which the Corporation may be entitled to cast as the holder of stock or other
securities in any other corporation, any of whose stock or other securities may
be held by the Corporation, at meetings of the holders of the stock or other
securities of such other corporation, or to consent in writing, in the name of
the Corporation as such holder, to any action by such other corporation, and may
instruct the person or persons so appointed as to the manner of casting such
votes or giving such consent, and may execute or cause to be executed in the
name and on behalf of the Corporation and under its corporate seal or otherwise,
all such written proxies or other instruments as he or she may deem necessary or
proper in the premises.
ARTICLE IX
FISCAL YEAR
The fiscal year of the Company shall begin the first day of July in each
year.
ARTICLE X
MISCELLANEOUS
Section 1. Notices and Waivers Thereof. Whenever any notice whatever is
---------- ----------------------------
required by these By-laws, the Charter or any of the laws of the State of
Delaware to be given to any stockholder, director or officer, such notice,
except as otherwise provided by the laws of the State of Delaware, may be given
personally or by telephone or be given by facsimile transmission or other form
of electronic communication, addressed to such stockholder at such person's
address as it appears on the stock transfer books of the Corporation, or to such
<PAGE>
16
director or officer at his or her Corporation location, if any, or at such
address as appears on the books of the Corporation, or the notice may be given
in writing by depositing the same in a post office, or in a regularly maintained
letter box, or by sending it via courier in a postpaid, sealed wrapper addressed
to such stockholder at such person's address as it appears on the stock transfer
books of the Corporation, or to such director or officer at his or her
Corporation location, if any, or such address as appears on the books of the
Corporation.
Any notice given by facsimile transmission or other form of electronic
communication shall be deemed to have been given when it shall have been
transmitted. Any notice given by mail or courier shall be deemed to have been
given when it shall have been mailed or delivered to the courier.
A waiver of any such notice in writing, including by facsimile
transmission, signed or dispatched by the person entitled to such notice or by
his or her duly authorized attorney, whether before or after the time stated
therein, shall be deemed equivalent to the notice required to be given, and the
presence at any meeting of any person entitled to notice thereof shall be deemed
a waiver of such notice as to such person.
Section 2. Audits. The accounts, books and records of the Corporation
---------- -------
shall be audited upon the conclusion of each fiscal year by an independent
certified public accountant selected by the Board of Directors, and it shall be
the duty of the Board of Directors to cause such audit to be done annually.
ARTICLE XI
AMENDMENTS
These By-laws may be altered, amended or repealed, and new By-laws may be
adopted (a) at any annual or special meeting of stockholders by the affirmative
vote of the holders of a majority of the voting power of the stock issued and
outstanding and entitled to vote thereat, provided, however, that any proposed
alteration, amendment or repeal of, or the adoption of any By-law inconsistent
with, Sections 3, 5 or 10 of Article II or Sections 1 or 5 of Article III of the
By-laws by the stockholders shall require the affirmative vote of the holders of
at least 80% of the voting power of all Voting Stock then outstanding, voting
together as a single class, and provided, further, however, that, in the case of
any such stockholder action at a special meeting of stockholders, notice of the
proposed alteration, amendment, repeal or adoption of the new By-law or By-laws
must be contained in the notice of such special meeting, or (b) by the
affirmative vote of a majority of the Whole Board.
<PAGE>
EXHIBIT 4.1
[FRONT SIDE OF STOCK CERTIFICATE]
COMMON STOCK COMMON STOCK
NUMBER SHARES
INCORPORATED UNDER THE LAWS THIS CERTIFICATE IS TRANSFERRABLE IN
OF THE STATE OF DELAWARE NEW YORK, NY
MIPS TECHNOLOGIES, INC.
THIS IS TO CERTIFY THAT CUSIP
SEE REVERSE FOR
CERTAIN DEFINITIONS
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF THE PAR VALUE OF $.01
EACH OF
MIPS Technologies, Inc., transferable on the books of the Corporation by the
holder hereof in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This certificate is not valid unless
countersigned by the Transfer Agent and registered by the Registrar.
Witness the seal of the Corporation and the signatures of its duly
authorized Officers.
Dated COUNTERSIGNED AND REGISTERED:
[ ]
TRANSFER AGENT
AND REGISTRAR
By
CHAIRMAN AND CHIEF EXECUTIVE OFFICER Authorized Signature
SECRETARY
[CORPORATE SEAL]______________________
<PAGE>
[REVERSE SIDE OF STOCK CERTIFICATE]
MIPS Technologies, Inc.
The Corporation will furnish without charge to each stockholder who so
requests a statement of the designations, powers, preferences and relative
participating, optional or other special rights of each class of stock or series
thereof of the Corporation and the qualifications, limitations or restrictions
of such preferences and/or rights. Such request may be made to the Corporation
or the Transfer Agent.
The following abbreviations when used in the inscription on the face of
this certificate shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - _____Custodian________
(Cust) (Minor)
under Uniform gifts to Minors
TEN ENT - as tenants in the entireties Act__________________________
(State)
UT TEN - as joint tenants with the right
of survivorship and not as
tenants in common
Additional abbreviations may also be used though not in the above list.
For value received, the undersigned hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
______________________________________
______________________________________
_____________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
shares of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint ______________ Attorney to transfer the said
stock on the books of the within named Corporation with full power of
substitution in the premises.
________________
Dated
________________________
Notice: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
<PAGE>
EXHIBIT 5.1
Shearman & Sterling
555 California Street
San Francisco, California 94104
(415) 616-1100
April 21, 1998
MIPS Technologies, Inc.
2011 North Shoreline Boulevard
Mountain View, California 94043
We have acted as special counsel to MIPS Technologies, Inc., a Delaware
corporation (the "Company"), in connection with the proposed offering
(the"offering") of shares of the Company's common stock, par value $.01 per
share (the "Shares"), by the Company and Silicon Graphics, Inc., as selling
stockholder ("SGI"), as described in the Registration Statement on Form S-1 (the
"Registration Statement") filed by the Company with the Securities and Exchange
Commission under the Securities act of 1933, as amended (the "Securities Act").
The Shares are to be sold to the public by the Company and SGI (the "Offering")
pursuant to the terms of an Underwriting Agreement among the Company, SGI and
the Underwriters named therein (the "Underwriting Agreement"), the form of which
will be filed as an exhibit to the Registration Statement.
We have examined, and have relied upon as to maters of fact, such
documents, corporate records and other instruments as we have deemed necessary
for the purposes of this opinion. Our opinion expressed herein is limited to the
General Corporation Law of the State of Delaware.
Based upon the foregoing, we are of the opinion that the Shares to be
sold in the Offering by the Company and SGI (including Shares, if any,
registered in a registration statement relating to the Offering filed by the
Company pursuant to Rule 462(b) under the Securities Act), upon the approval and
effectiveness in accordance with the Delaware General Corporation Law of an
amendment to the Company's Certificate of Incorporation providing for a
sufficient number of authorized but unissued Shares, when issued and delivered
in accordance with the terms of the Underwriting Agreement, will be duly
authorized and will be validly issued, fully paid and nonassessable.
<PAGE>
MIPS Technologies, Inc. 2 April 21, 1998
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Registration Statement. We hereby also consent to the
incorporation by reference of this opinion and consent to a registration
statement, if any, relating to the Offering filed by the Company pursuant to the
Rule 462(b) under the Securities Act. In giving this consent, we do not thereby
concede that we come within the category of persons whose consent is required by
the Securities Act or the General Rules and Regulations promulgated thereunder.
Very truly yours,
SHEARMAN & STERLING
<PAGE>
EXHIBIT 10.2
CORPORATE AGREEMENT
THIS CORPORATE AGREEMENT ("Agreement") is entered into as of _______,
1998 by and between SILICON GRAPHICS, INC., a Delaware corporation ("SGI"), and
MIPS TECHNOLOGIES, Inc., a Delaware corporation ("MIPS").
RECITALS
A. SGI, directly owns _____ shares of Common Stock, par value $.01
per share ("Common Stock"), of MIPS, and MIPS is a member of SGI's "affiliated
group" of corporations (the "SGI Group") for federal income tax purposes.
B. The parties are contemplating the possibility that SGI will sell
shares of Common Stock in an initial public offering (the "Initial Public
Offering") registered under the Securities Act of 1933, as amended.
C. The parties desire to enter into this Agreement to set forth their
agreement regarding (i) SGI's rights to purchase additional shares of Capital
Stock of MIPS to permit SGI to own at least the Minimum Ownership Percentage of
Capital Stock in MIPS, (ii) certain registration rights with respect to the
Common Stock (and any other securities issued in respect thereof or in exchange
therefor) and (iii) certain representations, warranties, covenants and
agreements applicable so long as MIPS is a subsidiary of SGI.
AGREEMENTS
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, SGI and MIPS, for themselves,
their successors, and assigns, hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1. Definitions. As used in this Agreement, the following
-----------
terms will have the following meanings, applicable both to the singular and the
plural forms of the terms described:
"Affiliate" means, with respect to a given Person, any Person
controlling, controlled by or under common control with such Person. For
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlled by" and "under common control with"), as applied to any
Person, means the possession, directly or indirectly, of the power to vote a
majority of the securities having voting power for the election of directors (or
other Persons acting in similar capacities) of such
<PAGE>
Person or otherwise to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting securities or
by contract or otherwise.
"Agreement" has the meaning ascribed thereto in the preamble hereto,
as such agreement may be amended and supplemented from time to time in
accordance with its terms.
"Applicable Stock" means at any time the (i) shares of Common Stock
owned by the SGI Entities that were owned on the date hereof, plus (ii) shares
of Common Stock purchased by the SGI Entities pursuant to Article II of this
Agreement, plus (iii) shares of Common Stock that were issued to SGI Entities in
respect of shares described in either clause (i) or clause (ii) in any
reclassification, share combination, share subdivision, share dividend, share
exchange, merger, consolidation or similar transaction or event.
"Capital Stock" means (i) in the case of a corporation, corporate
stock, (ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership, partnership
interests (whether general or limited) and (iv) any other interest or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"Company Securities" has the meaning ascribed thereto in Section
3.2(b).
"Disadvantageous Condition" has the meaning ascribed thereto in
Section 3.1(a).
"MIPS" has the meaning ascribed thereto in the preamble hereto.
"MIPS Entities" means MIPS and its Subsidiaries, and "MIPS Entity"
shall mean any of the MIPS Entities.
"Holder" means SGI, the other SGI Entities and any Transferee.
"Holder Securities" has the meaning ascribed thereto in Section
3.2(b).
"Initial Public Offering" has the meaning ascribed thereto in the
recitals to this Agreement.
"Initial Public Offering Date" means the date of completion of the
initial sale of Common Stock in the Initial Public Offering.
"Issuance Event" has the meaning ascribed thereto in Section 2.2.
"Issuance Event Date" has the meaning ascribed thereto in Section 2.2.
2
<PAGE>
"Market Price" of any shares of Common Stock (or other Capital Stock)
on any date means (i) the average of the last sale price of such shares on each
of the five trading days immediately preceding such date on the Nasdaq National
Market or, if such shares are not listed or quoted thereon, on the principal
national securities exchange or automated interdealer quotation system on which
such shares are traded or (ii) if such sale prices are unavailable or such
shares are not so traded, the value of such shares on such date determined in
accordance with agreed-upon procedures reasonably satisfactory to MIPS and SGI.
"Minimum Ownership Percentage" means the ownership of such number of
(i) shares of Capital Stock of the Company to the extent, and only to the
extent, necessary for SGI to maintain all of the following: (a) control of the
Company (within the meaning of Section 368(a)(2)(H) and (c) of the Internal
Revenue Code of 1986, as amended (the "Code")), (b) the status of the Company as
a member of the affiliated group of corporations (within the meaning of Section
1504 of the Code) of which SGI is the common parent, provided such status has
theretofore been maintained or (c) its then-existing percentage of the total
voting power and value of the Company, whichever percentage is highest, and (ii)
shares of non-voting capital stock to the extent, and only to the extent,
necessary to own 80% of each outstanding class of such stock.
"Option" has the meaning ascribed thereto in Section 2.1(a).
"Option Notice" has the meaning ascribed thereto in Section 2.2.
"Other Holders" has the meaning ascribed thereto in Section 3.2(c).
"Other Securities" has the meaning ascribed thereto in Section 3.2.
"Ownership Percentage" means, at any time, the fraction, expressed as
a percentage and rounded to the next highest thousandth of a percent, whose
numerator is the aggregate Value of the Applicable Stock and whose denominator
is the aggregate Value of outstanding shares of Common Stock of MIPS; provided,
--------
however, that any shares of Common Stock issued by MIPS in violation of its
- -------
obligations under Article II of this Agreement shall not be deemed outstanding
for the purpose of determining the Ownership Percentage. For purposes of this
definition, "Value" means, with respect to any share of stock, the value of such
share determined by SGI under principles applicable for purposes of Section 1504
of the Internal Revenue Code of 1986, as amended.
"Person" means any individual, partnership, limited liability company,
joint venture, corporation, trust, unincorporated organization, government (and
any department or agency thereof) or other entity.
"Registrable Securities" means shares of Common Stock and any stock or
other securities into which or for which such Common Stock may hereafter be
changed, converted or
3
<PAGE>
exchanged and any other shares or securities issued to the Holders (or such
shares or other securities into which or for which such shares are so changed,
converted or exchanged) upon any reclassification, share combination, share
subdivision, share dividend, share exchange, merger, consolidation or similar
transaction or event or pursuant to the Option. As to any particular
Registrable Securities, such Registrable Securities shall cease to be
Registrable Securities when (i) a registration statement with respect to the
sale by the Holder thereof shall have been declared effective under the
Securities Act and such securities shall have been disposed of in accordance
with such registration statement, (ii) such Registrable Securities are sold by
a person in a transaction in which the rights under the provisions of this
Agreement are not assigned or (iii) such Registrable Securities may be sold
pursuant to Rule 144(k) (or any similar provision then in force) under the
Securities Act without registration under the Securities Act. (iv) such
Registrable Securities shall have been otherwise transferred, new certificates
for them not bearing a legend restricting further transfer shall have been
delivered by MIPS and subsequent disposition of them shall not require
registration or qualification of them under the Securities Act or any state
securities or blue sky law then in effect or (v) they shall have ceased to be
outstanding.
"Registration Expenses" means any and all expenses incident to
performance of or compliance with any registration of securities pursuant to
Article III, including, without limitation, (i) the fees, disbursements and
expenses of MIPS's counsel and accountants and the fees and expenses of counsel
selected by the Holders in accordance with this Agreement in connection with the
registration of the securities to be disposed of, such fees and expenses of such
counsel selected by the Holders to be reasonable in the reasonable discretion of
MIPS; (ii) all expenses, including filing fees, in connection with the
preparation, printing and filing of the registration statement, any preliminary
prospectus or final prospectus, any other offering document and amendments and
supplements thereto and the mailing and delivering of copies thereof to any
underwriters and dealers; (iii) the cost of printing or producing any
underwriting agreements and blue sky or legal investment memoranda and any other
documents in connection with the offering, sale or delivery of the securities to
be disposed of; (iv) all expenses in connection with the qualification of the
securities to be disposed of for offering and sale under state securities laws,
including the fees and disbursements of counsel for the underwriters or the
Holders of securities in connection with such qualification and in connection
with any blue sky and legal investment surveys; (v) the filing fees incident to
securing any required review by the National Association of Securities Dealers,
Inc. of the terms of the sale of the securities to be disposed of; (vi) transfer
agents' and registrars' fees and expenses and the fees and expenses of any other
agent or trustee appointed in connection with such offering; (vii) all security
engraving and security printing expenses; (viii) all fees and expenses payable
in connection with the listing of the securities on any securities exchange or
automated interdealer quotation system or the rating of such securities, (ix)
any other fees and disbursements of underwriters customarily paid by the sellers
of securities, but excluding underwriting discounts and commissions and transfer
taxes, if any, and (x) other reasonable out-of-pocket expenses of Holders other
than legal fees and expenses referred to in clause (i) above.
"Rule 144" means Rule 144 (or any successor rule to similar effect)
promulgated under the Securities Act.
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"Rule 415 Offering" means an offering on a delayed or continuous basis
pursuant to Rule 415 (or any successor rule to similar effect) promulgated under
the Securities Act.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, or
any successor statute.
"Selling Holder" has the meaning ascribed thereto in Section 3.4(e).
"SGI" has the meaning ascribed thereto in the preamble hereto.
"SGI Entities" means SGI and Subsidiaries of SGI (other than
Subsidiaries that constitute MIPS Entities), and "SGI Entity" shall mean any of
the SGI Entities.
"SGI Group" has the meaning ascribed thereto in the recitals to this
Agreement.
"SGI Ownership Reduction" means any decrease at any time in the
Ownership Percentage to less than 50%.
"SGI Transferee" has the meaning ascribed thereto in Section 3.9.
"Subsidiary" means, as to any Person, any corporation, association,
partnership, joint venture or other business entity of which more than 50% of
the voting capital stock or other voting ownership interests is owned or
controlled, directly or indirectly, by such Person or by one or more of the
Subsidiaries of such Person or by a combination thereof. "Subsidiary," when
used with respect to SGI or MIPS, shall also include any other entity affiliated
with SGI or MIPS, as the case may be, that SGI and MIPS may hereafter agree in
writing shall be treated as a "Subsidiary" for the purposes of this Agreement.
"Transferee" has the meaning ascribed thereto in Section 3.9.
Section 1.2. Internal References. Unless the context indicates
--------------------
otherwise, references to Articles, Sections and paragraphs shall refer to the
corresponding articles, sections and paragraphs in this Agreement and references
to the parties shall mean the parties to this Agreement.
ARTICLE II
OPTIONS
Section 2.1. Options. (a) MIPS hereby grants to SGI, on the terms
-------
and conditions set forth herein, a continuing right (the "Option") to purchase
from MIPS such number of shares of the Capital Stock as is necessary to allow
the SGI Entities to maintain the Minimum Ownership Percentage
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in the Capital Stock of MIPS. The Option shall be assignable, in whole or in
part and from time to time, by SGI to any SGI Entity. The exercise price for
the shares of Capital Stock purchased pursuant to the Option shall be the
Market Price of the Capital Stock as of the date of first delivery of notice
of exercise of the Option by SGI (or its permitted assignee hereunder) to
MIPS.
(b) The provisions of Section 2.1(a) hereof notwithstanding, the
Option granted pursuant to Section 2.1 shall not apply and shall not be
exercisable in connection with the issuance by MIPS of any shares of Common
Stock pursuant to any stock option or other executive or employee benefit or
compensation plan maintained by MIPS, so long as, from and after the date hereof
and prior to the issuance of such shares, MIPS has repurchased from shareholders
and not subsequently reissued a number of shares equal or greater to the number
of shares to be issued in any such issuance.
Section 2.2. Notice. At least 20 business days prior to the issuance
------
of any shares of Capital Stock (other than in connection with the Initial Public
Offering, including the full exercise of all underwriters' over-allotment
options granted in connection therewith and other than issuances of Common Stock
to any SGI Entity) or the first date on which any event could occur that, in the
absence of a full or partial exercise of the Option, would result in a reduction
in SGI's level of ownership in MIPS to below the Minimum Ownership Percentage,
MIPS will notify SGI in writing (an "Option Notice") of any plans it has to
issue such shares or the date on which such event could first occur. Each Option
Notice must specify the date on which MIPS intends to issue such additional
shares or on which such event could first occur (such issuance or event being
referred to herein as an "Issuance Event" and the date of such issuance or event
as an "Issuance Event Date"), the number of shares MIPS intends to issue or may
issue and the other terms and conditions of such Issuance Event.
Section 2.3. Option Exercise and Payment. The Option may be
---------------------------
exercised by SGI (or any SGI Entity to which all or any part of the Option has
been assigned) for a number of shares equal to or less than the number of shares
that are necessary for the SGI Entities to maintain, in the aggregate, the
Minimum Ownership Percentage. Each Option may be exercised at any time by the
delivery to MIPS of a written notice (the "Exercise Notice") to such effect
specifying (i) the number of shares of Capital Stock to be purchased by SGI, or
any of the SGI Entities and (ii) a calculation of the exercise price for such
shares. Upon any such exercise of the Option, MIPS will deliver to SGI (or any
SGI Entity designated by SGI), against payment therefor, certificates (issued in
the name of SGI or its permitted assignee hereunder or as directed by SGI)
representing the shares of Capital Stock being purchased upon such exercise. If
after the receipt of an Option Notice and prior to the corresponding Issuance
Event Date, SGI delivers to MIPS an Exercise Notice, MIPS shall deliver the
certificates for the shares of Capital Stock being purchased prior to the
applicable Issuance Event Date. Payment for such shares shall be made by wire
transfer or intrabank transfer of immediately-available funds to such account as
shall be specified by MIPS, for the full purchase price for such shares.
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Section 2.4. Effect of Failure to Exercise. Except as provided in
-----------------------------
Section 2.6, any failure by SGI to exercise the Option in full shall not affect
SGI's right to exercise the Option at any time in the future.
Section 2.5. Initial Public Offering. Notwithstanding the foregoing,
-----------------------
SGI shall not be entitled to exercise the Option in connection with the Initial
Public Offering of the Common Stock if, upon the completion of the Initial
Public Offering, including the full exercise of all underwriters' over-allotment
options granted in connection therewith, SGI owns at least the Minimum Ownership
Percentage (other than (i)(c) of the definition of the Minimum Ownership
Percentage).
Section 2.6. Termination of Options. The Option shall terminate upon
----------------------
the occurrence of any Issuance Event that, after considering SGI's response
thereto and to any other Issuance Events, results in a SGI Ownership Reduction,
other than any Issuance Event in violation of this Agreement. Each Option, or
any portion thereof assigned to any SGI Entity other than SGI, also shall
terminate in the event that the Person to whom such Option, or such portion
thereof has been transferred, ceases to be a SGI Entity for any reason
whatsoever.
ARTICLE III
REGISTRATION RIGHTS
Section 3.1. Demand Registration - Registrable Securities. (a) Upon
--------------------------------------------
written notice provided at any time after the Initial Public Offering Date from
any Holder of Registrable Securities requesting that MIPS effect the
registration under the Securities Act of any or all of the Registrable
Securities held by such Holder, which notice shall specify the intended method
or methods of disposition of such Registrable Securities, MIPS shall use its
best efforts to effect the registration under the Securities Act and applicable
state securities laws of such Registrable Securities for disposition in
accordance with the intended method or methods of disposition stated in such
request (including in a Rule 415 Offering, if MIPS is then eligible to register
such Registrable Securities on Form S-3 (or a successor form) for such
offering); provided that:
-------------
(i) with respect to any registration statement filed, or to be filed,
pursuant to this Section 3.1, if MIPS shall furnish to the Holders of
Registrable Securities that have made such request a certified resolution
of the Board of Directors of MIPS (adopted by the affirmative vote of a
majority of the directors not designated by the SGI Entities that are also
directors or officers of any SGI Entity) stating that in the Board of
Directors' good faith judgment it would (because of the existence of, or in
anticipation of, any acquisition or financing activity, or the
unavailability for reasons beyond MIPS's reasonable control of any required
financial statements, or any other event or condition of similar
significance to MIPS) be significantly disadvantageous (a "Disadvantageous
Condition") to MIPS for such a registration statement to be maintained
effective, or to be filed and become effective, and setting forth the
general reasons for such judgment, MIPS shall be entitled to cause such
registration statement to be
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withdrawn and the effectiveness of such registration statement
terminated, or, in the event no registration statement has yet been
filed, shall be entitled not to file any such registration statement,
until such Disadvantageous Condition no longer exists (notice of which
MIPS shall promptly deliver to such Holders). Upon receipt of any such
notice of a Disadvantageous Condition, such Holders shall forthwith
discontinue use of the prospectus contained in such registration
statement and, if so directed by MIPS, each such Holder will deliver to
MIPS all copies, other than permanent file copies then in such Holder's
possession, of the prospectus then covering such Registrable Securities
current at the time of receipt of such notice; provided, that
--------
the filing of any such registration statement may not be delayed for a
period in excess of 90 days due to the occurrence of any particular
Disadvantageous Condition [and no more than three resolutions regarding
Disadvantageous Conditions may be made by the Board of Directors in any
two-year period.];
(ii) after any SGI Ownership Reduction, the Holders of Registrable
Securities may collectively exercise their rights under this Section 3.1
(through notice delivered by Holders owning in the aggregate a majority in
economic interest of the Registrable Securities then held by Holders) on
not more than four occasions (it being acknowledged that prior to any SGI
Ownership Reduction, there shall be no limit to the number of occasions on
which such Holders (other than any SGI Transferees and their Affiliates
(other than SGI Entities)) may exercise such rights);
(iii) except as otherwise provided herein, the Holders of
Registrable Securities shall not have the right to exercise registration
rights pursuant to this Section 3.1 within the 180-day period following the
registration and sale of Registrable Securities effected pursuant to a
prior exercise of the registration rights provided in this Section 3.1; and
(iv) the Holders of Registrable Securities shall not have the right
to exercise registration rights pursuant to this Section 3.1 within the
180-day period following the effective date of the Registration Statement
in connection with the Initial Public Offering.
(b) Notwithstanding any other provision of this Agreement to the
contrary, a registration requested by a Holder of Registrable Securities
pursuant to this Section 3.1 shall not be deemed to have been effected (and,
therefore, not requested for purposes of paragraph (a) above), (i) unless it has
become effective, (ii) if after it has become effective such registration is
interfered with by any stop order, injunction or other order or requirement of
the SEC or other governmental agency or court for any reason other than a
misrepresentation or an omission by such Holder and, as a result thereof, the
Registrable Securities requested to be registered cannot be completely
distributed in accordance with the plan of distribution set forth in the related
registration statement or (iii) if the conditions to closing specified in the
purchase agreement or underwriting agreement entered into in connection with
such registration are not satisfied or waived other than by reason of some act
or omission by such Holder of Registrable Securities.
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<PAGE>
(c) In the event that any registration pursuant to this Section 3.1
shall involve, in whole or in part, an underwritten offering, the Holders of a
majority of the Registrable Securities to be registered shall have the right to
designate an underwriter or underwriters reasonably acceptable to MIPS as the
lead or managing underwriters of such underwritten offering and, in connection
with each registration pursuant to this Section 3.1, such Holders may select one
counsel reasonably acceptable to MIPS to represent all such Holders.
(d) MIPS shall have the right to cause the registration of additional
equity securities for sale for its account, the account of any MIPS Entity or
any existing or former directors, officers or employees of the MIPS Entities in
any registration of Registrable Securities requested by the Holders pursuant to
paragraph (a) above; provided, however, that if the registration and sale of
-------- -------
such additional equity securities would require SGI or any SGI Entity to
exercise the Option to maintain the then-current Ownership Percentage or
ownership of 80% of each class of outstanding Nonvoting Stock, then the number
of such additional equity securities shall be reduced so that exercise of the
Option would not be necessary for SGI or any SGI Entity to maintain such
ownership levels and, provided, further, that if such Holders are advised in
-------- -------
writing (with a copy to MIPS) by a nationally recognized investment banking or
commercial banking firm selected by such Holders reasonably acceptable to MIPS
(which shall be the lead underwriter or a managing underwriter in the case of an
underwritten offering) that, in such firm's good faith view, all or a part of
such additional equity securities cannot be sold and the inclusion of such
additional equity securities in such registration would be likely to have an
adverse effect on the price, timing or distribution of the offering and sale of
the Registrable Securities then contemplated by any Holder, the registration of
such additional equity securities or part thereof shall not be permitted. The
Holders of the Registrable Securities to be offered may require that any such
additional equity securities be included in the offering proposed by such
Holders on the same conditions as the Registrable Securities that are included
therein. In the event that the number of Registrable Securities requested to be
included in a registration statement by the Holders thereof exceeds the number
which, in the good faith view of such investment banking firm, can be sold
without adversely affecting the price, timing, distribution or sale of
securities in the offering, the number shall be allocated pro rata among the
requesting Holders on the basis of the relative number of Registrable Securities
then held by each such Holder (provided that any number in excess of a Holder's
request may be reallocated among the remaining requesting Holders in a like
manner).
Section 3.2. Piggyback Registration. In the event that MIPS at any
----------------------
time after the Initial Public Offering Date proposes to register any of its
Common Stock, any other of its equity securities or securities convertible into
or exchangeable for its equity securities (collectively, including Common Stock,
"Other Securities") under the Securities Act, whether or not for sale for its
own account, in a manner that would permit registration of Registerable
Securities for sale for cash to the public under the Securities Act, it shall at
each such time give prompt written notice to each Holder of Registrable
Securities of its intention to do so and of the rights of such Holder under this
Section 3.2. Subject to the terms and conditions hereof, such notice shall offer
each such Holder the opportunity to include in such
9
<PAGE>
registration statement such number of Registrable Securities as such Holder
may request. Upon the written request of any such Holder made within 15 days
after the receipt of MIPS's notice (which request shall specify the number of
Registrable Securities intended to be disposed of and the intended method of
disposition thereof), MIPS shall use its best efforts to effect, in connection
with the registration of the Other Securities, the registration under the
Securities Act of all Registrable Securities which MIPS has been so requested
to register, to the extent required to permit the disposition (in accordance
with such intended method of disposition thereof) of the Registrable
Securities so requested to be registered; provided, that:
--------
(a) if, at any time after giving such written notice of its intention
to register any Other Securities and prior to the effective date of the
registration statement filed in connection with such registration, MIPS shall
determine for any reason not to register the Other Securities, MIPS may, at its
election, give written notice of such determination to such Holders and
thereupon MIPS shall be relieved of its obligation to register such Registrable
Securities in connection with the registration of such Other Securities, without
prejudice, however, to the rights of the Holders of Registrable Securities
immediately to request that such registration be effected as a registration
under Section 3.1 to the extent permitted thereunder;
(b) if the registration referred to in the first sentence of this
Section 3.2 is to be an underwritten registration on behalf of MIPS, and a
nationally recognized investment banking or commercial banking firm selected by
MIPS advises MIPS in writing that, in such firm's good faith view, all or a part
of such Registrable Securities cannot be sold and the inclusion of all or a part
of such Registrable Securities in such registration would be likely to have an
adverse effect upon the price, timing or distribution of the offering and sale
of the Other Securities then contemplated, MIPS shall include in such
registration:
(i) first, all Other Securities MIPS proposes to sell for its own
account ("Company Securities"),
(ii) second, up to the full number of Registrable Securities held by
Holders constituting SGI Entities that are requested to be included in such
registration (Registrable Securities that are so held being sometimes
referred to herein as "Holder Securities") in excess of the number of
Company Securities to be sold in such offering which, in the good faith
view of such investment banking or commercial banking firm, can be sold
without adversely affecting such offering (and (x) if such number is less
than the full number of such Holder Securities, such number shall be
allocated by SGI among such SGI Entities and (y) in the event that such
investment banking or commercial banking firm advises that less than all of
such Holder Securities may be included in such offering, such SGI Entities
may withdraw their request for registration of their Registrable Securities
under this Section 3.2 and 90 days subsequent to the effective date of the
registration statement for the registration of such Other Securities
request
10
<PAGE>
that such registration be effected as a registration under Section 3.1 to
the extent permitted thereunder,
(iii) third, up to the full number of Registrable Securities held by
Holders (other than SGI Entities) of Registrable Securities that are
requested to be included in such registration in excess of the number of
Company Securities and Holder Securities to be sold in such offering which,
in the good faith view of such investment banking or commercial banking
firm, can be so sold without so adversely affecting such offering (and (x)
if such number is less than the full number of such Registrable Securities,
such number shall be allocated pro rata among such Holders on the basis of
the number of Registrable Securities requested to be included therein by
each such Holder and (y) in the event that such investment banking firm
advises that less than all of such Registrable Securities may be included
in such offering, such Holders may withdraw their request for registration
of their Registrable Securities under this Section 3.2 and 90 days
subsequent to the effective date of the registration statement for the
registration of such Other Securities request that such registration be
effected as a registration under Section 3.1 to the extent permitted
thereunder) and
(iv) fourth, up to the full number of the Other Securities (other than
Company Securities), if any, in excess of the number of Company Securities
and Registrable Securities to be sold in such offering which, in the good
faith view of such investment banking firm, can be so sold without so
adversely affecting such offering (and, if such number is less than the
full number of such Other Securities, such number shall be allocated pro
rata among the holders of such Other Securities (other than Company
Securities) on the basis of the number of securities requested to be
included therein by each such Holder);
(c) if the registration referred to in the first sentence of this
Section 3.2 is to be an underwritten secondary registration on behalf of holders
of Other Securities (the "Other Holders"), and the lead underwriter or managing
underwriter advises MIPS in writing that in their good faith view, all or a part
of such additional securities cannot be sold and the inclusion of such
additional securities in such registration would be likely to have an adverse
effect on the price, timing or distribution of the offering and sale of the
Other Securities then contemplated, MIPS shall include in such registration the
number of securities (including Registrable Securities) that such underwriters
advise can be so sold without adversely affecting such offering, allocated pro
rata among the Other Holders and the Holders of Registrable Securities on the
basis of the number of securities (including Registrable Securities) requested
to be included therein by each Other Holder and each Holder of Registrable
Securities; provided, that if such registration statement is to be filed at any
--------
time after a SGI Ownership Reduction, if such Other Holders have requested that
such registration statement be filed pursuant to demand registration rights
granted to them by MIPS, MIPS shall include in such registration (i) first,
Other Securities sought to be included therein by the Other Holders pursuant
to the exercise of such demand registration rights, (ii) second, the number of
Holder Securities sought to be included in such registration in excess of the
number of Other Securities sought to be included in such registration by the
Other
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Holders which in the good faith view of such investment banking or
commercial banking firm, can be so sold without so adversely affecting such
offering (and (x) if such number is less than the full number of such Holder
Securities, such number shall be allocated by SGI among such SGI Entities and
(y) in the event that such investment banking or commercial banking firm advises
that less than all of such Holder Securities may be included in such offering,
such SGI Entities may withdraw their request for registration of their
Registrable Securities under this Section 3.2 and 90 days subsequent to the
effective date of the registration statement for the registration of such Other
Securities request that such registration be effected as a registration under
Section 3.1 to the extent permitted thereunder) and (iii) third, the number of
Registrable Securities sought to be included in such registration by Holders
(other than SGI Entities) of Registrable Securities in excess of the number of
Other Securities and the number of Holder Securities sought to be included in
such registration which, in the good faith view of such investment banking or
commercial banking firm, can be so sold without so adversely affecting such
offering (and (x) if such number is less than the full number of such
Registrable Securities, such number shall be allocated pro rata among such
Holders on the basis of the number of Registrable Securities requested to be
included therein by each such Holder and (y) in the event that such investment
banking or commercial banking firm advises that less than all of such
Registrable Securities may be included in such offering, such Holders may
withdraw their request for registration of their Registrable Securities under
this Section 3.2 and 90 days subsequent to the effective date of the
registration statement for the registration of such Other Securities request
that such registration be effected as a registration under Section 3.1 to the
extent permitted thereunder);
(d) MIPS shall not be required to effect any registration of
Registrable Securities under this Section 3.2 incidental to the registration of
any of its securities in connection with mergers, acquisitions, exchange offers,
subscription offers, dividend reinvestment plans or stock option or other
executive or employee benefit or compensation plans; and
(e) no registration of Registrable Securities effected under this
Section 3.2 shall relieve MIPS of its obligation to effect a registration of
Registrable Securities pursuant to Section 3.1.
Section 3.3. Expenses. Except as provided herein and except for
--------
underwriting discounts and commissions attributable to the Registrable
Securities sold by the Holders, MIPS shall pay all Registration Expenses with
respect to a particular offering (or proposed offering). Notwithstanding the
foregoing, each Holder and MIPS shall be responsible for its own internal
administrative and similar costs, which shall not constitute Registration
Expenses.
Section 3.4. Registration and Qualification. If and whenever MIPS is
------------------------------
required to effect the registration of any Registrable Securities under the
Securities Act as provided in Sections 3.1 or 3.2, MIPS shall as promptly as
practicable:
(a) prepare, file and use its reasonable best efforts to cause to
become effective a registration statement under the Securities Act relating to
the Registrable Securities to be offered;
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(b) prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith as
may be necessary to keep such registration statement effective and to comply
with the provisions of the Securities Act with respect to the disposition of all
Registrable Securities until the earlier of (A) such time as all of such
Registrable Securities have been disposed of in accordance with the intended
methods of disposition set forth in such registration statement and (B) the
expiration of six months after such registration statement becomes effective;
provided, that such six-month period shall be extended for such number of days
- --------
that equals the number of days elapsing from (x) the date the written notice
contemplated by paragraph (f) below is given by MIPS to (y) the date on which
MIPS delivers to the Holders of Registrable Securities the supplement or
amendment contemplated by paragraph (f) below;
(c) furnish to the Holders of Registrable Securities and to any
underwriter of such Registrable Securities such number of conformed copies of
such registration statement and of each such amendment and supplement thereto
(in each case including all exhibits), such number of copies of the prospectus
included in such registration statement (including each preliminary prospectus
and any summary prospectus), in conformity with the requirements of the
Securities Act, such documents incorporated by reference in such registration
statement or prospectus, and such other documents, as the Holders of Registrable
Securities or such underwriter may reasonably request, and upon request a copy
of any and all transmittal letters or other correspondence to or received from,
the SEC or any other governmental agency or self-regulatory body or other body
having jurisdiction (including any domestic or foreign securities exchange)
relating to such offering;
(d) use its reasonable best efforts to register or qualify all
Registrable Securities covered by such registration statement under the
securities or blue sky laws of such U.S. jurisdictions as the Holders of such
Registrable Securities or any underwriter to such Registrable Securities shall
request, and use its reasonable best efforts to obtain all appropriate
registrations, permits and consents in connection therewith, and do any and all
other acts and things which may be necessary or advisable to enable the Holders
of Registrable Securities or any such underwriter to consummate the disposition
in such jurisdictions of its Registrable Securities covered by such registration
statement; provided, that MIPS shall not for any such purpose be required to
--------
qualify generally to do business as a foreign corporation in any such
jurisdiction wherein it is not so qualified or to consent to general service of
process in any such jurisdiction;
(e) (i) use its best efforts to furnish to each Holder of Registrable
Securities included in such registration (each, a "Selling Holder") and to any
underwriter of such Registrable Securities an opinion of independent counsel for
MIPS addressed to each Selling Holder and dated the date of the closing under
the underwriting agreement (if any) (or if such offering is not underwritten,
dated the effective date of the registration statement) and (ii) use its best
efforts to furnish to each Selling Holder a "cold comfort" letter addressed to
each Selling Holder and signed by the independent public accountants who have
audited the financial statements of MIPS included in such registration
statement,
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in each such case covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) as are
customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities and such other matters as the Selling Holders may reasonably
request and, in the case of such accountants' letter, with respect to events
subsequent to the date of such financial statements;
(f) as promptly as practicable, notify the Selling Holders in writing
(i) at any time when a prospectus relating to a registration pursuant to
Sections 3.1 or 3.2 is required to be delivered under the Securities Act of the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading and (ii) of any request by the SEC or any
other regulatory body or other body having jurisdiction for any amendment of or
supplement to any registration statement or other document relating to such
offering, and in either such case, at the request of the Selling Holders prepare
and furnish to the Selling Holders a reasonable number of copies of a supplement
to or an amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
shall not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they are made, not
misleading;
(g) enter into customary agreements (including if the method of
distribution is by means of an underwriting, an underwriting agreement in
customary form) and take such other actions as are reasonably required in order
to expedite or facilitate the disposition of the Registrable Securities to be so
included in the registration statement;
(h) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders to the extent not already provided, as soon as reasonably practicable,
but not later than eighteen (18) months after the effective date of the
registration statement, an earnings statement covering the period of at least
twelve (12) months beginning with the first full month after the effective date
of such registration statement, which earnings statements shall satisfy the
provisions of Section 11(a) of the Securities Act;
(i) use its best efforts to list all such Registrable Securities
covered by such registration on each securities exchange and automated inter-
dealer quotation system on which a class of common equity securities of MIPS is
then listed;
(j) to the extent reasonably requested by the lead or managing
underwriters, send appropriate officers of MIPS to attend any "road shows"
scheduled in connection with any such registration, with all out-of-pocket costs
and expense incurred by MIPS or such officers in connection with such attendance
to be paid by MIPS; and
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(k) furnish for delivery in connection with the closing of any
offering of Registrable Securities pursuant to a registration effected pursuant
to Sections 3.1 or 3.2 unlegended certificates representing ownership of the
Registrable Securities being sold in such denominations as shall be requested by
the Selling Holders or the underwriters.
Section 3.5. Conversion of Other Securities, Etc. In the event that
------------------------------------
any Holder offers any options, rights, warrants or other securities issued by it
or any other Person that are offered with, convertible into or exercisable or
exchangeable for any Registrable Securities, the Registrable Securities
underlying such options, rights, warrants or other securities shall continue to
be eligible for registration pursuant to Sections 3.1 and 3.2.
Section 3.6. Underwriting; Due Diligence. (a) If requested by the
---------------------------
underwriters for any underwritten offering of Registrable Securities pursuant to
a registration requested under this Article III, MIPS shall enter into an
underwriting agreement with such underwriters for such offering, which agreement
will contain such representations and warranties by MIPS and such other terms
and provisions as are customarily contained in underwriting agreements of MIPS
to the extent relevant and as are customarily contained in underwriting
agreements generally with respect to secondary distributions to the extent
relevant, including, without limitation, indemnification and contribution
provisions substantially to the effect and to the extent provided in Section
3.7, and agreements as to the provision of opinions of counsel and accountants'
letters to the effect and to the extent provided in Section 3.4(e). The Selling
Holders on whose behalf the Registrable Securities are to be distributed by such
underwriters shall be parties to any such underwriting agreement and the
representations and warranties by, and the other agreements on the part of, MIPS
to and for the benefit of such underwriters, shall also be made to and for the
benefit of such Selling Holders. Such underwriting agreement shall also contain
such representations and warranties by such Selling Holders and such other terms
and provisions as are customarily contained in underwriting agreements with
respect to secondary distributions, when relevant, including, without
limitation, indemnification and contribution provisions substantially to the
effect and to the extent provided in Section 3.7.
(b) In connection with the preparation and filing of each
registration statement registering Registrable Securities under the Securities
Act pursuant to this Article III, MIPS shall give the Holders of such
Registrable Securities and the underwriters, if any, and their respective
counsel and accountants, such reasonable and customary access to its books and
records and such opportunities to discuss the business of MIPS with its officers
and the independent public accountants who have certified the financial
statements of MIPS as shall be necessary, in the opinion of such Holders and
such underwriters or their respective counsel, to conduct a reasonable
investigation within the meaning of the Securities Act.
Section 3.7. Indemnification and Contribution. (a) In the case of
--------------------------------
each offering of Registrable Securities made pursuant to this Article III, MIPS
agrees to indemnify and hold harmless, to the extent permitted by law, each
Selling Holder, each underwriter of Registrable Securities so offered
15
<PAGE>
and each Person, if any, who controls any of the foregoing Persons within the
meaning of the Securities Act and the officers, directors, affiliates,
employees and agents of each of the foregoing, against any and all losses,
liabilities, costs (including reasonable attorney's fees and disbursements),
claims and damages, joint or several, to which they or any of them may become
subject, under the Securities Act or otherwise, including any amount paid in
settlement of any litigation commenced or threatened, insofar as such losses,
liabilities, costs, claims and damages (or actions or proceedings in respect
thereof, whether or not such indemnified Person is a party thereto) arise out
of or are based upon any untrue statement by MIPS or alleged untrue statement
by MIPS of a material fact contained in the registration statement (or in any
preliminary or final prospectus included therein) or in any offering
memorandum or other offering document relating to the offering and sale of
such Registrable Securities prepared by MIPS or at its direction, or any
amendment thereof or supplement thereto, or in any document incorporated by
reference therein, or any omission by MIPS or alleged omission by MIPS to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided, however that MIPS shall
not be liable to any Person in any such case to the extent that any such loss,
liability, cost, claim or damage arises out of or relates to any untrue
statement or alleged untrue statement, or any omission, if such statement or
omission shall have been made in reliance upon and in conformity with
information relating to a Selling Holder, another holder of securities
included in such registration statement or underwriter furnished in writing to
MIPS by or on behalf of such Selling Holder, other holder or underwriter
specifically for use in the registration statement (or in any preliminary or
final prospectus included therein), offering memorandum or other offering
document, or any amendment thereof or supplement thereto. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of any Selling Holder, any other holder or any underwriter and shall
survive the transfer of such securities. The foregoing indemnity agreement is
in addition to any liability that MIPS may otherwise have to each Selling
Holder, other holder or underwriter of the Registrable Securities or any
controlling person of the foregoing and the officers, directors, affiliates,
employees and agents of each of the foregoing; provided, further, that, in the
-------- -------
case of an offering with respect to which a Selling Holder has designated the
lead or managing underwriters (or a Selling Holder is offering Registrable
Securities directly, without an underwriter), this indemnity does not apply to
any loss, liability, cost, claim or damage arising out of or relating to any
untrue statement or alleged untrue statement or omission or alleged omission in
any preliminary prospectus or offering memorandum if a copy of a final
prospectus or offering memorandum was not sent or given by or on behalf of any
underwriter (or such Selling Holder or other holder, as the case may be) to such
Person asserting such loss, liability, cost, claim or damage at or prior to the
written confirmation of the sale of the Registrable Securities as required by
the Securities Act and such untrue statement or omission had been corrected in
such final prospectus or offering memorandum.
(b) In the case of each offering made pursuant to this Agreement,
each Selling Holder, by exercising its registration rights hereunder, agrees to
indemnify and hold harmless, and to cause each underwriter of Registrable
Securities included in such offering (in the same manner and to the same extent
as set forth in Section 3.7(a)) to agree to indemnify and hold harmless, MIPS,
each other underwriter who participates in such offering, each other Selling
Holder or other holder with securities
16
<PAGE>
included in such offering and in the case of an underwriter, such Selling
Holder or other holder, and each Person, if any, who controls any of the
foregoing within the meaning of the Securities Act and the officers,
directors, affiliates, employees and agents of each of the foregoing, against
any and all losses, liabilities, costs (including reasonable attorney's fees
and disbursements), claims and damages to which they or any of them may become
subject, under the Securities Act or otherwise, including any amount paid in
settlement of any litigation commenced or threatened, insofar as such losses,
liabilities, costs, claims and damages (or actions or proceedings in respect
thereof, whether or not such indemnified Person is a party thereto) arise out
of or are based upon any untrue statement or alleged untrue statement by such
Selling Holder or underwriter, as the case may be, of a material fact
contained in the registration statement (or in any preliminary or final
prospectus included therein) or in any offering memorandum or other offering
document relating to the offering and sale of such Registrable Securities
prepared by MIPS or at its direction, or any amendment thereof or supplement
thereto, or any omission by such Selling Holder or underwriter, as the case
may be, or alleged omission by such Selling Holder or underwriter, as the case
may be, of a material fact required to be stated therein or necessary to make
the statements therein not misleading, but in each case only to the extent
that such untrue statement of a material fact is contained in, or such
material fact is omitted from information relating to such Selling Holder or
underwriter, as the case may be, furnished to MIPS in writing by or on behalf
of such Selling Holder or underwriter, as the case may be, specifically for
use in such registration statement (or in any preliminary or final prospectus
included therein), offering memorandum or other offering document, or any
amendment thereof or supplement thereto. The foregoing indemnity is in
addition to any liability which such Selling Holder or underwriter, as the
case may be, may otherwise have to MIPS, or controlling persons and the
officers, directors, affiliates, employees, and agents of each of the
foregoing; provided, however, that, in the case of an offering made pursuant
-------- -------
to this Agreement with respect to which MIPS has designated the lead or
managing underwriters (or MIPS is offering securities directly, without an
underwriter), this indemnity does not apply to any loss, liability, cost,
claim, or damage arising out of or based upon any untrue statement or alleged
untrue statement or omission or alleged omission in any preliminary prospectus
or offering memorandum if a copy of a final prospectus or offering memorandum
was not sent or given by or on behalf of any underwriter (or MIPS, as the case
may be) to such Person asserting such loss, liability, cost, claim or damage
at or prior to the written confirmation of the sale of the Registrable
Securities as required by the Securities Act and such untrue statement or
omission had been corrected in such final prospectus or offering memorandum.
(c) Each party indemnified under paragraph (a) or (b) above shall,
promptly after receipt of notice of a claim or action against such indemnified
party in respect of which indemnity may be sought hereunder, notify the
indemnifying party in writing of the claim or action; provided, that the failure
--------
to notify the indemnifying party shall not relieve it from any liability that it
may have to an indemnified party under this Section 3.7 (except that the failure
to notify an indemnifying party promptly of the commencement of any such action
to the extent prejudicial to the indemnifying party's ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party to the extent the indemnifying party is prejudiced under this
Section 3.7, but the omission so to notify the
17
<PAGE>
indemnifying party well not relieve it of any liability that it may have to
any indemnified party otherwise than under this Section 3.7). If any such
claim or action shall be brought against an indemnified party, and it shall
have notified the indemnifying party thereof, unless in such indemnified
party's reasonable judgment a conflict of interest between such indemnified
party and indemnifying parties may exist in respect of such claim, the
indemnifying party shall be entitled to participate therein, and, to the
extent that it wishes, jointly with any other similarly notified indemnifying
party, to assume the defense thereof with counsel satisfactory to the
indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party). After notice from the
indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 3.7 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation. If the indemnifying
party does not assume the defense of such claim or action, it is understood
that the indemnifying party shall not, in connection with any one such claim
or action or separate but substantially similar or related claims or actions
in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (in addition to one separate firm of local attorneys in each
such jurisdiction) at any time for all such indemnified parties. Any
indemnifying party against whom indemnity may be sought under this Section 3.7
shall not be liable to indemnify an indemnified party if such indemnified
party settles such claim or action without the consent of the indemnifying
party, which consent shall not be unreasonably withheld.
(d) If the indemnification provided for in this Section 3.7 shall for
any reason be unavailable (other than in accordance with its terms) to an
indemnified party in respect of any loss, liability, cost, claim or damage
referred to therein, then each indemnifying party shall, in lieu of indemnifying
such indemnified party, contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, cost, claim or damage in
such proportion as shall be appropriate to reflect (i) the relative benefits
received by the indemnifying party on the one hand and the indemnified party on
the other hand or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law or if the indemnified party failed to give the
notice required under paragraph (c) above, the relative benefits and the
relative fault of the indemnifying party on the one hand and the indemnified
party on the other with respect to the statements or omissions which resulted in
such loss, liability, cost, claim or damage as well as any other relevant
equitable considerations. The relative benefits received by the indemnifying
party and the indemnified party shall be deemed to be in the same respective
proportion as the net proceeds (before deducting expenses) of the offering
received by such party (or, in the case of an underwriter, such underwriter's
discounts and commissions) bear to the aggregate offering price of the
Registrable Securities or Other Securities. The relative fault shall be
determined by reference to whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the indemnifying party on the one hand or the
indemnified party on the other, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
statement or omission, but not by reference to any indemnified party's stock
ownership in MIPS. The amount paid or payable by an indemnified party
18
<PAGE>
as a result of the loss, cost, claim, damage or liability, or action in
respect thereof, referred to above in this paragraph (d) shall be deemed to
include, for purposes of this paragraph (d), any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 3.7(d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediate preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(e) Indemnification and contribution similar to that specified in the
preceding paragraphs of this Section 3.7 (with appropriate modifications) shall
be given by MIPS, the Selling Holders and underwriters with respect to any
required registration or other qualification of securities under any state law
or regulation or governmental authority.
(f) In no event shall SGI be liable pursuant to this Section 3.7 for
any amounts in excess of the net proceeds received by SGI pursuant to its sales
of securities in the offering in connection with which its liability hereunder
arises.
(g) The obligations of the parties under this Section 3.7 shall be in
addition to any liability which any party may otherwise have to any other party.
Section 3.8. Rule 144 and Form S-3. Commencing 90 days after the
---------------------
Initial Public Offering Date, MIPS shall use its best efforts to ensure that the
conditions to the availability of Rule 144 set forth in paragraph (c) thereof
shall be satisfied. Upon the request of any Holder of Registrable Securities,
MIPS will deliver to such Holder a written statement as to whether it has
complied with such requirements. MIPS further agrees to use its reasonable
efforts to cause all conditions to the availability of Form S-3 (or any
successor form) under the Securities Act of the filing of registration
statements under this Agreement to be met as soon as practicable after the
Initial Public Offering Date. Notwithstanding anything contained in this Section
3.8, MIPS may deregister under Section 12 of the Securities Exchange Act of
1934, as amended, if it then is permitted to do so pursuant to said Act and the
rules and regulations thereunder.
Section 3.9. Transfer of Registration Rights. Any Holder may
-------------------------------
transfer all or any portion of its rights under Article III to any transferee of
a number of Registrable Securities owned by such Holder exceeding five percent
(5%) of the outstanding class or series of such securities at the time of
transfer (each transferee that receives such minimum number of Registrable
Securities, a "Transferee"); provided, that each Transferee of Registrable
--------
Securities (other than SGI Entities) to which Registrable Securities are
transferred, sold or assigned directly by a SGI Entity (such Transferee,
19
<PAGE>
a "SGI Transferee"), together with any Affiliate of such SGI Transferee (and
any subsequent direct or indirect Transferees of Registrable Securities from
such SGI Transferee and any Affiliates thereof) shall be entitled to request
the registration of Registrable Securities pursuant to this Section 3.9 only
once prior to a SGI Ownership Reduction and thereafter shall only be entitled
to request the registration of Registrable Securities pursuant to Section
3.1(a)(ii) and, provided, further, that no Transferee shall be entitled to
request registration pursuant to this Section 3.9 for an amount of Registrable
Securities equal to less than $1,000,000. Any transfer of registration rights
pursuant to this Section 3.9 shall be effective upon receipt by MIPS of (i)
written notice from such Holder stating the name and address of any Transferee
and identifying the number of Registrable Securities with respect to which the
rights under this Agreement are being transferred and the nature of the rights
so transferred and (ii) a written agreement from such Transferee to be bound
by the terms of this Article III and Sections 5.3, 5.4, 5.9, 5.10, and 5.12 of
this Agreement. The Holders may exercise their rights hereunder in such
priority as they shall agree upon among themselves.
Section 3.10. Holdback Agreement. If any registration pursuant to
------------------
this Article III shall be in connection with an underwritten public offering of
Registrable Securities, each Selling Holder agrees not to effect any public sale
or distribution, including any sale under Rule 144, of any equity security of
MIPS or any security convertible into or exchangeable or exercisable for any
equity security of MIPS, in the case of Registrable Securities (otherwise than
through the registered public offering then being made), within 7 days prior to
or 90 days (or such lesser period as the lead or managing underwriters may
permit) after the effective date of the registration statement (or the
commencement of the offering to the public of such Registrable Securities in the
case of Rule 415 offerings). MIPS hereby also so agrees and agrees to cause
each other holder of equity securities or securities convertible into or
exchangeable or exercisable for such securities purchased from MIPS otherwise
than in a public offering to so agree; provided that, subject to Section 3.6(a)
-------------
hereof, MIPS shall not be so restricted from effecting any public sale or
distribution of any security in connection with any merger, acquisition,
exchange offer, subscription offer, dividend reinvestment plan or stock option
or other executive or employee benefit or compensation plan.
Section 3.11. Registration of Preferred Stock. MIPS agrees that it
-------------------------------
shall from time to time enter into one or more agreements with SGI and/or any
Transferee, if any, in form and substance reasonably satisfactory to the parties
thereto, granting to SGI or the Transferee, as the case may be, registration
rights for the registration of any shares of preferred stock of MIPS that may
hereafter be owned, directly or indirectly, by SGI or the Transferee, as the
case may be, substantially upon the same terms and conditions as those contained
in Article III for the benefit of SGI.
ARTICLE IV
CERTAIN COVENANTS AND AGREEMENTS
Section 4.1. No Violations. (a) For so long as the Ownership
-------------
Percentage is equal to or greater than 50%, SGI covenants and agrees that it
will not take any action or enter into any commitment
20
<PAGE>
or agreement which may reasonably be anticipated to result, with or without
notice and with or without lapse of time or otherwise, in a contravention or
event of default by any SGI Entity of (i) any provision of applicable law or
regulation, including but not limited to provisions pertaining to the Internal
Revenue Code of 1986, as amended, or the Employee Retirement Income Security
Act of 1974, as amended, (ii) any provision of SGI's certificate of
incorporation or bylaws, (iii) any credit agreement or other material
instrument binding upon SGI, or (iv) any judgment, order or decree of any
governmental body, agency or court having jurisdiction over SGI or any of
their respective assets.
(b) MIPS and SGI agree to provide to the other any information and
documentation requested by the other for the purpose of evaluating and ensuring
compliance with Section 4.1(a) hereof.
(c) Notwithstanding the foregoing Sections 4.1(a) and 4.1(b), nothing
in this Agreement is intended to limit or restrict in any way SGI's right's as a
shareholder of MIPS.
Section 4.2. Confidentiality. Except as required by law, regulation
---------------
or legal or judicial process, SGI agrees that neither it nor any SGI Entity nor
any of their respective directors, officers or employees will without the prior
written consent of MIPS disclose to any Person any material, non-public
information concerning the business or affairs of MIPS acquired from any
director, officer or employee of MIPS (including any director, officer or
employee of MIPS who is also a director, officer or employee of SGI).
ARTICLE V
MISCELLANEOUS
Section 5.1. Limitation of Liability. Neither SGI nor MIPS shall be
-----------------------
liable to the other for any special, indirect, incidental or consequential
damages of the other arising in connection with this Agreement.
Section 5.2. Subsidiaries. SGI agrees and acknowledges that SGI
------------
shall be responsible for the performance by each SGI Entity of the obligations
hereunder applicable to such SGI Entity.
Section 5.3. Amendments. This Agreement may not be amended or
----------
terminated orally, but only by a writing duly executed by or on behalf of the
parties hereto. Any such amendment shall be validly and sufficiently authorized
for purposes of this Agreement if it is signed on behalf of SGI and MIPS by any
of their respective presidents or vice presidents.
Section 5.4. Term. This Agreement shall remain in effect until all
----
Registrable Securities held by Holders have been transferred by them to Persons
other than Transferees; provided, that the provisions of Section 3.7 shall
--------
survive any such expiration.
21
<PAGE>
Section 5.5. Severability. If any provision of this Agreement or the
------------
application of any such provision to any party or circumstances shall be
determined by any court of competent jurisdiction to be invalid, illegal or
unenforceable to any extent, the remainder of this Agreement or such provision
of the application of such provision to such party or circumstances, other than
those to which it is so determined to be invalid, illegal or unenforceable,
shall remain in full force and effect to the fullest extent permitted by law and
shall not be affected thereby, unless such a construction would be unreasonable.
Section 5.6. Notices. All notices and other communications required
-------
or permitted hereunder shall be in writing, shall be deemed duly given upon
actual receipt, and shall be delivered (a) in person, (b) by registered or
certified mail, postage prepaid, return receipt requested or (c) by facsimile or
other generally accepted means of electronic transmission (provided that a copy
of any notice delivered pursuant to this clause (c) shall also be sent pursuant
to clause (b)), addressed as follows:
(a) If to MIPS, to:
MIPS
[ ]
Attention: [ ]
Telecopy No.:
(b) If to SGI, to:
SGI
200 North Shoreline Blvd.
Mountain View, CA 94043
Attention: General Counsel
Telecopy No.:
or to such other addresses or telecopy numbers as may be specified by
like notice to the other parties.
Section 5.7. Further Assurances. SGI and MIPS shall execute,
------------------
acknowledge and deliver, or cause to be executed, acknowledged and delivered,
such instruments and take such other action as may be necessary or advisable to
carry out their obligations under this Agreement and under any exhibit, document
or other instrument delivered pursuant hereto.
Section 5.8. Counterparts. This Agreement may be executed in any
------------
number of counterparts, each of which shall be deemed an original instrument,
but all of which together shall constitute but one and the same agreement.
22
<PAGE>
Section 5.9. Governing Law. This Agreement and the transactions
-------------
contemplated hereby shall be construed in accordance with, and governed by, the
laws of the State of Delaware.
Section 5.10. Entire Agreement. This Agreement constitutes the
----------------
entire understanding of the parties hereto with respect to the subject matter
hereof.
Section 5.11. Successors. This Agreement shall be binding upon, and
----------
shall inure to the benefit of, the parties hereto and their respective
successors and assigns. Nothing contained in this Agreement, express or
implied, is intended to confer upon any other person or entity any benefits,
rights or remedies.
Section 5.12. Specific Performance. The parties hereto acknowledge
--------------------
and agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. Accordingly, it is agreed that they
shall be entitled to an injunction or injunctions to prevent breaches of the
provisions of this Agreement and to enforce specifically the terms and
provisions hereof in any court of competent jurisdiction in the United States or
any state thereof, in addition to any other remedy to which they may be entitled
at law or equity.
23
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day
and year first above written.
SILICON GRAPHICS, INC.
By: _________________________
Name:
Title:
MIPS TECHNOLOGIES, INC.
By: _________________________
Name:
Title:
24
<PAGE>
EXHIBIT 10.3
MANAGEMENT SERVICES AGREEMENT
This Management Services Agreement (this "Agreement") is entered into
as of _________, 1998 by and between MIPS Technologies, Inc., a Delaware
corporation (the "Company"), and Silicon Graphics, Inc. a Delaware corporation
("SGI").
RECITALS
WHEREAS, the Company is issuing shares of Common Stock, $0.01 par
value per share ("Common Stock"), to the public in an offering (the "Initial
Public Offering") registered under the Securities Act of 1933, as amended;
WHEREAS, SGI has heretofore directly or indirectly provided certain
administrative, financial, management and other services to the Company;
WHEREAS, on the terms and subject to the conditions set forth herein,
the Company desires to retain SGI as an independent contractor to provide,
directly or indirectly, certain of those services to the Company after the
Closing Date (as defined below); and
WHEREAS, on the terms and subject to the conditions set forth herein,
SGI desires to provide, directly or indirectly, such services to the Company.
AGREEMENTS
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, SGI and the Company, for
themselves, their successors and assigns, hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01. Definitions. As used in this Agreement, the following
-----------
terms will have the following meanings, applicable both to the singular and the
plural forms of the terms described:
"Actions" has the meaning ascribed thereto in Section 4.02.
"Agreement" has the meaning ascribed thereto in the preamble hereto,
as such agreement may be amended and supplemented from time to time in
accordance with its terms.
"Common Stock" has the meaning ascribed thereto in the recitals to
this Agreement.
"Company" has the meaning ascribed thereto in the preamble hereto.
<PAGE>
"Company Indemnified Person" has the meaning ascribed thereto in
Section 4.03.
"Closing Date" means the date of the closing of the initial sale of
Common Stock in the Initial Public Offering.
"Initial Public Offering" has the meaning ascribed thereto in the
recitals to this Agreement.
"Outsourced Service" has the meaning ascribed thereto in Section 2.03.
"Person" means any individual, partnership, limited liability company,
joint venture, corporation, trust, unincorporated organization, government (and
any department or agency thereof) or other entity.
"Separation Agreement" means the Agreement between SGI and the Company
pursuant to which, among other things, the Company's business and operations
will be separated from those of SGI.
"Service Charges" has the meaning ascribed thereto in Section 3.01(c).
"Services" has the meaning ascribed thereto in Section 2.01.
"Subsidiary" means, as to any Person, any corporation, association,
partnership, joint venture or other business entity of which more than 50% of
the voting capital stock or other voting ownership interests is owned or
controlled directly or indirectly by such Person or by one or more of the
Subsidiaries of such Person or by a combination thereof.
"SGI" has the meaning ascribed thereto in the preamble hereto.
"SGI Entities" means SGI and its Subsidiaries (other than the Company)
and "SGI Entity" shall mean any of the SGI Entities.
Section 1.02. Internal References. Unless the context indicates
-------------------
otherwise, references to Articles, Sections and paragraphs shall refer to the
corresponding articles, sections and paragraphs in this Agreement and references
to the parties shall mean the parties to this Agreement.
ARTICLE II
PURCHASE AND SALE OF SERVICES
Section 2.01. Purchase and Sale of Services. On the terms and
-----------------------------
subject to the conditions of this Agreement and in consideration of the Service
Costs described below, SGI agrees to provide to the Company, and the Company
agrees to purchase from SGI, the services described in Schedule I (the
"Services"). At its option, SGI may cause any Service it is required to provide
<PAGE>
hereunder to be provided by any SGI Entity. Unless otherwise specifically
agreed by SGI and the Company, the Services to be provided by SGI hereunder
shall be substantially similar in scope, quality and nature to those provided to
the Company prior to the Closing Date and shall be performed by the same or
similarly qualified personnel; provided, however, that the selection of
personnel to perform the Services shall be at the sole discretion of SGI; and
provided, further, that, except as expressly provided in this Agreement, SGI
shall not be required to increase the volume, scope or quality of the Services
provided to the Company beyond that which has been provided to the Company prior
to the Closing Date.
Section 2.02. Additional Services. In addition to the Services to be
-------------------
provided by SGI pursuant to Section 2.01, if requested by the Company, and to
the extent that SGI and the Company may mutually agree in writing, SGI shall
provide additional services (including services not provided by SGI to the
Company prior to the Closing Date) to the Company The scope of any such
services, as well as the term, costs and other terms and conditions applicable
to such services, shall be as mutually agreed by SGI and the Company.
Section 2.03. Services Performed by Third Parties. At its option,
-----------------------------------
SGI may cause any Service it is required to provide hereunder to be provided by
any third-party that is providing, or may from time to time provide, the same or
similar services for SGI (an "Outsourced Service"). SGI shall remain
responsible, in accordance with the terms of this Agreement, for performance of
any Service it causes to be so provided.
Section 2.04. Impracticability and Force Majeure. SGI shall not be
----------------------------------
required to provide any Service to the extent the performance of such Service
becomes impracticable as a result of a cause or causes outside the reasonable
control of SGI or to the extent the provision of such Service would require SGI
to violate any applicable laws, rules or regulations or would result in the
breach of any applicable contract or contracts. SGI shall have no obligation to
perform or cause the services to be performed if its failure to do so is caused
by or results from any act of God, governmental action, natural disaster,
strike, failure of essential equipment or any other cause or circumstance beyond
the control of SGI or, if applicable, third party providers of services to SGI
(an "Event of Force Majeure"). SGI will notify the Company of any Event of
Force Majeure affecting its services to the Company. SGI agrees that following
any Event of Force Majeure, the Company shall have no obligation to pay for the
services affected thereby and SGI will use its reasonable best efforts to
restore such services.
ARTICLE III
SERVICE CHARGES
Section 3.01. Service Charges. (a) The charge for each Service
---------------
provided to the Company hereunder directly by SGI or any SGI Entity shall be
equal to the amount indicated, or determined as set forth, in Schedule I hereto
for such Service, as adjusted from time to time in accordance with Section
3.01(c).
<PAGE>
(b) The charge for each Outsourced Service provided to the Company
hereunder shall be equal to the third-party costs and expenses incurred by SGI
or any SGI Entity on behalf of the Company, plus all direct costs, if any,
incurred by SGI or any SGI Entity in providing such Outsourced Service. If SGI
incurs third-party costs or expenses on behalf of the Company as well as any SGI
Entity, SGI will allocate any such costs or expenses in good faith between the
Company and the various SGI Entities on behalf of which such costs or expenses
were incurred as SGI shall determine in the exercise of its reasonable judgment.
SGI shall apply usual and accepted accounting conventions in making such
allocations and SGI or its agents shall keep and maintain such books and records
as may be reasonably necessary to make such allocations. SGI shall make copies
of such books and records available to the Company upon request and with
reasonable notice.
(c) The parties intend for the Service charges pursuant to paragraphs
(a) and (b) above (collectively, the "Service Charges") to allow SGI and any SGI
Entity to recover the fully allocated direct costs of providing the Services
hereunder plus all out-of-pocket, third-party costs, charges and expenses, but
without any profit to SGI or any SGI Entity. The parties also intend for
charges to be easy to administer and justify and, therefore, the parties
acknowledge that it may be counterproductive to try to recover every cost,
charge or expense, particularly those that are insignificant or de minimis. The
parties shall use good faith efforts to discuss any situation in which any
charge, or the methodology for determining any charge, set forth in Schedule I
is insufficient to cover or exceeds, or is reasonably expected to be
insufficient to cover or exceed, the actual costs incurred by SGI or any SGI
Entity in providing any Service hereunder, and on the basis of such discussions
the parties may from time to time, upon mutual agreement, adjust the charges or
methodologies set forth in Schedule I; provided, however, that the incurrence of
costs by SGI or any SGI Entity in excess of the amounts set forth or determined
in accordance with Schedule I shall not justify the provision of, or payment
for, Services under this Agreement.
Section 3.02. Invoicing and Settlement of Costs. (a) SGI shall
---------------------------------
invoice the Company for all Service charges for each calendar month within
thirty (30) days following the end of such month, provided that any failure by
SGI to provide an invoice within such time period shall not relieve the Company
of its obligation to pay an invoice received after such date. All invoices
shall reflect in reasonable detail a description of the Service performed.
(b) The Company shall pay within thirty (30) days following its receipt
of any invoice from SGI pursuant to paragraph (a), by wire transfer of
immediately available funds payable to the order of SGI and without set off, all
amounts invoiced by SGI during the preceding calendar month. If the Company
fails to pay any monthly payment within 30 days following its receipt of any
invoice from SGI pursuant to paragraph (a), the Company shall pay, in addition
to the amount indicated in such invoice, interest on such amount at the prime
interest rate announced by [__________] plus 2% per annum compounded monthly for
the period such amount remains unpaid.
(c) In the event of a dispute as to the propriety of the amount
invoiced, the Company shall pay all undisputed amounts, but shall be entitled to
withhold payment of any amount in dispute (and shall not be obligated to pay
interest on the amount so withheld) and shall notify SGI within
<PAGE>
ten (10) business days from receipt of any disputed invoice of the disputed
amount and the reasons each such charge is disputed by the Company. SGI shall
provide to the Company, or shall cause its subsidiaries to so provide, records
relating to the disputed amount so as to enable the parties to resolve the
dispute. The parties shall use reasonable efforts to resolve any such dispute
promptly.
(d) Any invoice or payment not disputed in writing by either party
within 180 days of such invoice or payment, as the case may be, shall be
considered final and no longer subject to adjustment.
ARTICLE IV
LIMITATION OF LIABILITY; INDEMNIFICATION
Section 4.01. Limitation of Liability. The Company agrees that none
-----------------------
of SGI and its Subsidiaries and their respective directors, officers, agents,
and employees (each, a "Limited Indemnified Person") shall have any liability,
whether direct or indirect, in contract or tort or otherwise, to the Company for
or in connection with the Services rendered or to be rendered by any Limited
Indemnified Person pursuant to this Agreement, the transactions contemplated
hereby or any Limited Indemnified Person's actions or inactions in connection
with any such Services or transactions, except for damages which have resulted
from such Limited Indemnified Person's gross negligence or willful misconduct in
connection with any such Services, actions or inactions.
Section 4.02. Indemnification of SGI by the Company. The Company
-------------------------------------
agrees to indemnify and hold harmless each Limited Indemnified Person from and
against any damages, and to reimburse each Limited Indemnified Person for all
reasonable expenses as they are incurred in investigating, preparing, pursuing,
or defending any claim, action, proceeding, or investigation, whether or not in
connection with pending or threatened litigation and whether or not any Limited
Indemnified Person is a party (collectively, "Actions"), arising out of or in
connection with Services rendered or to be rendered by any Limited Indemnified
Person pursuant to this Agreement, the transactions contemplated hereby or any
Limited Indemnified Person's actions or inactions in connection with any such
Services or transactions; provided that the Company will not be responsible for
any damages of any Limited Indemnified Person that have resulted from such
Limited Indemnified Person's gross negligence or willful misconduct in
connection with any of the advice, actions, inactions, or Services referred to
above.
Section 4.03. Indemnification of the Company by SGI. SGI agrees to
-------------------------------------
indemnify and hold harmless the Company and its Subsidiaries and their
respective directors, officers, agents, and employees (each, a "Company
Indemnified Person") from and against any damages, and will reimburse each
Company Indemnified Person for all reasonable expenses as they are incurred in
investigating, preparing, or defending any Action, arising out of the gross
negligence or willful misconduct of any Limited Indemnified Person in connection
with the Services rendered or to be rendered pursuant to this Agreement.
<PAGE>
Section 4.04. Further Indemnification. To the extent that any other
-----------------------
Person has agreed to indemnify any Limited Indemnified Person or to hold a
Limited Indemnified Person harmless and such Person provides services to SGI or
any affiliate of SGI relating directly or indirectly to any employee plan or
benefit arrangement for which Services are provided under this Agreement, SGI
will exercise reasonable efforts (x) to make such agreement applicable to any
Company Indemnified Person so that each Company Indemnified Person is held
harmless or indemnified to the same extent as any Limited Indemnified Person or
(y) otherwise make available to each Company Indemnified Person the benefits of
such agreement.
Section 4.05. Disclaimer of Warranties. SGI disclaims all
------------------------
warranties, express or implied, including, but not limited to, the implied
warranties of merchantability and fitness for a particular purpose, with respect
to the services. SGI makes no representations or warranties as to the quality,
suitability or adequacy of the services for any purpose or use.
ARTICLE V
TERM AND TERMINATION
Section 5.01. Term. Except as otherwise provided in this Article V
----
or as otherwise agreed in writing by the parties, this Agreement shall have an
initial term (the "Initial Term") of three years from the Closing Date, and will
be renewed annually at the sole option of the Company.
Section 5.02. Termination. (a) Notwithstanding the Initial Term of
-----------
this Agreement, the Company may at any time terminate this Agreement with
respect to one or more of the Services, in whole or in part, upon giving at
least 30 days prior written notice to SGI.
(b) After the Initial Term of this Agreement SGI may from time to time
terminate this Agreement with respect to one or more of the Services, in whole
or in part, upon giving at least 60 days prior written notice to the Company.
(c) This Agreement will be subject to early termination by the Company
upon 30 days prior written notice if SGI ceases to own shares of Common Stock
representing more than 50% of the combined voting power of the Common Stock of
the Company.
(d) SGI may terminate any affected Service at any time if the Company
shall have failed to perform any of its material obligations under this
Agreement relating to any such Service, SGI has notified the Company in writing
of such failure, and such failure shall have continued for a period of 60 days
after receipt of the Company of notice of such failure.
(e) Each of the Company and SGI agrees that prior to exercising its
rights under this Section 5.02 it will consult for a reasonable period with the
other party in advance of such termination as to its implementation.
Section 5.03. Effect of Termination. (a) Other than as required by
---------------------
law, upon
<PAGE>
termination of any Service pursuant to Section 5.01 or Section 5.02, and upon
termination of this Agreement in accordance with its terms, SGI will have no
further obligation to provide the terminated Service (or any Service, in the
case of termination of this Agreement) and the Company will have no obligation
to pay any fees relating to such Service or make any other payments hereunder;
provided that notwithstanding such termination, (i) the Company shall remain
liable to SGI for fees owed and payable in respect of Service provided prior to
the effective date of the termination; (ii) SGI shall continue to charge the
Company for administrative and program costs relating to benefits paid after but
incurred prior to the termination of any Service and other services required to
be provided after the termination of such Service and the Company shall be
obligated to pay such expenses in accordance with the terms of this Agreement;
and (iii) the provisions of Articles III, V and VI shall survive any such
termination. All program and administrative costs attributable to Company
associates for SGI Plans that relate to any period after the effective date of
any such termination shall be for the account of the Company.
(b) Following termination of this Agreement with respect to any
Service, SGI and the Company agree to cooperate in providing for an orderly
transition of such Service to the Company or to a successor service provider.
Without limiting the foregoing, SGI agrees to (i) provide, within 90 days of the
termination, copies in a format designated by SGI, all records relating directly
or indirectly to benefit determinations of the Company associates, including but
not limited to compensation and service records, correspondence, plan
interpretive policies, plan procedures, administration guidelines, minutes, or
any data or records required to be maintained by law and (ii) work with the
Company in developing a transition schedule.
ARTICLE VI
MISCELLANEOUS
Section 6.01. Performance under Ancillary Agreements.
--------------------------------------
Notwithstanding anything to the contrary contained herein, the Company shall not
be charged anything under this Agreement for any Services that are specifically
required to be performed under the Separation Agreement or any other Ancillary
Agreement (as defined in the Separation Agreement) and any such other Services
shall be performed and charged for in accordance with the terms of the
Separation Agreement or such other Ancillary Agreement.
Section 6.02. No Agency. Nothing in this Agreement shall constitute
---------
or be deemed to constitute a partnership or joint venture between the parties
hereto or constitute or be deemed to constitute any party the agent or employee
of the other party for any purpose whatsoever and neither party shall have
authority or power to bind the other or to contract in the name of, or create a
liability against, the other in any way or for any purpose.
Section 6.03. Company as Sole Beneficiary. The Company acknowledges
---------------------------
that the Services shall be provided only with respect to the business of the
Company and its Subsidiaries as currently operated or as mutually agreed by the
parties hereto. The Company shall not request performance of any Service for
the benefit of any entity other than the Company and its Subsidiaries.
<PAGE>
The Company represents and agrees that the Company will use the Services only in
accordance with all applicable federal, state and local laws and regulations,
and in accordance with the reasonable conditions, rules, regulations and
specifications which may be set forth in any manuals, materials, documents and
instructions furnished from time to time by SGI to the Company. SGI reserves the
right to take all actions, including termination of any particular Service, that
SGI reasonably believes to be necessary to assure compliance with applicable
laws and regulations. SGI will notify the Company of the reasons for any such
termination of Services.
Section 6.04. Entire Agreement. This Agreement (including the
----------------
Schedules constituting a part of this Agreement) and any other writing signed by
the parties that specifically references this Agreement constitute the entire
agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements, understandings and negotiations, both written
and oral, between the parties with respect to the subject matter hereof. This
Agreement is not intended to confer upon any Person other than the parties
hereto any rights or remedies hereunder.
Section 6.05. Information. Subject to applicable law and privileges,
-----------
each party hereto covenants and agrees to provide the other party with all
information regarding itself and transactions under this Agreement that the
other party reasonably believes are required to comply with all applicable
federal, state, county and local laws, ordinances, regulations and codes,
including, but not limited to, securities laws and regulations.
Section 6.06. Confidential Information. The Company and SGI hereby
------------------------
covenant and agree to hold in trust and maintain confidential all Confidential
Information relating to the other party. "Confidential Information" shall mean
all information disclosed by either party to the other in connection with this
Agreement whether orally, visually, in writing or in any other tangible form,
and includes, but is not limited to, economic and business data, business plans,
and the like, but shall not include (i) information which becomes generally
available other than by release in violation of the provisions of this Section
6.06, (ii) information which becomes available on a nonconfidential basis to a
party from a source other than the other party to this Agreement provided the
party in question reasonably believes that such source is not or was not bound
to hold such information confidential, (iii) information acquired or developed
independently by a party without violating this Section 6.06 or any other
confidentiality agreement with the other party and (iv) information that any
party hereto reasonably believes it is required to disclose by law, provided
that it first notifies the other party hereto of such requirement and allows
such party a reasonable opportunity to seek a protective order or other
appropriate remedy to prevent such disclosure. Without prejudice to the rights
and remedies of either party to this Agreement, a party disclosing any
Confidential Information to the other party in accordance with the provisions of
this Agreement shall be entitled to equitable relief by way of an injunction if
the other party hereto breaches or threatens to breach any provision of this
Section 6.06.
Section 6.07. Mediation. SGI and the Company agree to negotiate in
---------
good faith in an effort to resolve any dispute related to this Agreement that
may arise between the parties. If the
<PAGE>
dispute cannot be resolved promptly by negotiation, then either party may give
the other party written notice that the dispute should be submitted to
mediation. Promptly thereafter, a mutually acceptable mediator shall be chose by
the parties, who shall share the cost of mediation services equally. If the
dispute has not been resolved by mediation within 90 days after the date of
written notice requesting mediation, then either party may initiate litigation
and pursue all and any remedies at law or at equity that such party is entitled
to.
Section 6.08. Notices. Any notice, instruction, direction or demand
-------
under the terms of this Agreement required to be in writing will be duly given
upon delivery, if delivered by hand, facsimile transmission, intercompany mail,
or mail, to the following addresses:
(a) If to the Company, to:
[Address]
(b) If to SGI, to:
[Address]
or to such other addresses or telecopy numbers as may be specified by
like notice to the other parties.
Section 6.09. Governing Law. This Agreement shall be construed in
-------------
accordance with and governed by the substantive internal laws of the State of
California.
Section 6.10. Severability. If any provision of this Agreement shall
------------
be invalid or unenforceable, such invalidity or unenforceability shall not
render the entire Agreement invalid. Rather, the Agreement shall be construed as
if not containing the particular invalid or unenforceable provision, and the
rights and obligations of each party shall be construed and enforced
accordingly.
Section 6.11. Amendment. This Agreement may only be amended by a
---------
written agreement executed by both parties hereto.
Section 6.12. Counterparts. This Agreement may be executed in
------------
separate counterparts, each of which shall be deemed an original and all of
which, when taken together, shall constitute one agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
signed by their duly authorized representatives.
MIPS TECHNOLOGIES, INC.
By: __________________________________
Name:
Title:
SILICON GRAPHICS, INC.
By:____________________________________
Name:
Title:
<PAGE>
Services Agreement - Schedule I
Service Charge or Billing Methodology
------- -----------------------------
<PAGE>
EXHIBIT 10.4
TAX SHARING AGREEMENT
This TAX SHARING AGREEMENT (this "Agreement") is dated as of ______ __,
1998, between Silicon Graphics, Inc. ("SGI") and MIPS Technologies, Inc.
WITNESSETH
----------
WHEREAS, SGI is the common parent of an affiliated group of corporations
which includes MIPS Technologies, Inc. (the "SGI Affiliated Group") and which
group and the members thereof file consolidated federal income tax returns as
well as certain consolidated, combined or unitary state income tax returns;
WHEREAS, MIPS Technologies, Inc. is a Member (as hereinafter defined) of
the SGI Affiliated Group;
WHEREAS, the SGI Affiliated Group has filed a consolidated federal income
tax return for its prior taxable years, and intends to file a consolidated
federal income tax return for subsequent years; and
WHEREAS, the parties hereto desire to set forth their agreements with
regard to their respective liabilities for federal, state, local and foreign
taxes for periods ending after the completion of the offering described in the
prospectus dated April __, 1998 (the "Offering"), and to provide for certain
other tax matters.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
Article 1 - Definitions
-----------------------
For purposes of this Agreement:
1.1 "Affiliated Group" means an affiliated group as defined in section
1504(a) of the Code.
1.2 "Code" means the Internal Revenue Code of 1986, as amended and in
effect from time to time, or any law which may be a successor thereto. A
reference to any section of the Code means such section as in effect from time
to time and any comparable provision of the Code or any successor law.
1.3 "Effective Period" shall have the meaning set forth in Article 8.1 of
this Agreement.
<PAGE>
2
1.4 "MIPS Technologies, Inc. Subgroup" shall mean the group of
corporations, if any, that would constitute a separate Affiliated Group with
MIPS Technologies, Inc. as the common Parent if MIPS Technologies, Inc. was not
a Member of the SGI Affiliated Group. If no MIPS Technologies, Inc. Subgroup
exists, references to MIPS Technologies, Inc. Subgroup in this Agreement shall
be interpreted as references to MIPS Technologies, Inc..
1.5 "MIPS Technologies, Inc. Subgroup Separate Federal Amount" shall have
the meaning set forth in Article 4.2 of this Agreement.
1.6 "MIPS Technologies, Inc. Subgroup Separate State, Local and Foreign
Amount" shall have the meaning set forth in Article 4.3 of this Agreement.
1.7 "MIPS Technologies, Inc. Subgroup Separate Tax Return Amount" shall
having the meaning set forth in Article 4.1 of this Agreement.
1.8 "IRS" shall mean the Internal Revenue Service.
1.9 "Member" means, with respect to any SGI Consolidated Return Period, an
includible corporation (as defined in section 1504(b) of the Code) in an
Affiliated Group.
1.10 "Parent" means any Member that directly owns stock that possesses more
than 80 percent of the total voting power of the stock of another Member.
1.11 "Regulation" means am income tax regulation promulgated by the U.S.
Treasury Department under the Code. A reference to any section of the
Regulations means such section as in effect from time to time and any comparable
successor regulation.
1.12 "SGI Consolidated Federal Return" shall mean any consolidated federal
income Tax return or amendment thereof of the SGI Affiliated Group for any SGI
Consolidated Return Period.
1.13 "SGI Consolidated Return Period" shall mean a taxable period that ends
within the Effective Period of this Agreement for which a consolidated, combined
or unitary (as applicable) federal, state or local income tax return is filed or
required to be filed by the SGI Affiliated Group.
1.14 "SGI Consolidated Tax Liability" means, with respect to any SGI
Consolidated Return Period, the consolidated, combined or unitary Tax (as
defined in Article 1.17 of this Agreement) liability of the SGI Affiliated
Group.
<PAGE>
3
1.15 "SGI State, Local and Foreign Returns" shall have the meaning set
forth in Article 2.2(a) of this Agreement.
1.16 "Subsidiary" means, with respect to any Parent, a Member, the majority
of whose voting stock is owned directly by such Parent.
1.17 "Tax" or "Taxes" shall mean all federal, including alternative minimum
tax and environmental tax, state, local and foreign gross or net income, gross
receipts, withholding, franchise, transfer, estimated or other tax or similar
charges and assessments, including all interest, penalties and additions imposed
with respect to such amounts.
1.18 "Tax Benefit" shall mean, with respect to Taxes, any item of loss,
deduction or credit, including, but not limited to, foreign tax credits,
alternative minimum tax credits, net operating losses and capital losses.
Article 2 - Tax Return Filing
-----------------------------
2.1 SGI Consolidated Federal Returns. (a) General. For any SGI
-------------------------------- -------
Consolidated Return Period, SGI shall have sole and exclusive responsibility for
the preparation and filing of all SGI Consolidated Federal Returns and
amendments thereto with the IRS. Such returns shall include all income, gains,
losses, deductions and credits of the MIPS Technologies, Inc. Subgroup.
(b) Cooperation. The MIPS Technologies, Inc. Subgroup shall furnish SGI,
-----------
at least sixty (60) days before the due date (including extensions) of any such
SGI Consolidated Federal Return, with its completed section of such SGI
Consolidated Federal Return, prepared in accordance with this Agreement, in
accordance with instructions from SGI and in a manner consistent with prior
returns, if any, provided that such actions are not inconsistent with this
Agreement. The MIPS Technologies, Inc. Subgroup will also furnish SGI work
papers and other such information and documentation as is reasonable requested
by SGI with respect to the MIPS Technologies, Inc. Subgroup.
2.2 SGI State, Local and Foreign Returns. (a) General. For any SGI
------------------------------------ -------
State, Local and Foreign Return Period, SGI shall have sole and exclusive
responsibility for the preparation and filing of all combined, consolidated or
unitary state, local or foreign income or franchise Tax returns which are
required to be filed by SGI or a Subsidiary of SGI (such returns collectively,
the "SGI State, Local and Foreign Returns").
(b) Cooperation. SGI will timely advise the MIPS Technologies, Inc.
-----------
Subgroup of the inclusion of the MIPS Technologies, Inc. Subgroup in any SGI
State, Local and Foreign Returns and the jurisdictions in which such returns
will be filed. The MIPS Technologies, Inc. Subgroup will evidence its agreement
to be included in such return on the appropriate form(s) and will take such
other actions as may be appropriate, in the opinion of SGI, to carry out the
purposes and intent of this Article 2.2, provided that such actions are not
inconsistent with this Agreement. The MIPS Technologies, Inc. Subgroup shall
furnish SGI, at least sixty (60) days
<PAGE>
4
before the due date (including extensions) of any such SGI State, Local and
Foreign Returns, with its completed section of such SGI State, Local and Foreign
Returns, prepared in accordance with this Agreement, in accordance with
instructions from SGI and in a manner consistent with prior returns, if any,
provided that such actions are not inconsistent with this Agreement. MIPS
Technologies, Inc. will also furnish SGI work papers and other such information
and documentation as is reasonable requested by SGI with respect to MIPS
Technologies, Inc..
Article 3 - SGI Tax Liability
-----------------------------
3.1 SGI Consolidated Federal Return Liability. Except to the extent
-----------------------------------------
otherwise provided herein, for each SGI Consolidated Return Period, SGI shall be
liable for and indemnify the MIPS Technologies, Inc. Subgroup against all Taxes
due in respect of all SGI Consolidated Federal Returns, subject to reimbursement
from the MIPS Technologies, Inc. Subgroup as contemplated by Article 4 of this
Agreement.
3.2 SGI State, Local and Foreign Return Liability. Except to the extent
---------------------------------------------
otherwise provided herein, for each SGI State, Local and Foreign Return Period,
SGI shall be liable for and indemnify the MIPS Technologies, Inc. Subgroup
against all Taxes due in respect of all SGI State, Local and Foreign Returns,
subject to reimbursement from the MIPS Technologies, Inc. Subgroup as
contemplated by Article 4 of this Agreement.
Article 4 - MIPS Technologies, Inc. Subgroup Separate Tax Return Amount
-----------------------------------------------------------------------
4.1 General. For any taxable period ending during the Effective Period of
-------
this Agreement, the term "MIPS Technologies, Inc. Subgroup Separate Tax Return
Amount" shall mean the aggregate amount, whether a negative or positive, of (i)
the MIPS Technologies, Inc. Subgroup Separate Federal Amount and (ii) the MIPS
Technologies, Inc. Subgroup Separate State, Local and Foreign Amount, each as
adjusted pursuant to the terms of this Agreement.
4.2 Computation of MIPS Technologies, Inc. Subgroup Separate Federal
----------------------------------------------------------------
Amount. For each SGI Consolidated Return Period that ends during the Effective
- ------
Period of this Agreement, the MIPS Technologies, Inc. Subgroup shall compute the
MIPS Technologies, Inc. Subgroup Separate Federal Amount for the portion of such
periods in which MIPS Technologies, Inc. is a Member of the SGI Affiliated
Group. "MIPS Technologies, Inc. Subgroup Separate Federal Amount" means, with
respect to each SGI Consolidated Return Period, the federal Tax liability that
would be payable by the MIPS Technologies, Inc. to the IRS (in which case such
amount will be positive), or the federal Tax refund that would be payable by the
IRS to MIPS Technologies, Inc. (in which case such amount will be negative) if
--
(1) in the case that no MIPS Technologies, Inc. Subgroup exists, MIPS
Technologies, Inc. had filed a separate federal income tax return for the SGI
Consolidated Return Period or (2) in the case that a MIPS
<PAGE>
5
Technologies, Inc. Subgroup exists, the MIPS Technologies, Inc. Subgroup had
filed a separate consolidated federal income tax return exclusively with the
Members of the MIPS Technologies, Inc. Subgroup for the SGI Consolidated Return
Period. In the event that the MIPS Technologies, Inc. Subgroup would have a net
operating loss, tax credit or other favorable Tax attribute (a "Tax Attribute)
for federal Tax purposes for a particular SGI Consolidated Return Period that
would eliminate the federal Tax liability of the MIPS Technologies, Inc.
Subgroup for such taxable period but would not yield a federal Tax refund for
MIPS Technologies, Inc. on a separate federal income tax return basis or the
MIPS Technologies, Inc. Subgroup on a separate consolidated federal income tax
return basis, the MIPS Technologies, Inc. Subgroup Separate Federal Amount shall
be zero for such taxable period, and such federal Tax Attribute shall be
recoverable, if at all, by MIPS Technologies, Inc. or the MIPS Technologies,
Inc. Subgroup in a subsequent SGI Consolidated Return Period on such separate
return basis, as herein provided. In computing the MIPS Technologies, Inc.
Subgroup Separate Federal Amount, MIPS Technologies, Inc. and each Member of the
MIPS Technologies, Inc. Subgroup shall follow the Tax elections and other Tax
positions adopted or prescribed by SGI and shall take into account the
adjustments and modifications set forth in Article 4.4 of this Agreement.
4.3 Computation of MIPS Technologies, Inc. Subgroup Separate State, Local
---------------------------------------------------------------------
and Foreign Amount. For each SGI Consolidated Return Period that ends on or
- -------------------
after the first day of the Effective Period of this Agreement, the MIPS
Technologies, Inc. Subgroup shall compute the MIPS Technologies, Inc. Subgroup
Separate State, Local and Foreign Amount for the portion of such periods in
which MIPS Technologies, Inc. is a Member of the SGI Affiliated Group. "MIPS
Technologies, Inc. Subgroup Separate State, Local and Foreign Amount" means,
with respect to each SGI Consolidated Return Period, the state, local and
foreign Tax liability that would be payable by the MIPS Technologies, Inc. the
applicable taxing authorities (in which case such amount will be positive), or
the state, local and foreign Tax refund that would be payable by the applicable
taxing authorities to MIPS Technologies, Inc. (in which case such amount will be
negative) if (1) in the case that no MIPS Technologies, Inc. Subgroup exists,
--
MIPS Technologies, Inc. had filed a separate state, local and foreign income or
franchise tax returns for the SGI Consolidated Return Period or (2) in the case
that a MIPS Technologies, Inc. Subgroup exists, the MIPS Technologies, Inc.
Subgroup had filed combined, consolidated or unitary state, local or foreign
income or franchise tax returns exclusively with the Members of the MIPS
Technologies, Inc. Subgroup for the SGI Consolidated Return Period. In the
event that the MIPS Technologies, Inc. Subgroup would have a net operating loss,
tax credit or other favorable Tax attribute (a "Tax Attribute) for state, local
or foreign Tax purposes for a particular SGI Consolidated Return Period that
would eliminate the state, local or foreign Tax liability of the MIPS
Technologies, Inc. Subgroup for such taxable period but would not yield a state,
local or foreign Tax refund for MIPS Technologies, Inc. on a separate federal
income tax return basis or the MIPS Technologies, Inc. Subgroup on a separate
combined, consolidated or unitary state, local or foreign income
<PAGE>
6
or franchise tax return basis, the MIPS Technologies, Inc. Subgroup Separate
Federal Amount shall be zero for such taxable period, and such state, local or
foreign Tax Attribute shall be recoverable, if at all, by MIPS Technologies,
Inc. or the MIPS Technologies, Inc. Subgroup in a subsequent SGI Consolidated
Return Period on such separate return basis, as herein provided. In computing
the MIPS Technologies, Inc. Subgroup Separate State, Local and Foreign Amount,
MIPS Technologies, Inc. and each Member of the MIPS Technologies, Inc. Subgroup,
if any, shall follow the Tax elections and other Tax positions adopted or
prescribed by SGI and shall take into account the adjustments and modifications
set forth in Article 4.4 of this Agreement.
4.4 Adjustments. In computing the MIPS Technologies, Inc. Subgroup
-----------
Separate Federal Amount (and to the extent appropriate, the MIPS Technologies,
Inc. Subgroup Separate State, Local and Foreign Amount), MIPS Technologies, Inc.
and each Member of the MIPS Technologies, Inc. Subgroup, if any, shall take into
account the following adjustments and modifications:
(a) The MIPS Technologies, Inc. Subgroup Separate Federal Amount
shall be computed as if MIPS Technologies, Inc. came into
existence in a Code section 351 transaction on the date of the
Offering, and unless otherwise provided, MIPS Technologies,
Inc. shall be deemed not to have existed prior to such date.
The MIPS Technologies, Inc. Subgroup shall not be entitled to
any Tax Benefits of either the SGI Affiliated Group or MIPS
Technologies, Inc. that existed prior to the date of the
Offering (a "Preexisting Tax Benefit").
(b) Dividends from any Member of the SGI Affiliated Group shall be
eliminated.
(c) Items of income, gain, loss or deduction arising from a
transaction described in section 1.1552-1(a)(2)(ii) of the
Treasury Regulations shall be taken into account by the MIPS
Technologies, Inc. Subgroup, respectively, in the same manner
and in the same taxable years as such items are actually taken
into account on the SGI Consolidated Federal Return.
(d) Carryforwards and carrybacks of any Tax. Benefits shall be
calculated as though SGI were the IRS and the MIPS
Technologies, Inc. Subgroup was a separate Affiliated Group of
corporations filing Tax returns on a consolidated, combined or
unitary basis.
(e) Characterization of items of income, expense, gain or loss that
are determined on a consolidated or combined basis in the
calculation of SGI Consolidated Federal Return Liability and SGI
State, Local and Foreign Liability, such as characterizations
under Code section 1231, shall retain their characterization for
purposes of determining the MIPS Technologies, Inc. Subgroup
Separate Federal Amount and the MIPS Technologies, Inc. Subgroup
Separate State, Local and Foreign Amount.
<PAGE>
7
(f) All ordinary income and capital gains shall be deemed to be
subject to Tax at the highest applicable Tax rate applicable to
taxable ordinary income of corporations.
(g) Any exemption or similar items that must be prorated or
apportioned among the component Members of the MIPS
Technologies, Inc. Subgroup shall not be taken into account.
(h) Estimated Tax payments made pursuant to Article 5 of this
Agreement shall not be included in the computation of the MIPS
Technologies, Inc. Subgroup Separate Tax Return Amount.
(i) Other adjustments reasonably specified by SGI shall be made.
4.5 Payment of MIPS Technologies, Inc. Subgroup Separate Tax Return
---------------------------------------------------------------
Amount. (a) Payment from MIPS Technologies, Inc. Subgroup to SGI. For any SGI
- ------ ----------------------------------------------------
Consolidated Return Period covered by this Agreement, if the MIPS Technologies,
Inc. Subgroup Separate Tax Return Amount is a positive amount, MIPS
Technologies, Inc. shall pay such amount to SGI on or before the due date
(without extensions) of the SGI Consolidated Federal Returns for the appropriate
SGI Consolidated Return Period. Such payment shall be reduced by the estimated
Tax payments made by the MIPS Technologies, Inc. Subgroup for such taxable
period pursuant to Article 5 of this Agreement. For administrative or other
reasons, SGI may direct or allow the above payment to be made after the
prescribed date. If all relevant information necessary to determine the amount
of the payment is not available by the due date, the payment shall be based on
estimates, and adjustments shall be made when sufficient information is
available or as soon as practicable after the SGI Consolidated Federal Return
for the appropriate SGI Consolidated Return Period is filed.
(b) Payment from SGI to MIPS Technologies, Inc. Subgroup. For any SGI
----------------------------------------------------
Consolidated Return Period covered by this Agreement, if the MIPS Technologies,
Inc. Subgroup Separate Tax Return Amount is a negative amount SGI shall pay to
MIPS Technologies, Inc. the amount that would have been allowed as a net Tax
refund to the MIPS Technologies, Inc. Subgroup on or before the due date
(without extensions) of the SGI Consolidated Federal Returns for the appropriate
SGI Consolidated Return Period. Such payment shall be increased by the
estimated Tax payments made by the MIPS Technologies, Inc. Subgroup for such
taxable period pursuant to Article 5 of this Agreement. For administrative or
other reasons, SGI may decide to make the above payment after the prescribed
date. If all relevant information necessary to determine the amount of the
payment is not available by the due date, the payment shall be based on
estimates, and adjustments shall be made when sufficient information is
available or as soon as practicable after the SGI Consolidated Federal Return
for the appropriate SGI Consolidated Return Period is filed.
<PAGE>
8
Article 5 - Estimated Tax Payments
----------------------------------
5.1 The MIPS Technologies, Inc. Subgroup shall pay to the SGI quarterly
installments of estimated Tax. The amount of such payments for the first,
second, third and fourth installments shall cumulatively equal 25 percent, 50
percent, 75 percent and 100 percent, respectively, of the estimated full-year
MIPS Technologies, Inc. Subgroup Separate Tax Return Amount (including the
minimum tax and environmental tax). Settlement for such payment shall be made
on or before, or as soon as practicable after, the due date of the applicable
estimated Tax payment to be paid by SGI.
5.2 The MIPS Technologies, Inc. Subgroup shall pay to SGI any and all
interest and penalties imposed on the SGI Affiliated Group as a result of the
underpayment of estimated Tax attributable to the MIPS Technologies, Inc.
Subgroup. For purposes of this Article 5.2, the Chief Financial Officer of SGI
shall determine which Member or Members of the SGI Affiliated Group the
underpayment is attributable. Such determination of the Chief Financial Officer
shall be final. A payment of such interest and penalties shall not be
considered a payment of estimated Tax.
Article 6 - Adjustments to SGI Consolidated Tax Liability
---------------------------------------------------------
6.1 General. If any adjustment in the SGI Consolidated Tax Liability is
-------
made as a result of an audit by the IRS, the granting of a claim for refund, a
final decision by a court, the carryback or carryforward of a loss, deduction or
credit or any other similar circumstance, the Tax refund or Tax liability
resulting therefrom, including any interest and penalties (an "Adjustment"),
shall be allocated between the SGI Affiliated Group and the MIPS Technologies,
Inc. Subgroup in accordance with the principles of this Agreement as if such
adjustments had been taken into account in the year to which they relate.
6.2 Adjustment Resulting in Basis Increase to MIPS Technologies, Inc.
-----------------------------------------------------------------
Subgroup. If any Adjustment results in an increase in the adjusted basis of any
- --------
asset transferred by SGI to the MIPS Technologies, Inc. Subgroup, the MIPS
Technologies, Inc. Subgroup shall pay to SGI the amount of any Tax benefit
resulting to it by virtue of such basis increase to SGI as and when such Tax
benefit is realized. The preceding sentence shall survive the expiration of
the Effective Period of this Agreement.
Article 7 - Miscellaneous Provisions
------------------------------------
7.1 It is understood and acknowledged that, in accordance with Regulation
(S) 1.1502-77, SGI will be the agent for all Members of the SGI Affiliated Group
with respect to all matters referred to therein. SGI shall have authority to
compromise or concede any Tax issues for any SGI Consolidated Return Period.
<PAGE>
9
7.2 If for any reason the application of this Agreement results in an
inequitable and unintended allocation, the General Tax Counsel of SGI shall have
the authority to reallocate items to eliminate or reduce the inequity, provided
such reallocation is based on the principles of this Agreement.
7.3 If the MIPS Technologies, Inc. ceases to be a Member of the SGI
Affiliated Group, this Agreement shall apply with respect to any period in which
the income of MIPS Technologies, Inc. is included in the SGI Consolidated Tax
Return. MIPS Technologies, Inc. shall remain liable to SGI for payments
required under this Agreement, including, but not limited to, payments of Tax
and estimated Tax for periods in which the MIPS Technologies, Inc. Subgroup's
income is included in the SGI Consolidated Tax Return and payments attributable
to adjustments referred to in Article 6 of this Agreement. Additionally, MIPS
Technologies, Inc. shall cooperate and provide reasonable access to books,
records and other information needed in connection with audits, administrative
proceedings, litigation and other similar matters related to periods in which
MIPS Technologies, Inc. was a member of the SGI Affiliated Group.
7.4 If MIPS Technologies, Inc. ceases to be a Member of the SGI Affiliated
Group, MIPS Technologies, Inc. shall not be entitled to any compensation from
SGI relating to (i) any federal Tax Attributes or (ii) any state, local or
foreign Tax Attributes that have not been utilized by MIPS Technologies, Inc. or
the MIPS Technologies, Inc. Subgroup on a separate return basis in any prior SGI
Consolidated Return Period.
7.5 If MIPS Technologies, Inc. ceases to be a Member of the SGI
Affiliated Group, MIPS Technologies, Inc. shall pay to SGI the amount of any
benefit MIPS Technologies, Inc. receives from the use of any Preexisting Tax
Benefit in any taxable period after ceasing to be such a Member. The preceding
sentence shall survive the expiration of the Effective Period of this Agreement.
7.6 This Agreement may be unilaterally amended by SGI in response to
legislative or regulatory changes in the Tax law, provided that any such
amendment is consistent with the overall general principles of this Agreement.
7.7 Any matter not specifically covered by this Agreement shall be handled
in the manner determined by SGI in accordance with the general principles of
this Agreement. Any dispute concerning the interpretation of this Agreement
shall be settled by the Chief Executive Officer, Chief Financial Officer and
General Tax Counsel of SGI.
7.8 This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same Agreement.
Article 8 - Effective Period
----------------------------
8.1 This Agreement shall apply to all taxable periods that begin or end
after the after the date of the Offering, provided that the MIPS Technologies,
Inc. Subgroup is a Member of the SGI Affiliated Group for a portion of such
taxable period (the "Effective Period").
8.2 The termination of this Agreement shall not relieve any party of any
obligation arising hereunder.
<PAGE>
10
* * * * * * *
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
duly executed and attested.
SGI MIPS Technologies, Inc.
By: ____________________________ By: ____________________________
Name: Name:
Title: Title:
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated January 29,
1998 (except Note 16, as to which the date is May , 1998), in the
Registration Statement (Form S-1) and related Prospectus of MIPS Technologies,
Inc. for the registration of shares of its common stock.
ERNST & YOUNG LLP
Palo Alto, California
- -------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the completion
of the events described in Note 16 to the financial statements.
/s/ ERNST & YOUNG LLP
Palo Alto, California
April 17, 1998
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