<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 22, 1999
REGISTRATION NO. 333-73071
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 3
TO
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 3674 77-0322161
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Identification
Organization) Classification Code Number)
Number)
</TABLE>
1225 CHARLESTON ROAD
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 567-5000
(Address, Including Zip Code, and Telephone Number, Including Area Code,
Of Registrant's Principal Executive Offices)
JOHN E. BOURGOIN
MIPS TECHNOLOGIES, INC.
1225 CHARLESTON ROAD
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 567-5000
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
------------------
COPIES TO:
WILLIAM H. HINMAN, JR. DONALD M. KELLER, JR.
Shearman & Sterling Venture Law Group,
1550 El Camino Real A Professional Corporation
Menlo Park, California 94025 2800 Sand Hill Road
(650) 330-2200 Menlo Park, California 94025
(650) 854-4488
------------------
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 MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(1)(3) REGISTRATION FEE(4)
<S> <C> <C> <C> <C>
Class A Common Stock, par value $0.001
per share 6,900,000 shares $42.375 $292,387,500 $81,283.73
</TABLE>
(1) Includes an aggregate of 900,000 shares of Class A Common Stock that the
Underwriters have the option to purchase from the Selling Stockholder to
cover over-allotments, if any. The shares of Class A Common Stock are not
being registered for the purpose of sales outside the United States.
(2) Based on the high and low prices reported on the Nasdaq National Market
system on February 25, 1999.
(3) Estimated solely for the purpose of calculating the registration fee and
based on the high and low prices.
(4) Previously paid.
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>
SUBJECT TO COMPLETION. DATED APRIL 22, 1999.
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
6,000,000 Shares
[LOGO]
Class A Common Stock
-------------
Silicon Graphics, Inc. is offering all of the shares of Class A common
stock, and we will not receive any proceeds from the sale of the shares. Upon
completion of this offering, Silicon Graphics will own 69% of our outstanding
common stock (67% if the Underwriters' over-allotment option is exercised in
full), consisting of all of the outstanding shares of our Class B common stock.
Holders of the Class A common stock are entitled to elect 20% of our board
of directors, while holders of the Class B common stock are entitled to elect
our remaining directors. The rights of the holders of the Class A and Class B
common stock are substantially identical in all other respects.
The Class A common stock is traded on The Nasdaq National Market under the
symbol "MIPS". On April 21, 1999, the last reported sale price of our common
stock on The Nasdaq National Market was $40.38 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF THE CLASS A COMMON STOCK.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------
<TABLE>
<CAPTION>
Per Share Total
---------- ----------
<S> <C> <C>
Initial price to public............................................ $ $
Underwriting discount.............................................. $ $
Proceeds, before expenses, to Silicon Graphics..................... $ $
</TABLE>
The underwriters may, under certain circumstances, purchase up to an
additional 900,000 shares of Class A common stock from Silicon Graphics at the
initial price to public less the underwriting discount.
------------------
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
BANCBOSTON ROBERTSON STEPHENS
------------
Prospectus dated , 1999.
<PAGE>
[Insider Front Cover]
[The Company's logo at top center of page]
[Graphic: the word "architecture" along the left side of the page reading,
from the bottom to the top of the page]
The Processor of Choice for Market-Leading Manufacturers
[The logos of manufacturers licensing the Company's processors are stacked in
two columns in the center of the page. The logos of the following
manufacturers are stacked in the left column, from top to bottom, Casio,
Cisco Systems, Echostar, General Instrument, NEC, Nintendo, and Phillips. The
logos of the following manufacturers are stacked in the right column, from
top to bottom, PlayStation, Samsung, Sharp, Toshiba, Vadem, and WebTV.]
[Gatefold]
[Seven products incorporating the Company's intellectual property are lined up
along the top of the page. The products along the top of the page appear and
are numbered from one to seven in the following order: Nintendo 64, Hewlett
Packard-Registered Trademark- LaserJet-TM- 4000 Printer, PlayStation-Registered
Trademark- Game Console, WebTV-Registered Trademark-, NEC MobilePro-TM- 800,
Nino-TM- 500, and DISH Network-TM-. Under the images of these products appears
the following text left justified:]
MIPS Technologies Intellectual Property
[Seven products incorporating the Company's intellectual property are lined up
along the bottom of the page. The products along the bottom of the page
appear and are numbered from one to seven in the following order:
Cisco-Registered Trademark- 8000/8500 Series-TM-, Vadem Clio-TM- Handheld PC,
Casio QV7000 SX Digital Camera, Uniden UniPRO PC100 Handheld PC, General
Instrument-Registered Trademark- DCT5000+ Advanced Interactive Digital
Consumer Terminal, Everex-Registered Trademark- Freestyle-Registered
Trademark- Palm-size PC, and Network Computer Devices, Inc., ThinSTAR-TM-
200. Above the images of these products appears the following text right
justified:]
Power and Innovation [The Company's Logo]
[The following text appears between the two rows of products incorporating the
Company's intellectual property on the left side of the gatefold page:]
MIPS Technologies, Inc. develops and licenses intellectual property for
high-performance processors and cores. MIPS Technologies' licensees offer
over 60 standard processors to the embedded RISC market. These processors are
found in different application areas and end products such as:
- Video Game Consoles - Routers
- Digital Set-Top Boxes - Handheld PCs and Palm-Size PCs
- Switches - DVDs
- Printers - Multi-function Peripherals
- Scanners - Automotive
- Copiers - PC Peripherals
- Screenphones - Industrial Control
[The following text appears between the two rows of products incorporating the
Company's intellectual property on the right side of the gatefold page:]
<PAGE>
<TABLE>
<S> <C>
1. Nintendo 64 8. Cisco-Registered Trademark- 8000/8500
Powered by the NEC-Registered Series-TM- Powered by IDT and NEC
Trademark- MIPS-Registered Trademark- MIPS-Registered Trademark- RISC processors
RISC Vr4300-TM- and MIPS Reality
Co-processor 9. Vadem Clio-TM- Handheld PC
Powered by the NEC MIPS-Registered Trademark-
2. Hewlett Packard-Registered Trademark- RISC Vr4111-TM- processor
LaserJet-TM- 4000 Printer
Powered by the NEC 10. Casio QV7000 SX
MIPS-Registered Trademark- RISC Digital Camera
Vr4300 processor Powered by the LSI Logic
MIPS-Registered Trademark- RISC MiniRISC processor
3. PlayStation-Registered Trademark-
Game Console 11. Uniden UniPRO PC 100
Powered by the LSI Logic-Registered Handheld PC
Trademark- MIPS-Registered Trademark- Powered by the Phillips MIPS-Registered
RISC MiniRISC-Registered Trademark- Trademark- RISC
processor PR31700 TwoChipHCG processor
4. WebTV-Registered Trademark- 12. General Instrument-Registered Trademark-
Powered by the IDT-Registered DCT 5000+
Trademark- MIPS-Registered Trademark- Advanced Interactive Digital Consumer Terminal
RISC RV4640 processor Powered by a MIPS-Registered Trademark-
RISC processor
5. NEC MobilePRO-TM- 800
Powered by the MIPS-Registered 13. Everex-Registered Trademark-
Trademark- RISC Freestyle-Registered Trademark-
NEC Vr4121-TM- processor Palm-size PC
Powered by the NEC MIPS-Registered Trademark-
6. Nino-TM- 500 RISC Vr4111 processor
Powered by the Phillips
MIPS-Registered Trademark- 14. Network Computer
RISC PR 31700 TwoChipHCG Devices, Inc., ThinSTAR-TM- 200
processor Powered by the NEC MIPS-Registered
Trademark-
7. DISH Network-TM- RISC Vr4310 processor
Powered by the IDT MIPS-Registered
Trademark- RISC
R3041 processor
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION ABOUT OUR COMPANY AND OUR FINANCIAL STATEMENTS AND THE NOTES TO
THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS.
MIPS TECHNOLOGIES, INC.
MIPS Technologies is a leading designer of high-performance processors and
related intellectual property for use in a wide variety of increasingly
sophisticated consumer devices and business equipment. Our processor designs are
based on our 32- and 64-bit reduced instruction set computing (RISC)
architectures. We are the only company that has a 64-bit architecture in
processors that are currently being sold to digital consumer product
manufacturers in high volumes.
We license our core processor designs and related intellectual property to
semiconductor manufacturers, companies that design but do not manufacture
semiconductor products, and system original equipment manufacturers. Together
with our licensees, we offer a variety of high-performance processors in
standard, custom, semi-custom and application-specific products. Our licensees
include, among others, Broadcom Corporation, Integrated Device Technology, Inc.,
LSI Logic Corporation, NEC Corporation, NKK Corporation, Philips Semiconductors,
Quantum Effect Design, Inc., Texas Instruments, Inc. and Toshiba Corporation.
Our licensees currently offer over 60 standard processors based on our RISC
architecture which have a cumulative installed base of over 120 million units.
According to INSIDE THE NEW COMPUTER INDUSTRY, an industry trade publication,
the market for RISC-based processors totaled approximately 133 million units in
calendar year 1998, a 36% increase over 1997. Based on industry sources, we
believe that more than one third of these units were based on the MIPS RISC
architecture.
Our primary target market is the emerging market for digital consumer
products. We believe that our 32- and 64-bit processor designs are well suited
for this market due to the scalability and performance of our RISC architecture
and the cost and time-to-market advantages provided by our intellectual
property. Our core processor designs and related intellectual property have been
incorporated into several key products in this market, including video games
such as the Nintendo 64 and Sony PlayStation, handheld personal computers such
as the NEC MobilePro, the Philips Nino, the Sharp Mobilon TriPad and the Vadem
Clio, digital set-top boxes such as EchoStar's Dish Network and General
Instrument's DVi-5000+ and Internet appliances from WebTV.
THE OFFERING
The following information assumes that the underwriters do not exercise the
option granted by Silicon Graphics to purchase additional shares in the
offering. See "Underwriting". The outstanding share information excludes
7,817,714 shares of Class A common stock reserved for issuance under our stock
option and stock purchase plans.
<TABLE>
<S> <C>
Class A common stock
offered by Silicon
Graphics(1)............ 6,000,000 shares
Class A common stock to
be outstanding after
this offering.......... 11,542,286 shares
Class A and Class B
common stock to be
outstanding after this
offering............... 37,292,286 shares
Nasdaq National Market
symbol................. "MIPS"
</TABLE>
- --------------
(1) Silicon Graphics currently owns 31,750,000 shares of Class B common stock
and no shares of Class A common stock. Under the terms of our certificate of
incorporation, as amended as a result of the recapitalization, upon the
transfer by Silicon Graphics of 6,000,000 shares of Class B common stock to
our underwriters in connection with this offering, such shares of Class B
common stock will be automatically converted into shares of Class A common
stock on a one-for-one basis.
3
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The historical financial information presented below, particularly for periods
prior to the third quarter of fiscal 1998, may not be indicative of our future
performance and does not necessarily reflect what our financial position and
results of operations would have been had we operated as a separate, stand-alone
entity during the periods covered. The historical financial information for such
periods does not reflect many significant changes that have occurred in our
funding and operations and the sources and costs of our revenue as a result of
both the separation of our business from that of Silicon Graphics and our shift
in strategic direction. The per share data excludes 7,817,714 shares of Class A
common stock reserved for issuance under our stock option and stock purchase
plans, of which 4,117,000 shares were subject to outstanding options as of
December 31, 1998. See "Management--1998 Long-Term Incentive Plan" and
"Management--Director Compensation".
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Royalties............................ $ 8,402 $ 13,576 $ 19,716 $ 37,192 $ 55,980 $ 26,759 $ 24,854
Contract revenue..................... 8,962 13,903 17,327 3,115 830 827 2,400
--------- --------- --------- --------- --------- --------- ---------
Total revenue........................ 17,364 27,479 37,043 40,307 56,810 27,586 27,254
Total costs and expenses............. 36,524 57,430 64,609 81,092 56,427 43,321 15,323
Net income (loss).................... (19,230) (30,020) (27,665) (40,835) 376 (15,746) 7,421
Net income (loss) per basic share.... $ (0.53) $ (0.83) $ (0.77) $ (1.13) $ 0.01 $ (0.44) $ 0.20
Net income (loss) per diluted
share.............................. (0.53) (0.83) (0.77) (1.13) 0.01 (0.44) 0.19
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................ $ 26,052
Working capital...................................................................... 19,065
Total assets......................................................................... 33,289
Total stockholders' equity........................................................... 22,872
</TABLE>
-----------------
THE RECAPITALIZATION AND OUR RELATIONSHIP WITH SILICON GRAPHICS
On January 14, 1999, Silicon Graphics announced its intention to effect a
multi-step divestiture of its remaining interest in us. Silicon Graphics has
advised us that this divestiture could occur through one or more transactions,
including in public or private offerings, in a dividend or other distribution to
its stockholders, in an exchange offer for outstanding shares of its common
stock, or otherwise. Silicon Graphics has also advised us that, other than this
offering, it has not formulated any definitive plans regarding the divestiture.
The timing and form of any disposition by Silicon Graphics will be subject to
the terms of a 90-day lock-up agreement between Silicon Graphics and the
underwriters, as well as market and other conditions. Under the terms of the
lock-up agreement, Silicon Graphics could announce definitive divestiture plans
during the 90-day lock-up period and could dispose of its remaining interest in
us at any time following the expiration of such 90-day period. For a discussion
of these and certain other matters regarding Silicon Graphics' ability to
dispose of shares of our common stock in the near term, see "Shares Available
for Future Sale". Silicon Graphics has announced that it expects the divestiture
of its interest in us to be completed by September 30, 2000.
4
<PAGE>
THE RECAPITALIZATION. In light of Silicon Graphics' intention to dispose of
its interest in us, we effected a recapitalization of our capital stock on April
5, 1999. The recapitalization was designed to permit an orderly, multi-step
increase in the number of shares of our common stock that are publicly traded
while preserving Silicon Graphics' ability to dispose of its remaining interest
in us in a transaction that is intended to be tax-free to Silicon Graphics and
its stockholders. As part of the recapitalization, our common stock was
redesignated as Class A common stock. Following the recapitalization, Silicon
Graphics exchanged the Class A common stock it owned for Class B common stock.
As a result, Silicon Graphics presently owns all of the outstanding shares of
Class B common stock and no shares of Class A common stock.
The holders of the Class A common stock, voting as a class, are entitled to
elect 20% of the members of our board of directors. The holders of the Class A
common stock will elect one director to our board of directors at our 1999
annual meeting of stockholders. Silicon Graphics, as the holder of all of the
outstanding shares of Class B common stock, is entitled to elect our remaining
directors. Additional information regarding the terms of the Class A and Class B
common stock, including a description of certain conversion and exchange
provisions, can be found on pages 62 through 65.
RELATIONSHIP BETWEEN US AND SILICON GRAPHICS. Silicon Graphics is entitled
to elect six of the seven members of our board of directors and, following this
offering, will own approximately 69% of the total outstanding shares of Class A
and Class B common stock (67% if the underwriters' overallotment option is
exercised in full). Accordingly, Silicon Graphics will have the ability to
exercise a controlling influence over our business and affairs.
In connection with the recapitalization, we agreed to enter into a
distribution tax indemnification agreement with Silicon Graphics. This agreement
will apply if Silicon Graphics distributes all of its interest in us in a
transaction intended to be tax-free to Silicon Graphics and its stockholders.
The agreement will contain provisions limiting our ability to issue our capital
stock following a tax-free distribution and prohibiting certain other actions.
The agreement will also impose certain indemnification obligations on us with
respect to a tax-free distribution. In addition, at the time of our initial
public offering and the separation of our business from that of Silicon
Graphics, we entered into certain agreements with Silicon Graphics governing
various relationships between the two companies. Information regarding these
agreements can be found on pages 53 through 59.
Our headquarters are located at 1225 Charleston Road, Mountain View,
California 94043, and our telephone number is (650) 567-5000.
5
<PAGE>
RECENT DEVELOPMENTS
On April 9, 1999, we announced our financial results for the third quarter
of fiscal 1999. Set forth below is unaudited selected financial information for
MIPS Technologies. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements contained elsewhere in this prospectus.
This information is not necessarily indicative of operating results that may be
expected for a full year (in thousands, except per share data).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
---------- ----------
(UNAUDITED)
<S> <C> <C>
Royalties............................................................ $ 23,274 $ 18,231
Contract revenue..................................................... 3,400 --
---------- ----------
Total revenue........................................................ 26,674 18,231
Total costs and expenses............................................. 9,343 6,706
Interest income (expense), net....................................... 469 (2)
---------- ----------
Income before income taxes........................................... 17,800 11,523
Provision for income taxes........................................... 7,120 --
---------- ----------
Net income........................................................... $ 10,680 $ 11,523
---------- ----------
---------- ----------
Net income per basic share........................................... $ 0.29 $ 0.32
Net income per diluted share......................................... 0.27 0.32
</TABLE>
Revenue for the third quarter of fiscal 1999 was $26.7 million, an increase
of $8.4 million, or 46%, over the comparable period in 1998. Royalties increased
by $5.0 million for the quarter primarily as a result of an increase in
royalties from sales of Nintendo 64 video game products. Contract revenue for
the quarter ended March 31, 1999 was $3.4 million and included engineering
service fees based upon our achievement of defined milestones earned under new
licensing arrangements.
Total costs and expenses for the third quarter of fiscal 1999 increased $2.6
million, or 39%, over the comparable period in 1998. Research and development
expenses increased $1.4 million as we added resources to support our project
development activities. Sales and marketing and administrative costs increased
$1.3 million due to an increase in our licensing and marketing activities and
the existence of legal and administrative costs related to our status as a
publicly traded company that we did not incur in the comparable prior period.
Income before income taxes for the quarter ended March 31, 1999 was $17.8
million, an increase of $6.3 million, or 55%, over the comparable period in
1998. We recorded a provision for income taxes of $7.1 million for the third
quarter of fiscal 1999. No provision for income taxes was recorded for the third
quarter of fiscal 1998 due to our status as a wholly owned subsidiary of Silicon
Graphics. Net income for the quarter ended March 31, 1999 was $10.7 million
compared to $11.5 million for the third quarter of fiscal 1998.
6
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING ANY
INVESTMENT DECISION. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE
ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES ALSO MAY IMPAIR
OUR BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS WOULD LIKELY SUFFER. IN
SUCH CASE, THE TRADING PRICE OF OUR CLASS A COMMON STOCK COULD DECLINE, AND YOU
MAY LOSE ALL OR PART OF YOUR INVESTMENT.
THIS PROSPECTUS CONTAINS FORWARD LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT OUR COMPANY AND OUR
INDUSTRY. THESE FORWARD LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED
IN SUCH STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY DESCRIBED IN
THIS SECTION AND ELSEWHERE IN THIS PROSPECTUS.
FACTORS NEGATIVELY AFFECTING SALES OF NINTENDO 64 VIDEO GAME PLAYERS AND RELATED
CARTRIDGES COULD MATERIALLY AND ADVERSELY AFFECT US
Contract revenue and royalties from Nintendo and NEC relating to Nintendo 64
video game players and related cartridges accounted for 23%, 69%, 79% and 75% of
our total revenue for the fiscal years ended June 30, 1996, 1997 and 1998 and
the first six months of fiscal 1999, respectively. We anticipate that royalties
related to sales of Nintendo 64 video game cartridges will continue to represent
a substantial portion of our total revenue for the next several years.
Accordingly, factors negatively affecting sales of Nintendo 64 video game
cartridges could have a material adverse effect on our results of operations and
financial condition. The market for home entertainment products is competitive
and the introduction of new products or technologies, as well as shifting
consumer preferences, could negatively impact the amount and timing of sales of
Nintendo 64 video game players and related cartridges.
WE EXPECT THAT REVENUE WE DERIVE FROM THE SALE OF NINTENDO VIDEO GAME PRODUCTS
WILL DECLINE WITH THE EVENTUAL INTRODUCTION OF THE NEXT GENERATION NINTENDO
VIDEO GAME SYSTEM
The eventual introduction of the next generation Nintendo video game system
is likely to result in declining sales of Nintendo 64 video game players and
related cartridges, although sales of video game cartridges, which account for a
significant portion of our royalties, will continue, albeit at a declining rate,
for a period of time after the introduction. We developed key elements of the
Nintendo 64 system in conjunction with Silicon Graphics. These elements included
certain software and graphics technologies which, as a result of our separation
from Silicon Graphics and our shift in strategic direction in early 1998, we no
longer offer. We understand that the next generation Nintendo video game system
will not incorporate any of our technology. We value our relationship with
Nintendo; however, there can be no assurance that this relationship will result
in any revenues for us other than those generated by the sale of Nintendo 64
video game players and related cartridges.
WE MUST DIVERSIFY OUR SOURCES OF REVENUE TO OFFSET THE EVENTUAL DECLINE IN
REVENUE WE DERIVE FROM SALES OF NINTENDO VIDEO GAME PRODUCTS
Our ability to diversify our sources of revenue is still uncertain and will
depend on whether our processors and related designs are selected for design
("design wins") into a broader range of digital consumer products and business
equipment. Our ability to achieve design wins is subject to several risks and
uncertainties, including:
- - the potentially limited opportunities for design wins with respect to certain
digital consumer products, such as video game products, due to a limited
number of
7
<PAGE>
product manufacturers and the length of product life cycles;
- - the risk that the performance, functionality, price and power characteristics
of our designs may not satisfy those that are critical to specific digital
consumer product applications; and
- - our limited research and development and sales and marketing experience in
our target markets due to our previous focus on the development of high
performance processors for Silicon Graphics' workstations and servers.
Even if our technology is incorporated into new products, we cannot be certain
that any such products will ultimately be brought to market, achieve commercial
acceptance or generate meaningful royalties for us.
FACTORS THAT NEGATIVELY AFFECT OUR SEMICONDUCTOR COMPANY LICENSEES COULD
ADVERSELY AFFECT OUR BUSINESS
Because our strategy has been to license our technology to a relatively
limited number of semiconductor companies, a significant portion of our total
revenue has been derived from a limited number of semiconductor companies.
Accordingly, factors negatively affecting a particular licensee could adversely
effect our results of operations and financial condition if such licensee
accounts for a significant portion of our revenue at the time. We are subject to
many risks beyond our control that influence the success of our licensees,
including, for example, the highly competitive environment in which they
operate, the market for their products, their engineering capabilities and their
financial and other resources.
Revenue from our top two semiconductor company licensees represented an
aggregate of 18% of our total revenue in fiscal 1998 and 14% of our total
revenue in the first half of fiscal 1999. We expect that this revenue
concentration will continue in the future, although the identity of the
particular licensees that will account for this revenue concentration may vary
from period to period depending on the addition or expiration of contracts, the
nature and timing of payments due under our contracts and the volumes and prices
at which our licensees sell products incorporating our technology.
WE DEPEND ON SEMICONDUCTOR COMPANIES AND DIGITAL CONSUMER PRODUCT MANUFACTURERS
TO ADOPT OUR TECHNOLOGY AND USE IT IN THE PRODUCTS THEY SELL
The adoption and continued use of our technology by semiconductor companies
and digital consumer product manufacturers is important to our continued
success. We face numerous risks in obtaining agreements with semiconductor
companies and digital consumer product manufacturers on terms consistent with
our business model, including:
- - the lengthy and expensive process of building a relationship with a potential
licensee;
- - the fact that we may compete with the internal design teams of semiconductor
companies and digital consumer product manufacturers;
- - the potential difficulties in persuading large semiconductor companies and
digital consumer product manufacturers to work with us, to rely on us for
critical technology, and to disclose to us proprietary manufacturing
technology; and
- - the potential difficulties in persuading potential licensees to bear certain
development costs associated with our technology and to produce embedded
processors using our technology.
We cannot assure you that we will be able to maintain our current
relationships or establish new relationships with additional licensees, and any
failure by us to do so could have a material adverse effect on our business.
Moreover, we are subject to risks beyond our control that influence the
success or failure of a particular semiconductor company or digital consumer
product manufacturer, including:
- - the competition it faces and the market acceptance of its products;
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- - its engineering, marketing and management capabilities and the technical
challenges unrelated to our technology that it faces in developing its
products; and
- - its financial and other resources.
None of our current licensees are obligated to license new or future
generations of our processor designs. In addition, because we do not control the
business practices of our licensees, we do not influence the degree to which our
licensees promote our technology or set the prices at which the products
incorporating our technology are sold to digital consumer product manufacturers.
Our separation from Silicon Graphics may negatively affect certain of our
existing licensee relationships, insofar as Silicon Graphics was a factor in
establishing and maintaining the relationship or in negotiating the financial
and other terms of our contracts with such licensees (due to, for example,
Silicon Graphics' status as a customer of such licensees).
OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS WHICH
COULD ADVERSELY AFFECT OUR STOCK PRICE
Our quarterly financial results may vary significantly due to a number of
factors, many of which are outside of our control. In addition, our revenue
components are difficult to predict and may fluctuate significantly from period
to period. Because our expenses are largely independent of our revenue in any
particular period, it is difficult to accurately forecast our operating results.
Our operating expenses are based, in part, on anticipated future revenue and a
high percentage of our expenses are fixed in the short term. As a result, if our
revenue is below expectations in any quarter, the adverse effect may be
magnified by our inability to adjust spending in a timely manner to compensate
for the revenue shortfall.
In light of the foregoing, we believe that quarter-to-quarter comparisons of
our revenue and operating results may not be a good indication of our future
performance. In addition, it is possible that in some future periods our results
of operations may be below the expectations of public market analysts and
investors. In this event, the price of our Class A common stock may fall.
Factors that could cause our revenue and operating results to vary from
quarter to quarter include:
- - the demand for and average selling prices of semiconductor products that
incorporate our technology;
- - the financial terms of our contractual arrangements with our semiconductor
licensees, which may provide for significant up-front payments or payments
based on the achievement of certain milestones;
- - the relative mix of contract revenue and royalties;
- - competitive pressures resulting in lower contract revenue or royalty rates;
- - our ability to develop, introduce and market new processor intellectual
property;
- - the establishment or loss of licensing relationships with semiconductor
companies or digital consumer product manufacturers;
- - the timing of new products and product enhancements by us and our
competitors;
- - changes in development schedules, research and development expenditure levels
and product support by us and digital consumer product manufacturers;
- - seasonal fluctuations; and
- - general economic and market conditions.
SILICON GRAPHICS CAN EXERCISE A CONTROLLING INFLUENCE OVER OUR BUSINESS AND
AFFAIRS
Upon completion of this offering, Silicon Graphics will own all of our
outstanding Class B common stock, representing approximately 69% of the total
outstanding Class A and Class B common stock (67% if the underwriters'
over-allotment option is
9
<PAGE>
exercised in full). Accordingly, Silicon Graphics will be able to direct the
election of 80% of our directors and to exercise a controlling influence over
our business and affairs, including:
- - any determinations with respect to mergers or other business combinations;
- - the acquisition or disposition of assets;
- - future issuances of debt and equity securities; and
- - the payment of dividends on our common stock.
Similarly, for so long as Silicon Graphics continues to beneficially own in
excess of 50% of the outstanding Class A and Class B common stock, it will have
the power to determine matters submitted to a vote of our stockholders without
the consent of other stockholders, will have the power to prevent or cause a
change in control of us and could take other actions that might be favorable to
Silicon Graphics.
Following this offering we will no longer be included in Silicon Graphics'
consolidated group for federal income tax purposes. However, under federal
income tax laws, we will remain jointly and severally liable for the federal
income tax liability of each other member of Silicon Graphics' consolidated
group arising during periods when we were a member of the group. Under the terms
of our tax sharing agreement with Silicon Graphics, Silicon Graphics has the
sole authority to respond to and conduct tax proceedings (including tax audits)
relating to us for such periods.
WE HAVE POTENTIAL CONFLICTS OF INTEREST WITH SILICON GRAPHICS WHICH COULD BE
RESOLVED IN A MANNER THAT ADVERSELY AFFECTS US
Conflicts of interest may arise between us and Silicon Graphics in a number
of areas relating to our past and ongoing relationships, including:
- - potential competitive business activities;
- - indemnification arrangements, including with respect to the separation of our
business from that of Silicon Graphics and the recapitalization;
- - potential acquisitions or financing transactions;
- - sales or other dispositions by Silicon Graphics of shares of our common
stock, including through the exercise of its registration rights or in a
tax-free distribution to its stockholders;
- - the exercise by Silicon Graphics of its ability to control our management and
affairs; and
- - tax and intellectual property matters.
We cannot assure you that any conflicts that may arise between us and
Silicon Graphics will be resolved in a manner that does not have a material
adverse effect on us, even if such result is not intended by Silicon Graphics.
In addition, certain of the agreements that we entered into with Silicon
Graphics in connection with the separation of our business from that of Silicon
Graphics contain specific procedures for resolving disputes between the two
companies with respect to the subject matter of those agreements. We cannot
assure you that more favorable results to us would not be obtained under
different procedures.
Silicon Graphics does not currently engage in the design and development of
processor intellectual property for embedded systems applications. However, our
certificate of incorporation provides that Silicon Graphics has no duty to
refrain from engaging in the same or similar activities or lines of business as
us. See "Description of Capital Stock -- Corporate Opportunities".
Ownership interests of our directors or officers in the common stock of
Silicon Graphics or service as both a director of MIPS Technologies and an
officer or employee of Silicon Graphics could create or appear to create
potential conflicts of interest when directors and officers are faced with
decisions that could have different implications for us and Silicon Graphics.
Our certificate of incorporation includes provisions relating to the
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allocation of business opportunities that may be suitable for both us and
Silicon Graphics based on the relationship to the companies of the individual to
whom the opportunity is presented and the method by which it was presented. See
"Description of Capital Stock -- Corporate Opportunities".
In May 1998, we entered into a memorandum of understanding with Silicon
Graphics, Nintendo Co. Ltd. and ArtX, Inc. in which Nintendo agreed that, in the
absence of certain litigation we and Silicon Graphics initiated against ArtX,
Inc., Nintendo would refrain from asserting any claims based on its belief that
certain disclosures in the registration statement for our initial public
offering constituted a breach of the confidentiality obligations contained in
our contract with Nintendo. Although we and Silicon Graphics strongly disagree
that any such breach has occurred, Nintendo may assert any claims it believes it
has against us with respect to the disclosures in such registration statement if
Silicon Graphics reasserts its claims against ArtX, Inc. See "Business --
Litigation".
WE ARE DEPENDENT ON THE EMERGING MARKET FOR DIGITAL CONSUMER PRODUCTS AND
CONSUMER ACCEPTANCE OF THE PRODUCTS THAT INCORPORATE OUR TECHNOLOGY
The digital consumer products industry is presently the primary market for
our processor, core and related designs. The market for digital consumer
products is relatively new and emerging, and our success will depend largely on
the level of consumer interest in digital consumer products, many of which have
only recently been introduced to the market. In addition, the timing and amount
of royalties we receive will depend on consumer acceptance of the products that
incorporate our technology. We cannot assure you that any products that
incorporate our technology will achieve commercial acceptance or generate
meaningful royalties for us.
Our dependence on the digital consumer products industry involves several
risks and uncertainties, including:
- - changes in consumer requirements and preferences;
- - the introduction of products by our competitors embodying new technologies or
features; and
- - the current lack of open industry standards for hardware and software in the
digital consumer products industry.
IF WE ARE UNABLE TO DEVELOP ENHANCEMENTS AND NEW GENERATIONS OF OUR INTELLECTUAL
PROPERTY, OUR ABILITY TO ACHIEVE DESIGN WINS MAY BE ADVERSELY AFFECTED
Our future success will depend on our ability to develop enhancements and
new generations of our processors, cores and other intellectual property that
satisfy the requirements of specific product applications and introduce these
new technologies to the marketplace in a timely manner. If our development
efforts are not successful or are significantly delayed, or if the
characteristics of our processor and related designs are not compatible with the
requirements of specific product applications, our ability to achieve design
wins may be limited. Our failure to achieve a sufficient number of design wins
could have a material adverse effect on our business, results of operations and
financial condition.
Technical innovations of the type critical to our success are inherently
complex and involve several risks, including:
- - our ability to anticipate and timely respond to changes in the requirements
of digital consumer product and business equipment manufacturers;
- - our ability to anticipate and timely respond to changes in semiconductor
manufacturing processes;
- - changing consumer preferences in the digital consumer products market;
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- - the emergence of new standards in the semiconductor, digital consumer product
or business equipment industries;
- - the significant investment that is often required before commercial viability
is determined; and
- - the introduction by our competitors of products embodying new technologies or
features.
Any failure by us to adequately address these risks could render our
existing processor, core and related designs obsolete and could have a material
adverse effect on our business, results of operations and financial condition.
In addition, we cannot assure you that we will have the financial and other
resources necessary to develop processor, core and related designs in the
future, or that any enhancements or new generations of the technology that we
develop will generate revenue in excess of the costs of development.
OUR INTELLECTUAL PROPERTY MAY BE MISAPPROPRIATED OR SUBJECT TO CLAIMS OF
INFRINGEMENT
We attempt to protect our intellectual property rights through a combination
of patent, trademark, copyright and trade secret laws, as well as licensing
agreements and employee and third-party nondisclosure and assignment agreements.
Our failure to obtain or maintain adequate protection of our intellectual
property rights for any reason could have a material adverse effect on our
business, results of operations and financial condition.
Policing the unauthorized use of our intellectual property is difficult, and
we cannot be certain that the steps we have taken will prevent the
misappropriation or unauthorized use of our technologies, particularly in
foreign countries where the laws may not protect our proprietary rights as fully
as in the United States. In addition, we cannot be certain that we will be able
to prevent other parties from designing and marketing unauthorized MIPS-based
products or that others will not independently develop or otherwise acquire the
same or substantially equivalent technologies as ours. Moreover, our cross
licensing arrangements, in which we license certain of our patents but do not
generally transfer know-how or other proprietary information, may facilitate the
ability of our cross-licensees, either alone or in conjunction with others, to
develop competitive products and designs. See "Business -- Intellectual
Property".
We cannot assure you that any of our patent applications will be approved or
that any of the patents that we own will not be challenged, invalidated or
circumvented by others or be of sufficient scope or strength to provide us with
any meaningful protection or commercial advantage. Significant litigation
regarding intellectual property rights exists in our industry. We cannot be
certain that third parties will not make a claim of infringement against us or
against our semiconductor company licensees or digital consumer product
manufacturers in connection with their use of our technology. Any claims, even
those without merit, could be time consuming to defend, result in costly
litigation and/or require us to enter into royalty or licensing agreements.
These royalty or licensing agreements, if required, may not be available to us
on acceptable terms or at all. A successful claim of infringement against us or
one of our semiconductor manufacturing licensees in connection with its use of
our technology could adversely affect our business.
OUR HISTORICAL FINANCIAL INFORMATION DOES NOT REFLECT THE RECENT CHANGES TO OUR
BUSINESS AND STRATEGY
The historical financial information included in this prospectus for periods
prior to the third quarter of fiscal 1998 does not reflect the many significant
changes in our cost structure that have occurred as a result of the separation
of our business from that of Silicon Graphics and our shift in strategic
direction. Such historical financial information also does not reflect changes
in our funding and operations that have resulted from our transition to a
separate, stand-alone entity.
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For example, in anticipation of the more limited focus of our ongoing
research and development activities, we reduced our research and development
staff by 185 persons in the third quarter of fiscal 1998. This reduction
primarily reflects the transfer to Silicon Graphics of employees engaged in the
development of next generation processors for Silicon Graphics' systems.
However, the research and development activities of the employees transferred to
Silicon Graphics did not generate any material revenue for us in recent periods
and, therefore, the reduction in our research and development staff did not
have, and is not expected to have, a material effect on our revenue. In
particular, while the royalties we received from our licensees on their sales to
Silicon Graphics of products incorporating our technology represented
approximately 20% of our total revenue in fiscal 1996, such royalties
represented less than 5% of our total revenue in fiscal 1997 and fiscal 1998 and
less than 1% in the first six months of fiscal 1999.
In addition, our sales and marketing activities have increased as a result
of our shift in focus from the design of processors addressing the needs of
Silicon Graphics to the development, marketing and licensing of processor and
related designs for a wide variety of applications in the digital consumer
products industry.
WE NEED TO CONTINUE TO DEVELOP OUR ADMINISTRATIVE INFRASTRUCTURE TO SUPPORT OUR
BUSINESS AS A STAND-ALONE COMPANY
Prior to the separation of our business from that of Silicon Graphics in
June 1998, we operated as a division of Silicon Graphics and not as a separate
stand-alone company. Although we continue to be a majority owned subsidiary of
Silicon Graphics, Silicon Graphics has no obligation to assist us except as
described in "Arrangements Between MIPS Technologies and Silicon Graphics--
Management Services Agreement". If we fail to implement the financial,
operational, administrative and other systems and infrastructure necessary to
support our business as a stand-alone company, our business, results of
operations and financial condition could be adversely affected.
IF WE FAIL TO COMPETE EFFECTIVELY IN THE MARKET FOR EMBEDDED PROCESSORS, OUR
BUSINESS WILL BE ADVERSELY AFFECTED
Competition in the market for embedded processors is intense. We believe
that the principal competitive factors in our industry are performance,
functionality, price, customizability and power consumption. We cannot assure
you that we will be able to compete successfully or that competitive pressures
will not materially and adversely affect our business, results of operations and
financial condition. We compete with designers and developers of processors and
cores, as well as semiconductor manufacturers whose product lines include
processors for embedded and non-embedded applications. In addition, we may face
competition from the producers of unauthorized MIPS-based clones and non-RISC
based technology designs. See "Business -- Competition".
To remain competitive, we must also differentiate our processors, cores and
related designs from those available or under development by the internal design
groups of semiconductor manufacturers, including some of our current and
prospective manufacturing licensees. Many of these internal design groups have
substantial programming and design resources and are part of larger
organizations with substantial financial and marketing resources. These internal
design groups may develop products that compete directly with ours or may
actively seek to license their own technology to third-party semiconductor
manufacturers.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater brand recognition, larger
customer bases as well as greater financial and marketing resources than we do.
This may allow them to respond more quickly than we can to new or emerging
technologies and changes in customer requirements. It may also allow them to
devote greater resources than we can to the
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development and promotion of their technologies and products. In addition, we
may face competition from non-RISC based technology designs.
FUTURE DISPOSITIONS OF OUR COMMON STOCK BY SILICON GRAPHICS COULD ADVERSELY
AFFECT THE MARKET PRICE FOR OUR COMMON STOCK
Following this offering, Silicon Graphics will own approximately 25,750,000
shares of Class B common stock (24,850,000 if the underwriters' overallotment
option is exercised in full). Silicon Graphics is not obligated to retain these
shares, except that it has agreed not to sell or otherwise dispose of any shares
of Class A or Class B common stock for 90 days after the completion of this
offering without the consent of our underwriters, other than in a distribution
by Silicon Graphics of all of the shares of Class B common stock that it owns in
order to avoid the application of certain recently proposed tax legislation. See
"Underwriting". Any sale or distribution by Silicon Graphics of a substantial
amount of Class A or Class B common stock in the public market or to its
stockholders, or the perception that such a sale or distribution could occur,
could have an adverse effect on the market price of the Class A common stock.
Subject to the above restriction and applicable federal securities laws,
Silicon Graphics may dispose of all or a portion of the shares of Class B common
stock that it owns in one or more transactions, including a public or private
offering, a distribution of the shares to its stockholders, an offer to exchange
the shares for outstanding shares of its common stock, or otherwise. Silicon
Graphics has registration rights with respect to its shares of Class B common
stock which would facilitate any future disposition. The timing and form of any
disposition by Silicon Graphics will be subject to the terms of a 90-day lock-up
agreement between Silicon Graphics and the underwriters, as well as market and
other conditions. Under the terms of the lock-up agreement, Silicon Graphics
could announce definitive divestiture plans during the 90-day lock-up period and
could dispose of its remaining interest in us at any time following the
expiration of such 90-day period.
We cannot assure you as to the period of time that Silicon Graphics will
retain its shares of Class B common stock following this offering. Moreover, the
United States Treasury Department has recently proposed legislation which, if
enacted without modification, could result in the distribution by Silicon
Graphics of all of the Class B common stock it owns shortly after completion of
this offering. See "The Recapitalization -- Proposed Tax Legislation".
There can be no assurance that, in any transfer by Silicon Graphics of a
controlling interest in us, any of our public stockholders will be able to
participate in such a transaction or will realize any premium with respect to
their shares of Class A common stock.
WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL TO SUCCEED
Our future success depends to a significant extent on the continued
contributions of our key management, technical, sales and marketing personnel,
many of whom are highly skilled and difficult to replace. We do not have
employment agreements with any of our officers or key employees. We intend to
hire additional highly skilled personnel, particularly technical personnel, for
our anticipated research and development activities. Competition for qualified
personnel, particularly those with significant experience in the semiconductor
and processor design industries, is intense. The loss of the services of any of
our key personnel or our inability to attract and retain qualified personnel in
the future could have a material adverse effect on our business, results of
operations and financial condition. In particular, our ability to hire and
retain qualified engineering personnel is essential to meet our business goals.
OUR SEPARATION FROM SILICON GRAPHICS MAY AFFECT US IN NEGOTIATING FUTURE
LICENSING ARRANGEMENTS AND RESOLVING FUTURE INTELLECTUAL PROPERTY DISPUTES
We have entered into licensing arrangements with Silicon Graphics with
respect to certain of its intellectual property that we use in our business. As
a result of the separation, however, we no longer have full access to Silicon
Graphics' patents and other intellectual property. In the past, the MIPS Group
benefitted from its status as a division of Silicon Graphics in its access to
the intellectual property of third parties through licensing arrangements or
otherwise, and in the
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negotiation of the financial and other terms of such arrangements. The
separation of our business from that of Silicon Graphics could adversely affect
our ability to negotiate commercially attractive intellectual property licensing
arrangements with third parties in the future. Moreover, in connection with
future intellectual property infringement claims, we will not have the benefit
of asserting counterclaims based on Silicon Graphics' intellectual property
portfolio, nor will we be able to provide licenses to Silicon Graphics'
intellectual property in order to resolve such claims.
OUR REVENUE IS SUBJECT TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES
A substantial portion of our revenue has been, and is expected to continue
to be, derived from customers outside the United States, primarily in Japan. To
date, substantially all of our revenue from international customers has been
denominated in U.S. dollars. However, to the extent that the sales by our
manufacturing licensees to their customers are denominated in foreign
currencies, the royalties we receive on such sales could be subject to
fluctuations in currency exchange rates. In addition, if the effective price of
the technology we sell to our licensees were to increase due to fluctuations in
foreign currency exchange rates, demand for our technology could fall which
would, in turn, reduce our royalties. Because we cannot predict the amount of
non-U.S. dollar denominated revenue earned by our licensees, we have not
historically attempted to mitigate the effect that currency fluctuations may
have on our revenue, and we do not presently intend to do so in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Revenue" and "-- Impact of Currency".
WE HAVE GROWN RAPIDLY, AND IF WE ARE UNABLE TO MANAGE THIS GROWTH, OUR BUSINESS
WILL BE ADVERSELY AFFECTED
Our ability to continue to grow successfully requires an effective planning
and management process. Since June 30, 1998, we have increased our headcount
substantially, from 63 employees at that date to 110 employees at December 31,
1998. This increase includes the addition of 24 employees in December 1998 at
our new development center in Denmark, as well as additional employees in our
sales and marketing staff.
Our growth has placed, and the recruitment and integration of additional
employees will continue to place, a strain on our resources. Digital consumer
product manufacturers and our semiconductor manufacturing licensees typically
require significant engineering support in the design, testing and manufacture
of products incorporating our technology. Accordingly, increases in the adoption
of our technology can be expected to increase the strain on our personnel,
particularly our engineers.
OUR ABILITY TO RAISE CAPITAL IN THE FUTURE MAY BE LIMITED
We believe that cash generated by our operations, together with our current
cash balance, will be sufficient to meet our operating and capital requirements
for the foreseeable future. However, we may in the future be required to raise
additional funds through public or private financing, strategic relationships or
other arrangements. We cannot be certain that any such financing will be
available on acceptable terms, or at all, and our failure to raise capital when
needed could have a material adverse effect on our business, operating results
and financial condition. Additional equity financing may be dilutive to the
holders of our common stock, and debt financing, if available, may involve
restrictive covenants. Moreover, strategic relationships, if necessary to raise
additional funds, may require that we relinquish our rights to certain
technology.
Our ability to issue shares of our common stock in connection with an
acquisition or in a public or private offering during the 30 months following a
tax-free distribution by Silicon Graphics of its interest in us will be limited
under the terms of a distribution tax indemnification agreement which we have
agreed to enter into with Silicon Graphics prior to a tax-free distribution. See
"Arrangements Between MIPS Technologies and Silicon Graphics -- Corporate
Agreement" and "-- Exchange Agreement".
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Prior to our initial public offering in June 1998, our working capital needs
were satisfied by Silicon Graphics. Presently, Silicon Graphics has no
obligation to assist us, financially or otherwise, except as described in
"Arrangements Between MIPS Technologies and Silicon Graphics".
YEAR 2000 PROBLEMS WITH THE PRODUCTS OR INTERNAL SYSTEMS OF OUR CRITICAL
SUPPLIERS OR THIRD PARTIES WHOSE PRODUCTS INCORPORATE OUR TECHNOLOGY COULD
ADVERSELY AFFECT OUR BUSINESS
Many computer programs and embedded date-reliant systems use two digits
rather than four to define the applicable year. Programs and systems that record
only the last two digits of the calendar year may not be able to distinguish
whether "00" means 1900 or 2000. If not corrected, date-related information and
data could cause such programs or systems to fail or to generate erroneous
information.
We are unable to directly assess the Year 2000 compliance of products and
technologies developed by others and incorporating our technology. To the extent
that any such third-party product or technology is not Year 2000 compliant, we
may be adversely affected due to our association with such product or
technology. In addition, our revenue and operating results could become subject
to unexpected fluctuations and could be adversely effected if our licensees or
system original equipment manufacturers encounter Year 2000 compliance problems
that affect their ability to distribute products that incorporate our
technology.
We will also be contacting critical suppliers to determine whether the
products and services they provide to us are Year 2000 compliant. A delay or
failure by our critical suppliers to be Year 2000 compliant could, in a worst
case, interrupt our business and have an adverse effect on our business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000 Issue".
OUR STOCK PRICE IS SUBJECT TO SIGNIFICANT FLUCTUATION DUE TO A NUMBER OF
FACTORS, CERTAIN OF WHICH ARE BEYOND OUR CONTROL
The market price of our common stock has fluctuated in the past and could
continue to be subject to wide fluctuations in response to various factors,
including announcements of technological innovations or new products by us, our
licensees, digital consumer product manufacturers or our competitors,
announcements regarding the loss or establishment of licensing relationships,
and developments with respect to our patents or proprietary rights.
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
their operating performance. These broad market fluctuations may adversely
affect the market price of the Class A common stock, and investors may be unable
to resell their shares at or above the offering price. See "Price Range of
Common Stock".
CERTAIN PROVISIONS OF OUR CORPORATE DOCUMENTS AND DELAWARE LAW MAY MAKE IT MORE
DIFFICULT FOR US TO BE ACQUIRED
Provisions of our certificate of incorporation and by-laws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our stockholders. Such provisions could also make more
difficult or delay the removal of our incumbent management. See "Description of
Capital Stock". However, these provisions do not have a substantial practical
significance to investors as long as we are controlled by Silicon Graphics.
------------------
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in this prospectus under the captions
"Prospectus Summary", "Risk Factors", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" including those
concerning (1) our strategy, (2) the future sources and costs of our revenue,
(3) our product development and sales and marketing efforts, and (4) our
relationship with Silicon Graphics, including the divestiture by Silicon
Graphics of its interest in us in a tax-free distribution to its stockholders or
otherwise, contain certain forward looking statements concerning our operations,
economic performance, financial condition and relationship with Silicon
Graphics. The forward looking statements contained in this prospectus are based
on current expectations and entail various risks and uncertainties that could
cause actual results to differ materially from those expressed or implied in
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
We will not receive any proceeds from the
sale of Class A common stock in this offering.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol "MIPS" since our initial public offering on June 30, 1998. Prior to such
time, there was no public market for our common stock. Effective April 5, 1999
and in connection with the recapitalization, our common stock, as then quoted on
the Nasdaq National Market, was redesignated as Class A common stock. On the
effective date of our initial public offering, June 30, 1998, the reported last
sale price of our common stock was $13.44 per share. The following table sets
forth, for the periods indicated, the high and low reported last sale prices per
share of our common stock on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR 1999
First Quarter.......................................................... $ 23.25 $ 10.63
Second Quarter......................................................... $ 32.00 $ 14.84
Third Quarter.......................................................... $ 66.38 $ 28.25
Fourth Quarter (through April 21, 1999)................................ $ 40.38 $ 59.50
</TABLE>
On April 21, 1999, the reported last sale price of the Class A common stock
on the Nasdaq National Market was $40.38 per share. As of February 19, 1999,
there were approximately 21 stockholders of record of our common stock.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently intend to retain any future earnings to fund the development and
growth of our business and do not expect to pay any cash or stock dividends for
the foreseeable future.
CORPORATE INFORMATION
MIPS Technologies, Inc. was incorporated in Delaware in June 1992. Prior to
the separation of our business from Silicon Graphics' other operations in the
fourth quarter of fiscal 1998, our business was conducted by Silicon Graphics
primarily through its MIPS Group, a division of Silicon Graphics. Our
predecessor, MIPS Computer Systems, Inc., which was acquired by Silicon Graphics
in 1992, was founded in 1984 and was engaged in the design and development of
RISC processors for the computer systems and embedded markets. Reference in this
prospectus to "MIPS Technologies", "we", "our" and "us" refer to MIPS
Technologies, Inc. and its subsidiaries.
Our web site is located at http://www.mips.com. Information contained on our
web site does not constitute part of this prospectus.
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THE RECAPITALIZATION
GENERAL
On January 14, 1999, Silicon Graphics announced its intention to divest its
interest in us by September 30, 2000. Silicon Graphics has advised us that this
divestiture could be effected in one or more transactions and is expected to
include a distribution of a significant portion of its interest in us to Silicon
Graphics stockholders in a transaction intended to generally qualify as a
tax-free distribution under the Internal Revenue Code (a "Tax-Free
Distribution"). The timing and form of any disposition by Silicon Graphics will
be subject to the terms of a 90-day lock-up agreement between Silicon Graphics
and the underwriters, as well as market and other conditions. Under the terms of
the lock-up agreement, Silicon Graphics could announce definitive divestiture
plans during the 90-day lock-up period and could dispose of its remaining
interest in us at any time following the expiration of such 90-day period.
In light of Silicon Graphics' intention to dispose of its interest in us, on
April 5, 1999, we effected a recapitalization of our capital stock under which
each previously issued and outstanding share of our common stock was
redesignated as one share of Class A common stock. Silicon Graphics and the
holders of a majority of the shares of our common stock held by persons other
than Silicon Graphics and its affiliates approved the recapitalization. Under
the terms of an exchange agreement between us and Silicon Graphics, Silicon
Graphics exchanged each share of Class A common stock it owned immediately after
the recapitalization for one share of Class B common stock. Silicon Graphics
currently beneficially owns all of the outstanding shares of Class B common
stock and no shares of Class A common stock. Under our certificate of
incorporation, prior to a Tax-Free Distribution, Silicon Graphics will continue
to own all of the outstanding shares of Class B common stock.
The holders of the Class A common stock, voting separately as a class, are
entitled to elect 20% of the members of our board of directors (the "Class A
Directors"), and in no event less than one director. One Class A Director will
be elected at our 1999 Annual Meeting of Stockholders, and the Class A Director
so elected will serve until his or her term expires at our 2002 Annual Meeting
of Stockholders. The holders of the Class B common stock, voting separately as a
class, are entitled to elect the remaining directors. Accordingly, Silicon
Graphics will elect six of the seven members of our board of directors.
The Class A common stock and the Class B common stock have substantially
identical rights and preferences in all other respects, including with respect
to all other matters submitted to the vote of stockholders (except as otherwise
required by law) and with respect to dividend rights and rights upon
liquidation.
The recapitalization was designed to permit an orderly, multi-step increase
in the number of shares of our common stock that are publicly traded while
preserving Silicon Graphics' ability to effect a Tax-Free Distribution. To
effect a distribution that would be tax free to Silicon Graphics and its
stockholders, current tax law requires, among other things, that Silicon
Graphics own, at the time of the distribution, capital stock representing at
least 80% of our voting power. In addition, for tax-free treatment, Silicon
Graphics must distribute all of the MIPS Technologies capital stock it then owns
to its stockholders in a single transaction.
Silicon Graphics' ability, by virtue of its ownership of all of the
outstanding shares of Class B common stock, to elect 80% of the members of our
board of directors (rounded up to the nearest whole director) at all times prior
to a Tax-Free Distribution will satisfy the 80% voting power requirement for a
Tax-Free Distribution under current tax law. Accordingly, prior to a Tax-Free
Distribution, under current tax law, Silicon Graphics may reduce its economic
interest in us below 80% through secondary market sales, thereby increasing the
public float of the Class A common stock, without jeopardizing its ability to
effect a Tax-Free Distribution of its remaining interest.
CONVERSION AND EXCHANGE PROVISIONS
Our certificate of incorporation contains provisions pursuant to which,
under certain
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circumstances, all outstanding shares of Class B common stock will be
automatically converted into shares of Class A common stock on a one-for-one
basis. Certain of these automatic conversion provisions may be triggered prior
to a Tax-Free Distribution, including upon a change of control of Silicon
Graphics or if Silicon Graphics' economic interest in us falls below certain
levels. In addition, the outstanding shares of Class B common stock will be
automatically converted into shares of Class A common stock if we are acquired,
subject to certain exceptions.
In the event that Silicon Graphics pursues and consummates a Tax-Free
Distribution, we expect that we would continue to have a dual class capital
structure only for so long as may be required for Silicon Graphics to effect,
and maintain the tax-free status of, the Tax-Free Distribution. However, there
can be no assurance as to the length of time that we will continue to have the
dual class capital structure, and the Class B common stock could be outstanding
indefinitely.
For a more complete description of the conversion and exchange provisions
contained in our certificate of incorporation, see "Description of Capital
Stock" beginning on page 62.
PROPOSED TAX LEGISLATION
On February 1, 1999, the United States Treasury Department proposed
legislation which, if enacted, would require a distributing corporation
generally to own stock representing 80% of the value of the spun-off corporation
in addition to the current requirement that it own stock representing 80% of the
voting power, in order for a spin-off to qualify for tax-free treatment under
Section 355 of the Internal Revenue Code.
We cannot predict whether this or any similar proposal will be enacted or,
if enacted, whether the final legislation will contain transitional relief that
would allow Silicon Graphics to complete a Tax-Free Distribution. If the
legislation is enacted substantially as proposed and without transitional
relief, Silicon Graphics could be required to effect a Tax-Free Distribution
shortly after this offering in order to avoid the application of such
legislation. In addition, depending on the form of such legislation, if enacted,
Silicon Graphics may be unable to effect a Tax-Free Distribution and therefore
could elect to retain its interest in us indefinitely.
EXCHANGE AGREEMENT
In connection with the recapitalization, we entered into an exchange
agreement with Silicon Graphics pursuant to which Silicon Graphics will become
obligated to purchase a pre-determined number of shares of our common stock if
it has not disposed of its entire interest in us prior to December 31, 2000,
subject to certain exceptions. Silicon Graphics may purchase such shares from us
or a third party, at its election.
The exchange agreement also obligates the parties to enter into a
distribution tax indemnification agreement prior to a Tax-Free Distribution. The
distribution tax indemnification agreement will contain covenants limiting our
ability to take certain actions following a Tax-Free Distribution that could
cause the distribution to become taxable to Silicon Graphics and, in some
instances, its stockholders. These covenants will prohibit us from:
- - changing the relative voting rights of the Class A and Class B common stock
during the five-year period following the Tax-Free Distribution;
- - exchanging outstanding shares of Class B common stock for shares of Class A
common stock during the five-year period following the Tax-Free Distribution;
- - issuing capital stock in an acquisition or private or public offering during
the 30-month period following the Tax-Free Distribution; and
- - taking certain other actions.
We must indemnify Silicon Graphics if we breach these covenants and in
certain other circumstances, including if more than a specified percentage of
our stock is acquired, unless certain requirements are met. See "Arrangements
Between MIPS Technologies and Silicon Graphics -- Exchange Agreement".
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CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998,
on an actual basis and on a pro forma basis giving effect to the
recapitalization of our capital stock, which was effective as of April 5, 1999.
You should read this information together with our financial statements and the
notes to those statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------
ACTUAL PRO FORMA
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' 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;
37,292,286 shares issued and outstanding actual and no shares
issued and outstanding pro forma (1)............................. 37 --
Class A common stock, par value $0.001: 150,000,000 shares
authorized; no shares issued and outstanding actual and 5,542,286
shares issued and outstanding pro forma (1)...................... -- 5
Class B common stock, par value $0.001: 100,000,000 shares
authorized; no shares issued and outstanding actual and
31,750,000 shares issued and outstanding pro forma............... -- 32
Additional paid-in capital......................................... 136,235 136,235
Accumulated deficit................................................ (113,400) (113,400)
--------- -----------
Total stockholders' equity....................................... 22,872 22,872
--------- -----------
Total capitalization................................................. $ 22,872 $ 22,872
--------- -----------
--------- -----------
</TABLE>
- --------------
(1) Excludes 7,817,714 shares of Class A common stock reserved for issuance
under our stock option and stock purchase plans, of which 4,117,000 shares
were subject to outstanding options as of December 31, 1998. See "Management
-- 1998 Long-Term Incentive Plan" and "Management -- Director Compensation".
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SELECTED CONSOLIDATED FINANCIAL DATA
You should read the selected consolidated financial data set forth below in
conjunction with "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and our financial statements and the notes to those
statements included elsewhere in this prospectus. The selected consolidated
financial data set forth below as of June 30, 1996, 1997 and 1998, and for the
fiscal years then ended, have been derived from our financial statements which
have been audited by Ernst & Young LLP, independent auditors. The data as of
June 30, 1994 and 1995, and for the fiscal years then ended, and as of December
31, 1997 and 1998, and for the six months then ended, is unaudited and, in the
opinion of our management, include all adjustments (consisting only of normal
recurring accruals) necessary to present fairly our results of operations for
the periods then ended and our financial position as of such dates. The interim
period results are not necessarily indicative of results to be expected for a
full year.
The historical financial information presented below, particularly for
periods prior to the third quarter of fiscal 1998, may not be indicative of our
future performance and does not necessarily reflect what our financial position
and results of operations would have been had we operated as a separate, stand-
alone entity during the periods prior to the third quarter of fiscal 1998. The
historical financial information for such periods does not reflect many
significant changes that have occurred in our funding and operations and the
sources and costs of our revenue as a result of both the separation of our
business from that of Silicon Graphics and our shift in strategic direction.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(unaudited) (unaudited)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue:
Royalties................................. $ 8,402 $ 13,576 $ 19,716 $ 37,192 $ 55,980 $ 26,759 $ 24,854
Contract revenue.......................... 8,962 13,903 17,327 3,115 830 827 2,400
--------- --------- --------- --------- --------- --------- ---------
Total revenue........................... 17,364 27,479 37,043 40,307 56,810 27,586 27,254
Costs and expenses:
Cost of contract revenue.................. 2,768 7,364 5,580 1,345 375 375 125
Research and development.................. 24,396 39,033 48,402 68,827 43,446 35,127 9,223
Sales and marketing....................... 5,668 6,761 6,026 6,170 5,307 2,910 3,019
General and administrative................ 3,692 4,272 4,601 4,750 4,685 2,295 2,956
Restructuring charge...................... -- -- -- -- 2,614 2,614 --
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses................ 36,524 57,430 64,609 81,092 56,427 43,321 15,323
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)..................... (19,160) (29,951) (27,566) (40,785) 383 (15,735) 11,931
Interest income (expense)................... (70) (69) (99) (50) (7) (11) 438
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes........... (19,230) (30,020) (27,665) (40,835) 376 (15,746) 12,369
Provision for income taxes.................. -- -- -- -- -- -- 4,948
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)........................... $ (19,230) $ (30,020) $ (27,665) $ (40,835) $ 376 $ (15,746) $ 7,421
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per basic share........... $ (0.53) $ (0.83) $ (0.77) $ (1.13) $ 0.01 $ (0.44) $ 0.20
Net income (loss) per diluted share......... (0.53) (0.83) (0.77) (1.13) 0.01 (0.44) 0.19
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents................... $ -- $ -- $ -- $ -- $ 45 $ -- $ 26,052
Working capital (deficiency)................ (11,230) (16,683) (8,531) (8,446) (4,530) (8,211) 19,065
Total assets................................ 12,338 15,744 15,289 19,674 4,696 16,724 33,289
Long-term obligations, net of current
maturities(1)............................. 457 739 331 -- -- -- --
Total stockholders' equity (deficit)........ (755) (3,736) 3,853 8,072 (747) 5,266 22,872
</TABLE>
- ------------------
(1) Long-term obligations consist of capital lease obligations. We leased
equipment under capital lease obligations that matured in fiscal 1998.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS TOGETHER WITH
"SELECTED CONSOLIDATED FINANCIAL DATA" AND OUR FINANCIAL STATEMENTS AND THE
NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION
CONTAINS FORWARD LOOKING STATEMENTS BASED ON OUR CURRENT EXPECTATIONS,
ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT US AND OUR INDUSTRY. THESE FORWARD
LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE INDICATED IN THESE FORWARD LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, AS MORE FULLY DESCRIBED IN THE "RISK FACTORS" SECTION
AND ELSEWHERE IN THIS PROSPECTUS. WE UNDERTAKE NO OBLIGATION TO UPDATE PUBLICLY
ANY FORWARD LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW INFORMATION BECOMES
AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
OVERVIEW
Our predecessor, MIPS Computer Systems, Inc., was founded in 1984 and was
engaged in the design and development of RISC processors for the computer
systems and embedded markets. Silicon Graphics adopted the MIPS architecture for
its computer systems in 1988 and acquired MIPS Computer Systems, Inc. in 1992.
Following the acquisition, Silicon Graphics continued the MIPS processor
business through its MIPS Group (a division of Silicon Graphics), which focused
primarily on the development of high-performance processors for Silicon
Graphics' workstations and servers. In order to increase the focus of the MIPS
Group on the design and development of processor intellectual property for the
embedded market, Silicon Graphics separated the business of the MIPS Group from
its other operations and transferred to us the assets, liabilities and
intellectual property related to this business.
Until the last few years, cost considerations limited the use of MIPS RISC
processors in high-volume digital consumer products. As the cost to manufacture
processors based on the MIPS technology decreased, the MIPS Group sought to
penetrate the consumer market, both through supporting and coordinating the
efforts of the MIPS semiconductor licensees and, most notably, by partnering
with Nintendo in its design of the Nintendo 64 video game player and related
cartridges. The combination of these efforts has led to significant growth in
MIPS-based devices. Based on industry sources, we believe that more than one
third of the market for RISC-based processors were based on the MIPS RISC
architecture in calendar year 1998.
Revenue related to sales of Nintendo 64 video game players and related
cartridges currently accounts for the substantial majority of MIPS Technologies'
revenue. In the short term, we intend to use our operating cash flow, including
royalties we receive with respect to sales of Nintendo 64 video game players and
related cartridges, to fund processor and related design efforts aimed at the
digital consumer products market and to establish and strengthen relationships
with semiconductor licensees and system original equipment manufacturers (system
OEMs). As part of these efforts, we intend to develop processors with increased
flexibility and modularity that will allow our semiconductor licensees, as well
as system OEMs, to provide high-performance, customized products more quickly.
The financial statements for periods prior to the third quarter of fiscal
1998 reflect the historical results of operations, financial position and cash
flows of the MIPS Group, certain portions of which were transferred to us by
Silicon Graphics in connection with the separation of the two businesses. The
financial statements for such periods 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 our business, as adjusted to
reflect allocations of certain corporate charges that our management believes
are reasonable. Our financial information for periods prior to the third quarter
of fiscal 1998 may not necessarily reflect the results of our operations,
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<PAGE>
financial position and cash flows in the future or what the results of
operations, financial position and cash flows would have been had the MIPS Group
been a separate, stand-alone entity during those periods. The financial
information for such earlier periods does not reflect the many significant
changes that have occurred in our funding and operations and the sources and
costs of revenue as a result of both our separation from Silicon Graphics and
our shift in strategic direction.
REVENUE
Our revenue consists of royalties and contract revenue earned under
contracts with our licensees and under our agreement with Nintendo. Our
contracts with our licensees are typically subject to periodic renewal or
extension and expire at various dates through December 2009. We generate
royalties from the sale by semiconductor manufacturers of products incorporating
our technology. Royalty revenue generally is recognized in the quarter in which
a report is received from a licensee detailing the shipments of products
incorporating our intellectual property (i.e., generally in the quarter
following the sale of the licensee's product to its customer). 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. Under the terms of an agreement with
Silicon Graphics entered into in connection with the separation, we also receive
all royalties payable by Nintendo relating to sales of Nintendo 64 video game
players and related cartridges.
Contract revenue includes technology license fees and engineering services
fees. We receive license fees for the use of technology that we have developed
internally and, in some cases, that we have licensed from third parties. License
fees are typically recognized upon the execution of the license agreement and
transfer of intellectual property, provided no further significant performance
obligations exist. Technology license fees vary based on, among other things,
whether a particular technology is licensed for a single application or for
multiple or unlimited applications, and whether the license granted covers a
particular design or a broader architecture. 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 us or production of semiconductor chips by the
licensee. Engineering services fees are recognized as revenue when defined
milestones are completed and the milestone payment is probable of collection. In
most instances, the technology we develop, including under engineering services
contracts, can be licensed to multiple customers.
In fiscal 1996, our total revenue was split relatively equally between
royalties and contract revenue. Royalties in fiscal 1996 were earned primarily
from NEC, while contract revenue primarily reflected engineering service fees
from Nintendo related to the Nintendo 64 video game system prior to its
commercial introduction. In fiscal 1997 and 1998 and the first six months of
fiscal 1999, our revenue mix changed significantly, with royalties representing
over 90% of our 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.
Royalties from Nintendo and NEC on sales of Nintendo 64 video game players
and related cartridges accounted for approximately 79% of our total revenue for
fiscal 1998 and 75% of our total revenue for the first six months of fiscal
1999. We anticipate that revenue related to sales of Nintendo 64 video game
players and related cartridges will continue to represent a significant portion
of our total revenue for the next several years. We receive royalties from NEC
based on a percentage of the revenue derived by NEC from sales of the processor
included in the Nintendo 64 video game player. Current royalties from Nintendo
are based on unit sales of Nintendo 64 video game cartridges. We also received
royalties from Nintendo with respect to the graphics chip included in Nintendo
64 video game players, and these royalties had a lifetime cap based on unit
sales that was reached in the second quarter of fiscal 1998. There is no cap on
royalties from NEC with respect to its sale
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<PAGE>
of processors to Nintendo for Nintendo 64 video game players or on royalties
from Nintendo with respect to sales of Nintendo 64 video game cartridges.
The market for home entertainment products is competitive and the
introduction of new products or technologies, as well as shifting consumer
preferences, could negatively impact the amount and timing of sales of Nintendo
64 video game players and related cartridges. In addition, the eventual
introduction of the next generation Nintendo video game system is likely to
result in declining sales of Nintendo 64 video game players and related
cartridges, although sales of video game cartridges, which account for a
significant portion of our royalties, will continue, albeit at a declining rate,
for a period of time after the introduction. We developed key elements of the
Nintendo 64 system in conjunction with Silicon Graphics. These elements included
certain software and graphics technologies which, as a result of our separation
from Silicon Graphics and our shift in strategic direction in early 1998, we no
longer offer. Accordingly, we will need to generate revenue growth from our
stated markets to offset the eventual decline of Nintendo 64 royalties. We
understand that the next generation Nintendo video game system will not
incorporate any of our technology. We value our relationship with Nintendo;
however, there can be no assurance that this relationship will result in any
revenues for us other than those generated by the sale of Nintendo 64 video game
players and related cartridges. In May 1998, we entered into a memorandum of
understanding with Silicon Graphics, Nintendo Co. Ltd. and ArtX, Inc. resolving
disputes among the parties regarding the use of our trade secrets and the scope
and nature of the confidentiality obligations imposed on us and Silicon Graphics
under our contract with Nintendo. See "Business -- Litigation".
We expect that royalties will continue to represent a significant percentage
of our total revenue over the next several years due to our contractual
arrangements with Nintendo. The amount, timing and relative mix of royalties and
contract revenue is difficult to predict. Factors affecting the amount and
timing of our future royalties include:
- - the adoption of our technology by digital consumer product and business
equipment manufacturers;
- - consumer acceptance of products incorporating our technology;
- - changes in the average selling prices of semiconductor and digital consumer
products and business equipment; and
- - fluctuations in currency exchange rates.
Moreover, our 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. 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. Factors affecting the amount and timing of our future
contract revenue include:
- - the financial terms of our contractual arrangements with our semiconductor
licensees, which may provide for significant up-front payments or payments
based on the achievement of certain milestones; and
- - the adoption of our technology by semiconductor manufacturers, which is
influenced by a number of factors including competitive conditions in the
market for processor and core intellectual property.
Although a substantial portion of our total revenue to date has been derived
from royalties and contract revenue relating to sales of Nintendo 64 video game
products, we expect that royalties and contract revenue related to sales of
other digital consumer products, such as handheld personal computers, cellular
telephones and set-top boxes, as well as other video game products, will
constitute an increasingly significant portion of our total revenue. Our ability
to diversify our revenue base will depend
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<PAGE>
primarily on the number and variety of design wins we obtain from digital
consumer product and business equipment manufacturers, and consumer acceptance
of products that incorporate our technology. We generally do not have a direct
contractual relationship with digital consumer product manufacturers, and the
royalty reports submitted by our semiconductor licensees generally do not
disclose which consumer products include our RISC technology. As a result, it is
difficult for us to identify or predict the extent to which our future revenue
will be dependent upon a particular digital consumer product or product
manufacturer.
Because revenue related to sales of digital consumer products is expected to
represent a substantial portion of our total revenue over the next several
years, we expect to experience seasonal fluctuations in our revenue and
operating results. We typically record royalty revenue from our licensees,
including Nintendo, in the quarter following the sale of the related digital
consumer product. Because a disproportionate amount of Nintendo 64 video game
cartridges are typically sold in the second fiscal quarter (which includes the
holiday selling season), we have realized a disproportionate amount of our
revenue and operating income in our third fiscal quarter. As we increase our
focus on processors, cores and related designs for high-volume digital consumer
products, similar seasonal fluctuations in our revenue and operating results can
be expected to continue.
A significant portion of our total revenue has been and is expected to
continue to be derived from a limited number of semiconductor companies. Revenue
from our top two semiconductor company licensees represented an aggregate of 48%
of our total revenue in fiscal 1996, 29% of our total revenue in fiscal 1997,
18% of our total revenue in fiscal 1998 and 14% of our total revenue for the six
months ended December 31, 1998. Although we continue to broaden our base of
licensees, it is likely that our revenue will continue to be concentrated at the
semiconductor licensee 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
our licensees sell products incorporating our technology. Accordingly, the
identity of particular licensees 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 our semiconductor company licensees could
adversely affect our future operating results.
To date, companies based in Japan have accounted for the substantial
majority of our total revenue, and nearly all of our international revenue.
International revenue accounted for approximately 83% of our total revenue in
fiscal 1996, 87% of our total revenue in fiscal 1997, 90% of our total revenue
in fiscal 1998 and 90% of our total revenue for the six months ended December
31, 1998. Substantially all of this revenue has been denominated in U.S.
dollars. We expect that revenue derived from international licensees, primarily
in Asia, will continue to represent a significant portion of our total revenue.
Several countries in Asia are experiencing economic difficulties, characterized
by reduced economic activity, lack of liquidity, highly volatile foreign
currency exchange and interest rates and unstable stock markets. Several of our
licensees sell products into Asia that incorporate our processors and related
designs. Any negative impact of the circumstances in Asia on sales of such
products by our licensees could have a negative impact on our royalty revenue.
COSTS AND EXPENSES
Our costs and expenses include cost of contract revenue, research and
development expenses, sales and marketing expenses and general and
administrative expenses.
COST OF CONTRACT REVENUE
Cost of contract revenue presently consists primarily of sublicense fees. We
incur an obligation to pay these fees when we sublicense to our customers
technology that we have licensed from third parties. Sublicense fees are
recognized as cost of contract
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<PAGE>
revenue when the obligation is incurred, which is typically the same period in
which the related revenue is recognized. Prior to fiscal 1998, cost of contract
revenue also included nonrecurring engineering service costs directly related to
a development agreement with a specific licensee which were expensed as incurred
over the period of services. We believe that future cost of contract revenue
will be minimal.
RESEARCH AND DEVELOPMENT
The separation of our business from that of Silicon Graphics and our shift
in strategic direction have significantly impacted our research and development
cost structure. In particular, the markets we presently target allow us to use
small design teams and to rely largely on industry standard third-party design
tools. By contrast, Silicon Graphics' complex processor requirements and its
need to develop and maintain proprietary design tools demanded that the MIPS
Group employ large design teams. As a result, we have been able to reduce our
staffing requirements and costs.
The decrease in research and development staff resulting from the separation
and shift in strategic direction was offset in part by the addition of 24
employees in December 1998 to staff research and development activities in a new
development center in Copenhagen, Denmark. These employees are engaged in
product development and also provide support and design expertise for our
European-based customers. At December 31, 1998, our research and development
staff was 75 persons, compared to 36 persons at June 30, 1998 and 221 persons at
December 31, 1997. Reflecting this change in our research and development cost
structure, our research and development expenses for the second quarter and
first six months of fiscal 1999 decreased by $13.1 million and $25.9 million,
respectively, to $4.7 million and $9.2 million, compared to $17.8 million and
$35.1 million for the comparable periods in fiscal 1998. We expect that our
research and development staff and expenses will increase as we continue to
develop new designs for the digital consumer products and business equipment
markets.
The costs we incur with respect to internally developed technology and
engineering services are included in research and development expense as they
are incurred and are not directly related to any particular licensee, license
agreement or license fee.
SALES AND MARKETING
Sales and marketing expenses include salaries, travel expenses and costs
associated with direct marketing, advertising and other marketing efforts. Costs
of technical support are also included in sales and marketing expenses. Our
sales and marketing efforts are directed at establishing and supporting
licensing relationships with semiconductor manufacturers, fabless semiconductor
companies and system OEMs. At December 31, 1998, our sales and marketing staff
totaled 22 persons. Our sales and marketing staff and related expenses are
expected to increase as we seek to diversify our revenue base.
GENERAL AND ADMINISTRATIVE
Historically, a significant portion of our 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. Presently,
certain tax and facilities services are provided to us pursuant to our
Management Services Agreement with Silicon Graphics. While our general and
administrative expenses have remained relatively stable since the separation, we
expect that our general and administrative expenses will increase in the future
due, in part, to costs related to our 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.
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RESULTS OF OPERATIONS -- SIX MONTHS ENDED DECEMBER 31, 1997 AND 1998
Total revenue for the first six months of fiscal 1999 decreased by $332,000
to $27.3 million, compared to $27.6 million for the comparable period in fiscal
1998. Royalties for the first six months of fiscal 1999 decreased by $1.9
million to $24.9 million, compared to $26.8 million for the same period in
fiscal 1998. This decrease was due to the absence of royalties from the graphics
chips included in the Nintendo 64 video game player, which reached its cap in
the second quarter of fiscal 1998. Contract revenue for the first six months of
fiscal 1999 increased by $1.6 million to $2.4 million, compared to $827,000 for
the same period in fiscal 1998. This increase in contract revenue reflects fees
generated primarily from new agreements, and included engineering service fees
of $1.5 million based upon the achievement of defined milestones in the second
quarter of fiscal 1999.
Cost of contract revenue decreased by $250,000 to $125,000 for the first six
months of fiscal 1999 compared with the same period in fiscal 1998. The decrease
was attributable to a decrease in sublicensing activities which resulted in a
decrease in an obligation to pay sublicense fees to our licensors.
Research and development expenses for the first six months of fiscal 1999
decreased by $25.9 million, to $9.2 million, compared to research and
development expenses of $35.1 million for the comparable period in fiscal 1998.
This decrease reflects the significant reduction in our research and development
staff accompanying the separation and our change in strategic direction in the
second half of fiscal 1998. Research and development expenses for the first six
months of fiscal 1998 reflect the operations of the MIPS Group which had a staff
of 221 persons at December 31, 1997. Because the markets we target allow us to
rely largely on industry standard third-party design tools and to use smaller
design teams than were employed by the MIPS Group, we reduced our research and
development staff by approximately 185 persons in the third quarter of fiscal
1998. This decrease was offset, in part, by the addition of 24 employees to
staff our development center in Copenhagen, Denmark, which opened in December
1998.
Sales and marketing and general and administrative expenses for the first
six months of fiscal 1999 increased $770,000, to $6.0 million, compared to sales
and marketing and general and administrative expenses of $5.2 million for the
comparable period in fiscal 1998. This increase was due to an increase in
staffing levels and legal and consulting services.
The restructuring charge taken in the second quarter of fiscal 1998 included
$500,000 in severance related costs and $2.1 million in asset writedowns related
to the shift in the strategic direction.
Interest income (expense), net, for the first six months of fiscal 1999
increased by $449,000 to interest income of $438,000 compared to interest
expense of $11,000 for the comparable period in fiscal 1998. The increase was
primarily due to interest income earned from investment of the net proceeds of
approximately $16.0 million from our initial public offering and, to a lesser
extent, cash generated from operating activities.
While we are a part of Silicon Graphics' consolidated group for federal
income tax purposes, we are responsible for our income taxes through a tax
sharing agreement with Silicon Graphics. Therefore, to the extent we produce
taxable income, losses or credits, we make or receive payments as though we
filed separate federal, state and local income tax returns. We 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 our outstanding common stock. Upon the consummation of this
offering we will no longer be a part of Silicon Graphics' consolidated group and
will file separate federal, state and local income tax returns.
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<PAGE>
We recorded a provision for income taxes of $4.9 million for the first six
months of fiscal 1999 compared to zero for the comparable period in fiscal 1998.
The provision for the first six months of fiscal 1999 was based on an estimated
federal and state combined rate of 40% on income before taxes. The net loss
incurred in the first six months of fiscal 1998 is primarily attributable to our
operations as a division of Silicon Graphics and were included in the income tax
returns filed by Silicon Graphics. In light of both historical losses incurred,
as well as the fact that, by operation of the tax sharing agreement, we will not
receive any benefit for losses incurred or have any tax liability for any income
earned up to the closing date of the initial public offering, no income tax
provision or benefit has been reflected for the first six months of fiscal 1998.
RESULTS OF OPERATIONS -- YEARS ENDED JUNE 30, 1996, 1997 AND 1998
Our total revenue in fiscal 1996, 1997 and 1998 was as follows:
<TABLE>
<CAPTION>
FISCAL YEAR TOTAL REVENUE
- --------------- --------------
<S> <C>
1996 $37.0 million
1997 40.3 million
1998 56.8 million
</TABLE>
Revenue for fiscal 1996 consisted of royalties from the sale by
semiconductor manufacturers of products incorporating our technology. Royalties
for fiscal 1997 and 1998 consisted of royalties from sale by semiconductor
manufacturers of products incorporating our technology and from sales of
Nintendo 64 video game players and related cartridges. The significant increase
in royalties in fiscal 1997 from fiscal 1996 and in fiscal 1998 from fiscal 1997
reflects royalties received from Nintendo and NEC related to sales of Nintendo
64 video game players and related cartridges. We earned our first significant
royalties from Nintendo 64 video game system sales in the third quarter of
fiscal 1997, following the commercial introduction of that system. In the second
quarter of fiscal 1998, royalties from the graphics chip included in the
Nintendo game player reached its cap.
Fiscal 1996 contract revenue included engineering service fees related to
development efforts for the Nintendo 64 video game system as well as
approximately $10.0 million in license fees from three licensees. Contract
revenue for fiscal 1997 consisted principally of engineering service fees from
Nintendo related to development efforts for Nintendo 64 video game products, and
for fiscal 1998 consisted principally of license fees related to code
compression technology. The decrease in contract revenue in fiscal 1997
reflected substantial completion in fiscal 1996 of the Nintendo 64 video game
system development prior to its commercial introduction by Nintendo.
Under the terms of our contracts with three of our licensees, such licensees
pay us royalties on sales to Silicon Graphics of certain products incorporating
our technology. We estimate that less than 5% of our total revenue for fiscal
1998 and less than 1% of our total revenue for the first six months of 1999 was
related to such sales.
Our cost of contract revenue in fiscal 1996, 1997 and 1998 was as follows:
<TABLE>
<CAPTION>
COST OF
FISCAL YEAR CONTRACT REVENUE
- --------------- ------------------
<S> <C>
1996 $5.6 million
1997 1.3 million
1998 375,000
</TABLE>
Cost of contract revenue in fiscal 1996 and 1997 was principally
attributable to non-recurring engineering fees related to Nintendo 64 video game
system development and in fiscal 1998 was principally attributable to sublicense
fees. The decrease in fiscal 1997 from 1996 was principally attributable to the
completion in fiscal 1996 of the Nintendo 64 video game system development. The
decrease in fiscal 1998 from 1997 was attributable to a decrease in sublicensing
activities which resulted in a decrease in our obligation to pay sublicensing
fees.
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<PAGE>
Research and development expenses in fiscal 1996, 1997 and 1998 were as
follows:
<TABLE>
<CAPTION>
RESEARCH AND
FISCAL YEAR DEVELOPMENT EXPENSES
- --------------- -----------------------
<S> <C>
1996 $48.4 million
1997 68.8 million
1998 43.4 million
</TABLE>
The increase in research and development expenses in fiscal 1997 was
attributable to additional personnel, including consultants, working on next
generation processor development projects. The decrease in research and
development expenses in fiscal 1998 was primarily due to the reduction in our
research and development staff from 221 persons at December 31, 1997 to 36
persons at June 30, 1998. This reduction reflects the transfer to Silicon
Graphics of employees engaged in the development of next generation processors
for Silicon Graphics' systems as well as other staff reductions associated with
our change in strategic direction.
Sales and marketing expenses in fiscal 1996, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
SALES AND
FISCAL YEAR MARKETING EXPENSES
- --------------- --------------------
<S> <C>
1996 $6.0 million
1997 6.2 million
1998 5.3 million
</TABLE>
The decrease in fiscal 1998 was primarily due to a decrease in advertising
and promotional spending.
General and administrative expenses, which remained relatively stable in
fiscal 1996, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
GENERAL AND
ADMINISTRATIVE
FISCAL YEAR EXPENSES
- --------------- --------------------
<S> <C>
1996 $4.6 million
1997 4.8 million
1998 4.7 million
</TABLE>
The restructuring charge taken in the second quarter of fiscal 1998 included
$500,000 in severance related costs and $2.1 million in asset write-downs
related to our shift in strategic direction.
Prior to the separation, we did not have a tax sharing agreement in place
but, rather, we were included in the income tax returns filed by Silicon
Graphics and its subsidiaries in various domestic and foreign jurisdictions.
Pursuant to the tax sharing agreement, we will realize no income tax benefit,
nor bear any income tax liability, related to our operations prior to the
completion of our initial public offering on July 6, 1998. Moreover, in light of
historical losses, on a stand-alone basis, our tax provision for fiscal 1998
would have been immaterial.
IMPACT OF CURRENCY
Certain of our international licensees pay royalties based on revenues that
are reported in a local currency (currently yen) and translated into U.S.
dollars at the exchange rate in effect when such revenues are reported by the
licensee. To date, substantially all of our revenue from international customers
has been denominated in U.S. dollars. However, to the extent that sales to
digital consumer product manufacturers by our manufacturing licensees are
denominated in foreign currencies, royalties we receive on such sales could be
subject to fluctuations in currency exchange rates. In addition, if the
effective price of the technology we sell to our licensees were to increase as a
result of fluctuations in foreign currency exchange rates, demand for technology
could fall which would, in turn, reduce our royalties. We are unable to predict
the amount of non-U.S. dollar denominated revenue earned by our licensees and,
therefore, have not attempted to mitigate the effect that currency fluctuations
may have on our royalty revenue.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth our statement of operations data for each of
the six quarters in the period ended December 31, 1998. This unaudited quarterly
information has been prepared on the same basis as the annual audited financial
statements and, in the
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<PAGE>
opinion of our 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,
1997 1997 1998 1998 1998 1998
--------- -------- --------- -------- --------- --------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Royalties............................. $14,287 $ 12,472 $18,231 $10,990 $11,611 $13,243
Contract revenue...................... 750 77 -- 3 650 1,750
--------- -------- --------- -------- --------- --------
Total revenue....................... 15,037 12,549 18,231 10,993 12,261 14,993
Costs and expenses:
Cost of contract revenue.............. 375 -- -- -- -- 125
Research and development.............. 17,338 17,789 4,446 3,873 4,552 4,667
Sales and marketing................... 1,448 1,462 1,274 1,123 1,289 1,730
General and administrative............ 1,257 1,038 986 1,404 1,135 1,821
Restructuring charge.................. -- 2,614 -- -- -- --
--------- -------- --------- -------- --------- --------
Total costs and expenses............ 20,418 22,903 6,706 6,400 6,976 8,343
--------- -------- --------- -------- --------- --------
Operating income (loss)................. (5,381) (10,354) 11,525 4,593 5,285 6,650
Interest income (expense)............... (7) (4) (2) 6 170 264
--------- -------- --------- -------- --------- --------
Income (loss) before income taxes....... (5,388) (10,358) 11,523 4,599 5,455 6,914
Provision for income taxes.............. -- -- -- -- 2,182 2,766
--------- -------- --------- -------- --------- --------
Net income (loss)....................... $(5,388) $(10,358) $11,523 $ 4,599 $ 3,273 $ 4,148
--------- -------- --------- -------- --------- --------
--------- -------- --------- -------- --------- --------
</TABLE>
Royalty revenue for the quarter ended December 31, 1997 decreased by $1.8
million, or 12.7%, compared to the prior quarter, reflecting, in part, a
decrease in royalties from the graphics chip included in the Nintendo video game
player which reached its cap during the December quarter. Royalty revenue for
the quarter ended March 31, 1998 increased by $5.8 million, or 46%, compared to
the prior quarter. This increase primarily reflects the seasonal nature of our
royalty stream, in particular royalties relating to sales of Nintendo 64 video
game products during the 1997 holiday selling season. Contract revenue for the
quarter ended December 31, 1998 increased by $1.1 million compared to the prior
quarter, due to fees generated primarily from new licensing agreements, and
included engineering service fees of $1.5 million based upon our achievement of
defined milestones during the quarter.
Research and development expenses for periods prior to the quarter ended
March 31, 1998 reflect the operations of the MIPS Group prior to the separation
of our business from that of Silicon Graphics. For the quarter ended March 31,
1998 and subsequent periods, our research and development expenses reflect the
reduction in our staff that accompanied the separation of our business from that
of Silicon Graphics and the shift in strategic direction. The restructuring
charge of $2.6 million in the second quarter of fiscal 1998 included $500,000 in
severance related costs and $2.1 million in asset writedowns related to the
separation and to our shift in strategic direction.
Our operating results for quarters subsequent to our initial public offering
in July 1998 reflect our responsibility for income taxes under our tax sharing
agreement with Silicon Graphics. The provision for income taxes was $2.2 million
for the quarter ended September 30, 1998 and $2.8 million for the quarter ended
December 31, 1998. Prior to our initial public offering, we were included in the
tax returns filed by Silicon Graphics and its subsidiaries in various domestic
and foreign jurisdictions and we did not separately record any provision for
income taxes.
We expect to experience significant fluctuations in our quarterly operating
results due to a variety of factors, many of which are
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<PAGE>
outside of our control. Factors that may adversely affect our quarterly
operating results include those described under the caption "Risk Factors -- Our
quarterly financial results are subject to significant fluctuations which could
adversely affect our stock price".
LIQUIDITY AND CAPITAL RESOURCES
On July 6, 1998 we completed our initial public offering of 5,500,000 shares
of our common stock. Of the 5,500,000 shares offered, we offered 1,250,000
shares and 4,250,000 shares were offered by Silicon Graphics. Net proceeds to us
from the initial public offering were approximately $16.0 million. Our principal
capital requirements are to fund working capital needs, and to a lesser extent
capital expenditures, in order to support our revenue growth. Prior to our
initial public offering, our capital requirements were satisfied by funds
provided by Silicon Graphics through its cash management system. Since the
initial public offering, we have not participated in Silicon Graphics' cash
management system and Silicon Graphics has not provided additional funds to
finance our operations.
At December 31, 1998 we had cash and cash equivalents of $26.1 million and
working capital of $19.1 million. For the six months ended December 31, 1997,
our operating activities used net cash of $10.4 million, reflecting the net loss
we incurred during the period. For the six months ended December 31, 1998, our
operating activities provided net cash of $11.2 million, primarily reflecting
net income and an increase in accrued liabilities, partially offset by an
increase in accounts receivable. The increase in accrued liabilities was the
result of an increase in accrued compensation related to higher staffing levels,
as well as accumulated performance bonuses and increased accrued administrative
costs associated with being a new public company. The increase in accounts
receivable was due to amounts owed to us under new license agreements entered
into during the period.
Net cash used in investing activities was $452,000 for the six months ended
December 31, 1997 and $1.4 million for the six months ended December 31, 1998.
Net cash used in investing activities in both periods presented consisted of
equipment purchases and licensing of computer aided design tools used in
development. Capital expenditures have been, and future expenditures are
anticipated to be, primarily for facilities and equipment to support expansion
of our operations and licensing of computer aided design tools used in
development. We expect that our capital expenditures will increase as our
employee base grows.
Net cash provided by financing activities was $10.9 million for the six
months ended December 31, 1997 compared to $16.2 million for the comparable
period in 1998. Financing activities for the six months ended December 31, 1997
consisted primarily of net funds provided by Silicon Graphics. Net cash provided
by financing activities for the six months ended December 31, 1998 consisted
primarily of cash received in connection with the issuance of common stock in
the initial public offering.
Our 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 our existing and new technologies gain market acceptance,
- - the level and timing of contract revenues and royalties,
- - competing technological and market developments, and
- - the cost of maintaining and enforcing patent claims and other intellectual
property rights.
We believe that cash generated by our operations, together with our existing
cash
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<PAGE>
balance, will be sufficient to meet our projected operating and capital
requirements for the foreseeable future. However, we may in the future be
required to raise additional funds through public or private financing,
strategic relationships or other arrangements. Additional equity financing may
be dilutive to holders of our common stock, and debt financing, if available,
may involve restrictive covenants. Moreover, strategic relationships, if
necessary to raise additional funds, may require that we relinquish our rights
to certain of our technologies. Our failure to raise capital when needed could
have a material adverse effect on our business, results of operations and
financial condition. We have had no direct third-party indebtedness.
Our ability to issue additional shares of our common stock in connection
with acquisitions or to raise equity capital during the 30 month period
following a Tax-Free Distribution by Silicon Graphics will be constrained by the
terms of certain of our agreements with Silicon Graphics. See "Arrangements
Between MIPS Technologies and Silicon Graphics -- Exchange Agreement" and "--
Corporate Agreement".
YEAR 2000 ISSUE
Many computer programs and embedded date-reliant systems use two digits
rather than four to define the applicable year. Programs and systems that record
only the last two digits of the calendar year may not be able to distinguish
whether "00" means 1900 or 2000. If not corrected, date-related information and
data could cause such programs or systems to fail or to generate erroneous
information.
Although our processor and related designs have no inherent time or date
function, we initiated a comprehensive assessment of our Year 2000 readiness in
September 1998. We have recently completed this assessment and have begun to
implement programs to make our information technology (IT) and related non-IT
and processes Year 2000 compliant. In addition, we recently replaced our
internal computer systems and operating and applications software. Each of the
suppliers of these systems and software has indicated to us that it believes its
products are Year 2000 compliant. We expect to complete changes to critical
systems by the third quarter of calendar year 1999. We believe that we have
allocated sufficient resources for our Year 2000 compliance efforts, and we
expect that our expenses in these efforts will be less than $200,000, exclusive
of ordinary costs to upgrade and maintain our equipment.
We intend to cooperate with our licensees and others with whom we do
business to coordinate Year 2000 compliance with operational processes and
marketed products. However, we are unable to directly assess the Year 2000
compliance of products and technologies developed by others and incorporating
our technology. To the extent that any such third-party product or technology is
not Year 2000 compliant, we may be adversely affected due to our association
with such product or technology. In addition, our revenue and operating results
could become subject to unexpected fluctuations and could be adversely effected
if our licensees or system OEMs encounter Year 2000 compliance problems that
affect their ability to distribute products that incorporate our technology.
We will also be contacting critical suppliers to determine whether the
products and services they provide are Year 2000 compliant. We will develop
contingency plans should the need arise. A delay or failure by critical
suppliers to be Year 2000 compliant could, in a worst case, interrupt our
business and have an adverse effect on our business, financial condition and
results of operations.
33
<PAGE>
BUSINESS
INDUSTRY BACKGROUND
Rapid advances in semiconductor technology have enabled the development of
higher performance processors at lower cost. As a result, it is now
cost-effective for system OEMs to embed these processors into a wider range of
electronic products and systems, including a new generation of digital consumer
products and business equipment. Processors may be purchased individually and
placed on a printed circuit board or they may be embedded into larger silicon
chips. Improvements in semiconductor manufacturing processes have enabled the
integration of entire systems onto a single integrated circuit to create complex
system-on-a-chip solutions. In many cases, these system-on-a-chip solutions are
the most cost-effective method of creating new product solutions.
However, design tool capabilities and the internal design resources of
semiconductor designers and 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 processors, 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 processors 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, processors and
cores 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
processors was common in higher cost but lower volume applications such as
telecommunications switching equipment and data networking routers. Although
microcontrollers are adequate for basic system control functions, they lack the
performance and bandwidth capabilities to implement today's advanced functions.
Recently, however, the price of 32- and 64-bit processors 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 processors increased from approximately 58 million units in
calendar year 1996 to 133 million units in calendar year 1998. 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 processors 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 processors enables the processing of realistic
graphic images in products that retail for less than $150. Other examples of
digital consumer products that incorporate high-performance processors include
digital cable set-top boxes, Internet appliances and handheld personal
computers. These battery-powered devices, such as the Philips Nino 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.
34
<PAGE>
As the lower cost of processing power has enabled higher functioning
processors 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 Windows CE
operating system specifically for next generation digital consumer products such
as the mobile computing and Windows-based terminals markets. The widespread
adoption of the Windows CE operating system could accelerate the growth of the
digital consumer products market and hence the demand for embedded processors.
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 processor 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 escalate, this intellectual property
must meet more demanding performance standards.
THE MIPS SOLUTION
We are a leading designer and developer of RISC-based high-performance
processor intellectual property for embedded systems applications. We are the
only company that currently offers embedded 64-bit processor designs for
high-volume digital consumer product applications. We have established a
distribution channel for our intellectual property by licensing our technology
to key semiconductor designers and manufacturers. Each of these licensees
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 standard processors. These standard
processors have a cumulative installed base of over 120 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 processors totaled 133 million units in calendar year
1998, a 36% increase over 1997. Based on industry sources, we believe that more
than one third of these units were based on the MIPS RISC architecture.
Our technology focuses on providing cost-effective and high-performance
processors, cores and related designs for high-volume embedded applications. The
MIPS RISC architecture is flexible and allows semiconductor manufacturers to
integrate their intellectual property with our processor, core 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 processor cores with a die size of less than two square
millimeters to high-performance workstations using processors with a die size of
300 square millimeters. In addition, while designed for high performance, our
RISC-based architectures have been incorporated in a number of low-power
applications such as 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.
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<PAGE>
Through our network of semiconductor manufacturing and design companies,
system OEMs and independent software vendors, we have developed the
infrastructure to support our architecture as a standard platform for the
embedded market.
SEMICONDUCTOR LICENSEES
We currently have nine key semiconductor licensees that develop, manufacture
(or have manufactured) and sell silicon solutions based on the MIPS RISC
processor architecture. Our current semiconductor licensees include, among
others, Broadcom Corporation, Integrated Device Technology, LSI Logic
Corporation, NEC Corporation, NKK Corporation, Philips Electronics N.V., Quantum
Effect Design, Inc., Texas Instruments, Inc. and Toshiba Corporation. NEC,
Toshiba and Philips, which have been licensees 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. Broadcom, a licensee since August
1998, is a key supplier of semiconductor products to the digital set-top box and
networking markets. LSI Logic, a licensee since 1987, is a leading supplier of
custom system-on-a-chip solutions for consumer devices, such as the Sony
PlayStation, and the communications equipment market. IDT, a licensee since
1988, is a supplier of MIPS-based processors for the set-top box used in WebTV's
Internet appliance and for communications equipment such as routers from Cisco
Systems, Inc. Several of these licensees have made significant investments in
our technology and market development which has resulted in multiple design
teams around the world engaged in the development of MIPS-based processors and
cores.
Using our flexible intellectual property, these licensees, and the multiple
design teams within these companies, are able to design optimized semiconductor
products for multiple segments of the embedded market. In some cases, our
licensees also add custom integration services and derivative design
technologies to enhance our processor designs. These licensees and their
associated design teams have developed a broad portfolio of processors and
standard products based on the MIPS RISC architecture as well as application
specific extensions which can be licensed back to us and offered to other
licensees. 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 us and LSI Logic
and is presently licensed by us to several of our semiconductor manufacturing
licensees.
We also develop and license custom core designs intended to address the
specific silicon process technology of the manufacturer to which it is licensed.
We believe that our ability to provide these custom core designs is a
significant competitive advantage. Because they are designed with the
manufacturer's specific silicon process technology in mind, these core designs
have superior performance levels and high value for the target licensee.
SYSTEM OEMs
Products based on the MIPS RISC architecture are used by a variety of system
OEMs in the embedded market. A number of high-profile digital consumer products
incorporate the MIPS RISC architecture, including the Nintendo 64 and Sony
PlayStation video game systems, the Philips Nino and NEC MobilePro handheld
personal computers, the Echo Star digital set-top box and WebTV's Internet
appliance. We participate in various sales and technical efforts directed to
system OEMs and have increased our business development organization to build
brand awareness of the MIPS RISC architecture among system OEMs.
INDEPENDENT SOFTWARE VENDORS
Our 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
36
<PAGE>
testers. Currently, these companies provide over 150 products in support of our
RISC architecture. This substantial software support allows system OEMs to
design the MIPS processor technology into their products. In particular,
software operating systems developed by Microsoft, Wind River Systems, Inc. and
Integrated Systems Inc. are compatible with our RISC architecture. We intend to
work with Microsoft to optimize our processor designs for products running on
the Windows CE operating system.
STRATEGY
We seek to be the world's leading provider of processor and core
intellectual property for the embedded market. To establish MIPS RISC-based
processors and cores as the industry standard and to proliferate our technology
into multiple markets and applications, we have implemented a business model
based on the non-exclusive licensing of our intellectual property. Key elements
of this strategy include:
TARGET EMERGING MARKET FOR DIGITAL CONSUMER PRODUCTS
As the price of high-performance 32- and 64-bit processors has declined,
system OEMs have embedded these processors into next generation digital consumer
products. We believe that our 32- and 64-bit processor 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 our
intellectual property. We target our processors for use in video game products,
handheld personal computers, set-top boxes, DVD players, digital televisions and
cameras and mobile telecommunications products.
LEVERAGE TECHNOLOGICAL EXPERTISE
We will focus our research and development efforts on enhancing our existing
technology to create processors, cores and related designs that are optimized
for specific embedded applications. Our strategy is to use our 32- and 64-bit
processor technology and a modular approach that emphasizes reusable and
licensable processor technologies. We believe that this increased flexibility
and modularity will allow our licensees to provide high-performance, customized
products more quickly to our customers. We also custom design cores based on a
manufacturer's specific silicon process technology. These custom core designs
have superior performance levels and a high value for the target licensee. In
addition to advancing our processor technology, we also intend to leverage our
expertise in high-performance/ high-bandwidth computer systems architecture to
develop intellectual property aimed at improving the performance and cost-
effectiveness of next generation digital consumer products.
STRATEGIC DEVELOPMENT OF LICENSEES
Our strategy has been to license the MIPS architecture to a relatively
limited set of world-class semiconductor manufacturing and design companies. We
believe that these long-term relationships have been fundamental to the
proliferation of MIPS-based products. We presently license our technology to
nine key semiconductor companies, each of which possesses leading design and/or
process technology and can leverage a strong market position in a variety of
embedded market applications. Our recently announced licensing relationships
with Texas Instruments and Broadcom are current examples of this strategy. We
may establish licenses with additional companies that we believe can offer
value-added design capabilities in our existing target markets as well as expand
the market for our processor and related designs.
STRENGTHEN MIPS' POSITION AS THE INDUSTRY STANDARD
As an early entrant in the intellectual property market, we have established
a strong brand awareness and a network of semiconductor licensees, system OEMs
and independent software vendors to support our processor and related design
efforts. We seek to expand the industry's support of the MIPS architecture by
continuing to focus on our
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relationships with semiconductor designers and manufacturers, software vendors
and system OEMs. We also intend to further enhance the MIPS brand and create
market "pull" through targeted advertising and co-marketing with our licensees
and participation in standards setting for the processor industry.
MARKETS AND APPLICATIONS
DIGITAL CONSUMER PRODUCTS
Together with our existing semiconductor manufacturing licensees and our
associated design teams, we seek to leverage our 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, MIPS RISC-based processors have been designed into many digital
consumer products. Revenue related to the video game market presently accounts
for a substantial majority of our total revenue, and such revenue is expected to
continue to account for a significant portion of our total revenue for at least
the next several years. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
VIDEO GAMES. The market for video games, which represents the first
high-volume consumer application for 32- and 64-bit processors, accounted for
approximately 30 million units in 1997, of which an estimated 85% used our
technology. Our key design wins in this market include the Nintendo 64 video
game system, which uses our R4300i processor manufactured by NEC, and the Sony
PlayStation, which uses our R3000 class embedded processor developed by LSI
Logic.
SET-TOP BOXES. As digital transmission of video signals becomes more widely
available and utilized, we believe that the market for compatible set-top boxes
could represent an area of growth in the use of 32- and 64-bit processors and
related designs. Key design wins in this market include the set-top box used in
WebTV's Internet appliance, which uses our R4000 class processor manufactured by
IDT, Echostar's Dish Network set-top box, which uses our R3000 class processor
manufactured by IDT, and General Instrument's DVi-5000+ advanced interactive
digital set-top terminal, introduced in 1998, which uses a MIPS-based product
from NEC. We also expect that Broadcom will use one of our processors in its
set-top box products.
HANDHELD PERSONAL COMPUTERS. While the market for handheld personal
computers has only recently begun to develop, we expect that this market will
continue to grow. To date, our RISC-based processor designs have been
incorporated into products such as the Philips Nino and Sharp's Mobilon, both of
which use our R3000 class processor developed by Philips. In addition, NEC has
incorporated our R4000 class processor design into its MobilePro handheld
personal computer, and Vadem has incorporated a similar processor into its Clio.
OTHER DIGITAL CONSUMER PRODUCTS. Other potential digital consumer product
applications for our 32- and 64-bit processors include Windows-based terminals,
mobile telecommunications products, Digital Versatile Disk (DVD) players,
digital televisions and cameras and the automobile PC, a product that provides
drivers with a variety of services, including directions, using voice
recognition and voice synthesis.
BUSINESS EQUIPMENT
Significant design wins in network and office automation applications
include networking management equipment from Cisco and laser printers from
Hewlett-Packard, QMS, Lanier and Kodak.
PRODUCTS
We design, develop and license intellectual property for high-performance
processors. Our intellectual property is used in the design of processors,
cores, instruction set architectures (ISAs) and application specific extensions
(ASEs) that enable our semiconductor licensees to design and/or manufacture
flexible, high-performance processors and cores for embedded systems within
demanding time-to-market requirements.
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Through licensing and royalty-based arrangements with our semiconductor
licensees, we seek to strengthen the position of the MIPS architecture and
proliferate our designs in embedded systems applications. We have not
historically and do not intend to manufacture processors and related devices.
BASIC PROCESSORS
We currently provide flexible, modular processor designs covering a range of
performance/price points to enable our licensees to provide both standardized
and customized semiconductor products more quickly to system OEMs.
R3000. The R3000 is a 32-bit processor introduced in 1988 that has served
as the basis for many derivatives by our semiconductor licensees. 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, handheld personal computers, networking equipment and laser
printers and copiers.
R4000. The R4000 is a 64-bit processor introduced in 1992 that has served
as the basis for a variety of derivatives, including the R4300i which 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 and network
servers and interactive consumer applications such as set-top boxes.
R5000. The R5000 is a 64-bit processor developed by QED in January 1996
that is presently licensed to us. The R5000, which we can sublicense to other
licensees, is a dual instruction issue processor that has served as the
processor in several Silicon Graphics workstations. Its performance
characteristics make it an attractive processor for more powerful and
sophisticated embedded applications.
JADE. Announced in November 1998, the Jade processor core is a
high-performance, low-power, 32-bit core designed for custom silicon-on-silicon
applications. This processor, an enhancement to the R3000, implements our
instruction set architecture and certain key features from the R4000. The Jade
core is available in both optimized and synthesizable formats and is designed
for easy integration with a wide variety of custom logic and peripherals.
OPAL. Announced in November 1998, the Opal processor core is a 64-bit core
aimed at companies with short time-to-market requirements that also require the
higher performance of a 64-bit core. The Opal core is available in both
optimized and synthesizable formats.
RUBY. Announced in November 1998, the Ruby processor is based on the MIPS V
instruction set architecture with special 64-bit operations for high performance
graphics. The Ruby processor is well suited for digital consumer devices and for
enterprise networking and communications products.
INSTRUCTION SET ARCHITECTURES
Instruction set architectures are combinations of binary instructions and
the hardware to execute them which together determine the native capability of a
processor. Instruction set architecture 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 instruction set architecture may be copyrighted or
patented, thus preventing unrestricted use without a license. We license our
instruction set architectures to promote the development and marketing of our
compatible parts by our semiconductor licensees.
MIPS I/II. The MIPS I/II instruction set architecture is the basic series
of instructions for 32-bit operations. This instruction set, which is presently
used in a wide range of applications, allows the performance of integer and
floating point computation, logical operations, data movement and a variety of
other functions. Many of the R3000 class cores implement the MIPS II instruction
set
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architecture. Full MIPS I/II compatibility is protected by patents, copyrights
and trademarks that we own.
MIPS III. In addition to providing full support for the MIPS II instruction
set architecture, the MIPS III instruction set architecture extends the MIPS II
instruction set architecture to 64-bit operations, increases the number of
floating point registers and adds certain other functions. The MIPS III
instruction set architecture is implemented in the R4000 series of products.
MIPS III is an instruction set that is necessary to operate 64-bit MIPS
processors in 64-bit mode.
MIPS IV. MIPS IV enhances floating point operations and adds additional
instructions that improve performance in a number of engineering and scientific
applications. The MIPS IV instruction set architecture is implemented in the
R5000 series of products.
MIPS V. MIPS V provides instructions that enhance performance in 3-D
graphics applications. Hardware for the MIPS V instruction set architecture has
not been implemented.
APPLICATION SPECIFIC EXTENSIONS
Application specific extensions are intended to provide design flexibility
for our application-specific products and are offered to our semiconductor
manufacturing licensees as optional, additional features to our processors and
cores.
MIPS16. MIPS16 is an application specific extension to our RISC
architecture introduced in October 1996 that permits substantially reduced
systems costs by reducing memory requirements through the use of 16-bit
instruction representation.
Our current processors, cores and related products incorporate the
technologies and intellectual property used by the MIPS Group in designing
processors for Silicon Graphics' high-performance computer systems, servers and
workstations. These high-end processor designs include our R8000 and R10000
processors. The R8000 processor, introduced in 1994, has floating-point and
computational capabilities that are valuable in engineering and scientific
markets. The R10000 processor, introduced in 1995, is a sophisticated 64-bit
processor capable of using dynamic instruction scheduling (out-of-order
execution) and speculative branches. Applications using the highly scalable
R10000 processor include supercomputers and high-performance servers for
commercial applications, including database management and transaction
processing. R10000 processors 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 us for incorporation into processor and related designs for the
embedded market.
RESEARCH AND DEVELOPMENT
We believe that our future competitive position will depend in large part on
our ability to develop new and enhanced processors, cores and related designs in
a timely and cost-effective manner. We believe that these capabilities are
necessary to meet the evolving and rapidly changing needs of semiconductor
manufacturers and system OEMs in our target markets. To this end, we have
assembled a team of highly skilled engineers that possess significant experience
in the design and development of complex processors. We are building on this
base of experience and the technologies that we have developed to enhance the
MIPS RISC architecture and develop a broader line of processors and cores that
are optimized for various applications. Our strategy is to use a modular
approach that emphasizes re-usable, licensable processors, cores and software
technology. We believe that this increased flexibility and modularity will allow
our semiconductor licensees to provide high-performance, customized products
more quickly to their customers. In addition, we develop and license
standardized instruction set architecture and application specific
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extensions to work within and around our RISC architecture to enhance and tailor
the capabilities of our processor designs for specific applications.
We develop and license our processor designs in several forms. Custom core
designs are intended to address the specific silicon process technology of the
manufacturer to which it is licensed. We believe that our ability to provide
these custom core designs is a significant competitive advantage. Because they
are designed with the manufacturer's specific silicon process technology in
mind, these core designs have superior performance levels and high value for the
target licensee.
We also generate both high-level description language representations of our
custom core designs called synthesizable or "soft" cores, and intermediate
representations with some process targeting called optimized cores.
Synthesizable and optimized cores are flexible and can be licensed to multiple
customers and used in multiple applications. Synthesizable cores are delivered
as high-level, process independent circuit descriptions, leaving the process
implementation details to the system OEM. These designs provide the greatest
flexibility to semiconductor companies. Optimized cores are generated using
standard ASIC methodologies, including circuit synthesis and automatic
place-and-route. The use of optimized cores simplifies and expedites the task of
porting a design to a specific manufacturing process. Implementation advantages
of a new process technology can be quickly exploited using optimized cores
without significant circuit redesign.
We are working with Microsoft to optimize the MIPS RISC-based processor
designs for products running on the Windows CE operating system. The Windows CE
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 Windows CE 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.
At December 31, 1998, our research and development staff totaled 75 persons
compared to 36 employees at June 30, 1998. This increase reflects, in part, the
addition of 24 employees operating out of a new development center opened in
Denmark in December 1998. Employees staffing this development center engage in
product development and provide support and design expertise for our customers
based in Europe. In the third quarter of fiscal 1998, we reduced our research
and development staff by 185 persons, reflecting the transfer to Silicon
Graphics of employees engaged in the development of next generation processors
for Silicon Graphics' systems as well as other staff reductions associated with
the separation and our shift in strategic direction.
Because we expect to use industry-standard third-party design tools, we will
not be required to develop and maintain the proprietary design tools that were
necessary in connection with the design of high-performance processors for
Silicon Graphics. As a result, we expect that our staffing requirements will be
lower than those required prior to the separation. However, we intend to hire
additional highly-skilled technical personnel to staff our anticipated research
and development activities.
SALES AND MARKETING
Our 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.
We license our RISC-based processors, cores 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
we establish form a
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distribution channel and are an important element of our strategy to proliferate
the MIPS RISC architecture as the standard in the embedded processor industry.
In establishing these partnerships, we seek to license our technology to
those companies we believe can offer value-added design capabilities in our
existing target markets as well as expand the market for our processor and
related designs.
We presently have two customers that individually account for more than 10%
of our total revenue: Nintendo and NEC. Substantially all of the revenue derived
from these two customers reflects contract revenue and royalties related to
development and sales of Nintendo 64 video game players and related cartridges.
Revenue related to sales of Nintendo 64 video game cartridges is expected to
continue to account for a significant portion of our total revenue for the next
several years and, therefore, we expect that a significant portion of our total
revenue will continue to be derived from Nintendo and, to a lesser extent, NEC.
We understand that the next generation Nintendo video game system will not
incorporate any of our technology. Because revenue related to sales of Nintendo
64 video game cartridges is expected to represent a substantial portion of our
total revenue, we also expect to experience seasonal fluctuations in our revenue
and operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Revenue". For financial information
regarding revenue derived from our international licensees, see Note 13 of Notes
to Financial Statements.
Although the precise terms of our 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 us or production of semiconductor products by
the licensee. Our contracts also provide for the payment of royalties to us
based on a percentage of the net revenue earned by the licensee from the sale of
products incorporating our technology and, in some cases, based on unit sales of
such products. Our contracts with our semiconductors licensees are typically
subject to periodic renewal or extension. We also offer licensees the option to
license our 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 our marketing activities are also aimed at system OEMs. Through
targeted advertising and co-marketing programs with our licensees, we seek to
increase awareness of the MIPS RISC architecture. We believe that these efforts
will provide product differentiation that will generate demand for our
technology from digital consumer product and business equipment manufacturers,
thereby increasing demand from semiconductor manufacturers for our designs in
their products.
Because our past processor design efforts have primarily focused on serving
the needs of Silicon Graphics, and although we have always maintained a sales
and marketing staff to support our strategic relationships, our sales and
marketing activities have not historically been central to our operations.
Following the separation of our business from that of Silicon Graphics, our
sales and marketing activities have become significantly more critical to our
success, and our staff and related expenses are expected to increase as we seek
to diversify our revenue base.
INTELLECTUAL PROPERTY
We regard our patents, copyrights, mask work rights, trademarks, trade
secrets and similar intellectual property as critical to our success, and rely
on a combination of patent, trademark, copyright, mask work and trade secret
laws to protect our proprietary rights. Our failure to obtain or maintain
adequate protection of our intellectual property rights for any reason could
have a material adverse effect on our business, results of operations and
financial condition.
Despite our efforts to protect our intellectual property rights,
unauthorized parties
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may attempt to copy or otherwise use our technologies, including in the
marketing and sale of unauthorized MIPS-based clones. We intend to vigorously
protect our intellectual property rights through litigation and other means.
However, there can be no assurance that we will be able to enforce our rights or
prevent other parties from designing and marketing unauthorized MIPS-based
products.
We own 54 U.S. patents on various aspects of our technology, with expiration
dates ranging from 2006 to 2017, 14 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 we submitted, that any patents
we hold will not be challenged, invalidated or circumvented or that any claims
allowed from our patents will be of sufficient scope or strength to provide
meaningful protection or any commercial advantage to us.
In addition, there can be no assurance that third parties will not assert
claims of infringement against us or against our licensees in connection with
their use of our technology. Such claims, even those without merit, could be
time consuming, result in costly litigation and/or require us to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to us, or at all.
Moreover, the laws of certain foreign countries may not protect our
intellectual property to the same extent as do the laws of the United States
and, because of the importance of our intellectual property rights to our
business, this could have a material adverse effect on our business, results of
operations and financial condition.
We also use licensing agreements and employee and third party nondisclosure
and assignment agreements to limit access to and distribution of our proprietary
information and to obtain ownership of technology prepared on a work-for-hire
basis. There can be no assurance that the steps we have taken to protect our
intellectual property rights will be adequate to deter misappropriation of such
rights or that we will be able to detect unauthorized uses and take immediate or
effective steps to enforce our rights. There can also be no assurance that the
steps we have taken to obtain ownership of contributed intellectual property
will be sufficient to assure our ownership of all proprietary rights.
We also rely on unpatented trade secrets to protect our 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 our proprietary technology or disclose such technology
or that we can ultimately protect our 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 us.
From time to time we have entered, and in the future may enter, into cross
licensing arrangements with others, pursuant to which we license certain of our
patents in exchange for patent licenses from such licensees. Although these
types of cross licensing arrangements are common in the semiconductor and
processor industries, and do not generally provide for transfers of know-how or
other proprietary information, such arrangements may facilitate the ability of
such licensees, either alone or in conjunction with others, to develop
competitive products and designs.
We have entered into arrangements with Silicon Graphics pursuant to which
certain intellectual property was assigned to us, subject to the grant of a
license to Silicon Graphics; certain intellectual property was retained by
Silicon Graphics, subject to the grant of a license to us; and certain
intellectual property was retained by Silicon Graphics without any ongoing
interest to us. Our inability to use Silicon Graphics' intellectual property in
the future could have a material adverse affect on our business and results of
operations.
In the past, the MIPS Group has benefitted from its status as a division of
Silicon Graphics
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in our 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. There can be no assurance that the separation of
our business from that of Silicon Graphics will not adversely affect our ability
to negotiate commercially attractive intellectual property licensing
arrangements with third parties in the future.
In addition, in connection with any future intellectual property
infringement claims, we will not have the benefit of asserting counterclaims
based on Silicon Graphics' intellectual property portfolio, nor will we be able
to provide licenses to Silicon Graphics' intellectual property in order to
resolve such claims.
COMPETITION
The market for embedded processors and cores is highly competitive and
characterized by rapidly changing technological needs and capabilities. We
believe that the principal competitive factors in the embedded processor market
are performance, functionality, price, customizability and power consumption.
Our processors and cores compete with those of ARM Holdings plc, Hitachi
Semiconductor (America) Inc. and Power PC (an alliance between Motorola, Inc.
and IBM Corporation). We also compete against certain semiconductor
manufacturers whose product lines include processors for embedded and
non-embedded applications, including Advanced Micro Devices, Inc., Intel
Corporation, Motorola, Inc. and National Semiconductor Corporation. In addition,
we may face competition from the producers of unauthorized MIPS-based clones and
non-RISC based technology designs.
In addition, we must continue to differentiate our processors, cores and
related designs from those available or under development by the internal design
groups of semiconductor manufacturers, including our current and prospective
manufacturing licensees. 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
our processor 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 we 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 our
technology, semiconductor manufacturers may adopt and promote these alternative
technologies. Certain of our competitors have greater name recognition and
customer bases as well as greater financial and marketing resources than us, and
such competition could adversely affect our business, results of operations and
financial condition.
EMPLOYEES
As of December 31, 1998, we had 110 full time employees. Of this total, 75
were in research and development, 22 were in sales and marketing and 13 were in
finance and administration. Our future success will depend in part on our
ability to attract, retain and motivate highly qualified technical and
management personnel who are in great demand in the semiconductor industry. We
intend to hire additional highly skilled technical personnel to staff our
anticipated research and development activities. None of our employees are
represented by a labor union or subject to a collective bargaining agreement. We
believe that our relations with our employees are good.
LITIGATION
On April 6, 1998, we filed an action against ArtX, Inc. and certain
employees of ArtX, Inc. with Silicon Graphics in the Superior Court of the State
of California alleging, among other things, misappropriation of trade secrets
and breach of contractual and fiduciary duties in connection with the
defendants' actions in developing graphics technology for Nintendo's
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next generation video game system. On April 23, 1998, Nintendo notified Silicon
Graphics and us of its belief that the disclosure of certain information
regarding the contract for the development of the Nintendo 64 video game system
in our registration statement relating to our initial public offering filed with
the Securities and Exchange Commission on April 21, 1998 constituted a breach of
that contract. Silicon Graphics and we strongly disagree that any such breach
has occurred. On May 27, 1998, we entered into a memorandum of understanding
with Silicon Graphics, Nintendo and ArtX, Inc. pursuant to which Silicon
Graphics and we have dismissed without prejudice the pending lawsuit against
ArtX, Inc., and Nintendo has agreed that, in the absence of a lawsuit against
Nintendo or ArtX, Inc., it will not assert any claim that the Nintendo 64
contract has been breached in connection with the filing of our registration
statement.
From time to time, we receive communications from third parties asserting
patent or other rights covering our products and technologies. Based upon our
evaluation, we may take no action or we may seek to obtain a license. There can
be no assurance in any given case that a license will be available on terms we
consider reasonable, or that litigation will not ensue. In addition, from time
to time we evaluate possible patent infringement claims against third parties
and may assert such claims if appropriate.
FACILITIES
Our executive, administrative and technical offices currently occupy
approximately 27,500 square feet (with an option to increase to 55,000 square
feet) in a building subleased from Silicon Graphics in Mountain View,
California. Payments by us to Silicon Graphics under this sublease are equal to
amounts payable by Silicon Graphics under its sublease for the property with a
third party. This sublease will expire on May 31, 2002, subject to earlier
termination in certain circumstances.
In addition, we sublease approximately 9,000 square feet of office space
from LSI Logic in Copenhagen, Denmark. The sublease is on a month-to-month basis
until April 1999, and we have an option to assume the related lease at that
time. If the lease is assumed, it will expire in February 2006, subject to our
earlier termination. If the lease is not assumed, LSI Logic may terminate the
sublease on 90 days notice.
We believe that these facilities are adequate to meet our current needs but
that we may need to seek additional space in the future.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors
and their ages as of February 1, 1999, were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ----------------------------------------- ----------- ------------------------------------------
<S> <C> <C>
John E. Bourgoin......................... 53 Chief Executive Officer, President and
Director
Lavi Lev................................. 42 Senior Vice President, Engineering
Kevin C. Eichler......................... 39 Vice President, Chief Financial Officer
and Treasurer
Derek Meyer.............................. 38 Vice President, Sales and Marketing
Sandy Creighton.......................... 45 Vice President, General Counsel and
Secretary
Dr. Forest Baskett(1).................... 55 Director
Kenneth L. Coleman(2).................... 56 Director
Fred M. Gibbons(1)(2)(3)................. 49 Director
Anthony B. Holbrook(2)(3)................ 59 Director
William M. Kelly(1)...................... 45 Director
Teruyasu Sekimoto........................ 59 Director
</TABLE>
- --------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Option Administration Committee.
JOHN E. BOURGOIN has served as our Chief Executive Officer since February
1998 and our President since September 1996, and has served on our board of
directors since May 1997. Mr. Bourgoin has also served as a Senior Vice
President of Silicon Graphics from September 1996 through May 1998. Prior to
joining Silicon Graphics, Mr. Bourgoin was Group Vice President, Computation
Products Group at Advanced Micro Devices, Inc.
LAVI LEV has served as our Senior Vice President -- Engineering since March
1998, and was Vice President -- Engineering of Silicon Graphics from 1996 to
March 1998. From 1995 to 1996, he served as Vice President, Engineering at
MicroUnity Systems Engineering and between 1992 and 1995 he was a manager at Sun
Microsystems, Inc. Prior to joining Sun Microsystems, Inc., Mr. Lev was employed
by Intel Corporation and was involved in the development of the Pentium
processor.
KEVIN C. EICHLER has served as our Vice President, Chief Financial Officer
and Treasurer since May 1998. Prior to joining us and since 1996, Mr. Eichler
served as Vice President, Finance, Chief Financial Officer, Treasurer and
Secretary of Visigenic Software Inc., an independent provider of software tools
for distributed object technologies for the Internet, Intranet and enterprise
computing environments. From 1995 to 1996, he served as Executive Vice
President, Finance and Chief Financial Officer of National Information Group, a
provider of technology solutions for financial services companies. From 1991 to
1995, Mr. Eichler served as Executive Vice President, Finance and Chief
Financial Officer of Mortgage Quality Management, Inc., a national provider of
quality control services and technologies to residential mortgage lenders.
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Prior to 1991, Mr. Eichler held management positions with NeXT Software and
Microsoft.
DEREK MEYER joined us in May 1996 as Director of Worldwide Marketing and
Sales and became Vice President -- Sales and Marketing in March 1998. Prior to
joining us and since 1994, Mr. Meyer served as marketing director for the
TriMedia division of Philips Semiconductors and prior to that time he was
director of SPARC marketing for Sun Microsystems, Inc.
SANDY CREIGHTON joined us in June 1998 as Vice President, General Counsel
and Secretary. Prior to joining us and since 1991, Ms. Creighton was Deputy
General Counsel at Sun Microsystems, Inc.
DR. FOREST BASKETT has served on our board of directors since January 1998.
Since 1990, Dr. Baskett has served as Senior Vice President, Research and
Development of Silicon Graphics, and since 1994, has also served as its Chief
Technology Officer.
KENNETH L. COLEMAN has served on our board of directors 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.
FRED M. GIBBONS has served on our board of directors since July 1998. Since
1999, Mr. Gibbons has been a partner with Concept Stage Venture Management, an
investment firm based in California. From 1995 through 1998, Mr. Gibbons was
also a lecturer at the Stanford University Graduate School of Engineering. In
1981, Mr. Gibbons founded Software Publishing Corporation based in San Jose,
California, a company engaged in the development of software systems for
personal computer applications, and was its Chief Executive Officer through
1994. Prior to 1981, Mr. Gibbons was employed as a product and marketing manager
for Hewlett-Packard Company.
ANTHONY B. HOLBROOK has served on our board of directors since July 1998.
Mr. Holbrook retired as Chief Technical Officer of Advanced Micro Devices, Inc.
in August 1994. Mr. Holbrook joined Advanced Micro Devices, Inc. in 1973 and
served in a number of executive capacities. He was elected a corporate officer
in 1978 and in 1982 was named Executive Vice President and Chief Operating
Officer. In 1986, Mr. Holbrook was named President of Advanced Micro Devices,
Inc. and was elected to the board of directors. In 1989, he moved from Chief
Operating Officer to Chief Technical Officer and in 1990 from President to Vice
Chairman, a position he held until April 1996. Prior to joining Advanced Micro
Devices, Inc., Mr. Holbrook held engineering management positions with Fairchild
Semiconductor and Computer Micro Technology Corporation. Mr. Holbrook is also a
director of SDI, Inc., a solid state laser manufacturer.
WILLIAM M. KELLY has served on our board of directors 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 on our board of directors since January 1998.
Mr. Sekimoto joined Silicon Graphics in 1987 as representative director of
Silicon Graphics Japan. He became Vice President, North Pacific Area in 1991 and
Senior Vice President, East Asia in 1995.
Ownership interests of our directors or officers in the common stock of
Silicon Graphics or service as both our director and as an officer or employee
of Silicon Graphics could create or appear to create potential conflicts of
interest when directors and officers are faced with decisions that could have
different implications for us and Silicon Graphics, such as potential
acquisitions or financing transactions as well as other
47
<PAGE>
corporate opportunities that may be suitable for both us and Silicon Graphics.
Our certificate of incorporation includes certain provisions relating to the
allocation of business opportunities that may be suitable for both us and
Silicon Graphics based on the relationship to us and Silicon Graphics of the
individual to whom the opportunity is presented and the method by which is
presented. See "Description of Capital Stock -- Corporate Opportunities". In
addition, under Delaware law, our officers and directors have fiduciary duties
to our stockholders.
CLASS OF THE BOARD OF DIRECTORS
Our board of directors is divided into three classes of directors serving
staggered three-year terms. The terms of office of the directors will expire as
follows:
<TABLE>
<CAPTION>
ANNUAL MEETING AT
WHICH TERM WILL
DIRECTOR EXPIRE
- ------------------------ ---------------------
<S> <C>
Mr. Bourgoin............ 1999
Mr. Coleman............. 1999
Mr. Holbrook............ 1999
Mr. Sekimoto............ 2000
Mr. Gibbons............. 2000
Dr. Baskett............. 2001
Mr. Kelly............... 2001
</TABLE>
Silicon Graphics has the ability to change the size and composition of our
board of directors. However, to ensure that there will be at least one Class A
Director at all times, our board of directors may not consist of less than five
members. In addition, the holders of the Class B common stock may not remove the
Class A Director except for cause.
BOARD COMMITTEES
Our board of directors has an Audit Committee, a Compensation Committee and
an Option Administration Committee. The responsibilities of the Audit Committee
include recommending to our board of directors the independent public
accountants to be selected to conduct the annual audit of our accounts;
reviewing the proposed scope of such audit and approving the audit fees to be
paid; and reviewing the adequacy and effectiveness of our internal auditing,
accounting and financial controls with the independent public accountants and
our financial and accounting staff.
The responsibilities of the Compensation Committee include developing
performance criteria for and periodically evaluating the performance of our
Chief Executive Officer, reviewing and recommending the salary, bonus and stock
incentive compensation of our Chief Executive Officer and reviewing the
salaries, bonuses and stock incentive compensation of our other officers as
proposed by our Chief Executive Officer.
The responsibilities of the Option Administration Committee include
administering the Incentive Plan, reviewing and approving grants under the
Incentive Plan (other than grants to the Chief Executive Officer) and approving
other performance-based compensation which is intended to be excluded from the
deductibility limitations imposed by Section 162(m) of the Internal Revenue Code
of 1986.
Our board of directors may, from time to time, establish certain other
committees to facilitate the management of MIPS Technologies.
DIRECTOR COMPENSATION
Directors who do not receive compensation as one of our officers or
employees or any of our affiliates are paid an annual board membership fee. All
directors are reimbursed for reasonable expenses incurred in attending our board
of director or committee meetings.
Our board of directors and Silicon Graphics approved our Director's Stock
Option Plan in July 1998. The plan authorizes 600,000 shares of Class A common
stock for issuance plus an annual increase each July 1 equal to the lesser of
(1) 100,000 shares, (2) the number of shares subject to option grants in the
prior one-year period, or (3) a lesser amount determined by our board of
directors. Upon a non-employee director's election or appointment to our board
of directors, he or
48
<PAGE>
she will automatically receive an initial nonstatutory stock option to purchase
40,000 shares of Class A common stock. Each director who has been a non-employee
director for at least six months will automatically receive an annual
nonstatutory stock option to purchase 10,000 shares of Class A common stock each
year on the date of the annual stockholder meeting. All stock options are
granted with an exercise price equal to the fair market value of Class A common
stock on the date of grant. Initial stock options vest 24% on the first
anniversary of the grant date and 2% each month thereafter; annual stock option
grants vest 2% each month over a 50-month period from the date of the grant.
Pursuant to the terms of the director stock option plan, Messrs. Holbrook and
Gibbons were each granted options to purchase 40,000 shares of Class A common
stock upon commencement of their term as members of our board of directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation earned for services rendered
to us and Silicon Graphics in all capacities for the fiscal years ended June 30,
1998 and 1997 by our Chief Executive Officer and our two other executive
officers whose salary and bonus exceeded $100,000 during the fiscal year ended
June 30, 1998. These officers are referred to as the Named Executive Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------------------- --------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) OPTIONS/SARS COMPENSATION (2)
- ---------------------------------- --------- --------- --------- ------------------ -------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
John E. Bourgoin ................. 1998 $ 372,053 -- $ 21,343 559,500 $ 2,226
Chief Executive Officer and 1997 280,000 $ 89,086 9,382 125,000 1,200
President
Lavi Lev ......................... 1998 $ 245,542 -- $ 309,228 298,400 $ 1,880
Senior Vice President, 1997 215,192 $ 106,550 83,024 64,000 2,400
Engineering
Derek Meyer ...................... 1998 $ 201,456 -- $ 32,210 209,700(3) $ 1,793
Vice President, Sales and 1997 182,215 $ 25,987 36,543 12,000 2,079
Marketing
</TABLE>
- --------------
(1) "Other Annual Compensation" for fiscal 1998 for the Named Executive Officers
included, in addition to certain DE MINIMIS items which are not required to
be separately described, (a) for Mr. Bourgoin: $11,348 for club membership
fees and $5,538 for an automobile allowance; (b) for Mr. Lev: $150,000 in
the form of a gross-up award related to a forgivable loan, $100,000 in
monthly amortization of a forgivable loan from Silicon Graphics and $50,538
in relocation expenses and housing allowances; and (c) for Mr. Meyer;
$32,210 on the sale of 2,500 restricted shares of Silicon Graphics common
stock.
(2) Consists of matching contributions made by Silicon Graphics under its 401(k)
plan.
(3) Consists of options exercisable to purchase 205,200 shares of MIPS
Technologies' common stock, granted by us, and options exercisable to
purchase 4,500 shares of Silicon Graphics' common stock, granted by Silicon
Graphics. In connection with their acceptance of employment with us, our
executive officers and employees that were previously employed by Silicon
Graphics mutually agreed with Silicon Graphics to forfeit all unvested
options to purchase Silicon Graphics common stock and all unvested
restricted shares of Silicon Graphics common stock. In addition, such
individuals had 30 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 remained unexercised at the end of that period
were forfeited.
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<PAGE>
OPTION GRANTS
The following tables set forth certain information with respect to option
grants made by us to the Named Executive Officers covering our Class A common
stock and by Silicon Graphics covering its common stock during the fiscal year
ended June 30, 1998.
<TABLE>
<CAPTION>
MIPS TECHNOLOGIES, INC.
OPTION GRANTS IN FISCAL 1998
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF RATES OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM (1)
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
- ---------------------------------------------- ---------- --------------- -------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
John E. Bourgoin.............................. 559,500 18.67% $12.00 05/22/08 $4,222,399 $10,700,387
Lavi Lev...................................... 298,400 9.96 12.00 05/22/08 2,251,946 5,706,873
Derek Meyer................................... 205,200 6.85 12.00 05/22/08 1,548,590 3,924,431
</TABLE>
<TABLE>
<CAPTION>
SILICON GRAPHICS, INC.
OPTION GRANTS IN FISCAL 1998
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF RATES OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR OPTION
UNDERLYING OPTIONS GRANTED TERM (1)
OPTIONS TO EMPLOYEES IN EXERCISE PRICE EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
- ---------------------------------------------- ---------- --------------- -------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
John E. Bourgoin.............................. -- -- -- -- -- --
Lavi Lev...................................... -- -- -- -- -- --
Derek Meyer................................... 4,500(2) * $12.88 11/13/07 $ 36,437 $ 92,337
</TABLE>
- --------------
* Less than 1%.
(1) Potential realizable value assumes that the price of the applicable stock
increases from the date of grant until the end of the option term (10 years)
at the annual rates specified (5% and 10%). The 5% and 10% assumed annual
rates of appreciation are mandated by rules of the Securities and Exchange
Commission and do not represent an estimate or projection of the future
price of the applicable stock. We do not believe that this method accurately
illustrates the potential value of a stock option. Actual gains, if any, on
stock option exercises depend upon the actual future price of the applicable
stock and the continued employment of the option holders through the vesting
period. Accordingly, the potential realizable values set forth in these
tables may not be achieved.
(2) In connection with their acceptance of employment with us, executive
officers and employees who were previously employed by Silicon Graphics
mutually agreed with Silicon Graphics to forfeit all unvested options to
purchase Silicon Graphics common stock and all unvested restricted shares of
Silicon Graphics common stock. In addition, such individuals had 30 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 remained unexercised at the end of that period were forfeited.
50
<PAGE>
OPTION EXERCISES AND OPTION VALUES
The following tables set forth certain information with respect to stock
option exercises by the Named Executive Officers during the fiscal year ended
June 30, 1998 and stock options held by them at fiscal year-end.
<TABLE>
<CAPTION>
MIPS TECHNOLOGIES, INC.
STOCK OPTION EXERCISES AND
JUNE 30, 1998 FISCAL YEAR-END VALUES
--------------------------------------------------------
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
JUNE 30, 1998 JUNE 30, 1998 (1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John E. Bourgoin.............. -- -- -- 559,500 -- $ 804,002
Lavi Lev...................... -- -- -- 298,400 -- 428,801
Derek Meyer................... -- -- -- 205,200 -- 294,872
</TABLE>
- --------------
(1) The amounts in this column reflect the difference between the closing market
price of our common stock on June 30, 1998, which was $13.44, and the option
exercise price. The actual value of unexercised options fluctuates with the
market price of the underlying stock.
<TABLE>
<CAPTION>
SILICON GRAPHICS, INC.
STOCK OPTION EXERCISES AND
JUNE 30, 1998 FISCAL YEAR-END VALUES
--------------------------------------------------------
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT JUNE 30, 1998 IN-THE-MONEY OPTIONS AT
(1) JUNE 30, 1998 (2)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John E. Bourgoin.............. -- -- 50,000 -- $ -- --
Lavi Lev...................... -- -- 21,734 -- 3,828 --
Derek Meyer................... -- -- 4,548 -- -- --
</TABLE>
- --------------
(1) All options listed in this table were either exercised or forfeited within
30 days to 90 days (depending on the terms of the option grant) after the
Named Executive Officers severed their employment relationships with Silicon
Graphics and became one of our employees.
(2) The amounts in this column reflect the difference between the closing market
price of the Silicon Graphics' common stock on June 30, 1998, which was
$12.13, and the option exercise price. The actual value of unexercised
options fluctuates with the market price of the underlying stock.
1998 LONG-TERM INCENTIVE PLAN
At the time of our initial public offering, we adopted the MIPS
Technologies, Inc. 1998 Long-Term Incentive Plan (the "Incentive Plan") in order
to attract, retain and motivate our officers and other key employees and
consultants, to compensate them for their contributions to our growth and
profits and to encourage equity ownership. The Incentive Plan authorizes the
issuance of various forms of stock-based awards to such individuals, including
stock options, stock appreciation rights, stock awards (such as restricted
stock), performance unit awards and other forms of equity-related awards which
the Option Administration Committee, in its capacity as the administrator of the
Incentive Plan, determines to be consistent with the purposes of the Incentive
Plan and our interests. An aggregate of 6,600,000 shares of Class A common stock
have been authorized for issuance under the Incentive Plan.
Under the Incentive Plan awards may be granted to officers, key employees
and consultants (including non-employee directors) as determined by the Option
Administration Committee, although incentive stock options intended to qualify
under Section 422 of the Internal Revenue Code may only be granted to employees.
The Option Administration Committee has full discretion to determine the type of
award, the number of shares related to each grant, and all other terms and
conditions of awards, provided that stock options must have a minimum 12-month
vesting period (subject to acceleration on a change in control or termination of
employment as determined by the Option Administration Committee).
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<PAGE>
As of December 31, 1998 there were outstanding options to purchase an
aggregate of 4,037,000 shares of Class A common stock at exercise prices ranging
from $12.00 to $22.13 per share, or a weighted average exercise price per share
of $13.90 under the Incentive Plan and there were outstanding 15,000 shares of
restricted stock, subject to repurchase.
EMPLOYEE STOCK PURCHASE PLAN
At the time of our initial public offering, we also adopted the MIPS
Technologies, Inc. Employee Stock Purchase Plan (the "Purchase Plan") in order
to provide employees the opportunity to purchase our Class A common stock.
Pursuant to the terms of the Purchase Plan, employees may purchase shares of our
Class A common stock through payroll deductions at a 15% discount from the lower
of its fair market value measured at the beginning of a pre-determined 24-month
offering period and at the end of each of four six-month exercise periods within
such offering period. An aggregate of 600,000 shares of Class A common stock,
subject to an annual increase to be added each July 1, beginning July 1, 1999,
equal to the lesser of 600,000 shares or 0.5% of the total number of our common
stock outstanding on a fully diluted basis on the preceding June 30 (subject to
an overall cap of 2% of the outstanding shares as of the end of the preceding
fiscal year), have been authorized for issuance under the Purchase Plan. In
order to encourage equity ownership by our employees and consultants overseas,
we have implemented a supplemental stock purchase plan with terms substantially
similar to the Purchase Plan for individuals based outside the United States. An
aggregate of 60,000 shares of Class A common stock have been authorized for
issuance under the Non-U.S. Purchase Plan.
CHANGE IN CONTROL AGREEMENTS
We also entered into change in control agreements with our executive
officers providing for certain benefits following (1) a change in control of us
and (2) certain terminations of employment during the 24-month period following
such a change in control. A "change in control" is generally defined in the
agreements to encompass significant transactions resulting in a change in the
corporate control of us, including, among other things, an acquisition of 30% of
the class of our common stock entitled to elect a majority of our directors, the
unapproved replacement of a majority of our directors and the reacquisition by
Silicon Graphics of all or substantially all of our outstanding equity
securities.
In the event of a change in control, each executive's options and shares of
restricted stock will become fully vested and the executive may elect, within
six months following the change in control, to have his or her options "cashed
out" at a price determined in the agreements. If an executive's employment is
terminated other than for cause or if an executive resigns for good reason (as
such terms are defined in the agreements), in either case within 24 months after
a change in control, the executive will be entitled to receive a lump sum cash
payment equal to 24 months' salary. Supplements to the change in control
agreements provide the executives with certain benefits upon termination of
employment in limited circumstances following a change in control of Silicon
Graphics while Silicon Graphics is still our controlling stockholder.
RELATED TRANSACTIONS
We have three outstanding loans to Mr. Lev. The first loan is a forgivable,
non-interest bearing note with a principal amount outstanding at June 30, 1998
of approximately $258,000. The principal of this loan is forgiven (reduced)
ratably on a periodic basis through December 2000, subject to Mr. Lev's
continued employment. The second loan is a forgivable, non-interest bearing
(except in certain limited circumstances) note with a principal amount
outstanding at June 30, 1998 of $250,000. The principal of this loan is
forgivable on March 1, 2002, subject to Mr. Lev's continued employment at all
times prior to such date. The third loan bears interest at an annual rate of
7.19% and had a principal amount outstanding at June 30, 1998 of $275,000. The
largest aggregate amount of these loans outstanding during the period since July
1, 1996 was approximately $900,000.
52
<PAGE>
ARRANGEMENTS BETWEEN MIPS TECHNOLOGIES AND SILICON GRAPHICS
RELATIONSHIP WITH SILICON GRAPHICS
Silicon Graphics presently owns all of our issued and outstanding Class B
common stock, representing approximately 85% of the outstanding Class A and
Class B common stock. Upon completion of this offering, Silicon Graphics will
own approximately 25,750,000 shares of Class B common stock, representing all of
the issued and outstanding Class B common stock and 69% of the outstanding Class
A and Class B common stock (67% if the underwriters' over-allotment option is
exercised in full). For so long as Silicon Graphics continues to beneficially
own all of the issued and outstanding Class B common stock, it will be able to
direct the election of a majority of our directors and to exercise a controlling
influence over our business and affairs, including any determinations with
respect to mergers or other business combinations, the acquisition or
disposition of assets, future issuances of debt and equity securities and the
payment of dividends on our common stock. Similarly, for so long as Silicon
Graphics continues to beneficially own in excess of 50% of the outstanding Class
A and Class B common stock, it will have the power to determine matters
submitted to a vote of stockholders without the consent of other stockholders,
will have the power to prevent or cause a change in control of us and could take
other actions that might be favorable to Silicon Graphics.
On January 14, 1999, Silicon Graphics announced its intention to divest its
interest in us by September 30, 2000. Silicon Graphics has advised us that this
divestiture could be effected in one or more transactions and is expected to
include a distribution of a significant portion of its interest in us to Silicon
Graphics stockholders in a Tax-Free Distribution. Silicon Graphics could dispose
of the shares of Class B common stock that it owns in one or more public or
private offerings, in a dividend or other distribution to its stockholders, in
an exchange offer for outstanding shares of its common stock, or otherwise.
However, other than this offering, Silicon Graphics has not formulated any
definitive plans regarding the divestiture of its interest in us. The timing and
form of any disposition by Silicon Graphics will be subject to the terms of a
90-day lock-up agreement between Silicon Graphics and the underwriters, as well
as market and other conditions. Under the terms of the lock-up agreement,
Silicon Graphics could announce definitive divestiture plans during the 90-day
lock-up period and could dispose of its remaining interest in us at any time
following the expiration of such 90-day period. Accordingly, there can be no
assurance as to the period of time that Silicon Graphics will continue to retain
the shares of Class B common stock, except that, in connection with this
offering and our initial public offering, Silicon Graphics has agreed not to
sell or otherwise dispose of any shares of Class A or Class B common stock for
90 days after completion of this offering without the lead underwriter's prior
written consent. This agreement does not apply to a distribution by Silicon
Graphics of all of its interest in us if, in order to avoid the application of
certain recently proposed tax legislation, such a distribution must be completed
prior to the date that is 90 days after completion of this offering in order for
Silicon Graphics to effect a Tax-Free Distribution.
For a description of certain provisions of our certificate of incorporation
concerning the allocation of business opportunities that may be suitable for
both us and Silicon Graphics, see "Description of Capital Stock -- Corporate
Opportunities".
In connection with the recapitalization, we entered into the Exchange
Agreement with Silicon Graphics, which imposes certain obligations on the
parties relative to the recapitalization and a Tax-Free Distribution. In
addition, for the purposes of governing certain of the relationships between the
parties following the separation of their businesses and the initial public
offering, we entered into
53
<PAGE>
the Separation Agreement with Silicon Graphics, the Corporate Agreement, the
Technology Agreement, the Trademark Agreement, the Tax Sharing Agreement and the
Management Services Agreement, each of which was effective as of the closing
date of the initial public offering (the "Separation Documents"). Because the
Separation Documents were entered into at a time when we were still a wholly
owned subsidiary of Silicon Graphics, they are not the result of arm's-length
negotiations between the parties. The Exchange Agreement and the Separation
Documents summarized below have been filed as exhibits to the Registration
Statement of which this prospectus forms a part and the summaries are qualified
in their entirety by reference to the full text of the agreements. See "Where
You Can Find Additional Information".
EXCHANGE AGREEMENT
Subject to the terms and conditions of the Exchange Agreement, if Silicon
Graphics has not disposed of its entire interest in us (whether through a
Tax-Free Distribution or otherwise) prior to December 31, 2000, Silicon Graphics
will accrue an obligation to purchase, on a quarterly basis, a predetermined
number of shares of Class A common stock and/or Class B common stock. This
purchase obligation terminates in the quarter preceding the quarter in which
Silicon Graphics disposes of its entire interest in us or exchanges its shares
of Class B common stock for Class A common stock as a result of a Change in Tax
Law (as defined below). We may waive all or part of Silicon Graphics' obligation
to make any such purchase if our independent directors and Chief Executive
Officer unanimously determine that such purchase is not in the interests of us
and our stockholders other than Silicon Graphics. At its sole option, Silicon
Graphics may satisfy its purchase obligation by purchasing newly issued shares
of Class B common stock from us or issued and outstanding shares of Class A
common stock in the public market or otherwise from a third party. Shares of
Class A common stock purchased by Silicon Graphics in satisfaction of this
obligation shall be exchanged for shares of Class B common stock. Silicon
Graphics will have registration rights with respect to the shares of Class A and
Class B common stock it purchases pursuant to this obligation.
The Exchange Agreement also requires Silicon Graphics to exchange all of its
shares of Class B common stock for shares of Class A common stock if, prior to a
Tax-Free Distribution, the Internal Revenue Code is amended (a "Change in Tax
Law") to provide in effect generally that in a tax-free spin-off of a
subsidiary, the distributing company must hold not less than 80% of the value of
the subsidiary's stock and such Change in Tax Law would apply to a Tax-Free
Distribution by Silicon Graphics.
Under the terms of the Exchange Agreement, Silicon Graphics has agreed to
indemnify and hold harmless us and our affiliates, officers, directors,
employees, agents, successors and assigns from and against any and all losses
incurred by them with respect to third party claims, to the extent such claims
arise out of the recapitalization or any distribution by Silicon Graphics of all
of its interest in us.
The Exchange Agreement also obligates the parties to enter into a
Distribution Tax Indemnification Agreement prior to a Tax-Free Distribution that
generally will limit our ability to take certain actions following a Tax-Free
Distribution that would cause the distribution to become taxable to Silicon
Graphics and, in some instances, its stockholders. In particular, under the
Distribution Tax Indemnification Agreement, we will agree not to, among other
things:
- - issue capital stock in an acquisition or private or public offering within
the 30-month period following the Tax-Free Distribution, except (1) pursuant
to the exercise of employee, director or consultant stock options or awards
and (2) the issuance of up to a cumulative amount of 10% of our stock that is
outstanding at the time of the Tax-Free Distribution;
54
<PAGE>
- - amend our certificate of incorporation in a manner that affects the voting
rights with respect to the Class B common stock or Class A common stock
during the five-year period following the Tax-Free Distribution;
- - exchange any shares of Class B common stock for Class A common stock,
including pursuant to the MIPS Exchange Right, during the five-year period
following the Tax-Free Distribution;
- - knowingly and voluntarily take any other actions during the 30-month period
following the Tax-Free Distribution which we believe will more likely than
not result in the Tax-Free Distribution becoming taxable; or
- - take any other action that would be a breach of certain reasonable covenants
or representations related to us and that are within our reasonable control
in the initial or any supplemental ruling request regarding a Tax-Free
Distribution submitted to the Internal Revenue Service.
Under the terms of the Distribution Tax Indemnification Agreement, we will
be required to indemnify Silicon Graphics from any taxes imposed on Silicon
Graphics due to a breach of the above covenants and any taxes resulting from an
acquisition of more than 10% of our stock (taking into account permitted
issuances described above) during the 30-month period following the Tax-Free
Distribution, unless (1) a supplemental ruling is obtained from the Internal
Revenue Service to the effect that such proposed action will not cause the
Tax-Free Distribution to become taxable, (2) Silicon Graphics consents to such
action or (3) we deliver to Silicon Graphics an opinion of nationally recognized
tax counsel, reasonably satisfactory to Silicon Graphics, that such action will
not cause the Tax-Free Distribution to become taxable.
The limitations on the issuance of shares of our capital stock and other
restrictions discussed above could have a negative impact on its financial
flexibility following a Tax-Free Distribution.
SEPARATION AGREEMENT
Pursuant to the Separation Agreement, Silicon Graphics transferred to us, or
agreed to transfer to us, the Company Assets and we assumed or agreed to assume
all Company Liabilities. Except as expressly set forth in the Separation
Agreement or in another Separation Document, neither party made 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 of any of the assets transferred, 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 another
Separation Document, all assets were transferred on an "as is", "where is"
basis, and we have 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 the initial public offering 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 such date, between us and
Silicon Graphics (including any contractual arrangements or arrangements
existing or alleged to exist between us and Silicon Graphics on or before such
date), except as expressly set forth in the Separation Agreement.
We have agreed to indemnify, defend and hold harmless Silicon Graphics and
each of its subsidiaries (other than us) and each of their directors, officers
and employees, from and against any and all Liabilities relating to, arising out
of or resulting from (1) the failure of us or any other person to pay, perform
or otherwise
55
<PAGE>
promptly discharge any Company Liabilities or any Company Contract in accordance
with its terms; (2) the Company Business, any Company Liability or any Company
Contract; (3) any breach by us of any Separation Document; and (4) 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 the prospectus or the registration statement relating to the
initial public offering, subject to certain exceptions.
Silicon Graphics has agreed to indemnify, defend and hold harmless us, each
of our subsidiaries, and each of their directors, officers and employees, from
and against any and all Liabilities relating to, arising out of or resulting
from (1) 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; (2) any Liability other than the Company Liabilities; and
(3) any breach by Silicon Graphics of any Separation Document.
DISPUTE RESOLUTION
The Separation Agreement contains provisions that govern the resolution of
disputes, controversies or claims that may arise between us and Silicon
Graphics. 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 the
matter is not resolved within a period of 90 days, then upon written notice by
either party to the other, any unresolved matter shall be submitted to mediation
conducted by a mediator mutually acceptable to the parties.
Either party may apply to any court having jurisdiction and seek injunctive
relief so as to maintain the status quo until such time as the mediation is
concluded or the controversy is otherwise resolved. In the event that any
dispute, controversy or claim is, or is reasonably likely to be, in excess of
$30 million, subject to certain conditions, any party may submit such dispute,
controversy or claim to a court of competent jurisdiction and the mediation
provisions contained in the Separation Agreement will not apply.
TERMINATION; FURTHER ASSURANCES
In addition to the actions specifically provided elsewhere in the Separation
Agreement, we have agreed with Silicon Graphics to use our respective reasonable
best efforts to take all actions reasonably necessary, proper or advisable under
applicable laws, regulations and agreements, to consummate and make effective
the transactions contemplated by the Separation Documents.
Set forth below are certain defined terms contained in the Separation
Agreement.
"Company Assets" generally means:
- - all personal property, inventory, receivables, books and records, goodwill,
sales material and governmental permits and licenses, in each case to the
extent they relate to the Company Business,
- - all intellectual property transferred or licensed pursuant to the Technology
Agreement and the Trademark Agreement,
- - all Company Contracts (as defined in the Separation Agreement),
- - any assets reflected in the Company Balance Sheet as our "Assets", subject to
any dispositions of such assets subsequent to the date of the Company Balance
Sheet, and
- - any and all other assets, rights and claims held immediately prior to the
closing date for the initial public offering by Silicon Graphics and used
primarily in the Company Business, in each case other than assets that are
expressly contemplated by the Separation Documents as assets to be retained
by Silicon Graphics.
"Company Liabilities" generally means:
- - all Liabilities expressly contemplated by the Separation Documents as
Liabilities to
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be assumed by us, and all of our agreements, obligations and Liabilities
under the Separation Documents;
- - all Liabilities (other than income taxes) primarily relating to (a) the
operation of the Company Business; (b) the operation of any business
conducted by us or any of our subsidiaries at any time after the closing date
of the initial public offering; and (c) any Company Assets; and
- - all Liabilities reflected as "Liabilities" or our obligations in the Company
Balance Sheet, subject to any discharge of such Liabilities subsequent to the
date of the Company Balance Sheet, in each case other than liabilities that
are expressly contemplated by the Separation Documents as liabilities to be
retained or assumed by Silicon Graphics, and all agreements and obligations
of Silicon Graphics under the Separation Documents.
"Company Business" means the business and operations of the various divisions
and subsidiaries of Silicon Graphics engaged in the development and licensing of
processor and related designs for the embedded market based on RISC
architecture, consisting principally of Silicon Graphics' MIPS Group.
CORPORATE AGREEMENT
PRE-EMPTIVE RIGHT OF SILICON GRAPHICS TO PURCHASE SHARES OF CAPITAL STOCK
Pursuant to the Corporate Agreement, we granted to Silicon Graphics a
continuing option to purchase, under certain circumstances, additional shares of
our common stock or shares of our non-voting capital stock (the "Stock Option").
The Stock Option may be exercised by Silicon Graphics simultaneously with the
issuance of any of our equity security, with respect to the common stock, only
to the extent necessary for Silicon Graphics to maintain (1) control of us
(within the meaning of Section 368(a)(2)(H) and (c) of the Internal Revenue
Code) provided such control has theretofore been maintained; (2) our status as a
member of the affiliated group of corporations (within the meaning of Section
1504 of the Internal Revenue Code) of which Silicon Graphics is the common
parent, provided such status has theretofore been maintained or (3) its
then-existing percentage of the total voting power and value of us, 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 50% of the outstanding shares of common stock.
REGISTRATION RIGHTS
The Corporate Agreement also provides that, upon request of Silicon
Graphics, we will use our best efforts to effect the registration under the
applicable federal and state securities laws of any of our shares of common
stock and non-voting capital stock 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 also has the right, subject to certain limitations, 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 our common equity
securities initiated by us on our own behalf or on behalf of our other
stockholders. We have agreed to pay all out-of-pocket costs and expenses in
connection with each such registration, except for underwriting discounts and
commissions attributable to the shares of stock sold by Silicon Graphics. In
connection with this offering, however, Silicon Graphics has agreed
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to waive this provision and will pay all related expenses.
Until such time as Silicon Graphics ceases to beneficially own in excess of
50% of the outstanding common stock, it 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 contains indemnification and contribution
provisions by us for the benefit of Silicon Graphics in connection with such
registrations.
COVENANT AGAINST CERTAIN ACTIONS
The Corporate Agreement also provides that for so long as Silicon Graphics
maintains beneficial ownership of a majority of the number of outstanding shares
of common stock, we 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: (1) 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;
(2) any provision of Silicon Graphics' certificate of incorporation or by-laws;
(3) any credit agreement or other material instrument binding upon Silicon
Graphics or any of its assets or (4) any judgment, order or decree of any
governmental body, agency or court having jurisdiction over Silicon Graphics or
any of its assets.
TECHNOLOGY AGREEMENT
Under the Technology Agreement, Silicon Graphics assigned and licensed
certain intellectual property rights to us, with a license back of certain
rights to Silicon Graphics. This assignment by Silicon Graphics included all of
its right, title and interest in and to 52 United States patents with expiration
dates ranging from 2006 through 2015, 14 pending United States patent
applications, and all foreign counterpart rights to the foregoing. In addition
to these patent rights, Silicon Graphics assigned other related intellectual
property rights, including various copyrights, mask work rights and trade
secrets.
This assignment provided us with Silicon Graphics' intellectual property
related to the MIPS RISC processor architecture for use in embedded
applications. Silicon Graphics also licensed other intellectual property rights
to us for use in our business. Certain of these rights were licensed on a
worldwide, royalty-free and exclusive basis solely for our use in the
development and licensing of processor and related designs for embedded
applications. We may in the future enter into with Silicon Graphics additional
royalty-bearing licenses with respect to other Silicon Graphics intellectual
property.
Under the Technology Agreement, we granted to Silicon Graphics a worldwide,
royalty-free, non-exclusive license with respect to the intellectual property
assigned by Silicon Graphics to us. This license back to Silicon Graphics will
be for its use in connection with the design and sale of Silicon Graphics
systems and products. Under the Separation Agreement, we are generally obligated
to indemnify Silicon Graphics for third-party claims relating to our
intellectual property. The Technology Agreement excludes trademarks and
trademark-related intellectual property, which is covered by the Trademark
Agreement.
TRADEMARK AGREEMENT
Pursuant to the Trademark Agreement, Silicon Graphics assigned to us all
trademarks, service marks, trade dress, logos and related goodwill concerning
the MIPS marks for processors and other semiconductor devices. This assignment
included all domestic and foreign registrations, as well as common law rights
throughout the world. We granted back to Silicon Graphics a worldwide,
royalty-free, and non-exclusive license to use the MIPS marks in connection with
Silicon Graphics' products that use processors embodying the
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MIPS architecture. The Trademark Agreement requires that Silicon Graphics comply
with reasonable quality standards. Neither Silicon Graphics nor us has any
indemnification obligations or warranties as to the trademarks and
trademark-related rights as part of the Trademark Agreement.
TAX SHARING AGREEMENT
We are presently included in Silicon Graphics' consolidated federal income
tax group, and our federal income tax liability has been included in the
consolidated federal income tax liability of the Silicon Graphics group. Under
the terms of the Tax Sharing Agreement, we are obligated to make payments to
Silicon Graphics such that, with respect to any period, the amount of taxes to
be paid by us, subject to certain adjustments, is determined as though we were
to file separate federal, state and local income tax returns.
Following this offering, because Silicon Graphics will own less than 80% of
our outstanding common stock, we will no longer be included in Silicon Graphics'
consolidated federal income tax group, but will instead be required to file
separate tax returns. However, under federal income tax laws, we will remain
jointly and severally liable for the federal income tax liability of each other
member of the Silicon Graphics' consolidated federal income tax group that arose
during the period in which we were included in such group.
MANAGEMENT SERVICES AGREEMENT
Under the Management Services Agreement, Silicon Graphics agreed to provide
certain administrative and corporate support services to us on an interim or
transitional basis following the initial public offering. Services available
under the Management Services Agreement include accounting, treasury, tax,
facilities and information services. Presently, Silicon Graphics provides
certain tax and facilities services to us under this agreement.
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. Silicon
Graphics must provide any such services 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. Silicon Graphics is not required to increase the
volume or quality of the services provided beyond the level at which they were
performed for us in the past. The Management Services Agreement has a three-year
term but will automatically terminate when Silicon Graphics ceases to own more
than 50% of the outstanding Class A and Class B common stock. Either party may
terminate the Management Services Agreement with respect to one or more of the
services provided thereunder upon giving at least 30 days prior written notice
to the other party.
FACILITIES LEASE ARRANGEMENTS
We presently 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 us to Silicon Graphics under this sublease are
presently approximately $51,000 per month, increasing to approximately $67,000
per month by August 2001. The amounts we pay under this sublease are generally
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
SILICON GRAPHICS
Silicon Graphics presently owns approximately 85% of the total Class A and
Class B common stock outstanding, consisting of all of the issued and
outstanding shares of Class B common stock. Upon completion of this offering,
Silicon Graphics will beneficially own approximately 69% of the total Class A
and Class B common stock outstanding, consisting of all of the issued and
outstanding shares of Class B common stock (67% if the underwriters'
over-allotment option is exercised in full). For a description of the historical
relationship between us and Silicon Graphics, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 1 of Notes
to Financial Statements. In connection with the recapitalization, we entered
into an exchange agreement with Silicon Graphics which governs certain matters
between the parties following the recapitalization, and in connection with the
separation of our business from the other businesses of Silicon Graphics and the
initial public offering of our common stock in 1998, we entered into various
agreements with Silicon Graphics intended to govern the relationship between the
parties on a going-forward basis. For a description of these agreements, see
"The Recapitalization" and "Arrangements Between MIPS Technologies and Silicon
Graphics".
Silicon Graphics is a leader in high-performance computing, providing a
broad range of workstations and graphics servers that deliver advanced 3-D
graphics and computing capabilities for engineering and creative professionals.
Silicon Graphics and Cray Research-branded servers and supercomputers deliver
advanced performance to technical computing professionals, with a growing
presence in strategic business analysis, web service and media serving
applications. Silicon Graphics provides solutions in several key industries,
including manufacturing, government, entertainment, communication, energy, the
sciences and education. The principal executive offices of Silicon Graphics are
located at 2011 North Shoreline Blvd., Mountain View, California 94043.
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BENEFICIAL OWNERSHIP OF COMMON STOCK BY DIRECTORS, EXECUTIVE OFFICERS AND
SILICON GRAPHICS
The following table sets forth, as of March 31, 1999, certain information
regarding the beneficial ownership of the Class A common stock and the Class B
common stock prior to and after this offering (assuming no exercise of the
underwriters' over-allotment option) by (1) Silicon Graphics, (2) each other
person known by us to own beneficially more than 5% of either the Class A common
stock or the Class B common stock, (3) each of our directors, (4) each Named
Executive Officer and (5) all directors and executive officers as a group.
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK
---------------- CLASS B COMMON STOCK
----------------------------------------
TOTAL COMMON STOCK
OWNED PRIOR TO -----------------------------
AND AFTER OWNED PRIOR TO OWNED AFTER
THIS OFFERING THIS OFFERING THIS OFFERING(1) PERCENTAGE OF TOTAL
---------------- ------------------- ------------------ COMMON STOCK(1)
PERCENTAGE PERCENTAGE PERCENTAGE -----------------------------
OF OF OF PRIOR TO AFTER
NAME OF SHAREHOLDER NUMBER CLASS NUMBER CLASS NUMBER CLASS THIS OFFERING THIS OFFERING
- ------------------------------ ------- ------- ----------- ------ --------- ------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Silicon Graphics, Inc......... -- -- 31,750,000 100% 25,750,000 100% 85.2% 69.0%
John E. Bourgoin (2).......... 151,448 * -- -- -- -- * *
Lavi Lev (3).................. 73,586 * -- -- -- -- * *
Derek Meyer(4)................ 51,327 * -- -- -- -- * *
Dr. Forest Baskett............ -- * -- -- -- -- * *
Kenneth L. Coleman............ 1,285 * -- -- -- -- * *
Fred M. Gibbons............... -- * -- -- -- -- * *
Anthony B. Holbrook........... -- * -- -- -- -- * *
William M. Kelly.............. -- * -- -- -- -- * *
Teruyasu Sekimoto............. -- * -- -- -- -- * *
Directors and Executive
Officers as a Group (11
persons)(5)................. 334,910 * -- -- -- -- * *
</TABLE>
- --------------
* Less than 1%.
(1) Assumes the underwriters' over-allotment option is not exercised.
(2) Includes 134,280 shares subject to acquisition within 60 days upon exercise
of options under the Incentive Plan and 15,000 shares of restricted stock
awards granted under the Incentive Plan.
(3) Includes 71,616 shares subject to acquisition within 60 days upon exercise
of options under the Incentive Plan. Mr. Lev disclaims beneficial ownership
of 1,000 of these shares.
(4) Includes 49,248 shares subject to acquisition within 60 days upon exercise
of options under the Incentive Plan.
(5) Includes 308,856 shares subject to acquisition within 60 days upon exercise
of options under the Incentive Plan and 15,000 shares of restricted stock
awards granted under the Incentive Plan.
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DESCRIPTION OF CAPITAL STOCK
Our certificate of incorporation was amended in connection with the
recapitalization to include a variety of provisions regarding our dual class
capital structure. The following table sets forth a general description of the
relative rights of the holders of the Class A and Class B common stock as well
as the various conversion and exchange provisions of our capital stock. The
following description of our capital stock is intended as a summary only and is
qualified in its entirety by reference to our amended and restated certificate
of incorporation filed with the Registration Statement of which this Prospectus
forms a part.
<TABLE>
<S> <C>
AUTHORIZED CAPITAL
STOCK............. 300,000,000 shares
COMMON STOCK...... - 150,000,000 shares of Class A common stock
- 100,000,000 shares of Class B common stock
PREFERRED STOCK... - 50,000,000 shares of preferred stock, issuable in series
OUTSTANDING CAPITAL
STOCK............. As of the date hereof (without giving effect to this offering), there
are 5,542,286 shares of Class A common stock outstanding, 31,750,000
shares of Class B common stock outstanding and no shares of preferred
stock outstanding. All of the shares of Class A common stock are held
by persons other than Silicon Graphics and its affiliates and all of
the shares of Class B common stock are held by Silicon Graphics. All
of the shares of Class A common stock and Class B common stock that
will be outstanding following this offering will be validly issued,
fully paid and nonassessable.
VOTING RIGHTS:
ELECTION OF
DIRECTORS....... - Holders of Class A common stock, voting as a separate class, will be
entitled to elect 20% of the directors, and in no event less than one
director. Each share of Class A common stock has one vote in the
election of such directors.
- Holders of Class B common stock, voting as a separate class, will be
entitled to elect the remaining directors.
- After a Tax-Free Distribution, a person or group of persons acting
in concert holding 10% or more of the Class B common stock must own at
least an equal percentage of the Class A common stock to exercise
its or their Class B common stock voting rights in the election of
directors. This provision is designed to ensure that, following a
Tax-Free Distribution and for so long as the Class B common stock
retains its special voting rights, a holder of such shares will not
have voting rights with respect to the election of directors that
are significantly disproportionate to its economic interest.
- Our certificate of incorporation does not provide for cumulative
voting in the election of directors.
ALL OTHER
MATTERS......... Each share of Class A common stock and Class B common stock is
entitled to one vote, voting together as a single class, in all other
matters submitted to a vote of stockholders (except as otherwise
required by law).
DIVIDENDS........... Holders of Class A common stock and Class B common stock will share,
equally on a per share basis, in all dividends declared by the Board
of Directors from time to time; provided that with respect to stock
dividends, holders of
</TABLE>
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<TABLE>
<S> <C>
shares of Class A common stock will only receive shares of Class A
common stock and holders of shares of Class B common stock will only
receive shares of Class B common stock. The number of shares of Class
A common stock and Class B common stock so paid or distributed will be
equal in number on a per share basis.
We may not subdivide or combine shares of either class of our common
stock without at the same time proportionally subdividing or combining
shares of the other class.
CONVERSION.......... Shares of Class B common stock are convertible into shares of Class A
common stock upon the occurrence of the following events:
- Automatically if, prior to a Tax-Free Distribution, such shares are
transferred to a person other than Silicon Graphics or one of its
subsidiaries.
- Automatically if, prior to a Tax-Free Distribution, another entity
acquires more than 50% of the voting power of Silicon Graphics in a
merger, consolidation or tender offer.
- Automatically (1) upon the closing of any transaction prior to a
Tax-Free Distribution after which Silicon Graphics owns less than 50%
of the total number of shares of Class A common stock and Class B
common stock outstanding, unless our independent directors and chief
executive officer determine prior to any such transaction that such
automatic conversion is not in our interests or the interests of our
public stockholders, and (2) in any event if, prior to a Tax-Free
Distribution, Silicon Graphics owns less than 30% of the total
number of shares of Class A common stock and Class B common stock
outstanding. These provisions are intended to ensure that Silicon
Graphics retains control of our board of directors only if it has a
substantial economic interest in us. These two automatic conversion
provisions will not apply following a Tax-Free Distribution.
- Automatically immediately prior to the effectiveness of any merger
or consolidation of us in which all or substantially all of our
capital stock is exchanged for the stock of another entity and our
stockholders immediately prior to the merger or consolidation own
less than 50% of the outstanding shares of such other entity
immediately after such merger or consolidation.
- Automatically at any time after the fifth anniversary of a Tax-Free
Distribution upon the approval of such conversion by the holders of a
majority of the Class A common stock and Class B common stock,
voting as a single class.
Automatic conversion pursuant to the last two provisions described
above will not occur if the inclusion of such provisions in our
certificate of incorporation would have a material adverse effect on
Silicon Graphics' ability to timely obtain a favorable ruling from the
Internal Revenue Service that the distribution to its stockholders of
its interest in us would be tax-free. Silicon Graphics has advised us
that, based on its discussions with the Internal Revenue Service to
date, it is highly unlikely that the Internal Revenue Service would
grant a favorable ruling regarding a Tax-Free Distribution if the last
conversion provision described above were to remain operative. As a
result, we expect that this provision will be rendered inoperative
pursuant to its terms and, therefore, be unavailable to us to
eliminate the dual class capital structure.
Shares of Class B common stock will not be automatically converted
into shares of Class A common stock:
</TABLE>
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<TABLE>
<S> <C>
- in any transfer effected in connection with a distribution of shares
of Class B common stock to stockholders of Silicon Graphics in a
transaction intended to qualify as a Tax-Free Distribution, or
- in any transfer following a Tax-Free Distribution.
Following a Tax-Free Distribution, shares of Class B common stock
shall be transferable as Class B common stock, subject to applicable
laws.
Prior to a Tax-Free Distribution and for so long as Silicon Graphics
or any of its subsidiaries owns any shares of Class B common stock,
shares of Class A common stock acquired by Silicon Graphics or any of
its subsidiaries will be automatically converted into shares of Class
B common stock.
All conversions will be effected on a one-for-one basis.
EXCHANGE............ Silicon Graphics will be obligated to exchange all of the outstanding
shares of Class B common stock that it owns for shares of Class A
common stock on a one-for-one basis if, prior to a Tax-Free
Distribution, the Internal Revenue Code is amended to provide, in
effect, that, generally, in a tax-free spin-off or split-off of a
subsidiary, the distributing company must hold at least 80% of the
value of the subsidiary's stock (in addition to 80% of the voting
power), and such amendment would apply to a Tax-Free Distribution by
Silicon Graphics of its interest in us.
At any time following a Tax-Free Distribution, we may exchange all
(but not less than all) of the outstanding shares of Class B common
stock for shares of Class A common stock on a one-for-one basis;
provided, however, that this provision will have no force or effect if
the inclusion of this provision in our certificate of incorporation
would have a material adverse effect on Silicon Graphics' ability to
timely obtain a favorable ruling from the Internal Revenue Service
regarding the tax-free status of the Tax-Free Distribution. Silicon
Graphics has advised us that, based on its discussions with the
Internal Revenue Service to date, it is highly unlikely that the
Internal Revenue Service would grant a favorable ruling regarding a
Tax-Free Distribution if this exchange provision were to remain
operative. As a result, we expect that this provision will be rendered
inoperative pursuant to its terms and, therefore, be unavailable to us
to eliminate the dual class capital structure.
Even if this exchange provision remains available, Silicon Graphics
may limit our ability to effect such an exchange under the terms of
the Distribution Tax Indemnification Agreement.
MERGERS AND
REORGANIZATIONS... All shares of Class A common stock and Class B common stock are
entitled to receive equally on a per share basis the same kind and
amount of consideration in the event of any merger, reorganization or
consolidation of us with any other company; provided, however, that,
in the event that all of the shares of Class B common stock have not
been converted into or exchanged for shares of Class A common stock,
in connection with a merger, reorganization or consolidation of us in
which all or substantially all of our common stock will be exchanged
for stock of another entity and the transaction is required to be
accounted for by the "pooling-of-interests" method, the holders of
Class A common stock and Class B common stock will be entitled to
receive shares of stock of the acquiring entity based on the relative
fair value of a share of the Class A common stock and a share of Class
B common stock as of the announcement date for such transaction.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
LIQUIDATION......... All shares of Class A common stock and Class B common stock are
entitled to receive equally on a per share basis all assets available
for distribution to stockholders.
OTHER
RIGHTS............ No shares of Class A or Class B common stock are subject to redemption
or have preemptive or preferential rights to purchase additional
shares of our common stock.
PREFERRED STOCK..... The preferred stock is issuable either as a class without series or in
one or more series and with such designations, rights, privileges,
restrictions and conditions for each class or series as is stated in
the resolutions providing for designation and issue of each such
series adopted by our board of directors. Our board of directors is
authorized to determine, among other things, the voting, dividend,
redemption, conversion and liquidation powers, rights and preferences
and the limitations thereon of such series. We believe that the
ability of our board of directors to issue one or more series of
preferred stock will provide us with flexibility in structuring
possible future financings and acquisitions, and in meeting other
corporate needs that may arise. The authorized shares of preferred
stock will be available for issuance without further action by
stockholders, unless such action is required by applicable law or the
rules of any stock exchange or automated quotation system on which our
securities may be listed or traded.
Although our board of directors 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. Our board of
directors will make any determination to issue such shares based on
its judgment as to our best interests and the best interests of our
stockholders. Our board of directors could issue preferred stock with
voting and other rights that could adversely effect the voting power
of the holders of the Class A and Class B common stock, and that could
discourage an acquisition attempt through which an acquiror may be
able to change the composition of our board of directors, including a
tender offer or other transaction that some, or a majority, of our
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.
</TABLE>
CORPORATE OPPORTUNITIES
Our certificate of incorporation provides that Silicon Graphics will have no
duty to refrain from engaging in the same or similar activities or lines of
business as we are engaged, and neither Silicon Graphics nor any officer or
director thereof (except as provided below), will be liable to us or our
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 us, Silicon Graphics will have no duty to communicate or
offer such corporate opportunity to us and will not be liable to us or our
stockholders for breach of any fiduciary duty as one of our stockholders 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 us.
In the event that one of our directors or officers 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 us and Silicon Graphics,
our director or officer will have fully satisfied and fulfilled the fiduciary
duty of such director or officer to us and our stockholders with respect to such
corporate opportunity if
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such director or officer acts in a manner consistent with the following policy:
- - a corporate opportunity offered to any person who is one of our officers, and
who is also a director but not an officer of Silicon Graphics, will belong to
us;
- - a corporate opportunity offered to any person who is a director but not one
of our officers, and who is also a director or officer of Silicon Graphics,
will belong to us if such opportunity is expressly offered to such person in
writing solely in his or her capacity as one of our directors, and otherwise
it will belong to Silicon Graphics; and
- - a corporate opportunity offered to any person who is an officer of both us
and Silicon Graphics will belong to us if such opportunity is expressly
offered to such person in writing solely in his or her capacity as one of our
officers, and otherwise it will belong to Silicon Graphics.
For purposes of the foregoing:
- - any of our directors who is chairman of our board of directors or of a
committee thereof will not be deemed to be one of our officers by reason of
holding such position (without regard to whether such position is deemed an
office under our by-laws), unless such person is one of our full-time
employees; and
- - the terms "we", "us" and "our" mean MIPS Technologies, Inc. and all
corporations, partnerships, joint ventures, associations and other entities
in which it beneficially owns (directly or indirectly) fifty percent or more
of the outstanding voting stock, voting power, partnership interest or
similar voting interests, and
- - the term "Silicon Graphics" means Silicon Graphics, Inc. and all
corporations, partnerships, joint ventures, associations and other entities
(other than us) 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 will expire on the date that Silicon Graphics
ceases to own beneficially our common stock representing at least 20% of the
total voting power of all classes of our outstanding common stock and no person
who is one of our directors or officers is also a director or officer of Silicon
Graphics or any of its subsidiaries (other than us).
In addition to any vote of the stockholders required by our certificate of
incorporation, until the time that Silicon Graphics ceases to own beneficially
our common stock representing at least 20% of the total voting power of all
classes of our 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 is required to alter, amend or repeal in a manner adverse to the interests
of Silicon Graphics and its subsidiaries (other than us), or adopt any provision
adverse to the interests of Silicon Graphics and its subsidiaries (other than
us), or inconsistent with, the corporate opportunity provisions described above.
Any person purchasing or otherwise acquiring our common stock will be deemed
to have notice of, and to have consented to, the foregoing provisions regarding
corporate opportunities.
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CERTIFICATE OF INCORPORATION AND BY-LAW PROVISIONS THAT MAY HAVE AN
ANTI-TAKEOVER EFFECT
Certain provisions of our certificate of incorporation and by-laws
summarized below may be deemed to have an anti-takeover effect and may delay,
discourage or prevent a tender offer or takeover attempt that a stockholder
might consider to be in its best interest, including attempts that might result
in a premium being paid over the market price of the Class A common stock.
BOARD OF DIRECTORS
NUMBER OF DIRECTORS. The board of directors consists of not less than five
and not more than 10 directors, with the exact number to be determined by the
board of directors. The directors, other than those elected by the holders of
preferred stock, will be classified, with respect to the time they 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.
FILLING VACANCIES. Our certificate of incorporation by-laws provide that,
subject to any rights of holders of preferred stock, and unless our board of
directors otherwise determines, newly created directorships resulting from any
increase in the number of directors shall be filled by the vote of the majority
of the directors then in office, provided that following such appointment, 20%
(rounded down to the nearest whole number) of the number of the directors on our
board of directors as so increased, excluding the number of directors whom the
holders of any series of preferred stock have the right to elect, consists of
directors elected by (or appointed on behalf of) the holders of Class A common
stock. Any director so elected or appointed shall hold office for the remainder
of the full term of the class of director in which the new directorship was
created and until his or her successor is elected and qualified.
Any vacancies on our board of directors created by the death, resignation,
disqualification or removal of a director may be filled by the vote of the
majority of the directors then in office elected by, or appointed on behalf of,
the same class of stock that elected that director whose death, resignation or
removal created the vacancy, unless there are no such directors, in which case
such vacancy may be filled by the vote of the majority of all directors then in
office, even if less than a quorum, or by the sole remaining director. Any
vacancy on our board of directors created by the death, resignation,
disqualification or removal of a director elected by (or appointed on behalf of)
the holders of a class of stock may also be filled by a vote of the holders of
such class of stock, unless there are no outstanding shares of such class of
stock, in which case any such vacancy may be filled by a vote of the holders of
the remaining class of stock. Any director elected to fill any such vacancy will
hold office for the remainder of the full term of the director whose vacancy is
being filled and until his or her successor is elected and qualified. No
decrease in the number of directors shall shorten the term of any incumbent
director.
REMOVAL OF DIRECTORS. Subject to the rights of any outstanding series of
preferred stock, any director may be removed from office, with cause, by the
affirmative vote of the holders of at least a majority of the outstanding Class
A and Class B common stock, voting as a single class. Prior to a Tax-Free
Distribution, any director elected by the holders of the Class B common stock
may be removed, with or without cause, by the affirmative vote of the holders of
at least a majority of the outstanding Class B common stock.
The provisions of the corporate documents described above would preclude a
third-party from removing incumbent directors and simultaneously gaining control
of our 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 our 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 us.
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NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
As of the time at which Silicon Graphics and its affiliates cease to
beneficially own an aggregate of at least a majority of the then outstanding
shares of Class A and Class B 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 for any purpose may be
called only by certain of our specified officers or by any officer at the
request in writing of a majority of our board of directors and the power of
stockholders to call a special meeting is specifically denied. Prior to the
Trigger Date, 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 our board of directors or certain specified officers.
ADVANCE NOTICE PROCEDURES
An advance notice procedure for the nomination, other than by or at the
direction of our board of directors, of candidates for election as directors, as
well as for other stockholder proposals, to be considered at annual meetings of
stockholders, must be followed to take such actions. In general, notice of
intent to nominate a director or raise matters at such meetings will have to be
received in writing by us 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 Trigger Date.
CHARTER AMENDMENTS
Our certificate of incorporation provides that the affirmative vote of the
holders of at least 80% of the outstanding Class A and Class B common stock is
required to amend, repeal or adopt any provision inconsistent with the foregoing
charter provisions. Our certificate of incorporation further provides that
certain provisions of our by-laws may be altered, amended or repealed by the
affirmative vote of directors constituting not less than a majority of our
entire board of directors (if effected by action of our 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 (1) 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
interested stockholder, (2) 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
(3) on or subsequent to
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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 Section 203, an interested stockholder is defined to
include (a) 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 (b) 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. We have 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 us to negotiate in advance with
our 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 our management. It is possible that such provisions could
make it more difficult to accomplish transactions which our stockholders may
otherwise deem to be in their best interests.
LIMITATION OF LIABILITY
Our certificate of incorporation provides that any of our directors will not
be personally liable to us or our stockholders for monetary damages for breach
of fiduciary duty as a director, except, if required by the DGCL as amended from
time to time, for liability (1) for breach of the director's duty of loyalty to
us or our stockholders, (2) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (3) under Section
174 of the DGCL, which concerns unlawful payments of dividends, stock purchases
or redemptions, or (4) 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 our certificate
of incorporation provides directors with protection from monetary damages for
breaches from their duty of care, it does not eliminate such duty. Accordingly,
our 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
The Class A common stock is traded on the Nasdaq National Market under the
symbol "MIPS".
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Class A common stock is Boston
EquiServe Limited Partnership located at 150 Royall Street, Canton,
Massachusetts. Its phone number is (781) 575-2000.
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SHARES AVAILABLE FOR FUTURE SALE
Upon completion of this offering, we will have 37,292,286 shares of common
stock issued and outstanding consisting of 11,542,286 shares of Class A common
stock and 25,750,000 shares of Class B common stock. All of the shares of Class
A common stock sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act of 1933, unless
purchased by one of our "affiliates" (as that term is defined in Rule 144 under
the Securities Act), in which case such shares will be subject to the resale
limitations of Rule 144. The shares of Class B common stock outstanding
following this offering, all of which will be beneficially owned by Silicon
Graphics, have not 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 is not obligated to retain or dispose of the shares of
Class B common stock that it owns, except that it has agreed not to sell or
otherwise dispose of any shares of Class A or Class B common stock for a period
of 90 days after completion of this offering without the consent of Goldman,
Sachs & Co. This agreement does not apply to a distribution by Silicon Graphics,
in certain limited circumstances, of all of the shares of Class B common stock
that it owns in a Tax-Free Distribution.
Subject to the above restriction and applicable federal securities laws,
Silicon Graphics may dispose of all or a portion of the shares of Class B common
stock that it owns in one or more transactions, including a public or private
offering, a distribution of the shares to its stockholders, an offer to exchange
the shares for outstanding shares of its common stock, or otherwise. Other than
this offering, Silicon Graphics has not formulated any definitive plans
regarding the divestiture of its interest in us. The timing and form of any
disposition by Silicon Graphics will be subject to the terms of a 90-day lock-up
agreement between Silicon Graphics and the underwriters, as well as market and
other conditions. Under the terms of the lock-up agreement, Silicon Graphics
could announce definitive divestiture plans during the 90-day lock-up period and
could dispose of its remaining interest in us at any time following the
expiration of such 90-day period. Silicon Graphics has registration rights with
respect to its shares of Class B common stock which would facilitate any future
disposition. See "Arrangements Between MIPS Technologies and Silicon Graphics".
There can be no assurance as to the period of time that Silicon Graphics
will retain its shares of Class B common stock following this offering.
Moreover, the United States Treasury Department has recently proposed tax
legislation which, if enacted, could result in a distribution by Silicon
Graphics of all of its Class B common stock shortly after the completion of this
offering. See "The Recapitalization -- Proposed Tax Legislation". 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 Class A common stock prevailing from
time to time. Nevertheless, the disposition by Silicon Graphics of substantial
amounts of Class A or Class B common stock in the public market, including
through a Tax-Free Distribution, or the perception that any sale or other
disposition could occur, could adversely affect the prevailing market price of
the Class A common stock.
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 one
of our "affiliates" 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
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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 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 Class B
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.
As of December 31, 1998, there were outstanding options to purchase
4,117,000 shares of Class A common stock which will be eligible for sale in the
public market from time to time subject to vesting. Our directors and certain of
our officers have agreed with the Underwriters not to dispose of or hedge any of
their Class A common stock or securities convertible into or exchangeable for
shares of Class A common stock during the period from the date of this
prospectus continuing through the date that is two trading days after the date
of our public announcement of our 1999 fourth quarter operating results (the
date of such announcement is currently expected to be July 20, 1999). As of
February 26, 1999, such directors and officers owned 11,054 shares of our common
stock that may be sold, and held options to purchase approximately 465,000
shares of common stock that will be exercisable, on July 23, 1999 or within 30
days thereafter. These stock options generally have exercise prices below the
current market price of the Class A common stock. The possible sale of a
significant number of such shares by the holders thereof may have an adverse
effect on the price of the Class A common stock.
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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 that may be relevant to you if you are a non-U.S. Holder. In general, a
"non-U.S. Holder" is any holder of Class A common stock other than:
- a citizen or resident of the United States;
- a corporation, partnership or other entity 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);
- an estate, the income of which is includable in gross income for United
States federal income tax purposes regardless of its source; or
- 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 United States
expatriates). ACCORDINGLY, OFFEREES OF CLASS A 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 CLASS A COMMON STOCK.
If you are an individual, you may, subject to certain exceptions, be deemed
to be a United States resident (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, an
alien may be treated as a resident alien if he or she (1) meets a lawful
permanent residence test or (2) elects to be treated as a United States resident
and meets the test in the immediately preceding sentence in the immediately
following year. Resident aliens are subject to United States federal income tax
as if they were United States citizens.
DIVIDENDS
If dividends are paid on the Class A common stock, as a non-U.S. Holder, you
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 (1)
considered effectively connected with a trade or business carried on by you
within the United States, or alternatively, (2) if certain tax treaties apply,
considered attributable to a permanent establishment in the United States
maintained by you if certain income tax treaties apply.
Under currently effective United States Treasury regulations (the "Current
Regulations"), if we have no definitive knowledge regarding your tax status, we
must withhold tax at the rate of 30% on all dividend payments if your address is
outside the United States. For these purposes, under the Current Regulations,
dividends paid to an address in a foreign country generally are presumed to be
paid to a resident of that country absent knowledge to the contrary. The Final
Regulations eliminate this presumption. Further, to claim the benefit of an
applicable treaty rate, you will be required to file the appropriate United
States Internal Revenue Service form 1001 or form W-8BEN (or substitute form)
with the United States. In addition, under the Final Regulations, in the case of
Class A common stock held by a foreign partnership, (1) the certification
requirement will generally be applied to the partners of the partnership and
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(2) 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. If you are eligible for a reduced
rate of United States withholding tax pursuant to a tax treaty, you may obtain a
refund of any excess amounts withheld by filing an appropriate claim for refund
with the Internal Revenue Service.
Dividends that are considered effectively connected with a United States
trade or business or attributable to a United States permanent establishment
generally will not be subject to United States withholding tax if you file the
appropriate U.S. Internal Revenue Service form 4224 or W-8ECI (or substitute
form) with us (which form, under United States Treasury regulations generally
effective for payments made after December 31, 1999 ("Final Regulations"), will
require you to provide a United States taxpayer identification number). You will
be taxed on such dividends for United States federal income tax purposes on a
net income basis, in the same manner as if you were a resident of the United
States. If you are a corporation, you 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).
SALE OF CLASS A COMMON STOCK
As a non-U.S. Holder, you will not be subject to United States federal
income tax on any gain realized upon the disposition of such holder's shares of
Class A common stock unless: (1)(a) the gain is considered effectively connected
with a trade or business carried on by you within the United States, or
alternatively, (b) if certain tax treaties apply, is considered attributable to
a permanent establishment in the United States maintained by you (and in either
case, the branch profits tax discussed above may also apply if you are a
corporation); (2) you are an individual who holds shares of Class A common stock
as a capital asset and you are present in the United States for 183 days or more
in the taxable year of disposition, and certain other conditions are met; or (3)
we are or have been a United States real property holding corporation (a
"USRPHC") for United States federal income tax purposes (which we do not believe
that we currently are or are likely to become) at any time within the shorter of
the five-year period preceding such disposition or your holding period. If we
are or were to become a USRPHC at any time during this period, gains realized
upon a disposition of Class A common stock by you would not be subject to United
States federal income tax, provided you did not directly or indirectly own more
than 5% of the Class A common stock during this period generally and that the
Class A common stock had been regularly traded on an established securities
market.
ESTATE TAX
If you are 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, Class A common stock will be includable in your 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
We must report annually to the Internal Revenue Service and to each of you
the amount of dividends paid to, and the tax withheld with respect to, each of
you. 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.
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 Class A common
stock if you have an address outside the United States. Backup withholding and
information reporting generally will apply to dividends paid on shares of Class
A common stock to a non-U.S. Holder if you have an
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address in the United States, or if you fail to establish an exemption or to
provide certain other information to the payor. Under the Final Regulations,
however, if you fail to certify your status in accordance with the requirements
of the Final Regulations, you may be subject to United States backup withholding
on payments of dividends.
The payment of proceeds from the disposition of Class A common stock to or
through a United States office of a broker will be subject to information
reporting and backup withholding unless you, under penalties of perjury,
certify, among other things, your status as a non-U.S. Holder or otherwise
establishes an exemption. The payment of proceeds from the disposition of Class
A common stock to or through a non-U.S. office of a non-U.S. broker generally
will be subject to information reporting, but not backup withholding, if the
broker is a United States person, a "controlled foreign corporation" for United
States federal income tax purposes or a foreign person 50% or more of whose
gross income from certain periods is effectively connected with a United States
trade or business. Information reporting and not backup withholding will not
apply if 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 you will be refunded or credited
against the your United States federal income tax liability, if any, provided
that the required information is furnished to the Internal Revenue Service.
LEGAL MATTERS
The validity of the Class A common stock offered hereby will be passed upon
for us by Shearman & Sterling, Menlo Park, California, and for the Underwriters
by Venture Law Group, A Professional Corporation, Menlo Park, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements as of June 30, 1997 and 1998 and for each of the three years in the
period ended June 30, 1998, as set forth in their report. We have included our
financial statements in this prospectus in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, a Registration Statement on Form S-1 under the
Securities Act with respect to the Class A Common Stock offered in this
offering. This prospectus, filed as part of that Registration Statement, does
not contain all the information in the Registration Statement and the exhibits
and schedules thereto. For further information with respect to us and the Class
A Common Stock, you should refer to the Registration Statement and the exhibits
and schedules filed as a part thereof. Statements in this prospectus regarding
the contents of any contract or any other document are not necessarily complete
and you should refer to the copy of such contract or document filed as an
exhibit to the Registration Statement for additional information.
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The Registration Statement, including exhibits and schedules thereto, may be
inspected at the public reference facilities maintained by the Securities and
Exchange 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.
As a result of our initial public offering, we became subject to the
informational requirements of the Exchange Act and have filed periodic reports
and other information with the Securities and Exchange Commission. We will
furnish to our 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.
--------------
MIPS, R3000, R4000, R5000, R8000 and R10000 are registered trademarks, and
MIPS 16, R4300i and the MIPS logo are trademarks of the Company. Silicon
Graphics and Cray are registered trademarks of Silicon Graphic, Inc. and Cray
Research, Inc., respectively. Sony is used with permission from Sony Computer
Entertainment America. PlayStation and the PlayStation logos are registered
trademarks of Sony Computer Entertainment Inc. WebTV and the WebTV logo are
trademarks of WebTV Networks, Inc. Certain images on the inside front cover of
this prospectus are courtesy of Nintendo of America Inc. -C-1998 Nintendo. This
prospectus contains other trademarks and registered trademarks of the Company
and other companies.
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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
Statement of Stockholders' Equity (Deficit)......................................... F-5
Statements of Cash Flows............................................................ F-6
Notes to Financial Statements....................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
MIPS Technologies, Inc.
We have audited the accompanying balance sheets of MIPS Technologies, Inc.
(the "Company") as of June 30, 1997 and 1998, and the related statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MIPS Technologies, Inc. at
June 30, 1997 and 1998, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1998 in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Jose, California
July 20, 1998
F-2
<PAGE>
MIPS TECHNOLOGIES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------- --------------
1997 1998 1998
--------- --------- --------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................... $ -- $ 45 $ 26,052
Accounts receivable................................ 381 250 2,602
Prepaid expenses and other current assets.......... 2,775 618 453
--------- --------- --------------
Total current assets............................. 3,156 913 29,107
Equipment and furniture, net......................... 15,190 2,787 3,155
Other assets......................................... 1,328 996 1,027
--------- --------- --------------
$ 19,674 $ 4,696 $ 33,289
--------- --------- --------------
--------- --------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................... $ 5,834 $ 3,087 $ 3,661
Accrued liabilities................................ 5,437 2,356 6,381
Current portion of capital lease obligations....... 331 -- --
--------- --------- --------------
Total current liabilities........................ 11,602 5,443 10,042
Deferred revenue, less current portion............... -- -- 375
Stockholders' equity (deficit):
Common stock, $0.001 par value: 150,000,000 shares
authorized. Issued and outstanding: 36,000,000
shares at June 30, 1997 and June 30, 1998 and
37,292,286 shares at December 31, 1998........... 36 36 37
Additional paid-in capital........................... 129,236 120,041 136,235
Accumulated deficit.................................. (121,200) (120,824) (113,400)
--------- --------- --------------
Total stockholders' equity (deficit)............. 8,072 (747) 22,872
--------- --------- --------------
$ 19,674 $ 4,696 $ 33,289
--------- --------- --------------
--------- --------- --------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
MIPS TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------------- --------------------
1996 1997 1998 1997 1998
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Royalties................................ $ 19,716 $ 37,192 $ 55,980 $ 26,759 $ 24,854
Contract revenue......................... 17,327 3,115 830 827 2,400
--------- --------- --------- --------- ---------
Total revenue........................ 37,043 40,307 56,810 27,586 27,254
Costs and expenses (see Note 11 regarding
related party transactions with Silicon
Graphics):
Cost of contract revenue................. 5,580 1,345 375 375 125
Research and development................. 48,402 68,827 43,446 35,127 9,223
Sales and marketing...................... 6,026 6,170 5,307 2,910 3,019
General and administrative............... 4,601 4,750 4,685 2,295 2,956
Restructuring charge..................... -- -- 2,614 2,614 --
--------- --------- --------- --------- ---------
Total costs and expenses............. 64,609 81,092 56,427 43,321 15,323
--------- --------- --------- --------- ---------
Operating income (loss).................. (27,566) (40,785) 383 (15,735) 11,931
Interest income (expense)................ (99) (50) (7) (11) 438
--------- --------- --------- --------- ---------
Income (loss) before income taxes........ (27,665) (40,835) 376 (15,746) 12,369
Provision for income taxes............... -- -- -- -- 4,948
--------- --------- --------- --------- ---------
Net income (loss)........................ $ (27,665) $ (40,835) $ 376 $ (15,746) $ 7,421
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per basic share........ $ (0.77) $ (1.13) $ 0.01 $ (0.44) $ 0.20
Net income (loss) per diluted share...... (0.77) (1.13) 0.01 (0.44) 0.19
Common shares outstanding-basic.......... 36,000 36,000 36,000 36,000 37,225
Common shares outstanding-diluted........ 36,000 36,000 36,033 36,000 38,239
</TABLE>
F-4
<PAGE>
MIPS TECHNOLOGIES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON ADDITIONAL ACCUMULATED STOCKHOLDERS'
STOCK PAID-IN-CAPITAL DEFICIT EQUITY (DEFICIT)
------------- -------------- ------------- ------------------
<S> <C> <C> <C> <C>
Balances at June 30, 1995.... $ 36 $ 48,928 $ (52,700) $ (3,736)
Net loss................... -- -- (27,665) (27,665)
Net financing provided from
Silicon Graphics......... -- 35,254 -- 35,254
--- -------------- ------------- --------
Balances at June 30, 1996.... 36 84,182 (80,365) 3,853
Net loss................... -- -- (40,835) (40,835)
Net financing provided from
Silicon Graphics......... -- 45,054 -- 45,054
--- -------------- ------------- --------
Balances at June 30, 1997.... 36 129,236 (121,200) 8,072
Net income................. -- -- 376 376
Net financing returned to
Silicon Graphics......... -- (1,965) -- (1,965)
Net equipment transferred
to Silicon Graphics...... -- (7,230) -- (7,230)
--- -------------- ------------- --------
Balances at June 30, 1998.... 36 120,041 (120,824) (747)
Net income (unaudited)..... -- -- 7,421 7,421
Common stock issued under
employee stock option and
purchase plans
(unaudited).............. -- 323 -- 323
Currency translation
adjustment (unaudited)... -- -- 3 3
Shares issued in initial
public offering, net of
issuance costs of $1,628
(unaudited).............. 1 15,871 -- 15,872
--- -------------- ------------- --------
Balances at December 31, 1998
(unaudited)................ $ 37 $ 136,235 $ (113,400) $ 22,872
--- -------------- ------------- --------
--- -------------- ------------- --------
</TABLE>
See accompanying notes.
F-5
<PAGE>
MIPS TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------------- --------------------
1996 1997 1998 1997 1998
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)....................... $ (27,665) $ (40,835) $ 376 $ (15,746) $ 7,421
Adjustments to reconcile net income to
cash provided by (used in) operations:
Depreciation.......................... 8,201 7,343 5,044 3,063 997
Restructuring charge.................. -- -- 2,114 2,614 --
Other non-cash charges................ 28 99 362 116 133
Changes in operating assets and
liabilities:
Accounts receivable................. (218) 146 131 -- (2,352)
Accounts payable.................... 753 1,899 (2,747) (381) 574
Other assets and liabilities........ (8,267) (3,385) (832) (91) 4,401
--------- --------- --------- --------- ---------
Net cash flow provided by (used
in) operating activities,
excluding Silicon Graphics
financing....................... (27,168) (34,733) 4,448 (10,425) 11,174
Investing activities -- capital
expenditures............................ (7,257) (9,913) (2,107) (452) (1,365)
Financing activities:
Net proceeds from issuance of common
stock................................. -- -- -- -- 16,195
Payments on capital lease obligations... (829) (408) (331) (218) --
Net financing provided from (returned
to) Silicon Graphics.................. 35,254 45,054 (1,965) 11,095 --
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities............ 34,425 44,646 (2,296) 10,877 16,195
Effect of exchange rate changes on cash... -- -- -- -- 3
--------- --------- --------- --------- ---------
Net increase in cash...................... -- -- 45 -- 26,007
Cash and cash equivalents, beginning of
period.................................. -- -- -- -- 45
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of
period.................................. $ -- $ -- $ 45 $ -- $ 26,052
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental disclosures of cash flow
information:
Net equipment transferred to Silicon
Graphics............................ $ -- $ -- $ 7,230 $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Interest paid......................... $ 99 $ 50 $ 13 $ -- $ 10
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-6
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF DECEMBER 31, 1998 AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 AND 1998 IS UNAUDITED
NOTE 1. FORMATION AND DESCRIPTION OF BUSINESS
FORMATION OF MIPS TECHNOLOGIES, INC. (THE "COMPANY"). MIPS Technologies'
predecessor, MIPS Computer Systems, Inc., was founded in 1984 and was engaged in
the design and development of RISC processors for the computer systems and
embedded markets. Silicon Graphics adopted the MIPS architecture for its
computer systems in 1988 and acquired MIPS Computer Systems, Inc. in 1992.
Following the acquisition, Silicon Graphics continued the MIPS processor
business through its MIPS Group (a division of Silicon Graphics), which focused
primarily on the development of high-performance processors for Silicon
Graphics' workstations and servers. Until the last few years, cost
considerations limited the use of MIPS RISC processors in high-volume digital
consumer products. However, as the cost to manufacture processors based on the
MIPS technology decreased, the MIPS Group sought to penetrate the consumer
market, both through supporting and coordinating the efforts of the MIPS
semiconductor licensees 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
processor applications dedicated to the embedded market, in December 1997,
Silicon Graphics initiated a plan to separate the business of the MIPS Group
from its other operations.
In April 1998, the Board of Directors of the Company approved a transaction
pursuant to which Silicon Graphics transferred to the Company the assets and
liabilities related to the design and development of processor intellectual
property for embedded market applications (the "Separation"). In connection with
the Separation, the Company and Silicon Graphics entered into a Corporate
Agreement that provides for certain pre-emptive rights of Silicon Graphics to
purchase shares of the Company's capital stock, registration rights related to
shares of the Company's capital stock owned by Silicon Graphics and covenants
against certain actions by the Company for as long as Silicon Graphics owns a
majority of the Company's outstanding common stock. Furthermore, the Company and
Silicon Graphics entered into a Management Services Agreement pursuant to which
Silicon Graphics currently provides certain services to the Company on an
interim or transitional basis.
Since the closing of the Company's initial public offering (the "Offering")
on July 6, 1998, the Company has been a majority owned subsidiary of Silicon
Graphics.
MIPS Technologies International A.G., a wholly owned subsidiary of the
Company, was incorporated in Switzerland on November 20, 1998. MIPS Denmark
Development Center located in Copenhagen, Denmark, a branch of the Swiss
subsidiary, was opened on December 1, 1998. The development center will work on
product development as well as provide support and design expertise for the
Company's European-based customers.
BASIS OF PRESENTATION. The accompanying financial statements for periods
prior to June 30, 1998 reflect the operations of the Company's predecessor, the
MIPS Group. The balance sheets as of June 30, 1997 and 1998 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. Until June
30, 1998, cash management for the Company was done by
F-7
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF DECEMBER 31, 1998 AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 AND 1998 IS UNAUDITED
Silicon Graphics on a centralized basis and all cash provided by Silicon
Graphics was recorded as interest-free financing from Silicon Graphics in these
financial statements.
The statements of operations include all revenue and costs attributable to
the Company, including a corporate allocation of the costs of facilities and
employee benefits. Additionally, incremental corporate administration, finance
and management costs are allocated to the Company based on certain methodologies
that management believes are reasonable under the circumstances (see Note 11).
Subsequent to June 30, 1998, the Company operated as a stand-alone company,
MIPS Technologies, Inc. The consolidated financial statements include the
accounts of the Company and its wholly owned Swiss subsidiary, MIPS Technologies
International A.G., after elimination of intercompany transactions and balances.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION. The financial information as of December 31,
1998, and for the six months ended December 31, 1997 and 1998 are unaudited but
include all adjustments (consisting only of normal recurring adjustments) which
the Company considers necessary for a fair presentation of the financial
position at such date and the operating results and cash flows for those
periods. Results for the six months ended December 31, 1998 are not necessarily
indicative of the results to be expected for the entire 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 derives revenue from fees for the transfer
of proven and reusable intellectual property components or the performance of
engineering services to customer specifications. The Company enters into
licensing agreements that provide licensees the right to incorporate the
Company's intellectual property components in their products with terms and
conditions that have historically varied by licensee. Generally these agreements
include one or more of the following elements: (1) royalty payments, which are
payable upon the sale of a licensee's products, (2) nonrefundable technology
license fees, which are payable upon the transfer of intellectual property and
(3) engineering service fees, which generally are payable upon the Company's
achievement of defined milestones. No upgrades or modifications to a licensed
product are provided.
The Company classifies all revenue that involves the future sale of a
licensee's products as royalty revenue. Royalty revenue generally is recognized
in the quarter in which a report is received from a licensee detailing the
shipments of products incorporating the Company's intellectual property
components (i.e., in the quarter following the sale of licensed product by the
licensee). The Company classifies all revenue that does not involve the future
sale of a licensee's products, primarily license fees and engineering service
fees, as contract revenue. License fees are recognized upon the execution of the
license agreement and transfer of intellectual property,
F-8
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF DECEMBER 31, 1998 AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 AND 1998 IS UNAUDITED
provided no further significant performance obligations exist. Engineering
services, which are performed on a best efforts basis, are recognized as revenue
when the defined milestones are completed and the milestone payment is probable
of collection. Milestones have historically been formulated to correlate with
the estimated level of effort and related costs.
COSTS OF CONTRACT REVENUE. Cost of contract revenue consists mainly of
sublicence fees which are recognized as the obligation is incurred. Prior to
fiscal 1998, such costs also included non recurring engineering service costs
directly related to a development agreement with a specific licensee which were
expensed as incurred over the period of services.
RESEARCH AND DEVELOPMENT EXPENSES. Costs incurred with respect to
internally developed technology and engineering services are included in the
research and development expense as they are not directly related to any
particular licensee, license agreement or license fees. Such costs are expensed
as incurred.
Certain license agreements provide for limited product support that consists
of an identified customer contact at the Company and telephonic or e-mail
product support. Such support arrangements have been insignificant to date.
EQUIPMENT AND FURNITURE. Equipment and furniture 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.
PREPAID EXPENSES AND OTHER CURRENT ASSETS. Prepaid expenses and other
current assets consist principally of amounts paid by the Company in advance for
maintenance contracts on its computer-aided software design tools. These
contracts typically cover a one-year period, over which the cost is amortized.
STOCK-BASED COMPENSATION. Certain employees of the Company were granted
options to purchase Silicon Graphics common stock and were awarded restricted
shares of Silicon Graphics common stock while employed by Silicon Graphics. In
addition, certain employees of the Company purchased Silicon Graphics common
stock through the Silicon Graphics stock purchase plan. In connection with their
acceptance of employment with the Company, all unvested options to purchase
Silicon Graphics common stock and unvested restricted shares of Silicon Graphics
common stock held by employees of the Company that were previously employed by
Silicon Graphics were forfeited. In addition, such individuals had 30 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 remained
unexercised after that date were forfeited.
The Company has adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-based Compensation
("SFAS 123"). As allowed by SFAS 123, the Company accounts for stock-based
employee compensation arrangements under the intrinsic value method prescribed
by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. As a result, no expense was recognized for options to purchase common
stock of Silicon Graphics (prior to the Separation) or the Company (following
its initial public offering) that were granted with an exercise price equal to
fair market value at the date of grant, and no expense was recognized in
connection with purchases under the Silicon Graphics' employee stock purchase
plan prior to the Separation. For Silicon Graphics stock options that were
F-9
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF DECEMBER 31, 1998 AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 AND 1998 IS UNAUDITED
granted and for restricted Silicon Graphics and Company common stock issued at
discounted prices, the Company recognizes compensation expense over the vesting
period for the difference between the exercise or purchase price and the fair
market value on the measurement date.
EARNINGS PER SHARE. The Company follows the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS
128 requires the presentation of basic and fully diluted earnings per share.
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares that were
outstanding during the period. Diluted earnings per share is computed giving
effect to all dilutive potential common shares that were outstanding for any
periods presented in these financial statements. The Company effected a
360,000-for-one split of its Common Stock on June 5, 1998 and the share and
earnings per share data in the financial statements give effect to that split.
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------------- --------------------
1996 1997 1998 1997 1998
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net income (loss)........................ $ (27,665) $ (40,835) $ 376 $ (15,746) $ 7,421
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted-average shares outstanding --
basic.................................. 36,000 36,000 36,000 36,000 37,225
Effect of dilutive securities employee
stock options.......................... -- -- 33 -- 1,014
--------- --------- --------- --------- ---------
Weighted-average shares outstanding --
diluted................................ 36,000 36,000 36,033 36,000 38,239
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per share -- basic..... $ (0.77) $ (1.13) $ 0.01 $ (0.44) $ 0.20
Net income (loss) per share -- diluted... (0.77) (1.13) 0.01 (0.44) 0.19
</TABLE>
COMPREHENSIVE INCOME. During fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). There was no impact to the Company as a result of the adoption of SFAS
130, and there is no material difference between the Company's reported net
income (loss) and the comprehensive net income (loss) under SFAS 130 for the
periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). The Company is required
to adopt SFAS 131 in fiscal 1999. SFAS 131 requires disclosure of certain
information regarding operating segments, products and services, geographic
areas of operation and major customers. The adoption of SFAS 131 is
F-10
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF DECEMBER 31, 1998 AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 AND 1998 IS UNAUDITED
expected to have no impact on the Company's financial position, results of
operations or cash flows.
In March 1998, FASB issued Statement of Financial Accounting Standards No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
("SFAS 132"). SFAS 132 does not change the recognition or measurement of pension
or postretirement benefit plans, but revises and standardizes disclosure
requirements for pensions and other postretirement benefits. The adoption of
SFAS 132 in fiscal 1999 will have no impact on the Company's results of
operations or financial condition.
In June 1998, FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Financial Instruments and for Hedging Activities
("SFAS 133"), which provides comprehensive and consistent standards for the
recognition and measurement of derivatives and hedging activities. The Company
is required to adopt SFAS 133 in fiscal 2000. It is not anticipated to have an
impact on the Company's results of operations or financial condition when
adopted because the Company currently does not hold any derivative financial
instruments and does not expect to engage in hedging activities in the near
future.
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 processor
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, 1997 and 1998,
one customer accounted for 100% of accounts receivable. During the year ended
June 30, 1996, revenue from three customers represented an aggregate of 72% of
total revenue and during the years ended June 30, 1997 and 1998, revenue from
two customers represented an aggregate of 88% and 85% 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 13). The Company anticipates that revenue from
international customers will continue to represent a substantial portion of its
total revenue. To date, substantially all of the revenue from international
customers has been denominated in U.S. dollars. However, to the extent that
sales to digital consumer product manufacturers by the Company's manufacturing
partners are denominated in foreign currencies, royalties received by the
Company on such sales could be subject to fluctuations in currency exchange
rates. In addition, if the effective price of the technology sold by the Company
to its partners were to increase as a result of fluctuations in foreign currency
exchange rates, demand for the Company's technology could fall which would, in
turn, reduce the Company's royalties. The relative significance of the Company's
international operations exposes it to a number of additional risks including
political and economic instability,
F-11
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF DECEMBER 31, 1998 AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 AND 1998 IS UNAUDITED
longer accounts receivable collection periods and greater difficulty in
collection of accounts receivable, reduced or limited protection for
intellectual property, export license requirements, tariffs and other trade
barriers and potentially adverse tax consequences. There can be no assurance
that the Company will be able to sustain revenue derived from international
customers or that the foregoing factors will not have a material adverse effect
on the Company's business, operating results and financial condition.
NOTE 4. RESTRUCTURING CHARGE
The restructuring charge recorded in fiscal 1998 includes $500,000 in
severance and related costs (17 employees, a majority of which supported
research and development activities) and $2.1 million in fixed asset write-downs
related to the Company's shift in strategic direction. All severance and related
costs were paid and 16 employees were terminated as of September 30, 1998.
NOTE 5. 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.
Employee loans are included in other assets in the accompanying balance sheet
and approximated $1.3 million and $1.0 million at June 30, 1997 and 1998,
respectively. Approximately $776,000 and $432,000 of these loans at June 30,
1997 and 1998, respectively, relate to loans which are forgiven by the Company
on a periodic basis as the employee or officer remains employed by the Company.
Loan forgiveness charged to expense was $28,000, $99,000 and $240,000 in fiscal
1996, 1997 and 1998, respectively. 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 7.19% to
7.25% and are due on dates ranging from September 1999 to March 2002.
NOTE 6. EQUIPMENT AND FURNITURE
The components of equipment and furniture are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Equipment............................................... $ 45,918 $ 7,990
Equipment under capital lease........................... 1,198 --
Furniture and fixtures.................................. 516 421
--------- ---------
47,632 8,411
Accumulated depreciation................................ (32,442) (5,624)
--------- ---------
Equipment and furniture, net............................ $ 15,190 $ 2,787
--------- ---------
--------- ---------
</TABLE>
F-12
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF DECEMBER 31, 1998 AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 AND 1998 IS UNAUDITED
NOTE 7. ACCRUED LIABILITIES
The components of accrued liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Accrued compensation and employee-related expenses......... $ 4,163 $ 194
Development and marketing funds............................ 1,053 1,555
Other accrued liabilities.................................. 221 607
--------- ---------
$ 5,437 $ 2,356
--------- ---------
--------- ---------
</TABLE>
Accrued compensation and employee related expenses at June 30, 1997 include
approximately $1.6 million in accrued vacation and $1.2 million in accrued
employee relocation expenses. The development and marketing funds represent
amounts received from certain of the Company's licensees to be used in joint
development and marketing programs. In connection with the separation, all
accrued vacation amounts as of May 31, 1998 were paid to employees. The amount
accrued at June 30, 1998 represents accrued vacation costs from June 1, 1998 to
June 30, 1998.
NOTE 8. CAPITAL LEASE OBLIGATIONS
The Company leased equipment under capital lease obligations that matured in
fiscal 1998.
NOTE 9. INCOME TAXES
The net losses incurred for the fiscal years ended June 30, 1996, 1997 and
1998 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, by
operation of the tax sharing agreement, the Company will not receive any benefit
for losses incurred or have any tax liability for any income earned up to the
closing date of the initial public offering, no income tax provision or benefit
has been reflected for the years ended June 30 1996, 1997 and 1998.
As a member of Silicon Graphics' consolidated group for federal income tax
purposes, the Company is jointly and severally liable for the federal income tax
liability of each other member of the consolidated group. The Company is also
jointly and severally liable for pension and benefit funding termination
liabilities of other group members, as well as certain benefit plan taxes.
At June 30, 1997 and 1998, the Company's deferred tax assets and the related
valuation allowance were immaterial.
Subsequent to the initial public offering, the Company, while still a part
of Silicon Graphics' consolidated group for federal income tax purposes, is
responsible for its income taxes through a tax sharing agreement with Silicon
Graphics. Therefore, to the extent the Company produces taxable income, loss or
credits, it will make or receive payments as though it filed separate federal,
state and local income tax returns. The Company recorded a provision for income
taxes of $4.9 million for the first six months of fiscal 1999. This provision
was based on an estimated federal and state combined rate of 40% on income
before taxes.
F-13
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF DECEMBER 31, 1998 AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 AND 1998 IS UNAUDITED
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.
NOTE 10. STOCKHOLDERS' EQUITY
In May 1998, the Board of Directors of the Company authorized and the
Company's stockholder later approved a 360,000-for-one stock split of the
Company's common stock and an amendment to the Company's Certificate of
Incorporation increasing the number of authorized shares of common stock to
150,000,000 shares. All prior year financial statements have been restated to
effect the stock split.
PREFERRED STOCK. The Company has 50,000,000 shares of preferred stock, par
value $0.001 per share, authorized for issuance. No shares of preferred stock
have been issued.
1998 LONG-TERM INCENTIVE PLAN. The 1998 Long-Term Incentive Plan (the "1998
Plan") was adopted by the Board of Directors of the Company and approved by the
Company's stockholder in May 1998. The 1998 Plan authorized the issuance of
various forms of stock-based awards including incentive and non-qualified stock
options, stock appreciation rights, stock awards and performance unit awards to
officers and other key employees and consultants. Stock options and stock
appreciation rights are generally granted at an exercise price of not less than
the fair value on the date of grant; the prices of other stock awards are
determined by the Option Administration Committee of the Board of Directors. An
aggregate of 6,600,000 shares of common stock may be issued under the 1998 Plan
and are reserved for future issuance.
The stock option activity under the 1998 Plan is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------------------
SHARES AVAILABLE NUMBER OF WEIGHTED AVERAGE
FOR GRANT SHARES EXERCISE PRICE PER SHARE
----------------- ----------- -------------------------
<S> <C> <C> <C>
Balance at July 1, 1997........... -- -- $ --
Shares authorized for issuance.... 6,600,000 -- --
Options granted in fiscal 1998.... (2,996,900) 2,996,900 12.00
----------------- ----------- -------
Balance at June 30, 1998.......... 3,603,100 2,996,900 $ 12.00
----------------- ----------- -------
----------------- ----------- -------
</TABLE>
At June 30, 1998, the weighted average contractual life of the options
outstanding was 10 years. There were no options exercisable at June 30, 1998.
EMPLOYEE STOCK PURCHASE PLAN. The Employee Stock Purchase Plan (the
"Purchase Plan") was adopted by the Board of Directors of the Company and
approved by the Company's stockholder in May 1998. The purpose of the Purchase
Plan is to provide employees of the Company who participate in the Purchase Plan
with an opportunity to purchase common stock of the Company through payroll
deductions. Under the Purchase Plan, eligible employees may purchase stock at
85% of the lower of the fair market value of the Company's common stock (a) on
the date of commencement of the offering period or (b) the applicable exercise
date within such offering period. A 24-month offering period commences every six
months, generally on May 1 and
F-14
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF DECEMBER 31, 1998 AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 AND 1998 IS UNAUDITED
November 1 of each year. The offering period is divided into four six-month
exercise periods. The exercise date is the last day of the particular six-month
exercise period within the offering period. If the fair market value of the
Company's common stock on the first day of any exercise period is less than such
value on the first day of that offering period, all employees participating in
the Purchase Plan on the first day of such exercise period will be deemed to
have withdrawn from the offering period on the first day of such exercise period
and to have enrolled in the new offering period commencing on that date.
Purchases are limited to 10% of each employee's eligible compensation. As of
June 30, 1998, no shares have been issued to employees of the Company under the
Purchase Plan. Presently 600,000 shares of the Company's common stock are
reserved for future issuance under the Purchase Plan, and on July 1 of each year
the amount reserved for issuance will be increased by the lesser of one-half of
one percent of the outstanding shares of the Company's common stock on a fully
diluted basis or 600,000 shares, or such lesser amount determined by the Board
of Directors of the Company.
DIRECTORS' STOCK OPTION PLAN. The Board of Directors of the Company adopted
and the Company's stockholder approved the Directors' Stock Option Plan (the
"Director Plan") on July 2, 1998. The plan authorizes 600,000 shares of the
Company's common stock for issuance plus an annual increase each July 1 equal to
the lesser of (1) 100,000 shares, (2) the number of shares subject to option
granted in the prior one year period, or (3) a lesser amount determined by the
Board of Directors of the Company. Upon a non-employee director's election or
appointment to the Board, he or she will automatically receive a non-statutory
stock option to purchase 40,000 shares of the Company's common stock. Each
director who has been a non-employee director for at least six months will
automatically receive a non-statutory stock option to purchase 10,000 shares of
the Company's common stock each year on the date of the annual meeting of
stockholders. All stock options are granted an exercise price equal to the fair
market value of the Company's common stock on the date of grant. Stock options
generally vest over a 50-month period from the date of the grant. As of June 30,
1998, no shares had been issued to directors of the Company under the Director
Plan.
NON-U.S. STOCK PURCHASE PLAN. The Non-U.S. Stock Purchase Plan (the
"Non-U.S. Purchase Plan") was adopted by the Board in July 1998. The purpose of
the Non-U.S. Purchase Plan is to provide employees and consultants of the
Company who do not provide services in the United States and who participate in
the Non-U.S. Purchase Plan with an opportunity to purchase the Company's common
stock at the same discount and subject to the same general rules as the Purchase
Plan. The Non-U.S. Purchase Plan has 24-month offering periods commencing every
six months and each offering period is divided into four six-month exercise
periods. Purchases are limited to ten percent of each employee's and
consultant's eligible compensation. As of June 30, 1998, no shares had been
issued to employees or consultants of the Company under the Non-U.S. Purchase
Plan and 60,000 shares of the Company's common stock were reserved for issuance.
SILICON GRAPHICS STOCK AWARD PLANS. Certain employees of the Company were
granted options to purchase Silicon Graphics common stock and were awarded
restricted shares of Silicon Graphics common stock while employed by Silicon
Graphics. In addition, certain employees of the Company purchased Silicon
Graphics common stock through the Silicon Graphics stock purchase plan. In
connection with their acceptance of employment with the Company, all unvested
options to purchase Silicon Graphics common stock and unvested restricted shares
of Silicon Graphics
F-15
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF DECEMBER 31, 1998 AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 AND 1998 IS UNAUDITED
common stock held by employees of the Company previously employed by Silicon
Graphics were forfeited. In addition, such individuals had 30 or 90 days from
May 29, 1998 (depending on the terms of the option grant) to exercise any vested
options to purchase Silicon Graphics common stock, and any vested options that
remained unexercised after that date were forfeited.
Silicon Graphics has various stock award plans, which provide for the grant
of incentive and nonstatutory stock options and the issuance of restricted stock
to employees. Incentive stock options are granted at not less than the fair
market value on the date of grant; the prices of nonstatutory stock option
grants and restricted stock were determined by the board of directors of Silicon
Graphics. Under the plans, options and restricted stock generally vest over a
fifty-month period from the date of grant.
Silicon Graphics stock option activity related to employees of the Company
is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------
NUMBER OF WEIGHTED AVG.
SHARES EXERCISE PRICE
----------- ---------------
<S> <C> <C>
Balance at June 30, 1995....................... 1,717,720 $ 17.94
Options granted................................ 772,440 26.98
Options exercised.............................. (52,039) 9.97
Options canceled............................... (649,967) 7.40
-----------
Balance at June 30, 1996....................... 1,788,154 22.26
Options granted................................ 1,641,064 21.00
Options exercised.............................. (148,748) 10.56
Options canceled............................... (1,705,085) 23.90
-----------
Balance at June 30, 1997....................... 1,575,385 18.17
Options granted................................ 161,861 12.85
Options exercised.............................. (113,427) 10.77
Options canceled............................... (1,493,260) 18.02
-----------
Balance at June 30, 1998....................... 130,559 19.62
-----------
-----------
</TABLE>
Additional information about outstanding options to purchase Silicon
Graphics common stock held by employees of the Company at June 30, 1998 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
-----------------------------------------------
WEIGHTED
AVERAGE WEIGHTED
NUMBER CONTRACTUAL AVERAGE
RANGE OF EXERCISE PRICE OF SHARES LIFE (IN YEARS) EXERCISE PRICE
- -------------------------------- ----------- ----------------- ---------------
<S> <C> <C> <C>
$8.06-$11.69.................... 11,577 6.94 $ 10.99
$12.63-$18.88................... 53,430 7.86 18.14
$20.00-$30.13................... 65,552 8.02 22.35
-----------
$8.06-$30.13.................... 130,559 7.86 19.62
-----------
-----------
</TABLE>
F-16
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF DECEMBER 31, 1998 AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 AND 1998 IS UNAUDITED
Shares of restricted Silicon Graphics common stock awarded to employees of
the Company in fiscal 1996, 1997 and 1998 were 40,000 shares, 83,500 shares and
27,000 shares, respectively.
At June 30, 1996, 1997 and 1998, options to purchase 856,711 shares, 480,629
shares and 130,559 shares, respectively, of Silicon Graphics common stock were
held by employees of the Company. At June 30, 1996, 1997 and 1998, there were
35,000 shares, 50,125 shares and no shares, respectively, of restricted Silicon
Graphics stock held by employees of the Company that were subject to repurchase.
SILICON GRAPHICS STOCK PURCHASE PLAN. Silicon Graphics has an employee
stock purchase plan under which eligible employees may purchase stock at 85% of
the lower of the closing price for the stock at the beginning of a twenty
four-month offering period or the end of each six-month purchase period. The
purchase periods generally begin in May and November. Purchases are limited to
10% of each employee's compensation. Shares issued to employees of the Company
under this plan in fiscal 1996, 1997 and 1998 were 76,084 shares, 135,808 shares
and 101,292 shares, respectively. Former employees of Silicon Graphics are not
eligible to participate in this plan.
GRANT DATE FAIR VALUES. The weighted average estimated fair value of
Silicon Graphics employee stock options granted at grant date market prices
during fiscal 1996, 1997 and 1998 was $11.32 per share, $8.08 per share and
$6.02 per share, respectively. The weighted average exercise price of Silicon
Graphics employee stock options granted at grant date market prices during
fiscal 1996, 1997 and 1998 was $29.66 per share, $20.70 per share and $14.89 per
share, respectively. The weighted average estimated fair value of Silicon
Graphics employee stock options granted at below grant date market prices during
fiscal 1996 and 1997 was $17.07 per share and $13.09 per share, respectively.
The weighted average exercise price of Silicon Graphics employee stock options
granted at below grant date market prices during 1996 and 1997 was $21.35 per
share and $15.65 per share, respectively. There were no Silicon Graphics options
granted at below grant date market price during fiscal 1998. The weighted
average estimated fair value of Silicon Graphics restricted stock granted during
fiscal 1996, 1997 and 1998 was $27.30 per share, $23.37 per share and $24.37 per
share, respectively. The weighted average estimated fair value of shares granted
under the Silicon Graphics stock purchase plan during fiscal 1996, 1997 and 1998
was $15.09 per share, $7.85 per share and $6.88 per share, respectively.
The weighted average estimated fair value of the Company's employee stock
options granted at grant date market prices during fiscal 1998 was $8.71 per
share.
F-17
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF DECEMBER 31, 1998 AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 AND 1998 IS UNAUDITED
The weighted average fair value of Silicon Graphics options granted has been
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions:
<TABLE>
<CAPTION>
EMPLOYEE STOCK OPTIONS STOCK PURCHASE PLAN SHARES
------------------------------------- -------------------------------------
YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30,
------------------------------------- -------------------------------------
1996 1997 1998 1996 1997 1998
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Expected life (in years)..................... 3.8 2.7 2.7 0.5 0.5 0.5
Risk-free interest rate...................... 5.18% 6.38% 5.74% 5.49% 5.45% 5.72%
Volatility................................... 0.45 0.50 0.61 0.45 0.57 0.79
Dividend yield............................... 0% 0% 0% 0% 0% 0%
</TABLE>
The weighted average fair value of Company options granted has been
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions for the activity under the Company's
plans:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1998
-----------------
<S> <C>
Expected life (in years).................................................... 5.0
Risk-free interest rate..................................................... 5.66%
Volatility.................................................................. 0.70
Divided yield............................................................... 0%
</TABLE>
PRO FORMA INFORMATION. The Company has elected to follow APB 25 in
accounting for its employee stock options because the alternative fair value
accounting provided for under SFAS 123 requires the use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, no compensation expense is recognized in the Company's financial
statements except in connection with the granting of restricted shares or unless
the exercise price of the Company's employee stock options is less than the
market price of the underlying stock on the date of grant. Total compensation
expense recognized in the Company's financial statements for stock-based awards
under APB 25 for fiscal 1996, 1997 and 1998 was $0.5 million, $1.7 million and
$1.0 million, respectively.
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options and
employee stock purchase plan under the fair value method prescribed by SFAS 123.
For purposes of pro forma disclosures, the
F-18
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF DECEMBER 31, 1998 AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 AND 1998 IS UNAUDITED
estimated fair value of the stock awards is amortized to expense over the
vesting periods. The Company's pro forma information is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Pro forma net loss............................................. $ (30,041) $ (46,288) $ (738)
Pro forma basic and diluted net loss per share................. $ (0.83) $ (1.28) $ (0.02)
</TABLE>
The historical pro forma impact of applying the fair value method prescribed
by SFAS 123 is not representative of the impact that may be expected in the
future due to changes resulting from the Separation and the establishment of the
Company's plans during 1998.
NOTE 11. RELATED PARTY TRANSACTIONS
FUNDING. Prior to the separation, the Company utilized Silicon Graphics'
centralized cash management services and processes related to receivables,
payables, payroll and other activities and the Company's net cash requirements
were funded by Silicon Graphics. Net financing provided to the Company by
Silicon Graphics in fiscal 1996 and 1997 was approximately $35 million and $45
million, respectively. There was a net return of capital to Silicon Graphics by
the Company of approximately $9.2 million and zero in fiscal 1998. The average
balance due Silicon Graphics during fiscal 1996, 1997 and 1998 was approximately
$67 million, $107 million and $125 million, respectively.
At December 31, 1998, accounts payable includes approximately $207,000
payable to Silicon Graphics related to certain administrative and corporate
support services provided by Silicon Graphics on behalf of the Company and
approximately $2.7 million taxes payable to Silicon Graphics under the tax
sharing agreement with Silicon Graphics. The tax sharing agreement provides that
the Company and Silicon Graphics will make payments to each other such that,
with respect to any period, the amount of taxes to be paid by the Company,
subject to certain adjustments, will be determined as though the Company were to
file separate federal, state and local income tax returns.
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 $9.0 million, $11.0
million, $9.0 million, $6.2 million and zero for the years ended June 30, 1996,
1997 and 1998 and for the six-month periods ended December 31, 1997 and December
31, 1998, respectively.
In June 1998, the Company and Silicon Graphics entered into the Management
Services Agreement, pursuant to which Silicon Graphics will provide certain
administrative and corporate support services to the Company on an interim or
transitional basis, including accounting, treasury,
F-19
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF DECEMBER 31, 1998 AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 AND 1998 IS UNAUDITED
tax, facilities and information services. Specified charges for such services
are generally intended to allow Silicon Graphics to recover the fully allocated
direct costs of providing the services, plus all out-of-pocket costs and
expenses, but without any profit. The Management Services Agreement will have a
three-year term and will be subject to automatic termination at such time as
Silicon Graphics' beneficial ownership interest in the Company's outstanding
common stock ceases to exceed 50%. In addition, either Silicon Graphics or the
Company may terminate the Management Services Agreement with respect to one or
more of the services provided thereunder upon giving at least 30 days prior
written notice to the other party.
Management believes that the basis used for allocating corporate services is
reasonable. While the terms of these transactions may differ from those that
would result from transactions among unrelated parties, management does not
believe such differences would be material.
FACILITIES. The Company's executive, administrative and technical offices
currently occupy space in a building subleased from Silicon Graphics in Mountain
View, California. Payments by the Company to Silicon Graphics under this
sublease are expected to be $611,000, $743,000, $776,000 and $741,000 in fiscal
years 1999, 2000, 2001 and 2002, respectively. The sublease will terminate on
May 31, 2002, subject to earlier termination in certain circumstances.
NOTE 12. CONTINGENCIES
From time to time, the Company receives communications from third parties
asserting patent or other rights covering the Company's products and
technologies. Based upon the Company's evaluation, it may take no action or it
may seek to obtain a license. There can be no assurance in any given case that a
license will be available on terms the Company considers reasonable, or that
litigation will not ensue.
Management is not aware of any pending disputes that would be likely to have
a material adverse effect on the Company's business, results of operations or
financial condition.
NOTE 13. INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION
The Company operates in one industry segment. The Company's revenue by
geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
United States.................................................. $ 6,123 $ 5,066 $ 5,621
Export:
Japan........................................................ 22,620 35,241 50,939
Europe....................................................... 6,300 -- 250
Rest of World................................................ 2,000 -- --
--------- --------- ---------
Total revenue.............................................. $ 37,043 $ 40,307 $ 56,810
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-20
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF DECEMBER 31, 1998 AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 AND 1998 IS UNAUDITED
NOTE 14. SUBSEQUENT EVENT (UNAUDITED)
On April 5, 1999, the Company effected a recapitalization of its authorized
capital stock pursuant to which (i) each issued and outstanding share of the
Company's common stock, par value $0.001 per share, was redesignated as one
share of newly created and issued Class A common stock, par value $0.001 per
share, of the Company and (ii) Silicon Graphics, Inc. exchanged each share of
Class A common stock it owned for one share of newly created and issued Class B
common stock, par value $0.001 per share, of the Company. The recapitalization
was designed to permit an orderly, multi-step increase in the number of shares
of MIPS Technologies common stock that are publicly traded while preserving
Silicon Graphics' ability to divest of its interest in MIPS Technologies in a
transaction intended to qualify generally as a tax-free distribution under the
Internal Revenue Code.
F-21
<PAGE>
UNDERWRITING
Silicon Graphics and the underwriters for the offering named below have
entered into an underwriting agreement with respect to the shares being offered.
Subject to certain conditions, each underwriter has severally agreed to purchase
the number of shares indicated in the following table. Goldman, Sachs & Co.,
Credit Suisse First Boston Corporation and BancBoston Robertson Stephens Inc.
are the representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriter Number of Shares
- --------------------------------------------------------- -----------------
<S> <C>
Goldman, Sachs & Co......................................
Credit Suisse First Boston Corporation...................
BancBoston Robertson Stephens Inc........................
-----------------
Total.................................................. 6,000,000
-----------------
-----------------
</TABLE>
--------------
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 900,000
shares from Silicon Graphics to cover such sales. They may exercise that option
for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same proportion
as set forth in the table above.
The following tables show the per share and total underwriting discounts and
commissions to be paid to the underwriters by Silicon Graphics. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase 900,000 additional shares.
<TABLE>
<CAPTION>
Paid by Silicon Graphics
- -----------------------------------------------------------------------------
No Exercise Full Exercise
---------------- ----------------
<S> <C> <C>
Per Share............................... $ $
Total................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial price to public. Any such securities
dealers may resell any shares purchased from the underwriters to certain other
brokers or dealers at a discount of up to $ per share from the initial
price to public. If all the shares are not sold at the initial offering price,
the representatives may change the offering price and the other selling terms.
We and Silicon Graphics have agreed with the underwriters not to dispose of
or hedge any of their Class A or Class B common stock or securities convertible
into or exchangeable for shares of Class A or Class B common stock during the
period from the date of this prospectus continuing through the date 90 days
after the date of this prospectus, except with the prior written consent of
Goldman, Sachs & Co. This agreement does not apply to existing employee
benefit plans or to a distribution by Silicon Graphics of all of the Class B
common stock that it owns if, in order to avoid the application of certain
recently proposed tax legislation, such a distribution must be made prior to the
date that is 90 days after completion of this offering in order for Silicon
Graphics to effect a Tax-Free Distribution.
In addition, our directors and certain of our officers have agreed with the
underwriters not to dispose of or hedge any of their Class A common stock or
securities convertible into or exchangeable for shares of Class A common
U-1
<PAGE>
stock during the period from the date of this prospectus continuing through the
date that is two trading days after the date of our public announcement of our
1999 fourth quarter operating results (the date of such announcement is
currently expected to be July 20, 1999). As of February 26, 1999, such directors
and officers owned 11,054 shares of our common stock that may be sold, and held
options to purchase approximately 465,000 shares of common stock that will be
exercisable, on July 23, 1999 or within 30 days thereafter.
In connection with this offering, the underwriters may purchase and sell
shares of Class A common stock in the open market. These transactions may
include short sales, stabilizing transactions and purchases to cover positions
created by short sales. Short sales involve the sale by the underwriters of a
greater number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the Class A
common stock while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the Class A common stock. As a result, the price of
the Class A common stock may be higher than the price that otherwise might exist
in the open market. If these activities are commenced, they may be discontinued
by the underwriters at any time. These transactions may be effected on the
Nasdaq Stock Market, in the over-the-counter market or otherwise.
In connection with this offering, certain underwriters and selling group
members (if any) who are qualified market makers on The Nasdaq National Market
may engage in passive market making transactions in the common stock on The
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934 during the business day prior to the pricing of
the offering before the commencement of offers or sales of the common stock.
Passive market makers must comply with applicable volume and price limitations
and must be identified as such. In general, a passive market maker must display
its bid at a price not in excess of the highest independent bid of such
security; if all independent bids are lowered below the passive market makers'
bid, however, such bid must then be lowered when certain purchase limits are
exceeded.
Each underwriter has represented and agreed that (i) it has not offered or
sold and prior to the date six months after the date of issue of the shares of
Class A common stock will not offer or sell any shares of common stock to
persons in the United Kingdom, except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances that have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied, and will comply with, all
applicable provisions of the Financial Services Act 1986 of Great Britain with
respect to anything done by it in relation to the shares of Class A common stock
in, from or otherwise involving the United Kingdom; and (iii) it has only issued
or passed on and will only issue or pass on in the United Kingdom any document
received by it in connection with the issuance of the International shares to a
person who is of a kind described in Article 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1996 (as amended) of Great
Britain or is a person to whom the document may otherwise lawfully be issued or
passed on.
Buyers of shares of Class A common stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of
U-2
<PAGE>
purchase in addition to the initial price to public.
Sales of shares of Class A common stock made outside of the United States
will be effected through selling agents of the underwriters. No shares of Class
A common stock offered hereby have been registered for the purpose of sales
outside the United States, as any such sales will be made in reliance on
Regulation S under the Securities Act of 1933.
Silicon Graphics will pay all expenses incurred by us in connection with the
offering. The total expenses of the offering, excluding underwriting discounts
and commissions, are expected to be approximately $900,000.
Silicon Graphics retained Goldman, Sachs & Co. to act as its financial
advisor in connection with its investment in us. Silicon Graphics has agreed to
pay Goldman, Sachs & Co. customary cash fees for these financial advisory
services.
A special committee of our board of directors constituted in connection with
the Recapitalization retained Credit Suisse First Boston Corporation to act as
its financial advisor. We paid Credit Suisse First Boston Corporation customary
cash fees for these financial advisory services.
We and Silicon Graphics have agreed to indemnify the several underwriters
against certain liabilities, including liabilities under the Securities Act of
1933.
U-3
<PAGE>
[Inside Back Cover]
MIPS-Registered Trademark- Architecture Licensees
[Graphic: the word "success" along the right side of the page, reading from the
bottom to the top of the page.]
[Broadcom Logo] MIPS-based-TM- processors are
manufactured and sold by world-class
[IDT Logo] companies including Broadcom Corporation,
IDT, LSI Logic Corporation, NEC
[LSI Logic Logo] Corporation, NKK Corporation, Phillips
Semiconductors, QED Inc., Texas
[NEC Logo] Instruments and Toshiba Corporation. The
MIPS-Registered Trademark- architecture is
[NKK Logo] flexible and allows licensees to integrate their
intellectual property with the MIPS-Registered
[Phillips Logo] Trademark- processor and related designs to
develop differentiated and innovative products
[QED Logo] for a variety of embedded applications.
[Texas Instruments Logo]
[Toshiba Logo]
[The following text appears at the bottom of the page:]
Providing choice
[MIPS RISC Logo] [The Company's Logo]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Use of Proceeds................................ 18
Price Range of Common Stock.................... 18
Dividend Policy................................ 18
Corporate Information.......................... 18
The Recapitalization........................... 19
Capitalization................................. 21
Selected Consolidated Financial Data........... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 23
Business....................................... 34
Management..................................... 46
Arrangements Between MIPS Technologies and
Silicon Graphics.............................. 53
Principal and Selling Stockholder.............. 60
Description of Capital Stock................... 62
Shares Available for Future Sale............... 70
Certain United States Federal Tax
Considerations for Non-United States
Holders....................................... 72
Legal Matters.................................. 74
Experts........................................ 74
Where You Can Find Additional Information...... 74
Index to Financial Statements.................. F-1
Underwriting................................... U-1
</TABLE>
6,000,000 Shares
[LOGO]
Class A Common Stock
-------------
PROSPECTUS
-------------
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
BANCBOSTON ROBERTSON STEPHENS
Representatives of the Underwriters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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. which will be paid by Silicon Graphics, Inc.
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............................................. $ 81,284
NASD Filing Fee.................................................. 29,739
Blue Sky Qualification Fees and Expenses......................... 5,000
Printing and Engraving Expenses.................................. 130,000
Legal Fees and Expenses.......................................... 450,000
Accounting Fees and Expenses..................................... 200,000
Miscellaneous.................................................... 16,000
---------
Total.......................................................... $ 912,023
---------
---------
</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 Amended and
Restated Certificate of Incorporation of the Registrant provides for
indemnification of the officers and directors of the Registrant to the full
extent permitted by applicable law.
In accordance with Delaware law, the Amended and Restated Certificate of
Incorporation of the Registrant contains a provision to limit the personal
liability of directors of the Registrant for violations of their fiduciary duty.
This provision eliminates each director's liability to the Registrant or its
stockholders for monetary damages except (i) for any breach of the director's
duty of loyalty to the Registrant 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. In addition, the Registrant has agreed by contract to
indemnify the directors and certain officers of the Registrant for certain
liabilities incurred by
II-1
<PAGE>
such person by reason of the fact that such is a director or officer, provided
such person was acting in good faith.
Pursuant to the underwriting agreement between the Registrant, 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 Registrant 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 Registrant has not issued or sold any
unregistered securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Form of Amended and Restated Certificate of Incorporation of the Registrant**
3.2 Form of Amended and Restated By-Laws of the Registrant**
4.1 Form of Class A Common Stock Certificate**
5.1 Opinion of Shearman & Sterling**
10.1 Separation Agreement**
10.2 Corporate Agreement**
10.3 Management Services Agreement**
10.4 Tax Sharing Agreement**
10.5 Technology Agreement**
10.6 Trademark Agreement**
10.7 Form of Exchange Agreement**
10.8.1 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")+**
10.8.2 First Addendum to the Joint Development and License Agreement+**
10.8.3 Second Addendum to the Joint Development and License Agreement+**
10.8.4 Fourth Addendum to the Joint Development and License Agreement+**
10.9 MIPS Technologies, Inc. 1998 Long-Term Incentive Plan**
10.10 Employee Stock Purchase Plan**
10.11 Non-US Employee Stock Option Plan**
10.12 Directors' Stock Option Plan**
10.13 Form of Change in Control Agreement
10.14 Form of Supplemental Change in Control Agreement
10.15 Change in Control Agreement, dated as of April 1, 1999, between John E. Bourgoin and
the Registrant
10.16 Supplemental Change in Control Agreement, dated as of April 1, 1999, between John E.
Bourgoin and the Registrant
10.17 Form of Indemnification Agreement**
21.1 Subsidiaries of the Registrant**
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**
</TABLE>
- --------------
* To be filed by amendment.
II-2
<PAGE>
** Previously filed
+ Portions of this Exhibit have been omitted pursuant to an order granting
confidential treatment issued by the Securities and Exchange Commission on
June 29, 1998.
(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) 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.
(b) 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 Registrant 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 22nd day
of April, 1999.
<TABLE>
<S> <C> <C>
MIPS TECHNOLOGIES, INC.
By: /s/ JOHN E. BOURGOIN
--------------------------------------
Name: John E. Bourgoin
Title: CHIEF EXECUTIVE OFFICER
</TABLE>
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
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ JOHN E. BOURGOIN Chief Executive Officer
- ------------------------------ and Director (Principal April 22, 1999
John E. Bourgoin Executive Officer)
/s/ KEVIN C. EICHLER
- ------------------------------ Principal Financial and April 22, 1999
Kevin C. Eichler Accounting Officer
*
- ------------------------------ Director April 22, 1999
Forest Baskett
*
- ------------------------------ Director April 22, 1999
Kenneth Coleman
*
- ------------------------------ Director April 22, 1999
Fred M. Gibbons
*
- ------------------------------ Director April 22, 1999
Anthony B. Holbrook
*
- ------------------------------ Director April 22, 1999
William M. Kelly
*
- ------------------------------ Director April 22, 1999
Teruyasu Sekimoto
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ SANDY CREIGHTON
------------------------- Attorney-in-Fact
Sandy Creighton
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Form of Amended and Restated Certificate of Incorporation of the Registrant**
3.2 Form of Amended and Restated By-Laws of the Registrant**
4.1 Form of Class A Common Stock Certificate**
5.1 Opinion of Shearman & Sterling**
10.1 Separation Agreement**
10.2 Corporate Agreement**
10.3 Management Services Agreement**
10.4 Tax Sharing Agreement**
10.5 Technology Agreement**
10.6 Trademark Agreement**
10.7 Form of Exchange Agreement**
10.8.1 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")+**
10.8.2 First Addendum to the Joint Development and License Agreement+**
10.8.3 Second Addendum to the Joint Development and License Agreement+**
10.8.4 Fourth Addendum to the Joint Development and License Agreement+**
10.9 MIPS Technologies, Inc. 1998 Long-Term Incentive Plan**
10.10 Employee Stock Purchase Plan**
10.11 Non-US Employee Stock Purchase Plan**
10.12 Directors' Stock Option Plan**
10.13 Form of Change in Control Agreement
10.14 Form of Supplemental Change in Control Agreement
10.15 Change in Control Agreement, dated as of April 1, 1999, between John E. Bourgoin and the Registrant
10.16 Supplemental Change in Control Agreement, dated as of April 1, 1999, between John E. Bourgoin and the
Registrant
10.17 Form of Indemnification Agreement**
21.1 Subsidiaries of the Registrant**
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**
</TABLE>
- --------------
* To be filed by amendment.
** Previously filed.
+ Portions of this Exhibit have been omitted pursuant to an order granting
confidential treatment issued by the Securities and Exchange Commission on
June 29, 1998.
<PAGE>
MIPS TECHNOLOGIES, INC.
CLASS A COMMON STOCK
($.001 PAR VALUE)
FORM OF UNDERWRITING AGREEMENT
_______ __, 1999
Goldman, Sachs & Co.,
Credit Suisse First Boston Corporation,
BancBoston Robertson Stephens, Inc.
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004
Ladies and Gentlemen:
Silicon Graphics, Inc., a Delaware corporation (the "Selling
Stockholder") and a stockholder of MIPS Technologies, Inc., a Delaware
corporation (the "Company"), proposes, subject to the terms and conditions
stated herein, to sell to the Underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of 6,000,000 shares (the "Firm Shares") and, at the
election of the Underwriters, up to 900,000 additional shares (the "Optional
Shares") of Class A Common Stock ("Stock") of the Company (the Firm Shares and
the Optional Shares that the Underwriters elect to purchase pursuant to Section
2 hereof are herein collectively called the "Shares").
1. (a) Each of the Company and Selling Stockholder jointly and
severally represents and warrants to, and agrees with, each of the Underwriters
that:
(i) A registration statement on Form S-1 (File No.
333-73071) (the "Initial Registration Statement") in respect of the Shares has
been filed with the Securities and Exchange Commission (the "Commission"); the
Initial Registration Statement and any post-effective amendment thereto, each in
the form heretofore delivered to you, and, excluding exhibits thereto, delivered
to you for each of the other Underwriters, have been declared effective by the
Commission in such form; other than a registration statement, if any, increasing
the size of the offering (a "Rule 462(b) Registration Statement"), filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Act"), which became effective upon filing, no other document with respect to
the Initial Registration Statement has heretofore been filed with the
Commission; and no stop order suspending the effectiveness of the Initial
Registration Statement, any post-effective amendment thereto or the Rule 462(b)
Registration Statement, if any, has been issued and no proceeding for that
purpose has been initiated or threatened by the Commission (any preliminary
prospectus included in the Initial Registration Statement or filed with the
Commission pursuant to Rule 424(a) of the rules and regulations of the
Commission under the Act is hereinafter called a "Preliminary Prospectus"; the
various parts of the Initial Registration Statement and the Rule 462(b)
Registration Statement, if any, including all exhibits thereto and including the
information contained in the form of final prospectus filed with the Commission
pursuant to Rule 424(b) under the Act in accordance with Section 5(A)(a) hereof
and deemed by virtue of Rule 430A under the Act to be part of the Initial
Registration
<PAGE>
Statement at the time it was declared effective, each as amended at the time
such part of the Initial Registration Statement became effective or such part of
the Rule 462(b) Registration Statement, if any, became or hereafter becomes
effective, are hereinafter collectively called the "Registration Statement"; and
such final prospectus, in the form first filed pursuant to Rule 424(b) under the
Act, is hereinafter called the "Prospectus");
(ii) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material respects to
the requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain 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 the light of the circumstances under which they were
made, not misleading; PROVIDED, HOWEVER, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein or by the
Selling Stockholder expressly for use in the preparation of the answers therein
to Items 7 and 11(m) of Form S-1;
(iii) The Registration Statement conforms, and the
Prospectus and any further amendments or supplements to the Registration
Statement or the Prospectus will conform, in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder and do not and will not, as of the applicable effective date as to
the Registration Statement and any amendment thereto and as of the applicable
filing date as to the Prospectus and any amendment or supplement thereto,
contain 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 not
misleading; PROVIDED, HOWEVER, that this representation and warranty shall not
apply to any statements or omissions made in reliance upon and in conformity
with information furnished in writing to the Company by an Underwriter through
Goldman, Sachs & Co. expressly for use therein or by the Selling Stockholder
expressly for use in the preparation of the answers therein to Items 7 and 11(m)
of Form S-1;
(iv) Neither the Company nor any of its
subsidiaries has sustained since the date of the latest audited financial
statements included in the Prospectus any material loss or interference with
its business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in the
Prospectus; and, since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has not been any
change in the capital stock or long-term debt of the Company or any of its
subsidiaries or any material adverse change, or any development involving a
prospective material adverse change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of operations
of the Company and its subsidiaries considered as a whole, otherwise than as
set forth or contemplated in the Prospectus;
(v) The Company and its subsidiaries have good and
marketable title to all personal property owned by them, in each case free and
clear of all liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such property and do
not materially interfere with the use made and proposed to be made of such
property by the Company and its subsidiaries; and any real property and
buildings held under lease by the Company and its subsidiaries are held by them
under valid, subsisting and enforceable leases with such exceptions as are not
material and do not materially interfere with the use made and proposed to be
made of such property and buildings by the Company and its subsidiaries, neither
the Company nor any of its subsidiaries own any real property;
-2-
<PAGE>
(vi) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the State
of Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus, and has been
duly qualified as a foreign corporation for the transaction of business and is
in good standing under the laws of each other jurisdiction in which it owns or
leases properties or conducts any business so as to require such qualification,
or is subject to no material liability or disability by reason of the failure to
be so qualified in any such jurisdiction; and each subsidiary of the Company has
been duly incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation;
(vii) The Company has an authorized capitalization
as set forth in the Prospectus, and all of the issued shares of capital stock
of the Company have been duly and validly authorized and issued, are fully
paid and non-assessable and conform to the description of such stock
contained in the Prospectus; and all of the issued shares of capital stock of
each subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and (except for directors'
qualifying shares) are owned directly or indirectly by the Company, free and
clear of all liens, encumbrances, equities or claims;
(viii) The compliance by the Company with all of the
provisions of this Agreement and the consummation of the transactions herein
contemplated will not conflict with or result in a breach or violation of any of
the terms or provisions of, or constitute a default under (in each case material
to the Company and to subsidiaries, considered as a whole), any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which the Company
or any of its subsidiaries is bound or to which any of the property or assets of
the Company or any of its subsidiaries is subject, nor will such action result
in any violation of the provisions of the Certificate of Incorporation or
By-laws of the Company, nor will such action result in any violation (in each
case material to the Company and its subsidiaries, considered as a whole) of any
statute or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries or any of
their properties; and no consent, approval, authorization, order, registration
or qualification of or with any such court or governmental agency or body is
required for sale of the Shares or the consummation by the Company of the
transactions contemplated by this Agreement, except the registration under the
Act of the Shares and such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the Underwriters;
(ix) Neither the Company nor any of its
subsidiaries is (a) in violation of its Certificate of Incorporation or
By-laws; or (b) in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any indenture,
mortgage, deed of trust, loan agreement, lease or other agreement or
instrument to which it is a party or by which it or any of its properties may
be bound except, in the case of clause (b), for such violations as would not
have a material adverse effect on the financial condition or results of
operations of the Company and its subsidiaries, considered as a whole;
(x) The statements set forth in the Prospectus under
the caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock, under the captions "Summary -
The Recapitalization and our Relationship with Silicon Graphics", "The
Recapitalization", "Arrangements between MIPS Technologies and Silicon
Graphics", "Certain United States Federal Tax Considerations for Non-United
States Holders" and under the caption "Underwriting", insofar as they purport to
describe the provisions of the laws and documents referred to therein, are
accurate, complete and fair in all material respects;
-3-
<PAGE>
(xi) Other than as set forth or contemplated in the
Prospectus, there are no legal or governmental proceedings pending to which the
Company or any of its subsidiaries is a party or of which any property of the
Company or any of its subsidiaries is the subject which, if determined adversely
to the Company or any of its subsidiaries, would individually or in the
aggregate have a material adverse effect on the current or future consolidated
financial position, stockholders' equity or results of operations of the Company
and its subsidiaries, considered as a whole; and, to the Company's knowledge, no
such proceedings are threatened or contemplated by governmental authorities or
threatened by others;
(xii) The Company is not and, after giving effect to
the offering and sale of the Shares, will not be an "investment company", as
such term is defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act");
(xiii) To the Company's knowledge, Ernst & Young LLP,
who have certified certain financial statements of the Company and its
subsidiaries, are independent public accountants as required by the Act and
the rules and regulations of the Commission thereunder;
(xiv) Except as set forth in the Prospectus, the
Company has reviewed its operations and that of its subsidiaries and any
third parties with which the Company or any of its subsidiaries has a
material relationship to evaluate the extent to which the business or
operations of the Company or any of its subsidiaries will be affected by the
Year 2000 Problem. As a result of such review, except as set forth or
contemplated in the Prospectus, the Company has no reason to believe, and
does not believe, that the Year 2000 Problem will have a material adverse
effect on the general affairs, management, the current or future consolidated
financial position, business prospects, stockholders' equity or results of
operations of the Company and its subsidiaries, considered as a whole or
result in any material loss or interference with the Company's business or
operations. The "Year 2000 Problem" as used herein means any significant
risk that computer hardware or software used in the receipt, transmission,
processing, manipulation, storage, retrieval, retransmission or other
utilization of data or in the operation of mechanical or electrical systems
of any kind will not, in the case of dates or time periods occurring after
December 31, 1999, function at least as effectively as in the case of dates
or time periods occurring prior to January 1, 2000.
(xv) The Company owns, or possesses adequate rights
to use, all material trademarks, service marks, trade names, trademark
registrations, service mark registrations, domain names, copyrights,
licenses, know-how, trade secrets and proprietary information necessary for
the conduct of its business and, except as set forth in the Prospectus, has
no reason to believe that the conduct of its business will conflict with, and
has not received any notice of any claim of conflict with, any such rights,
in each case with such exceptions as would not have a material adverse effect
on the business, financial condition, results of operations or prospects of
the Company; and, to the Company's knowledge, neither the Company nor any of
its subsidiaries have infringed or are infringing any trademarks, services
marks, trade names, trademark registrations, service mark registrations,
domain names or copyrights, which infringement could reasonably be expected
to result in any material adverse change, or in any development involving a
prospective material adverse change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of operations
of the Company and its subsidiaries, considered as a whole;
(xvi) The Company owns, or possesses adequate rights
to use, all patents necessary for the conduct of its business with such
exceptions as do not have a material adverse effect on the financial
condition or results of operations of the Company and its subsidiaries,
considered as a whole; to the Company's knowledge, no valid United States
patent is or would be infringed by the activities of the Company, except as
would not have a material adverse effect on the business, financial
condition, results of operations or prospects of the Company; there are no
actions, suits or judicial proceedings pending relating to patents or
proprietary information to which the
-4-
<PAGE>
Company is a party or of which any property of the Company is subject, and,
to the knowledge of the Company, no actions, suits or judicial proceedings
are threatened by governmental authorities or, except as set forth or
contemplated in the Prospectus, others, in each case except as would not
result in any material adverse change, or in any development involving a
prospective material adverse change, in or affecting the general affairs,
management, the current or future consolidated financial position, business
prospects, stockholders' equity or results of operations of the Company and
its subsidiaries; except as set forth or contemplated in the Prospectus or as
would not result in any material adverse change, or in any development
involving a prospective material adverse change, in or affecting the general
affairs, management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, the Company is not aware of
any claim by others that the Company is infringing or otherwise violating the
patents or other intellectual property of others and is not aware of any
rights of third parties to any of the Company's patent applications, licensed
patents or licenses which could affect materially the use thereof by the
Company;
(xvii) The Company carries, or is covered by,
insurance as is customary for companies similarly situated and engaged in
similar businesses in similar industries;
(xviii) There are no contracts or other
documents which are required to be described in the Prospectus or to be filed
as exhibits to the Initial Registration Statement by the Act or the Exchange
Act which are not so described or filed;
(ix) No labor disturbance by the employees of the
Company exists or, to the knowledge of the Company, is imminent which might
be expected to have a material adverse effect on the business, financial
condition, results of operations or prospects of the Company;
(xx) The Company has no subsidiaries other than
MIPS Technologies International A.G.;
(xxi) The Company has furnished the Underwriters
a true and complete copy of each of the Preliminary Proxy Statement and
Definitive Proxy Statement (together, including the form of Proxy and
annexes, the "Proxy Materials") filed with the Commission in connection with
the Company's Special Meeting of stockholders held March 31, 1999 (the
"Special Meeting") to approve the recapitalization (the "Recapitalization")
of the Company described therein, including the approval and adoption of
certain changes to the Company's Certificate of Incorporation and By-laws
pursuant to which each issued and outstanding share of the Company's then
existing common stock was redesignated as one share of newly created and
issued Class A Common Stock. The Proxy Materials, as of their respective
filing dates and, in the case of the Definitive Proxy Statement, as of the
date of the Special Meeting, complied in all material respects with the
requirements of the Exchange Act and did not contain any 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 in which they were made, not misleading. All material
authorizations, consents, orders and approvals of, or declarations with, any
governmental entity necessary for the consummation of the Recapitalization
and transactions contemplated in the Proxy Materials have been obtained. The
Recapitalization has been duly and validly authorized by all necessary
corporate action on the part of the Company and has been approved by the
Board of Directors and stockholders of the Company; and the Recapitalization
has been consummated in the manner described in the Definitive Proxy
Statement; and
(xxii) Each of the Corporate Agreement dated as of
July 6, 1998, Management Services Agreement dated as of July 6, 1998, Tax
Sharing Agreement dated as of July 6, 1998, Separation Agreement dated July
6, 1998, Trademark Agreement dated July 6, 1998, Technology Transfer
Agreement dated July 6, 1998 and Exchange Agreement dated ______, 1999
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<PAGE>
between the Company and the Selling Stockholder (collectively, the
"Intercompany Agreements") have been duly and validly authorized by all
necessary corporate action on the part of the Company and the Selling
Stockholder, including the approval by their respective boards of directors.
The Intercompany Agreements have been duly executed and delivered by each of
the Company and the Selling Stockholder and constitute valid and binding
obligations of the Company and the Selling Stockholder, enforceable against
the parties in accordance with their respective terms.
(b) The Selling Stockholder represents and warrants to,
and agrees with, each of the Underwriters that:
(i) All consents, approvals, authorizations and
orders necessary for the execution and delivery by the Selling Stockholder of
this Agreement hereinafter referred to, and for the sale and delivery of the
Shares to be sold by the Selling Stockholder hereunder, have been obtained;
and the Selling Stockholder has full right, power and authority to enter into
this Agreement, and to sell, assign, transfer and deliver the Shares to be
sold by the Selling Stockholder hereunder;
(ii) The sale of the Shares to be sold by the
Selling Stockholder hereunder and the compliance by the Selling Stockholder
with all of the provisions of this Agreement, and the consummation of the
transactions herein contemplated will not conflict with or result in a breach
or violation of any of the terms or provisions of, or constitute a default
under, any statute, indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument to which the Selling Stockholder is a party or
by which the Selling Stockholder is bound or to which any of the property or
assets of the Selling Stockholder is subject, nor will such action result in
any violation of the provisions of the Certificate of Incorporation or
By-laws of the Selling Stockholder or any statute or any order, rule or
regulation of any court or governmental agency or body having jurisdiction
over the Selling Stockholder or the property of the Selling Stockholder,
except, in each case, for such conflicts, breaches, violations or defaults as
would not, singly or in the aggregate, have a material adverse effect on the
ability of the Selling Stockholder to timely perform its obligations under
this Agreement.
(iii) The Selling Stockholder has, and immediately
prior to each Time of Delivery (as defined in Section 4 hereof) the Selling
Stockholder will have, good and valid title to the Shares to be sold by the
Selling Stockholder hereunder, free and clear of all liens, encumbrances,
equities or claims; and, upon delivery of such Shares and payment therefor
pursuant hereto, good and valid title to such Shares, free and clear of all
liens, encumbrances, equities or claims, will pass to the several
Underwriters;
(iv) During the period beginning from the date
hereof and continuing to and including the date 90 days after the date of
the Prospectus, the Selling Stockholder will not offer, sell, contract to
sell or otherwise dispose of, except as provided hereunder, any securities of
the Company that are substantially similar to the Shares, including but not
limited to any securities that are convertible into or exchangeable for, or
that represent the right to receive, Stock or any such substantially similar
securities without the prior written consent of Goldman Sachs & Co., PROVIDED
HOWEVER, that the foregoing consent shall not be required for a transaction
by the Selling Stockholder that is intended to qualify as a Tax-Free
Distribution and that, as a result of a Change in Tax Law, would not be a
Tax-Free Distribution unless undertaken by the Selling Stockholder prior to
the expiration of the foregoing 180-day period, PROVIDED FURTHER, that the
Selling Stockholder provides prompt notice to the Underwriters of its
intention to effect such Tax-Free Distribution prior to undertaking such
transaction. "Tax-Free Distribution" means the divestiture by the Selling
Stockholder of its interest in the Company to the stockholders of the Selling
Stockholder in a transaction generally intended to qualify under Section 355
of the Internal Revenue Code of 1986, as amended. "Change in Tax Law" means
the amendment of the Internal Revenue Code by the
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<PAGE>
enactment of new legislation which, in effect, generally imposes a
requirement to the effect that in a tax-free spin-off or split-off of a
subsidiary, the distributing company must hold not less than 80% of the value
of all or a portion of the subsidiary's stock;
(v) The Selling Stockholder has not taken and will
not take, directly or indirectly, any action which is designed to or which
has constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares;
(vi) To the extent that any statements or omissions
made in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto are made in reliance upon
and in conformity with written information furnished to the Company by the
Selling Stockholder expressly for use therein, such Preliminary Prospectus
and the Registration Statement did, and the Prospectus and any further
amendments or supplements to the Registration Statement and the Prospectus,
when they become effective or are filed with the Commission, as the case may
be, will conform in all material respects to the requirements of the Act and
the rules and regulations of the Commission thereunder and will not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading; and
(vii) In order to document the Underwriters'
compliance with the reporting and withholding provisions of the Tax Equity
and Fiscal Responsibility Act of 1982 with respect to the transactions herein
contemplated, the Selling Stockholder will deliver to you prior to or at the
First Time of Delivery (as hereinafter defined) a properly completed and
executed United States Treasury Department Form W-9 (or other applicable form
or statement specified by Treasury Department regulations in lieu thereof).
2. Subject to the terms and conditions herein set forth, (a)
the Selling Stockholder agrees to sell to each of the Underwriters, and each
of the Underwriters agrees, severally and not jointly, to purchase from the
Selling Stockholder, at a purchase price per share of $_____, the number of
Firm Shares set forth opposite the Selling Stockholder's name in Schedule II
hereto; and (b) in the event and to the extent that the Underwriters shall
exercise the election to purchase Optional Shares as provided below, the
Selling Stockholder agrees to sell to each of the Underwriters, and each of
the Underwriters agrees, severally and not jointly, to purchase from the
Selling Stockholder, at the purchase price per share set forth in clause (a)
of this Section 2, that portion of the number of Optional Shares as to which
such election shall have been exercised (to be adjusted by you so as to
eliminate fractional shares) determined by multiplying such number of
Optional Shares by a fraction the numerator of which is the maximum number of
Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in SCHEDULE I hereto and the
denominator of which is the maximum number of Optional Shares which all of
the Underwriters are entitled to purchase hereunder.
The Selling Stockholder hereby grants to the Underwriters the right
to purchase at their election up to 900,000 Optional Shares, at the purchase
price per share set forth in the paragraph above, for the sole purpose of
covering overallotments in the sale of the Firm Shares. Any such election to
purchase Optional Shares may be exercised only by written notice from you to
the Selling Stockholder, given within a period of 30 calendar days after the
date of this Agreement and setting forth the aggregate number of Optional
Shares to be purchased and the date on which such Optional Shares are to be
delivered, as determined by you but in no event earlier than the First Time
of Delivery (as defined in Section 4 hereof) or, unless you and the Selling
Stockholder otherwise agree in writing, earlier than two or later than ten
business days after the date of such notice.
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<PAGE>
3. Upon the authorization by you of the release of the Firm
Shares, the several Underwriters propose to offer the Firm Shares for sale
upon the terms and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter
hereunder, in definitive form, and in such authorized denominations and
registered in such names as Goldman, Sachs & Co. may request upon at least
forty-eight hours' prior notice to the Selling Stockholder shall be delivered
by or on behalf of the Selling Stockholder to Goldman, Sachs & Co., through
the facilities of the Depository Trust Company ("DTC"), for the account of
such Underwriter, against payment by or on behalf of such Underwriter of the
purchase price therefor by wire transfer of Federal (same-day) funds to the
account specified by the Selling Stockholder to Goldman, Sachs & Co. at least
forty-eight hours in advance. The Selling Stockholder will cause the
certificates representing the Shares to be made available for checking and
packaging at least twenty-four hours prior to the Time of Delivery (as
defined below) with respect thereto at the office of DTC or its designated
custodian (the "Designated Office"). The time and date of such delivery and
payment shall be, with respect to the Firm Shares, 9:30 a.m., New York time,
on ............., 1999 or such other time and date as Goldman, Sachs & Co.
and the Selling Stockholder may agree upon in writing, and, with respect to
the Optional Shares, 9:30 a.m., New York time, on the date specified by
Goldman, Sachs & Co. in the written notice given by Goldman, Sachs & Co. of
the Underwriters' election to purchase such Optional Shares, or such other
time and date as Goldman, Sachs & Co. and the Selling Stockholder may agree
upon in writing. Such time and date for delivery of the Firm Shares is
herein called the "First Time of Delivery", such time and date for delivery
of the Optional Shares, if not the First Time of Delivery, is herein called
the "Second Time of Delivery", and each such time and date for delivery is
herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of
Delivery by or on behalf of the parties hereto pursuant to Section 7 hereof,
including the cross receipt for the Shares and any additional documents
requested by the Underwriters pursuant to Section 7(l) hereof, will be
delivered at the offices of Venture Law Group, A Professional Corporation,
2800 Sand Hill Road, Menlo Park, California 94025 (the "Closing Location"),
and the Shares will be delivered at the Designated Office, all at such Time
of Delivery. A meeting will be held at the Closing Location at 10:00 a.m.,
New York City time, on the New York Business Day next preceding such Time of
Delivery, at which meeting the final drafts of the documents to be delivered
pursuant to the preceding sentence will be available for review by the
parties hereto. For the purposes of this Section 4, "New York Business Day"
shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not
a day on which banking institutions in New York are generally authorized or
obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you
and to file such Prospectus pursuant to Rule 424(b) under the Act not later
than the Commission's close of business on the second business day following
the execution and delivery of this Agreement, or, if applicable, such earlier
time as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus which
shall be disapproved by you promptly after reasonable notice thereof; to
advise you, promptly after it receives notice thereof, of the time when any
amendment to the Registration Statement has been filed or becomes effective
or any supplement to the Prospectus or any amended Prospectus has been filed
and to furnish you with copies thereof; to advise you, promptly after it
receives notice thereof, of the issuance by the Commission of any stop order
or of any order preventing or suspending the use of any Preliminary
Prospectus or Prospectus, of the suspension of the qualification of the
Shares for offering or sale in any jurisdiction, of the initiation or
threatening of any proceeding for any such purpose, or of any request by the
Commission for the amending or supplementing of the Registration Statement or
Prospectus or for additional information; and, in the event of the issuance
of any stop
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<PAGE>
order or of any order preventing or suspending the use of any Preliminary
Prospectus or prospectus or suspending any such qualification, promptly to
use its best efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you
may reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with
such laws so as to permit the continuance of sales and dealings therein in
such jurisdictions for as long as may be necessary to complete the
distribution of the Shares, provided that in connection therewith the Company
shall not be required to qualify as a foreign corporation or to file a
general consent to service of process in any jurisdiction;
(c) Prior to 10:00 A.M., New York City time, on the New
York Business Day next succeeding the date of this Agreement and from time to
time, to furnish the Underwriters with copies of the Prospectus in New York
City in such quantities as you may reasonably request, and, if the delivery
of a prospectus is required at any time prior to the expiration of nine
months after the time of issue of the Prospectus in connection with the
offering or sale of the Shares and if at such time any events shall have
occurred as a result of which the Prospectus as then amended or supplemented
would include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made when such Prospectus is
delivered, not misleading, or, if for any other reason it shall be necessary
during such period to amend or supplement the Prospectus in order to comply
with the Act, to notify you and upon your request to file such documents and
to prepare and furnish without charge to each Underwriter and to any dealer
in securities as many copies as you may from time to time reasonably request
of an amended Prospectus or a supplement to the Prospectus which will correct
such statement or omission or effect such compliance, and in case any
Underwriter is required to deliver a prospectus in connection with sales of
any of the Shares at any time nine months or more after the time of issue of
the Prospectus, upon your request but at the expense of such Underwriter, to
prepare and deliver to such Underwriter as many copies as you may request of
an amended or supplemented Prospectus complying with Section 10(a)(3) of the
Act;
(d) To make generally available to the Company's
securityholders as soon as practicable, but in any event not later than
eighteen months after the effective date of the Registration Statement (as
defined in Rule 158(c) under the Act), an earnings statement of the Company
and its subsidiaries (which need not be audited) complying with Section 11(a)
of the Act and the rules and regulations of the Commission thereunder
(including, at the option of the Company, Rule 158);
(e) The Company and the Selling Stockholder will not,
during the period beginning from the date hereof and continuing to and
including the date 90 days after the date of the Prospectus, offer, sell,
contract to sell or otherwise dispose of, except as provided hereunder, any
securities of the Company that are substantially similar to the Shares,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities (other than pursuant to director or employee
stock option plans and director or employee stock purchase plans existing on,
or upon the conversion or exchange of convertible or exchangeable securities,
outstanding as of, the date of this Agreement) without the prior written
consent of Goldman, Sachs & Co.
(f) To furnish to the Company's stockholders as soon as
practicable after the end of each fiscal year an annual report (including a
balance sheet and statements of income, stockholders' equity and cash flows
of the Company and its consolidated subsidiaries certified by independent
public accountants) and, as soon as practicable after the end of each of the
first three quarters of each fiscal year (beginning with the fiscal quarter
ending after the effective date of the Registration Statement), to make
available to its stockholders consolidated summary financial
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<PAGE>
information of the Company and its subsidiaries for such quarter in
accordance with applicable Commission regulations;
(g) During a period of three years from the effective
date of the Registration Statement, to furnish to you copies of all reports
or other communications (financial or other) furnished to stockholders, and
to deliver to you (i) as soon as they are available, copies of any reports
and financial statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the Company
is listed; and (ii) such additional public information concerning the
business and financial condition of the Company as you may from time to time
reasonably request (such financial statements to be on a consolidated basis
to the extent the accounts of the Company and its subsidiaries are
consolidated in reports furnished to its stockholders generally or to the
Commission);
(h) To use its best efforts to list for quotation the
Shares on the National Association of Securities Dealers Automated Quotations
National Market System ("NASDAQ"); and
(i) If the Company elects to rely upon Rule 462(b), the
Company shall file a Rule 462(b) Registration Statement with the Commission
in compliance with Rule 462(b) by 10:00 P.M. Washington, D.C. time, on the
date of this Agreement, and the Company shall at the time of filing either
pay to the Commission the filing fee for the Rule 462(b) Registration
Statement or give irrevocable instructions for the payment of such fee
pursuant to Rule 111(b) under the Act.
6. Each of the Company and the Selling Stockholder covenants
and agrees with one another and with the several Underwriters that the
Selling Stockholder will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or
producing any Agreement among Underwriters, this Agreement, the Blue Sky
Memorandum, closing documents (including any compilations thereof) and any
other documents in connection with the offering, purchase, sale and delivery
of the Shares; (iii) all expenses in connection with the qualification of the
Shares for offering and sale under state securities laws as provided in
Section 5(b) hereof, including the reasonable fees and disbursements of
counsel for the Underwriters in connection with such qualification and in
connection with the Blue Sky survey (iv) all fees and expenses in connection
with listing the Shares on the NASDAQ; (v) the filing fees incident to, and
the reasonable fees and disbursements of counsel for the Underwriters in
connection with, securing any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of the Shares; (vi) the
cost of preparing stock certificates; (vii) the cost and charges of any
transfer agent or registrar and (viii) all costs and expenses incident to the
performance of the Selling Stockholder's and the Company's obligations
hereunder which are not otherwise specifically provided for in this Section,
including (A) any fees and expenses of counsel for the Selling Stockholder,
and (B) all expenses and taxes incident to the sale and delivery of the
Shares to be sold by the Selling Stockholder to the Underwriters hereunder.
In connection with clause (viii)(B) of the preceding sentence, Goldman, Sachs
& Co. agrees to pay New York State stock transfer tax, and the Selling
Stockholder agrees to reimburse Goldman, Sachs & Co. for associated carrying
costs if such tax payment is not rebated on the day of payment and for any
portion of such tax payment not rebated. It is understood, however, that the
Company shall bear, and the Selling Stockholder shall not be required to pay
or to reimburse the Company for, the cost of any other matters not directly
relating to the sale and purchase of the Shares pursuant to this Agreement,
and that, except as provided in this Section, and Sections 8 and 11 hereof,
the Underwriters will pay all of their own costs and expenses, including the
fees of their counsel, stock transfer taxes on resale
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<PAGE>
of any of the Shares by them, and any advertising expenses connected with any
offers they may make.
7. The obligations of the Underwriters hereunder, as to the
Shares to be delivered at each Time of Delivery, shall be subject, in their
discretion, to the condition that all representations and warranties and
other statements of the Company and of the Selling Stockholder herein are, at
and as of such Time of Delivery, true and correct, the condition that each of
the Company and the Selling Stockholder shall have performed all of its
obligations hereunder theretofore to be performed, and the following
additional conditions:
(a) The Prospectus shall have been filed with the
Commission pursuant to Rule 424(b) within the applicable time period
prescribed for such filing by the rules and regulations under the Act and in
accordance with Section 5(a) hereof; if the Company has elected to rely upon
Rule 462(b), the Rule 462(b) Registration Statement shall have become
effective by 10:00 P.M., Washington, D.C. time, on the date of this
Agreement; no stop order suspending the effectiveness of the Registration
Statement or any part thereof shall have been issued and no proceeding for
that purpose shall have been initiated or threatened by the Commission; and
all requests for additional information on the part of the Commission shall
have been complied with to your reasonable satisfaction;
(b) Venture Law Group, A Professional Corporation,
counsel for the Underwriters, shall have furnished to you such written
opinion or opinions (a draft of such opinion is attached as Annex II(a)
hereto), dated such Time of Delivery, with respect to the matters covered in
paragraphs (i), (ii), (iii), (vi), and (viii) of subsection (c)(A) below as
well as such other related matters as you may reasonably request, and such
counsel shall have received such papers and information as they may
reasonably request to enable them to pass upon such matters;
(c) (A) Shearman & Sterling, special counsel for the
Company, shall have furnished to you their written opinion (a draft of such
opinion is attached as Annex II(b) hereto), dated such Time of Delivery, in
form and substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
State of Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization
as set forth in the Prospectus, and all of the issued shares of capital stock
of the Company (including the Shares being delivered at such Time of
Delivery) have been duly and validly authorized and issued and are fully paid
and non-assessable; and the Shares conform to the description of the Stock
contained in the Prospectus;
(iii) This Agreement has been duly authorized,
executed and delivered by the Company;
(iv) The compliance by the Company with all of the
provisions of this Agreement and the consummation of the transactions herein
contemplated will not conflict with or result in a breach or violation of any
of the terms or provisions of, or constitute a default under (in each case
material to the Company and its subsidiaries, considered as a whole), any
indenture, mortgage, deed of trust, loan agreement or other material
agreement known to such counsel to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries is
bound or to which any of the property or assets of the Company or its
subsidiaries is subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the Company, nor
will such action result in any violation (in each case material to the
Company and its subsidiaries, considered as a whole) of any statute or any
order, rule or regulation known to such
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counsel of any court or governmental agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their properties;
(v) No consent, approval, authorization, order,
registration or qualification of or with any such court or governmental
agency or body is required for the issue and sale of the Shares or the
consummation by the Company of the transactions contemplated by this
Agreement, except the registration under the Act of the Shares, and such
consents, approvals, authorizations, registrations or qualifications as may
be required under state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriters;
(vi) The statements set forth in the Prospectus
under the caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock, under the captions "Summary
- -The Recapitalization and our Relationship with Silicon Graphics", "The
Recapitalization", "Arrangements between MIPS Technologies and Silicon
Graphics", "Certain United States Federal Tax Considerations for Non-United
States Holders" and under the caption "Underwriting", insofar as they purport
to describe the provisions of the laws and documents referred to therein
fairly presents the information called for with respect to such laws and
documents in all material respects;
(vii) The Company is not an "investment company", as
such term is defined in the Investment Company Act;
(viii) The Registration Statement and the Prospectus
and any further amendments and supplements thereto made by the Company prior
to such Time of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion) comply
as to form in all material respects with the requirements of the Act and the
rules and regulations thereunder; although they do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus, except for those
referred to in the opinion in subsection (vi) of this Section 7(c)(A), they
have no reason to believe that, as of its effective date, the Registration
Statement or any further amendment thereto made by the Company prior to such
Time of Delivery (other than the financial statements and related schedules
and other financial data therein, as to which such counsel need express no
opinion) contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading or that, as of its date, the Prospectus or
any further amendment or supplement thereto made by the Company prior to such
Time of Delivery (other than the financial statements and related schedules
and other financial data therein, as to which such counsel need express no
opinion) contained an untrue statement of a material fact or omitted to state
a material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or that, as of such
Time of Delivery, either the Registration Statement or the Prospectus or any
further amendment or supplement thereto made by the Company prior to such
Time of Delivery (other than the financial statements and related schedules
and other financial data therein, as to which such counsel need express no
opinion) contains an untrue statement of a material fact or omits to state a
material fact necessary to make th statements therein, in the light of the
circumstances under which they were made, not misleading; and they do not
know of any amendment to the Registration Statement required to be filed or
of any contracts or other documents of a character required to be filed as an
exhibit to the Registration Statement or required to be described in the
Registration Statement or the Prospectus which are not filed or described as
required; and
(ix) Counsel does not know of any agreements or
documents required to be filed as exhibits to the Registration Statement or
described in the Registration Statement or Prospectus which are not so filed
or described as required, and such agreements and documents as
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are summarized in the Registration Statement or the Prospectus are fairly
summarized in all material respects.
(B) The General Counsel of the Company shall have
furnished to you its written opinion, dated such Time of Delivery, in form
and substance satisfactory to you to the effect that:
(i) The Company has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases
properties or conducts any business so as to require such qualification, or
is subject to no material liability or disability by reason of failure to be
so qualified in any such jurisdiction (such counsel being entitled to rely in
respect of the opinion in this clause upon opinions of local counsel and in
respect of matters of fact upon certificates of officers of the Company,
provided that such counsel shall state that they believe that both you and
they are justified in relying upon such opinions and certificates);
(ii) All of the issued shares of capital stock of
each such subsidiary of the Company are owned directly or indirectly by the
Company, free and clear of all liens, encumbrances, equities or claims (such
counsel being entitled to rely in respect of the opinion in this clause upon
opinions of local counsel and in respect of matters of fact upon certificates
of officers of the Company or its subsidiaries, provided that such counsel
shall state that they believe that both you and they are justified in relying
upon such opinions and certificates);
(iii) Any real property and buildings held under
lease by the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material
and do not materially interfere with the use made and proposed to be made of
such property and buildings by the Company and its subsidiaries (in giving
the opinion in this clause, such counsel may state that no examination of
record titles for the purpose of such opinion has been made, and that they
are relying upon a general review of the titles of the Company and its
subsidiaries, upon opinions of local counsel and abstracts, reports and
policies of title companies rendered or issued at or subsequent to the time
of acquisition of such property by the Company or its subsidiaries, upon
opinions of counsel to the lessors of such property and, in respect of
matters of fact, upon certificates of officers of the Company or its
subsidiaries, provided that such counsel shall state that they believe that
both you and they are justified in relying upon such opinions, abstracts,
reports, policies and certificates);
(iv) To the best of such counsel's knowledge and
other than as set forth or contemplated in the Prospectus, there are no legal
or governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the Company or any of its
subsidiaries is the subject which, if determined adversely to the Company or
any of its subsidiaries, would individually or in the aggregate have a
material adverse effect on the current or future consolidated financial
position stockholders' equity or results of operations of the Company and its
subsidiaries, considered as a whole; and, to the best of such counsel's
knowledge, no such proceedings are threatened or contemplated by governmental
authorities or threatened by others;
(v) Neither the Company nor any of its
subsidiaries is (a) in violation of its Certificate of Incorporation or
By-laws or (b) in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any indenture,
mortgage, deed of trust, loan agreement, or lease or agreement or other
instrument to which it is a party or by which it or any of its properties may
be bound, except, in the case of clause (b), where such default would not
have a material adverse effect on the Company and its subsidiaries,
considered as a whole;
(d) (A) Shearman & Sterling, special counsel for the
Selling Stockholder, shall have furnished to you its written opinion with
respect to the Selling Stockholder (a draft of such opinion
-13-
<PAGE>
is attached as Annex II(c) hereto), dated such Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(i) This Agreement has been duly executed and
delivered by or on behalf of the Selling Stockholder.
(ii) No consent, approval, authorization or order
of any court or governmental agency or body is required for the consummation
of the transactions contemplated by this Agreement in connection with the
Shares to be sold by the Selling Stockholder hereunder, except such as have
been obtained under the Act and such as may be required under state
securities or Blue Sky laws in connection with the purchase and distribution
of such Shares by the Underwriters;
(iii) Immediately prior to such Time of Delivery,
the Selling Stockholder was the sole registered owner of the Shares to be
sold at such time of Delivery by the Selling Stockholder under this Agreement
free and clear of all liens, encumbrances, equities or claims and had full
corporate power and authority to sell, assign, transfer and deliver the
Shares to be sold by the Selling Stockholder hereunder; and
(iv) Upon consummation of the sale of the Shares by
the Selling Stockholder pursuant to this Agreement, all of the rights of the
Selling Stockholder in the Shares, free and clear of all liens, encumbrances,
equities or claims, will have been transferred to each of the several
Underwriters who have purchased such Shares in good faith and without notice
of any such lien, encumbrance, equity or claim or any other adverse claim
within the meaning of the Uniform Commercial Code.
In rendering the opinion in paragraph (iii), such counsel may rely
upon a certificate of the Selling Stockholder in respect of matters of fact
as to ownership of, and liens, encumbrances, equities or claims on, the
Shares sold by the Selling Stockholder, provided that such counsel provides
you with a copy of such certificate and shall state that they believe that
both you and they are justified in relying upon such certificate;
(B) The General Counsel or Assistant General Counsel of
the Selling Stockholder shall have furnished to you its written opinion,
dated such Time of Delivery, in form and substance satisfactory to you to the
effect that:
The sale of the Shares to be sold by the Selling
Stockholder hereunder and the compliance by the Selling Stockholder with all
of the provisions of this Agreement, and the consummation of the transactions
herein contemplated will not conflict with or result in a breach or violation
of any terms or provisions of, or constitute a default under, any statute,
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which the Selling Stockholder is a party
or by which the Selling Stockholder is bound or to which any of the property
or assets of the Selling Stockholder is subject, nor will such action result
in any violation of the provisions of the Certificate of Incorporation or
By-laws of the Selling Stockholder or any statute, order, rule or regulation
known to such counsel of any court or governmental agency or body having
jurisdiction over the Selling Stockholder or the property of the Selling
Stockholder, except in each case, for such conflicts, breaches, violations or
defaults as would not, singly or in the aggregate, have a material adverse
effect on the ability of the Selling Stockholder to hereby perform its
obligations under this Agreement.
(e) On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time, on the
effective date of any post-effective amendment to the Registration Statement
filed subsequent to the date of this Agreement and also at each Time of
Delivery, Ernst & Young, LLP shall have furnished to you a letter or letters,
dated the respective dates of delivery thereof, in form and substance
satisfactory to you, to the effect set forth in Annex I hereto
-14-
<PAGE>
(the executed copy of the letter delivered prior to the execution of this
Agreement is attached as Annex I(a) hereto and a draft of the form of letter
to be delivered on the effective date of any post-effective amendment to the
Registration Statement and as of each Time of Delivery is attached as Annex
I(b) hereto);
(f) (i) Neither the Company nor any of its subsidiaries
shall have sustained since the date of the latest audited financial
statements included in the Prospectus any loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in the
Prospectus, and (ii) since the respective dates as of which information is
given in the Prospectus there shall not have been any change in the capital
stock or long-term debt of the Company or any of its subsidiaries or any
change, or any development involving a prospective change, in or affecting
the general affairs, management, financial position, stockholders' equity or
results of operations of the Company and its subsidiaries, otherwise than as
set forth or contemplated in the Prospectus, the effect of which, in any such
case described in Clause (i) or (ii), is in the judgment of the
Representatives so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(g) On or after the date hereof (i) no downgrading shall
have occurred in the rating accorded the Company's debt securities by any
"nationally recognized statistical rating organization", as that term is
defined by the Commission for purposes of Rule 436(g)(2) under the Act, and
(iii) no such organization shall have publicly announced that it has under
surveillance or review, with possible negative implications, its rating of
any of the Company's debt securities; there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or on NASDAQ; (ii) a
suspension or material limitation in trading in the Company's securities on
NASDAQ; (iii) a general moratorium on commercial banking activities declared
by either Federal or New York or California State authorities; (iv) the
outbreak or escalation of hostilities involving the United States or the
declaration by the United States of a national emergency or war, if the
effect of any such event specified in this Clause (iv) in the judgment of the
Representatives makes it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares being delivered at such Time of
Delivery on the terms and in the manner contemplated in the Prospectus; or
(v) the occurrence of any material adverse change in the financial, political
or economic condition in the United States or elsewhere which in the judgment
of the Representatives would materially and adversely affect the financial
markets, the market for these Shares or the market for any other equity
securities.
(i) The Shares at such Time of Delivery shall have been
duly listed for quotation on NASDAQ subject to notice of issuance;
(j) The Company has obtained and delivered to the
Underwriters executed copies of an agreement from each officer and director
of the Company, substantially to the effect set forth in Exhibit A hereto in
form and substance satisfactory to you;
(k) The Company shall have complied with the provisions
of Section 5(c) hereof with respect to the furnishing of prospectuses on the
New York Business Day next succeeding the date of this Agreement; and
(l) The Company and the Selling Stockholder shall have
furnished or caused to be furnished to you at such Time of Delivery
certificates of officers of the Company and of the Selling Stockholder,
respectively, satisfactory to you as to the accuracy of the representations
and warranties of the Company and the Selling Stockholder, respectively,
herein at and as of such Time of Delivery, as to the performance by the
Company and the Selling Stockholder of all of their respective
-15-
<PAGE>
obligations hereunder to be performed at or prior to such Time of Delivery,
and as to such other matters as you may reasonably request, and the Company
shall have furnished or caused to be furnished certificates as to the matters
set forth in subsections (a) and (f) of this Section;
8. (a) Each of the Company and the Selling Stockholder,
jointly and severally, will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to
which such Underwriter may become subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such action or
claim as such expenses are incurred; PROVIDED, HOWEVER, that the Company and
the Selling Stockholder shall not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon
an untrue statement or alleged untrue statement or omission or alleged
omission made in any Preliminary Prospectus, the Registration Statement or
the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any
Underwriter through Goldman, Sachs & Co. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the
Company and the Selling Stockholder against any losses, claims, damages or
liabilities to which the Company or the Selling Stockholder may become
subject, under the Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
an untrue statement or alleged untrue statement of a material fact contained
in any Preliminary Prospectus, the Registration Statement or the Prospectus,
or any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through Goldman,
Sachs & Co. expressly for use therein; and will reimburse the Company and the
Selling Stockholder for any legal or other expenses reasonably incurred by
the Company or the Selling Stockholder in connection with investigating or
defending any such action or claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party under such subsection, notify the indemnifying party
in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have
to any indemnified party otherwise than under such subsection. In case any
such action shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it
shall wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel satisfactory to such indemnified
party (who shall not, except with the consent of the indemnified party, be
counsel to the indemnifying party), and, after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party shall not be liable to such indemnified party
under such subsection for any legal expenses of other counsel or any other
expenses, in each case subsequently incurred by such indemnified party, in
connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the written consent of
the indemnified party, effect
-16-
<PAGE>
the settlement or compromise of, or consent to the entry of any judgment with
respect to, any pending or threatened action or claim in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified party is an actual or potential party to such action or claim)
unless such settlement, compromise or judgment (i) includes an unconditional
release of the indemnified party from all liability arising out of such
action or claim and (ii) does not include a statement as to or an admission
of fault, culpability or a failure to act, by or on behalf of any indemnified
party.
(d) If the indemnification provided for in this Section 8
is unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Selling
Stockholder on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or if the
indemnified party failed to give the notice required under subsection (c)
above, then each indemnifying party shall contribute to such amount paid or
payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company and the Selling Stockholder on the one hand and the Underwriters on
the other in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities (or actions in respect thereof),
as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Stockholder on the one hand
and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Selling Stockholder bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault
shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company or the Selling Stockholder on the one hand or the Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company,
the Selling Stockholder and the Underwriters agree that it would not be just
and equitable if contributions pursuant to this subsection (d) were
determined by PRO RATA allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to above in this
subsection (d). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this subsection (d) shall be deemed to include
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), no Underwriter shall
be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which
such Underwriter has otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f)
of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations
in this subsection (d) to contribute are several in proportion to their
respective underwriting obligations and not joint.
(e) The obligations of the Company and the Selling
Stockholder under this Section 8 shall be in addition to any liability which
the Company and the Selling Stockholder may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
-17-
<PAGE>
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the
same terms and conditions, to each officer and director of the Company
(including any person who, with his or her consent, is named in the
Registration Statement as about to become a director of the Company) and to
each person, if any, who controls the Company or the Selling Stockholder
within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to
purchase the Shares which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or
other parties to purchase such Shares on the terms contained herein. If
within thirty-six hours after such default by any Underwriter you do not
arrange for the purchase of such Shares, then the Selling Stockholder shall
be entitled to a further period of thirty-six hours within which to procure
another party or other parties satisfactory to you to purchase such Shares on
such terms. In the event that, within the respective prescribed periods, you
notify the Selling Stockholder that you have so arranged for the purchase of
such Shares, or the Selling Stockholder notifies you that they have so
arranged for the purchase of such Shares, you or the Selling Stockholder
shall have the right to postpone a Time of Delivery for a period of not more
than seven days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your
opinion may thereby be made necessary. The term "Underwriter" as used in
this Agreement shall include any person substituted under this Section with
like effect as if such person had originally been a party to this Agreement
with respect to such Shares.
(b) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by you and
the Selling Stockholder as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed one-eleventh
of the aggregate number of all the Shares to be purchased at such Time of
Delivery, then the Selling Stockholder shall have the right to require each
non-defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to
purchase hereunder) of the Shares of such defaulting Underwriter or
Underwriters for which such arrangements have not been made; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by you and
the Selling Stockholder as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased exceeds one-eleventh of the
aggregate number of all of the Shares to be purchased at such Time of
Delivery, or if the Selling Stockholder shall not exercise the right
described in subsection (b) above to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this
Agreement (or, with respect to the Second Time of Delivery, the obligations
of the Underwriters to purchase and of the Selling Stockholder to sell the
Optional Shares) shall thereupon terminate, without liability on the part of
any non-defaulting Underwriter or the Selling Stockholder, except for the
expenses to be borne by the Company and the Selling Stockholder and the
Underwriters as provided in Section 6 hereof and the indemnity and
contribution agreements in Section 8 hereof; but nothing herein shall relieve
a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations,
warranties and other statements of the Company, the Selling Stockholder and
the several Underwriters, as set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement, shall remain in
full force and effect, regardless of any investigation (or any statement as
to the results thereof) made
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<PAGE>
by or on behalf of any Underwriter or any controlling person of any
Underwriter, or the Company, or the Selling Stockholder, or any officer or
director or controlling person of the Company, or any controlling person of
the Selling Stockholder, and shall survive delivery of and payment for the
Shares.
11. If this Agreement shall be terminated pursuant to Section 9
hereof, neither the Company nor the Selling Stockholder shall then be under
any liability to any Underwriter except as provided in Sections 6 and 8
hereof; but, if for any other reason any Shares are not delivered by or on
behalf of the Selling Stockholder as provided herein, the Selling Stockholder
will reimburse the Underwriters through you for all out-of-pocket expenses
approved in writing by you, including reasonable fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for
the purchase, sale and delivery of the Shares not so delivered, but the
Company and the Selling Stockholder shall then be under no further liability
to any Underwriter in respect of the Shares not so delivered except as
provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each
of the Underwriters, and the parties hereto shall be entitled to act and rely
upon any statement, request, notice or agreement on behalf of any Underwriter
made or given by you jointly or by Goldman, Sachs & Co. on behalf of you as
the representatives.
All statements, requests, notices and agreements hereunder shall be
in writing, and if to the Underwriters shall be delivered or sent by mail,
telex or facsimile transmission to you as the representatives in care of
Goldman, Sachs & Co., 32 Old Slip, 9th Floor, New York, New York 10005,
Attention: Registration Department; if to the Selling Stockholder shall be
delivered or sent by mail, telex or facsimile transmission to counsel for the
Selling Stockholder at its address set forth in Schedule II hereto; and if to
the Company shall be delivered or sent by mail, telex or facsimile
transmission to the address of the Company set forth in the Registration
Statement, Attention: Secretary; provided, however, that any notice to an
Underwriter pursuant to Section 8(d) hereof shall be delivered or sent by
mail, telex or facsimile transmission to such Underwriter at its address set
forth in its Underwriters' Questionnaire or telex constituting such
Questionnaire, which address will be supplied to the Company or the Selling
Stockholder by you on request. Any such statements, requests, notices or
agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to
the benefit of, the Underwriters, the Company and the Selling Stockholder
and, to the extent provided in Sections 8 and 10 hereof, the officers and
directors of the Company and each person who controls the Company, the
Selling Stockholder or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser
of any of the Shares from any Underwriter shall be deemed a successor or
assign by reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used
herein, the term "business day" shall mean any day when the Commission's
office in Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the
parties hereto in any number of counterparts, each of which shall be deemed
to be an original, but all such counterparts shall together constitute one
and the same instrument.
If the foregoing is in accordance with your understanding, please
sign and return to us one for the Company and each of the Representatives
plus one for each counsel and the Selling Stockholder, counterparts hereof,
and upon the acceptance hereof by you, on behalf of each of the Underwriters,
this letter and such acceptance hereof shall constitute a binding agreement
among each of the
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<PAGE>
Underwriters, the Company and the Selling Stockholder. It is understood that
your acceptance of this letter on behalf of each of the Underwriters is
pursuant to the authority set forth in a form of Agreement among
Underwriters, the form of which shall be submitted to the Company and the
Selling Stockholder for examination, upon request, but without warranty on
your part as to the authority of the signers thereof.
Very truly yours,
MIPS TECHNOLOGIES, INC.
By:
-------------------------
Name:
` Title:
SILICON GRAPHICS, INC.
By:
-------------------------
Name:
Title:
Accepted as of the date hereof in New York, New York:
Goldman, Sachs & Co.
Credit Suisse First Boston Corporation,
BancBoston Robertson Stephens, Inc.
By:
- ---------------------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
-20-
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM SHARES MAXIMUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
------------- ---------------- -------------------
<S> <C> <C>
Goldman, Sachs & Co. .............................
Credit Suisse First Boston Corporation............
BancBoston Robertson Stephens, Inc................
-------------- --------------
Total............................................. 6,000,000 900,000
-------------- --------------
-------------- --------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF SOLD IF
FIRM SHARES MAXIMUM OPTION
TO BE SOLD EXERCISED
---------------- ------------------
<S> <C> <C>
The Company............................... 0 0
The Selling Stockholder:
SILICON GRAPHICS, INC.(a)......... 6,000,000 900,000
--------- -------
Total.................................. 6,000,000 900,000
--------- -------
--------- -------
</TABLE>
(a) The Selling Stockholder is represented by Shearman & Sterling, 1550 El
Camino Real, Menlo Park, California 94025, (650) 330-2200.
-22-
<PAGE>
ANNEX I
Pursuant to Section 7(e) of the Underwriting Agreement, the
accountants shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to the Company and its subsidiaries within the meaning of the Act and
the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined by them
and included in the Prospectus or the Registration Statement comply as to
form in all material respects with the applicable accounting requirements of
the Act and the related published rules and regulations thereunder; and, if
applicable, they have made a review in accordance with standards established
by the American Institute of Certified Public Accountants of the unaudited
consolidated interim financial statements, selected financial data, pro forma
financial information, financial forecasts and/or condensed financial
statements derived from audited financial statements of the Company for the
periods specified in such letter, as indicated in their reports thereon,
copies of which have been furnished to the representatives of the
Underwriters (the "Representatives");
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of the
unaudited condensed consolidated statements of income, consolidated balance
sheets and consolidated statements of cash flows included in the Prospectus
as indicated in their reports thereon copies of which have been separately
furnished to the Representatives and on the basis of specified procedures
including inquiries of officials of the Company who have responsibility for
financial and accounting matters regarding whether the unaudited condensed
consolidated financial statements referred to in paragraph (vi)(A)(i) below
comply as to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations,
nothing came to their attention that caused them to believe that the
unaudited condensed consolidated financial statements do not comply as to
form in all material respects with the applicable accounting requirements of
the Act and the related published rules and regulations;
(iv) The unaudited selected financial information with
respect to the consolidated results of operations and financial position of
the Company for the five most recent fiscal years included in the Prospectus
agrees with the corresponding amounts (after restatements where applicable)
in the audited consolidated financial statements for such five fiscal years,
copies of which have been furnished to the Representatives;
(v) They have compared the information in the Prospectus
under selected captions with the disclosure requirements of Regulation S-K
and on the basis of limited procedures specified in such letter nothing came
to their attention as a result of the foregoing procedures that caused them
to believe that this information does not conform in all material respects
with the disclosure requirements of Items 301, 302, 402 and 503(d),
respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available interim
<PAGE>
financial statements of the Company and its subsidiaries, inspection of the
minute books of the Company and its subsidiaries since the date of the latest
audited financial statements included in the Prospectus, inquiries of
officials of the Company and its subsidiaries responsible for financial and
accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused them to
believe that:
(A) (i) the unaudited consolidated statements of
income, consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the related
published rules and regulations, or (ii) any material modifications should be
made to the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus for them to be in conformity with generally
accepted accounting principles;
(B) any other unaudited income statement data and
balance sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited consolidated financial statements from
which such data and items were derived, and any such unaudited data and items
were not determined on a basis substantially consistent with the basis for
the corresponding amounts in the audited consolidated financial statements
included in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any unaudited
condensed financial statements referred to in Clause (A) and any unaudited
income statement data and balance sheet items included in the Prospectus and
referred to in Clause (B) were not determined on a basis substantially
consistent with the basis for the audited consolidated financial statements
included in the Prospectus;
(D) any unaudited pro forma consolidated condensed
financial statements included in the Prospectus do not comply as to form in
all material respects with the applicable accounting requirements of the Act
and the published rules and regulations thereunder or the pro forma
adjustments have not been properly applied to the historical amounts in the
compilation of those statements;
(E) as of a specified date not more than five days
prior to the date of such letter, there have been any changes in the
consolidated capital stock (other than issuances of capital stock upon
exercise of options and stock appreciation rights, upon earn-outs of
performance shares and upon conversions of convertible securities, in each
case which were outstanding on the date of the latest financial statements
included in the Prospectus) or any increase in the consolidated long-term
debt of the Company and its subsidiaries, or any decreases in consolidated
net current assets or stockholders' equity or other items specified by the
Representatives, or any increases in any items specified by the
Representatives, in each case as compared with amounts shown in the latest
balance sheet included in the Prospectus, except in each case for changes,
increases or decreases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
(F) for the period from the date of the latest
financial statements included in the Prospectus to the specified date
referred to in Clause (E) there were any decreases in consolidated net
revenues or operating profit or the total or per share amounts of
consolidated net income or other items specified by the Representatives, or
any increases in any items specified by the Representatives, in each case as
compared with the comparable period of the preceding year and with any other
period of corresponding length specified by the Representatives, except in
each case
F-2
<PAGE>
for decreases or increases which the Prospectus discloses have occurred or
may occur or which are described in such letter; and
(vii) In addition to the examination referred to in their
report(s) included in the Prospectus and the limited procedures, inspection
of minute books, inquiries and other procedures referred to in paragraphs
(iii) and (vi) above, they have carried out certain specified procedures, not
constituting an examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Representatives, which are derived from the
general accounting records of the Company and its subsidiaries, which appear
in the Prospectus, or in Part II of, or in exhibits and schedules to, the
Registration Statement specified by the Representatives, and have compared
certain of such amounts, percentages and financial information with the
accounting records of the Company and its subsidiaries and have found them to
be in agreement.
F-3
<PAGE>
EXHIBIT 10.13
MIPS TECHNOLOGIES, INC.
1225 Charleston Road
Mountain View, CA 94043-1353
April 1, 1999
[Name]
[Title]
MIPS Technologies, Inc.
1225 Charleston Road
Mountain View, CA 94043-1353
Dear [Name]:
MIPS Technologies, Inc. (the "COMPANY") considers it essential to
the best interests of its shareholders to foster the continuous employment of
key management personnel. In this connection, the Board (as defined in
Section 2(b)) recognizes that, as is the case with many publicly held
corporations, the possibility of a change in control may exist and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Company and its shareholders.
The Board has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of officers of
the Company, including you, to their assigned duties without distraction in the
face of potentially disturbing circumstances arising from the possibility of a
change in control of the Company, although no such change is now contemplated.
In order to induce you to remain in the employ of the Company and
in consideration of your agreement set forth in Section 2(i) hereof, the Company
agrees that you shall receive the benefits set forth in this agreement
("AGREEMENT") under the circumstances described below.
1. TERM OF AGREEMENT. This Agreement shall commence on the
date hereof and shall continue in effect until your employment with the Company
is terminated other than after a Change in Control (as defined in Section 2(d)),
unless sooner terminated by written agreement of the Company and you.
<PAGE>
2. DEFINITIONS. As used in this Agreement:
(a) "BENEFICIAL OWNER" shall have the meaning ascribed to such
term in Rule 13d-3 of the General Rules and Regulations under the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT").
(b) "BOARD" shall mean the Board of Directors of the Company.
(c) "BUSINESS COMBINATION" means and includes each and all of
the following occurrences:
(i) a consolidation or merger pursuant to which more
than 75% of the Company's Majority Voting Stock is transferred to
different holders, except for a transaction intended primarily to change
the state of the Company's incorporation;
(ii) more than 75% of the assets of the Company are sold
or otherwise disposed of; or
(iii) the Company dissolves or liquidates or effects a
partial liquidation involving more than 75% of its assets.
(d) "CHANGE IN CONTROL" of the Company means and includes each
and all of the following occurrences:
(i) A Business Combination.
(ii) When any "person" as defined in Section 3(a)(9) of
the Exchange Act and as used in Sections 13(d) and 14(d) thereof other
than SGI, including a "group" as defined in Section 13(d) of the Exchange
Act but excluding the Company and any subsidiary and any employee benefit
plan sponsored or maintained by the Company or any subsidiary (including
any trustee of such plan acting as trustee), directly or indirectly,
becomes the Beneficial Owner of securities of the Company representing
thirty percent (30%) or more of the Majority Voting Stock; PROVIDED,
HOWEVER, that no crossing of such 30% threshold shall be a "Change in
Control" if it is caused (i) solely as a result of an acquisition by the
Company of its voting securities or (ii) solely as a result of an
acquisition of the Company's voting securities directly from the Company,
in either case until such time thereafter as such person acquires
additional voting securities other than directly from the Company and,
after giving effect to such transaction, such person owns 30% or more of
the Majority Voting Stock; PROVIDED FURTHER, HOWEVER, that no transaction
involving a change in the corporate control of SGI, whether through stock
acquisition, merger, voting agreement or otherwise, will result in a
Change in Control for purposes of this Agreement.
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<PAGE>
(iii) During any period of three (3) consecutive years
(not including any period during which SGI maintains control over the
Company), individuals who, at the beginning of such period, constitute
the Board (the "INCUMBENT BOARD") cease for any reason to constitute at
least a majority of the Board; PROVIDED, that any person (A) becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Company's shareholders, was approved by the vote of at
least a majority of the directors then comprising the Incumbent Board or
(B) obtaining a position on the Board which was immediately previously
held by a director elected or appointed while SGI maintained control over
the Company, regardless of whether such person is approved by a majority
of the directors then comprising the Incumbent Board (in either case
other than an election or nomination of any individual whose initial
assumption of office is in connection with an actual or threatened
election contest relating to the election of the directors of the
Company, as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) shall be, for purposes of this
Agreement, considered as though such person were a member of the
Incumbent Board. For purposes of this Agreement, SGI shall be deemed to
maintain control over the Company until the later of (i) the date on
which SGI, any successor to SGI and any of their respective affiliates
dispose of all shares of Class B Common Stock of the Company and
(ii) the date on which SGI, any successor to SGI and any of their
respective affiliates first hold securities representing less than 50%
of the outstanding voting power in the election of the Company's
directors.
(iv) a Reacquisition Event.
For purposes of this Agreement, the Board of Directors may by
resolution, clarify the date as of which a Change in Control shall be deemed to
have occurred.
(e) "CURRENT COMPENSATION" shall mean your monthly base salary,
as in effect immediately prior to your termination of employment with the
Company.
(f) "DISABILITY" shall mean a physical or mental illness or
injury which, as determined by the Company, continuously prevents you from
performing your duties with the Company for a period of six months prior to
termination.
(g) "GOOD REASON" shall mean grounds for termination by you of
your employment by the Company based upon prior constructive termination by the
Company as provided in Section 5 hereof.
(h) "MAJORITY VOTING STOCK" shall mean the class of the
Company's voting stock which, as of the time of determination, possesses the
right to elect a majority of the directors of the Company.
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<PAGE>
(i) "POTENTIAL CHANGE IN CONTROL OF THE COMPANY" shall be
deemed to have occurred if (i) the Company enters into an agreement or letter of
intent, the consummation of which would result in the occurrence of a Change in
Control of the Company; (ii) any person (including the Company) publicly
announces an intention to take or to consider taking actions which if
consummated would constitute a Change in Control of the Company; (iii) any
person, other than SGI or a trustee or other fiduciary holding securities under
an employee benefit plan for the Company, who is or becomes the beneficial
owner, directly or indirectly, of 9.5% or more of the Majority Voting Stock
increases his beneficial ownership of such securities by five (5) percentage
points or more over the percentage so owned by such person; or (iv) the Board
adopts a resolution to the effect that, for purposes of this Agreement, a
Potential Change in Control of the Company has occurred. You agree that,
subject to the terms and conditions of this Agreement, in the event of a
Potential Change in Control of the Company, you will remain in the employ of the
Company (or the subsidiary thereof by which you are employed at the date such
Potential Change in Control occurs) until the earliest of (x) a date which is
six months from the occurrence of such Potential Change in Control of the
Company, (y) the termination by you of your employment by reason of Disability
or (z) the occurrence of a Change in Control of the Company.
(j) "RECAPITALIZATION" shall mean the proposed recapitalization
of the Company pursuant to which the Company's share capital will be divided
into two classes of stock possessing distinct voting rights in the election of
the Company's directors but otherwise having substantially identical rights and
preferences.
(k) "REACQUISITION EVENT" shall mean (i) the acquisition by
SGI of direct or indirect beneficial ownership of all or substantially all of
the Company's then outstanding voting securities, other than any acquisition
by SGI of direct or indirect beneficial ownership of the Company's voting
securities in furtherance of the Recapitalization, (ii) upon written
direction of SGI following a resolution by the Board of Directors of SGI, the
acquisition by the Company of all or substantially all of its outstanding
voting securities not held by SGI which would result in the direct or
indirect beneficial ownership by SGI of all or substantially all of the
Company's voting securities, or (iii) a merger or other corporate combination
involving the Company and SGI or any entity that is owned or controlled by
SGI, regardless of which entity survives such merger or other corporate
combination; PROVIDED, HOWEVER, that no transaction in furtherance of a
Spin-Off shall constitute a Reacquisition Event.
(l) "SGI" means Silicon Graphics, Inc., a Delaware
corporation, and any successor to all or substantially all of its business or
assets.
(m) "SPIN-OFF" means (i) any transaction or series of
transactions as the result of, after such transaction or series of
transactions, the stockholder's of SGI prior to such transaction or series of
transactions hold independent interests representing the Company's business
and SGI's business or (ii) any other transaction or series of transactions as
a result of which all or substantially all of the Company's outstanding
voting securities are directly or indirectly held by the public.
(n) "TERMINATION PAYMENT" shall mean the severance pay to which
you are entitled upon termination of your employment within 24 months after a
Change in Control as provided in Section 3(a) hereof.
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<PAGE>
3. COMPENSATION FOLLOWING A CHANGE IN CONTROL.
(a) Subject to Sections 6 and 7 below, if your employment with
the Company is terminated within 24 months after a Change in Control:
(i) you shall be entitled to a Termination Payment, payable
in cash, in an amount equal to 24 months of your Current Compensation
at the rate in effect immediately prior to such Change in Control.
(ii) in the event that your ability to sell the stock of the
Company is limited by the provisions of the Securities Act of 1933, as
amended, or any rule or regulation promulgated thereunder, or by any
agreement entered into by you in connection with the Change in
Control, you shall be entitled to exercise any stock option granted to
you by the Company until the earlier of either (A) the date which is
three months after the end of the end of the period during which such
limitation applies or (B) the end of the term of the stock option.
(b) Subject to Sections 6 and 7 below, upon the occurrence of a
Change in Control:
(i) (A) any stock option granted to you by the Company shall
become fully vested and exercisable and shall remain exercisable in
accordance with the terms of the applicable option award agreement,
except to the extent modified by Section 3(a), and (B) you shall have
the right during the period of six months following such Change in
Control to have any such option "cashed out" at its market value
determined as provided herein. The cash out proceeds shall be paid to
you or, in the event of your death prior to payment, the
representative of your estate. For this purpose, the market value of
an outstanding option shall be measured as the difference between the
option exercise price and the "Change in Control Price" as defined in
Section 3(d), as of the date such Change in Control is determined to
have occurred or such other date as the Board may determine prior to
the Change in Control.
(ii) all forfeiture restrictions applicable to restricted
stock granted to you by the Company shall lapse and such restricted
stock shall be released from the Company's repurchase right set forth
in the applicable restricted stock agreement.
(c) Any cash payable to you under Section 3(a)(i) shall be
payable between 30 and 60 calendar days after your termination of employment.
Any cash payable to you under Section 3(b)(i) shall be made within 30 calendar
days after the date the Company receives your written notice electing to be
cashed out on the value of your options.
(d) For purposes of this Section 3, "CHANGE IN CONTROL PRICE"
shall be, as determined by the Board, (i) the highest closing sale price of a
share of the Company's Common
5
<PAGE>
Stock as reported by the NASDAQ National Market System and as appearing in
THE WALL STREET JOURNAL (or, in the event the Common Stock is listed on a
stock exchange, the highest closing price on such exchange as reported on the
composite transactions reporting system), at any time within the 60-day
period immediately preceding the date of determination of the Change in
Control Price by the Board (the "60-DAY PERIOD"), or (ii) the highest price
paid or offered for a share of the Common Stock, as determined by the Board,
in any bona fide transaction or bona fide offer related to the Change in
Control of the Company, at any time within the 60-day period.
(e) Anything contained in Sections 3(a) or 3(b) above to the
contrary notwithstanding, the Company shall have no obligation to pay you a
Termination Payment, to accelerate the vesting of your options, to cash out your
options or to release your restricted shares from their forfeiture restrictions
or repurchase rights under this Agreement in the event of a termination of your
employment prior to a Change in Control. The Company shall also have no
obligation to pay you a Termination Payment if, after a Change in Control, the
Company terminates your employment for "Cause" or if your employment terminates
due to your death, retirement or resignation other than for "Good Reason."
Furthermore, if it is determined by the Board, upon receipt of a written opinion
of the Company's independent public accountants that to accelerate the vesting
of your options, to cash out your options or to release your restricted shares
from their forfeiture restrictions or repurchase rights under this Agreement
would preclude accounting for the acquisition of the Company as a pooling of
interests, and the Board otherwise desires to approve a proposed acquisition of
the Company by an acquiring company which requires as a condition to closing of
the acquisition that the acquisition be accounted for as a pooling of interests,
then the Company shall not be obligated to accelerate or cash out your options
or release your restricted shares from their forfeiture restrictions or
repurchase rights under this Agreement to the extent necessary to enable the
acquisition to be accounted for as a pooling of interests.
(f) In the event that the terms of this Agreement relating to
options or restricted stock conflict with the terms of any option, stock award
or related agreement between you and the Company, the terms that are more
favorable to you will control.
4. TERMINATION FOR CAUSE. Termination of your employment with the
Company shall be regarded as termination for Cause only upon:
(a) your willful and continued failure to substantially perform
your duties with the Company (other than such failure resulting from your
incapacity due to physical or mental illness) after there is delivered to you by
the Board a written demand for substantial performance which sets forth in
detail the specific respects in which it believes you have not substantially
performed your duties;
(b) your willfully engaging in gross misconduct which is
materially and demonstrably injurious to the Company;
6
<PAGE>
(c) your committing a felony or an act of fraud against the
Company or its affiliates; or
(d) your breaching materially the terms of your employee
confidentiality and proprietary information agreement with the Company.
No act, or failure to act, by you shall be considered "willful" if
done, or omitted to be done, by you in good faith and in your reasonable belief
that your act or omission was in the best interest of the Company and/or
required by applicable law.
Anything contained in this Section 4 to the contrary
notwithstanding, you shall not be deemed to have been terminated for Cause
unless and until there shall have been delivered to you a copy of a resolution
duly adopted by the affirmative vote of not less than a majority of the entire
membership of the Board at a meeting of the Board called and held for that
purpose (after reasonable notice to and an opportunity for you, together with
your counsel, to be heard before the Board), finding that in the good faith
opinion of the Board, you were guilty of conduct set forth in this Section 4 and
specifying the particulars thereof in detail.
5. TERMINATION FOR GOOD REASON. Your employment with the Company may
be regarded as having been constructively terminated by the Company, and you may
therefore terminate your employment for Good Reason and thereupon become
entitled to compensation pursuant to Section 3 above, if, after a Change in
Control, one or more of the following events shall occur (unless such event(s)
applies generally to all officers of the Company and any successor to the
Company, or applies to a person solely in his capacity as a member of the
Board):
(a) without your express written consent, the assignment to you
of any duties or the significant reduction of your duties, either of which is
inconsistent with your position with the Company (or the duties and
responsibilities of such position) immediately prior to a Change in Control, or
your removal from or any failure to re-elect you to any such position;
(b) without your express written consent, the substantial
reduction, without good business reasons, of the facilities and perquisites
(including office space and location) available to you immediately prior to a
Change in Control;
(c) a reduction by the Company in your salary or in any
bonus compensation formula applicable to you as in effect immediately prior
to a Change in Control, or the failure by the Company to increase such base
salary each year following a Change in Control by an amount which equals at
least one-half (1/2), on a percentage basis, of the average annual percentage
increase in base salary for all officers of the Company (and any successor of
the Company) during the prior two full calendar years;
7
<PAGE>
(d) a material reduction by the Company in the kind or level of
employee benefits to which you were entitled prior to a Change in Control with
the result that your overall benefits package is significantly reduced after the
Change in Control; or the taking of any action by the Company which would
materially and adversely affect your participation in any plan, program or
policy generally applicable to executives or employees of the Company or any
successor of the Company (including but not limited to paid vacation days), or
deprive you in a material and substantial way of any fringe benefits enjoyed by
you prior to a Change in Control;
(e) the Company's requiring you to be based at a location that
is more than 25 miles from your then present location without your consent
(except for required travel on the Company's business to an extent substantially
consistent with your present business travel obligations);
(f) any purported termination of your employment by the Company
which is not effected for Disability or for Cause, or any purported termination
for which the grounds relied upon are not valid; or
(g) the failure of the Company to obtain the assumption of this
Agreement by any successor as contemplated in Section 10 hereof.
6. PARACHUTE PAYMENTS. In the event that any payment or
benefit received or to be received by you in connection with a termination of
your employment with the Company or any corporation which is a related
corporation within the meaning of section 280G(e) of the Internal Revenue Code
of 1986 (the "CODE") (collectively, the "SEVERANCE PAYMENTS") would
(i) constitute a "parachute payment" within the meaning of section 280G of the
Code or any similar or successor provision and (ii) but for this Section 6, be
subject to the excise tax imposed by section 4999 of the Code or any similar or
successor provision (the "EXCISE TAX"), then, subject to the provisions of
Section 7 hereof, such Severance Payments (which Severance Payments shall
collectively be referred to herein as the "SEVERANCE PARACHUTE PAYMENTS") shall
be reduced to the largest amount which you, in your sole discretion, determine
would result in no portion of the Severance Parachute Payments being subject to
the Excise Tax. The determination of any required reduction pursuant to this
Section 6 (including the determination as to which specific Severance Parachute
Payments shall be reduced) shall be made by you in your sole discretion, and
such determination shall be conclusive and binding upon the Company or any
related corporation for all purposes. The Company and its related corporations
waive all claims and rights against you with respect thereto except as
specifically set forth in the next sentence. If the Internal Revenue Service
(the "IRS") determines that a Severance Parachute Payment is subject to the
Excise Tax, then the Company or any related corporation, as their exclusive
remedy, shall seek to enforce the provisions of Section 7 hereof. Such
enforcement of Section 7 hereof shall be the only remedy, under any and all
applicable state and federal laws or otherwise, for your failure to reduce the
Severance Parachute Payments so that no portion thereof is subject to the Excise
Tax. The Company or related corporation shall reduce a Severance Parachute
8
<PAGE>
Payment in accordance with Section 6 only upon written notice by you indicating
the amount of such reduction, if any.
7. REMEDY. If, notwithstanding the reduction described in
Section 6 hereof, the IRS determines that you are liable for the Excise Tax as a
result of the receipt of a Severance Parachute Payment, then you shall, subject
to the provisions of this Agreement, be obligated to pay to the Company (the
"REPAYMENT OBLIGATION") an amount of money equal to the "REPAYMENT AMOUNT." The
Repayment Amount with respect to a Severance Parachute Payment shall be the
smallest such amount, if any, as shall be required to be paid to the Company so
that your net proceeds with respect to any Severance Parachute Payment (after
taking into account the payment of the Excise Tax imposed on such Severance
Parachute Payment) shall be maximized. Notwithstanding the foregoing, the
Repayment Amount with respect to a Severance Parachute Payment shall be zero if
a Repayment Amount of more than zero would not eliminate the Excise Tax imposed
on such Severance Parachute Payment. If the Excise Tax is not eliminated through
the performance of the Repayment Obligation, you shall pay the Excise Tax. The
Repayment Obligation shall be performed within 30 days of either (i) your
entering into a binding agreement with the IRS as to the amount of your Excise
Tax liability or (ii) a final determination by the IRS or a court decision
requiring you to pay the Excise Tax with respect to such a Severance Parachute
Payment from which no appeal is available or is timely taken.
8. DISPUTES. To dispute a termination for Good Reason by you,
the Company must give you written notice of such dispute within ten business
days after your effective date of termination. To dispute a termination by the
Company or any failure to make payments claimed to be due hereunder, you must
give written notice of such dispute to the Company within 30 days after
receiving a notice of termination, or within 30 days after the date on which a
payment claimed by you to be due hereunder was due to be made, as the case may
be.
If any such dispute is finally determined in your favor, the
Company shall pay all reasonable fees and expenses, including attorneys' and
consultants' fees, that you incur in good faith in connection therewith.
9. NO MITIGATION.
(a) You shall not be required to mitigate the amount of any
payment provided for in Section 3 hereof by seeking other employment or
otherwise, nor shall the amount of such payment be reduced by reason of
compensation or other income you receive for services rendered after your
termination of employment with the Company, subject to Section 18; PROVIDED,
HOWEVER, that the amount of any payment provided for in Section 3 may be offset
by the Company by the amount of any indebtedness you may have to the Company at
the time of your termination of employment.
9
<PAGE>
(b) In addition to the Termination Payment payable pursuant to
Section 3 hereof, you shall be entitled to receive all benefits payable to you
under any benefit plan of the Company in which you participate.
10. COMPANY'S SUCCESSORS. The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation, or
otherwise) to all or substantially all of the business and/or assets of the
Company, to expressly assume and agree to perform the obligations under this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. As used in this
Section 10, "COMPANY" includes any successor to its business or assets as
aforesaid which executes and delivers this Agreement or which otherwise becomes
bound by all the terms and provisions of this Agreement by operation of law.
11. NOTICE. Notices and all other communications provided for
in this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or five (5) days after deposit with postal
authorities transmitted by United States registered or certified mail, return
receipt requested, postage prepaid, addressed to the applicable address set
forth on the first page of this Agreement, or to such other address as either
party may have furnished to the other in writing in accordance herewith, except
that notices of change of address shall be effective only upon receipt.
12. AMENDMENT OR WAIVER. No provisions of this Agreement may
be modified, waived, or discharged unless such waiver, modification, or
discharge is agreed to in writing by you and the Company. No waiver of either
party at any time of the breach of, or lack of compliance with, any conditions
or provisions of this Agreement shall be deemed a waiver of other provisions or
conditions hereof.
13. SOLE AGREEMENT. This Agreement represents the entire
agreement between you and the Company with respect to the matters set forth
herein. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter of this Agreement will be made by
either party which are not set forth expressly herein.
14. EMPLOYEE'S SUCCESSORS. This Agreement shall inure to the
benefit of and be enforceable by your personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees, and
legatees. If you should die while any amounts are still payable to you
hereunder, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to your devisee, legatee, or other
designee or, if there be no such designees, to your estate.
15. VALIDITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
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16. APPLICABLE LAW. This Agreement shall be interpreted and
enforced in accordance with the laws of the State of California.
17. COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
18. RIGHTS NOT DUPLICATIVE. Any amounts paid or payable to you
hereunder shall be reduced and offset by any amounts paid to you under the terms
of the supplemental letter agreement dated the date hereof between the Company
and you pertaining to the effects of a change in the corporate control of SGI.
If the foregoing conforms with your understanding of the matters
described herein, please indicate your agreement to the terms hereof by signing
where indicated below and returning one copy of this Agreement to the
undersigned.
Very truly yours,
MIPS TECHNOLOGIES, INC.
By:
-----------------------------------
Name:
Title:
ACCEPTED AND AGREED TO AS OF
THE DATE FIRST SET FORTH ABOVE:
- -----------------------------------
Name:
11
<PAGE>
EXHIBIT 10.14
MIPS TECHNOLOGIES, INC.
1225 Charleston Road
Mountain View, CA 94043-1353
April 1, 1999
[Name]
[Title]
MIPS Technologies, Inc.
1225 Charleston Road
Mountain View, CA 94043-1353
SUPPLEMENT TO CHANGE IN CONTROL AGREEMENT
Dear [Name]:
Reference is hereby made to the letter agreement between you and
MIPS Technologies, Inc. (the "COMPANY"), dated the date hereof (the "CHANGE IN
CONTROL AGREEMENT"), pursuant to which the Company has undertaken to provide you
with certain benefits in the event of a Change in Control and upon certain
terminations of your employment following a Change in Control (capitalized terms
not otherwise defined herein shall have the meanings ascribed thereto in the
Change in Control Agreement). The Company's Board, in recognition of the unique
circumstances presented by the Company's current majority ownership and control
by SGI and the contemplated Recapitalization and spin-off by SGI, has determined
that appropriate measures should be taken to provide the Company's senior
management with certain protections against a termination of their employment
following a change in control of SGI while SGI maintains control over the
Company.
In order to induce you to remain in the employ of the Company and
in consideration of your agreement set forth in Section 2(g) hereof, the Company
agrees that you shall receive the benefits set forth in this supplemental
agreement (this "AGREEMENT") under the circumstances described below.
1. TERM OF AGREEMENT. This Agreement shall commence on the
date hereof and shall continue in effect until the earlier of (a) the date on
which your employment with the Company is terminated other than after an SGI
Change in Control (as defined in Section 2(i)) or (b) the first date on which
SGI no longer maintains control over the Company, unless sooner terminated by
written agreement of the Company and you. For purposes of this Agreement, SGI
<PAGE>
shall be deemed to maintain control over the Company until the later of (i) the
date on which SGI, any successor to SGI and any of their respective affiliates
dispose of all shares of Class B Common Stock of the Company and (ii) the date
on which SGI, any successor to SGI and any of their respective affiliates first
hold securities representing less than 50% of the outstanding voting power in
the election of the Company's directors.
2. DEFINITIONS. As used in this Agreement:
(a) "BENEFICIAL OWNER" shall have the meaning ascribed to such
term in Rule 13d-3 of the General Rules and Regulations under the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT").
(b) "BOARD" shall mean, with respect to any corporation, such
corporation's board of directors.
(c) "BUSINESS COMBINATION" means and includes each and all of
the following occurrences:
(i) a consolidation or merger pursuant to which more
than 75% of SGI's voting stock is transferred to different holders,
except for a transaction intended primarily to change the state of SGI's
incorporation;
(ii) more than 75% of the assets of SGI are sold or
otherwise disposed of; or
(iii) SGI dissolves or liquidates or effects a partial
liquidation involving more than 75% of its assets;
PROVIDED, HOWEVER, that no transaction in furtherance of a Spin-Off shall
constitute a Business Combination.
(d) "CURRENT COMPENSATION" shall mean your monthly base salary,
as in effect immediately prior to your termination of employment with the
Company.
(e) "DISABILITY" shall mean a physical or mental illness or
injury which, as determined by the Company, continuously prevents you from
performing your duties with the Company for a period of six months prior to
termination.
(f) "GOOD REASON" shall mean grounds for termination by you of
your employment by the Company based upon prior constructive termination by the
Company as provided in Section 5 hereof.
2
<PAGE>
(g) "POTENTIAL SGI CHANGE IN CONTROL" shall be deemed to have
occurred if (i) SGI enters into an agreement or letter of intent, the
consummation of which would result in the occurrence of an SGI Change in
Control; (ii) any person (including SGI) publicly announces an intention to take
or to consider taking actions which if consummated would constitute an SGI
Change in Control; (iii) any person, other than a trustee or other fiduciary
holding securities under an employee benefit plan for SGI, who is or becomes the
beneficial owner, directly or indirectly, of securities of SGI representing 9.5%
or more of the combined voting power of SGI's then outstanding securities,
increases his beneficial ownership of such securities by five (5) percentage
points or more over the percentage so owned by such person; or (iv) the
Company's Board adopts a resolution to the effect that, for purposes of this
Agreement, a Potential SGI Change in Control has occurred. You agree that,
subject to the terms and conditions of this Agreement, in the event of a
Potential SGI Change in Control, you will remain in the employ of the Company
(or the subsidiary thereof by which you are employed at the date such Potential
SGI Change in Control occurs) until the earliest of (x) a date which is six
months from the occurrence of such Potential SGI Change in Control of the
Company, (y) the termination by you of your employment by reason of Disability
or (z) the occurrence of an SGI Change in Control.
(h) "SGI" means Silicon Graphics, Inc., a Delaware corporation.
(i) "SGI CHANGE IN CONTROL" means and includes each and all of
the following occurrences:
(i) A Business Combination.
(ii) When any "person" as defined in Section 3(a)(9) of
the Exchange Act and as used in Sections 13(d) and 14(d) thereof,
including a "group" as defined in Section 13(d) of the Exchange Act but
excluding SGI and any subsidiary and any employee benefit plan sponsored
or maintained by SGI or any subsidiary (including any trustee of such
plan acting as trustee), directly or indirectly, becomes the Beneficial
Owner of securities of SGI representing fifty percent (50%) or more of
the combined voting power of SGI's then outstanding securities with
respect to the election of the directors of SGI; PROVIDED, HOWEVER, that
no crossing of such 50% threshold shall be a "Change in Control" if it is
caused (i) solely as a result of an acquisition by SGI of its voting
securities or (ii) solely as a result of an acquisition of SGI's voting
securities directly from SGI, in either case until such time thereafter
as such person acquires additional voting securities other than directly
from SGI and, after giving effect to such transaction, such person owns
50% or more of the combined voting power of SGI's then outstanding
securities with respect to the election of the directors of SGI.
(iii) During any period of three (3) consecutive years
(not including any period prior to the date hereof), individuals who, at
the beginning of such period, constitute SGI's Board (the "INCUMBENT
BOARD") cease for any reason to constitute at least a majority of SGI's
Board; PROVIDED, that any person becoming a director subsequent to
3
<PAGE>
the date hereof whose election, or nomination for election by the
Company's shareholders, was approved by the vote of at least a
majority of the directors then comprising the Incumbent Board (other
than an election or nomination of any individual whose initial
assumption of office is in connection with an actual or threatened
election contest relating to the election of the directors of SGI, as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under
the Exchange Act) shall be, for purposes of this Agreement, considered
as though such person were a member of the Incumbent Board.
For purposes of this Agreement, the Company's Board may by
resolution, clarify the date as of which an SGI Change in Control shall be
deemed to have occurred.
(j) "SPIN-OFF" means (i) any transaction or series of
transactions as the result of which, after such transaction or series of
transactions, the stockholders of SGI prior to such transaction or series of
transactions hold separate interests representing the Company's business and
SGI's business or (ii) any other transaction or series of transactions as a
result of which all or substantially all of the Company's outstanding voting
securities are directly or indirectly held by the public.
(k) "TERMINATION PAYMENT" shall mean the severance pay to which
you are entitled upon termination of your employment within 12 months after an
SGI Change in Control as provided in Section 3(a) hereof.
3. COMPENSATION FOLLOWING A CHANGE IN CONTROL.
(a) Subject to Sections 6 and 7 below, if your employment with
the Company is terminated within 12 months after an SGI Change in Control:
(i) you shall be entitled to a Termination Payment, payable
in cash, in an amount equal to 24 months of your Current Compensation
at the rate in effect immediately prior to such SGI Change in Control;
and
(ii) (A) any stock option granted to you by the Company shall
become fully vested and exercisable and shall remain exercisable in
accordance with the terms of the applicable option award agreement,
and (B) you shall have the right during the period of six months
following such termination of employment to have any such option
"cashed out" at its market value determined as provided herein. The
cash out proceeds shall be paid to you or, in the event of your death
prior to payment, the representative of your estate. For this
purpose, the market value of an outstanding option shall be measured
as the difference between the option exercise price and the closing
market price on the date of your termination of employment; and
(iii) all forfeiture restrictions applicable to restricted
stock granted to you by the Company shall lapse and such restricted
stock shall be released from the Company's repurchase right set forth
in the applicable restricted stock agreement.
(b) Any cash payable to you under Section 3(a)(i) shall be
payable between 30 and 60 calendar days after your termination of employment.
Any cash payable to you under Section 3(a)(ii) shall be made within 30 calendar
days after the date the Company receives your written notice electing to be
cashed out on the value of your options.
4
<PAGE>
(c) Anything contained in Section 3(a) above to the contrary
notwithstanding, the Company shall have no obligation to pay you a Termination
Payment, to accelerate the vesting of your options, to cash out your options or
to release your restricted shares from their forfeiture restrictions or
repurchase rights under this Agreement (i) in the event of a termination of your
employment prior to an SGI Change in Control or (ii) if, after an SGI Change in
Control, the Company terminates your employment for "Cause" or if your
employment terminates due to your death, retirement or resignation other than
for "Good Reason." Furthermore, if it is determined by SGI's Board, upon
receipt of a written opinion of SGI's independent public accountants that for
the Company to accelerate the vesting of your options, to cash out your options
or to release your restricted shares from their forfeiture restrictions or
repurchase rights under this Agreement would preclude accounting for the
acquisition of SGI as a pooling of interests, and SGI's Board otherwise desires
to approve a proposed acquisition of SGI by an acquiring company which requires
as a condition to closing of the acquisition that the acquisition be accounted
for as a pooling of interests, then the Company shall not be obligated to
accelerate or cash out your options or release your restricted shares from their
forfeiture restrictions or repurchase rights under this Agreement to the extent
necessary to enable the acquisition to be accounted for as a pooling of
interests, and shall not take any such action without the express written
consent of SGI.
(d) In the event that the terms of this Agreement relating to
options or restricted stock conflict with the terms of any option, stock award
or related agreement between you and the Company, the terms that are more
favorable to you will control.
4. TERMINATION FOR CAUSE. Termination of your employment with the
Company shall be regarded as termination for Cause only upon:
(a) your termination of employment in the ordinary course of
business due to your failure to satisfactorily perform the duties assigned to
you, in the good faith determination of the Company's chief executive officer
or, if such position is vacant, the Company's Board, in either case based upon
documented reports regarding your performance;
(b) your willfully engaging in gross misconduct which is
materially and demonstrably injurious to the Company;
(c) your committing a felony or an act of fraud against the
Company or its affiliates; or
(d) your breaching materially the terms of your employee
confidentiality and proprietary information agreement with the Company.
No act, or failure to act, by you shall be considered "willful" if
done, or omitted to be done, by you in good faith and in your reasonable belief
that your act or omission was in the best interest of the Company and/or
required by applicable law.
5
<PAGE>
Anything contained in this Section 4 to the contrary
notwithstanding, you shall not be deemed to have been terminated for Cause under
Section 4(b) or (c) unless and until there shall have been delivered to you a
copy of a resolution duly adopted by the affirmative vote of not less than a
majority of the entire membership of the Company's Board at a meeting of the
Company's Board called and held for that purpose (after reasonable notice to and
an opportunity for you, together with your counsel, to be heard before the
Company's Board), finding that in the good faith opinion of the Company's Board,
you were guilty of conduct set forth in Section 4(b) or (c) and specifying the
particulars thereof in detail.
5. TERMINATION FOR GOOD REASON. Your employment with the Company may
be regarded as having been constructively terminated by the Company, and you may
therefore terminate your employment for Good Reason and thereupon become
entitled to compensation pursuant to Section 3 above, if, after an SGI Change in
Control, one or more of the following events shall occur (unless such event(s)
applies generally to all officers of the Company and any successor to the
Company, or applies to a person solely in his capacity as a member of the
Company's Board):
(a) the assignment to you of duties (or the significant
reduction of your duties) which are inconsistent with the position of an
executive of the Company, provided that you resign your employment within 30
days after the effectiveness of such assignment or reduction and you cite this
Section 5(a) as the reason for your resignation in a formal letter of
resignation addressed to the Company's Board;
(b) a reduction by the Company in your salary or in any bonus
compensation formula applicable to you as in effect immediately prior to the SGI
Change in Control, or the failure by the Company to increase such base salary in
the year following such SGI Change in Control by an amount which equals at least
one-half (1/2), on a percentage basis, of the average annual percentage increase
in base salary for all officers of the Company (and any successor of the
Company) during the prior two full calendar years;
(c) a material reduction by the Company in the kind or level of
employee benefits to which you were entitled prior to the SGI Change in Control
with the result that your overall benefits package is significantly reduced
after the SGI Change in Control; or the taking of any action by the Company
which would materially and adversely affect your participation in any plan,
program or policy generally applicable to executives or employees of the Company
or any successor of the Company (including but not limited to paid vacation
days), or deprive you in a material and substantial way of any fringe benefits
enjoyed by you prior to the SGI Change in Control;
(d) the Company's requiring you to be based at a location that
is more than 35 miles from your then present location without your consent
(except for required travel on the Company's business to an extent substantially
consistent with your present business travel obligations); or
6
<PAGE>
(e) any purported termination of your employment by the Company
which is not effected for Disability or for Cause, or any purported termination
for which the grounds relied upon are not valid.
6. PARACHUTE PAYMENTS. In the event that any payment or
benefit received or to be received by you in connection with a termination of
your employment with the Company or any corporation which is a related
corporation within the meaning of section 280G(e) of the Internal Revenue Code
of 1986 (the "CODE") (collectively, the "SEVERANCE PAYMENTS") would
(i) constitute a "parachute payment" within the meaning of section 280G of the
Code or any similar or successor provision and (ii) but for this Section 6, be
subject to the excise tax imposed by section 4999 of the Code or any similar or
successor provision (the "EXCISE TAX"), then, subject to the provisions of
Section 7 hereof, such Severance Payments (which Severance Payments shall
collectively be referred to herein as the "SEVERANCE PARACHUTE PAYMENTS") shall
be reduced to the largest amount which you, in your sole discretion, determine
would result in no portion of the Severance Parachute Payments being subject to
the Excise Tax. The determination of any required reduction pursuant to this
Section 6 (including the determination as to which specific Severance Parachute
Payments shall be reduced) shall be made by you in your sole discretion, and
such determination shall be conclusive and binding upon the Company or any
related corporation for all purposes. The Company and its related corporations
waive all claims and rights against you with respect thereto except as
specifically set forth in the next sentence. If the Internal Revenue Service
(the "IRS") determines that a Severance Parachute Payment is subject to the
Excise Tax, then the Company or any related corporation, as their exclusive
remedy, shall seek to enforce the provisions of Section 7 hereof. Such
enforcement of Section 7 hereof shall be the only remedy, under any and all
applicable state and federal laws or otherwise, for your failure to reduce the
Severance Parachute Payments so that no portion thereof is subject to the Excise
Tax. The Company or related corporation shall reduce a Severance Parachute
Payment in accordance with Section 6 only upon written notice by you indicating
the amount of such reduction, if any.
7. REMEDY. If, notwithstanding the reduction described in
Section 6 hereof, the IRS determines that you are liable for the Excise Tax as a
result of the receipt of a Severance Parachute Payment, then you shall, subject
to the provisions of this Agreement, be obligated to pay to SGI (the "REPAYMENT
OBLIGATION") an amount of money equal to the "REPAYMENT AMOUNT." The Repayment
Amount with respect to a Severance Parachute Payment shall be the smallest such
amount, if any, as shall be required to be paid to the Company so that your net
proceeds with respect to any Severance Parachute Payment (after taking into
account the payment of the Excise Tax imposed on such Severance Parachute
Payment) shall be maximized. Notwithstanding the foregoing, the Repayment Amount
with respect to a Severance Parachute Payment shall be zero if a Repayment
Amount of more than zero would not eliminate the Excise Tax imposed on such
Severance Parachute Payment. If the Excise Tax is not eliminated through the
performance of the Repayment Obligation, you shall pay the Excise Tax. The
Repayment Obligation shall be performed within 30 days of either (i) your
entering into a binding agreement with the IRS as to the amount of your Excise
Tax liability or (ii) a final determination by the IRS
7
<PAGE>
or a court decision requiring you to pay the Excise Tax with respect to such
a Severance Parachute Payment from which no appeal is available or is timely
taken.
8. DISPUTES. To dispute a termination for Good Reason by you,
the Company must give you written notice of such dispute within ten business
days after your effective date of termination. To dispute a termination by the
Company or any failure to make payments claimed to be due hereunder, you must
give written notice of such dispute to the Company within 30 days after
receiving a notice of termination, or within 30 days after the date on which a
payment claimed by you to be due hereunder was due to be made, as the case may
be.
If any such dispute is finally determined in your favor, the
Company shall pay all reasonable fees and expenses, including attorneys' and
consultants' fees, that you incur in good faith in connection therewith.
9. NO MITIGATION.
(a) You shall not be required to mitigate the amount of any
payment provided for in Section 3 hereof by seeking other employment or
otherwise, nor shall the amount of such payment be reduced by reason of
compensation or other income you receive for services rendered after your
termination of employment with the Company, subject to Section 18; PROVIDED,
HOWEVER, that the amount of any payment provided for in Section 3 may be offset
by the Company by the amount of any indebtedness you may have to the Company at
the time of your termination of employment.
(b) In addition to the Termination Payment payable pursuant to
Section 3 hereof, you shall be entitled to receive all benefits payable to you
under any benefit plan of the Company in which you participate.
10. COMPANY'S SUCCESSORS. The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation, or
otherwise) to all or substantially all of the business and/or assets of the
Company, to expressly assume and agree to perform the obligations under this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. As used in this
Section 10, "COMPANY" includes any successor to its business or assets as
aforesaid which executes and delivers this Agreement or which otherwise becomes
bound by all the terms and provisions of this Agreement by operation of law.
11. NOTICE. Notices and all other communications provided for
in this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or five (5) days after deposit with postal
authorities transmitted by United States registered or certified mail, return
receipt requested, postage prepaid, addressed to the applicable address set
forth on the first page of this Agreement, or to such other address as either
party may
8
<PAGE>
have furnished to the other in writing in accordance herewith, except that
notices of change of address shall be effective only upon receipt.
12. AMENDMENT OR WAIVER. No provisions of this Agreement may
be modified, waived, or discharged unless such waiver, modification, or
discharge is agreed to in writing by you and the Company. No waiver of either
party at any time of the breach of, or lack of compliance with, any conditions
or provisions of this Agreement shall be deemed a waiver of other provisions or
conditions hereof.
13. SOLE AGREEMENT. This Agreement represents the entire
agreement between you and the Company with respect to the matters set forth
herein. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter of this Agreement will be made by
either party which are not set forth expressly herein.
14. EMPLOYEE'S SUCCESSORS. This Agreement shall inure to the
benefit of and be enforceable by your personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees, and
legatees. If you should die while any amounts are still payable to you
hereunder, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to your devisee, legatee, or other
designee or, if there be no such designees, to your estate.
15. VALIDITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
16. APPLICABLE LAW. This Agreement shall be interpreted and
enforced in accordance with the laws of the State of California.
17. COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
18. RIGHTS NOT DUPLICATIVE. Any amounts paid or payable to you
hereunder shall be reduced and offset by any amounts paid to you under the terms
of the Change in Control Agreement.
9
<PAGE>
If the foregoing conforms with your understanding of the matters
described herein, please indicate your agreement to the terms hereof by signing
where indicated below and returning one copy of this Agreement to the
undersigned.
Very truly yours,
MIPS TECHNOLOGIES, INC.
By:
---------------------------------
Name:
Title:
ACCEPTED AND AGREED TO AS OF
THE DATE FIRST SET FORTH ABOVE:
- ------------------------------------
Name:
10
<PAGE>
Exhibit 10.15
EXECUTION COPY
MIPS TECHNOLOGIES, INC.
1225 Charleston Road
Mountain View, CA 94043-1353
April 1, 1999
John Bourgoin
President and Chief Executive Officer
MIPS Technologies, Inc.
1225 Charleston Road
Mountain View, CA 94043-1353
Dear John:
MIPS Technologies, Inc. (the "COMPANY") considers it essential to the
best interests of its shareholders to foster the continuous employment of key
management personnel. In this connection, the Board (as defined in Section 2(b))
recognizes that, as is the case with many publicly held corporations, the
possibility of a change in control may exist and that such possibility, and the
uncertainty and questions which it may raise among management, may result in the
departure or distraction of management personnel to the detriment of the Company
and its shareholders.
The Board has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of officers of
the Company, including you, to their assigned duties without distraction in the
face of potentially disturbing circumstances arising from the possibility of a
change in control of the Company, although no such change is now contemplated.
In order to induce you to remain in the employ of the Company and in
consideration of your agreement set forth in Section 2(i) hereof, the Company
agrees that you shall receive the benefits set forth in this agreement
("AGREEMENT") under the circumstances described below.
1. TERM OF AGREEMENT. This Agreement shall commence on the date
hereof and shall continue in effect until your employment with the Company is
terminated other than after a Change in Control (as defined in Section 2(d)),
unless sooner terminated by written agreement of the Company and you.
<PAGE>
April 1, 1999
Page 2
2. DEFINITIONS. As used in this Agreement:
(a) "BENEFICIAL OWNER" shall have the meaning ascribed to such term
in Rule 13d-3 of the General Rules and Regulations under the Securities Exchange
Act of 1934, as amended (the "EXCHANGE ACT").
(b) "BOARD" shall mean the Board of Directors of the Company.
(c) "BUSINESS COMBINATION" means and includes each and all of the
following occurrences:
(i) a consolidation or merger pursuant to which more than 75%
of the Company's Majority Voting Stock is transferred to different holders,
except for a transaction intended primarily to change the state of the
Company's incorporation;
(ii) more than 75% of the assets of the Company are sold or
otherwise disposed of; or
(iii) the Company dissolves or liquidates or effects a partial
liquidation involving more than 75% of its assets.
(d) "CHANGE IN CONTROL" of the Company means and includes each and
all of the following occurrences:
(i) A Business Combination.
(ii) When any "person" as defined in Section 3(a)(9) of the
Exchange Act and as used in Sections 13(d) and 14(d) thereof other than
SGI, including a "group" as defined in Section 13(d) of the Exchange Act
but excluding the Company and any subsidiary and any employee benefit plan
sponsored or maintained by the Company or any subsidiary (including any
trustee of such plan acting as trustee), directly or indirectly, becomes
the Beneficial Owner of securities of the Company representing thirty
percent (30%) or more of the Majority Voting Stock; PROVIDED, HOWEVER, that
no crossing of such 30% threshold shall be a "Change in Control" if it is
caused (i) solely as a result of an acquisition by the Company of its
voting securities or (ii) solely as a result of an acquisition of the
Company's voting securities directly from the Company, in either case until
such time thereafter as such person acquires additional voting securities
other than directly from the Company and, after giving effect to such
transaction, such person owns 30% or more of the Majority Voting Stock;
PROVIDED FURTHER, HOWEVER, that no transaction involving a change in the
corporate control of SGI, whether through stock acquisition,
<PAGE>
April 1, 1999
Page 3
merger, voting agreement or otherwise, will result in a Change in Control
for purposes of this Agreement.
(iii) During any period of three (3) consecutive years (not
including any period during which SGI maintains control over the Company),
individuals who, at the beginning of such period, constitute the Board (the
"INCUMBENT BOARD") cease for any reason to constitute at least a majority
of the Board; PROVIDED, that any person (A) becoming a director subsequent
to the date hereof whose election, or nomination for election by the
Company's shareholders, was approved by the vote of at least a majority of
the directors then comprising the Incumbent Board or (B) obtaining a
position on the Board which was immediately previously held by a director
elected or appointed while SGI maintained control over the Company,
regardless of whether such person is approved by a majority of the
directors then comprising the Incumbent Board (in either case other than an
election or nomination of any individual whose initial assumption of office
is in connection with an actual or threatened election contest relating to
the election of the directors of the Company, as such terms are used in
Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be,
for purposes of this Agreement, considered as though such person were a
member of the Incumbent Board. For purposes of this Agreement, SGI shall
be deemed to maintain control over the Company until the later of (i) the
date on which SGI and its affiliates dispose of all shares of Class B
Common Stock of the Company then held by them and (ii) the date on which
SGI and its affiliates first hold securities representing less than 50% of
the outstanding voting power in the election of the Company's directors.
(iv) a Reacquisition Event.
For purposes of this Agreement, the Board of Directors may by
resolution, clarify the date as of which a Change in Control shall be deemed to
have occurred.
(e) "CURRENT COMPENSATION" shall mean your monthly base salary, as
in effect immediately prior to your termination of employment with the Company.
(f) "DISABILITY" shall mean a physical or mental illness or injury
which, as determined by the Company, continuously prevents you from performing
your duties with the Company for a period of six months prior to termination.
(g) "GOOD REASON" shall mean grounds for termination by you of your
employment by the Company based upon prior constructive termination by the
Company as provided in Section 5 hereof.
<PAGE>
April 1, 1999
Page 4
(h) "MAJORITY VOTING STOCK" shall mean the class of the Company's
voting stock which, as of the time of determination, possesses the right to
elect a majority of the directors of the Company.
(i) "POTENTIAL CHANGE IN CONTROL OF THE COMPANY" shall be deemed to
have occurred if (i) the Company enters into an agreement or letter of intent,
the consummation of which would result in the occurrence of a Change in Control
of the Company; (ii) any person (including the Company) publicly announces an
intention to take or to consider taking actions which if consummated would
constitute a Change in Control of the Company; (iii) any person, other than SGI
or a trustee or other fiduciary holding securities under an employee benefit
plan for the Company, who is or becomes the beneficial owner, directly or
indirectly, of 9.5% or more of the Majority Voting Stock increases his
beneficial ownership of such securities by five (5) percentage points or more
over the percentage so owned by such person; or (iv) the Board adopts a
resolution to the effect that, for purposes of this Agreement, a Potential
Change in Control of the Company has occurred. You agree that, subject to the
terms and conditions of this Agreement, in the event of a Potential Change in
Control of the Company, you will remain in the employ of the Company (or the
subsidiary thereof by which you are employed at the date such Potential Change
in Control occurs) until the earliest of (x) a date which is six months from the
occurrence of such Potential Change in Control of the Company, (y) the
termination by you of your employment by reason of Disability or (z) the
occurrence of a Change in Control of the Company.
(j) "RECAPITALIZATION" shall mean the proposed recapitalization of
the Company pursuant to which the Company's share capital will be divided into
two classes of stock possessing distinct voting rights in the election of the
Company's directors but otherwise having substantially identical rights and
preferences.
(k) "REACQUISITION EVENT" shall mean (i) the acquisition by SGI of
direct or indirect beneficial ownership of all or substantially all of the
Company's then outstanding voting securities, other than any acquisition by SGI
of direct or indirect beneficial ownership of the Company's voting securities in
furtherance of the Recapitalization, (ii) upon written direction of SGI
following a resolution by the Board of Directors of SGI, the acquisition by the
Company of all or substantially all of its outstanding voting securities not
held by SGI which would result in the direct or indirect beneficial ownership by
SGI of all or substantially all of the Company's voting securities, or (iii) a
merger or other corporate combination involving the Company and SGI or any
entity that is owned or controlled by SGI, regardless of which entity survives
such merger or other corporate combination; PROVIDED, HOWEVER, that no
transaction in furtherance of a Spin-Off shall constitute a Reacquisition Event.
<PAGE>
April 1, 1999
Page 5
(l) "SGI" means Silicon Graphics, Inc., a Delaware corporation, and
any successor to all or substantially all of its business or assets.
(m) "SPIN-OFF" means (i) any transaction or series of transactions
as a result of which, after such transaction or series of transactions, the
stockholders of SGI prior to such transaction or series of transactions hold
independent interests representing the Company's business and SGI's business or
(ii) any other transaction or series of transactions as a result of which all or
substantially all of the Company's outstanding voting securities are directly or
indirectly held by the public.
(n) "TERMINATION PAYMENT" shall mean the severance pay to which you
are entitled upon termination of your employment within 24 months after a Change
in Control as provided in Section 3(a) hereof.
3. COMPENSATION FOLLOWING A CHANGE IN CONTROL.
(a) Subject to Sections 6 and 7 below, if your employment with the
Company is terminated within 24 months after a Change in Control:
(i) you shall be entitled to a Termination Payment, payable
in cash, in an amount equal to 24 months of your Current Compensation at
the rate in effect immediately prior to such Change in Control.
(ii) in the event that your ability to sell the stock of the
Company is limited by the provisions of the Securities Act of 1933, as
amended, or any rule or regulation promulgated thereunder, or by any
agreement entered into by you in connection with the Change in Control, you
shall be entitled to exercise any stock option granted to you by the
Company until the earlier of either (A) the date which is three months
after the end of the end of the period during which such limitation applies
or (B) the end of the term of the stock option.
(b) Subject to Sections 6 and 7 below, upon the occurrence of a
Change in Control:
<PAGE>
April 1, 1999
Page 6
(i) (A) any stock option granted to you by the Company shall
become fully vested and exercisable and shall remain exercisable in
accordance with the terms of the applicable option award agreement, except
to the extent modified by Section 3(a), and (B) you shall have the right
during the period of six months following such Change in Control to have
any such option "cashed out" at its market value determined as provided
herein. The cash out proceeds shall be paid to you or, in the event of
your death prior to payment, the representative of your estate. For this
purpose, the market value of an outstanding option shall be measured as the
difference between the option exercise price and the "Change in Control
Price" as defined in Section 3(d), as of the date such Change in Control is
determined to have occurred or such other date as the Board may determine
prior to the Change in Control.
(ii) all forfeiture restrictions applicable to restricted
stock granted to you by the Company shall lapse and such restricted stock
shall be released from the Company's repurchase right set forth in the
applicable restricted stock agreement.
(c) Any cash payable to you under Section 3(a)(i) shall be payable
between 30 and 60 calendar days after your termination of employment. Any cash
payable to you under Section 3(b)(i) shall be made within 30 calendar days after
the date the Company receives your written notice electing to be cashed out on
the value of your options.
(d) For purposes of this Section 3, "CHANGE IN CONTROL PRICE" shall
be, as determined by the Board, (i) the highest closing sale price of a share of
the Company's Common Stock as reported by the NASDAQ National Market System and
as appearing in THE WALL STREET JOURNAL (or, in the event the Common Stock is
listed on a stock exchange, the highest closing price on such exchange as
reported on the composite transactions reporting system), at any time within the
60-day period immediately preceding the date of determination of the Change in
Control Price by the Board (the "60-DAY PERIOD"), or (ii) the highest price paid
or offered for a share of the Common Stock, as determined by the Board, in any
bona fide transaction or bona fide offer related to the Change in Control of the
Company, at any time within the 60-day period.
(e) Anything contained in Sections 3(a) or 3(b) above to the
contrary notwithstanding, the Company shall have no obligation to pay you a
Termination Payment, to accelerate the vesting of your options, to cash out your
options or to release your restricted shares from their forfeiture restrictions
or repurchase rights under this Agreement in the event of a termination of your
employment prior to a Change in Control. The Company shall also have no
obligation to pay you a Termination Payment if, after a Change in Control, the
Company terminates your employment for "Cause" or if your employment terminates
due to your death, retirement or resignation other than for "Good Reason."
Furthermore, if it is determined by the Board, upon receipt of a written opinion
of the Company's independent public accountants that to
<PAGE>
April 1, 1999
Page 7
accelerate the vesting of your options, to cash out your options or to release
your restricted shares from their forfeiture restrictions or repurchase rights
under this Agreement would preclude accounting for the acquisition of the
Company as a pooling of interests, and the Board otherwise desires to approve a
proposed acquisition of the Company by an acquiring company which requires as a
condition to closing of the acquisition that the acquisition be accounted for as
a pooling of interests, then the Company shall not be obligated to accelerate or
cash out your options or release your restricted shares from their forfeiture
restrictions or repurchase rights under this Agreement to the extent necessary
to enable the acquisition to be accounted for as a pooling of interests.
(f) In the event that the terms of this Agreement relating to
options or restricted stock conflict with the terms of any option, stock award
or related agreement between you and the Company, the terms that are more
favorable to you will control.
4. TERMINATION FOR CAUSE. Termination of your employment with the
Company shall be regarded as termination for Cause only upon:
(a) your willful and continued failure to substantially perform
your duties with the Company (other than such failure resulting from your
incapacity due to physical or mental illness) after there is delivered to you by
the Board a written demand for substantial performance which sets forth in
detail the specific respects in which it believes you have not substantially
performed your duties;
(b) your willfully engaging in gross misconduct which is materially
and demonstrably injurious to the Company;
(c) your committing a felony or an act of fraud against the Company
or its affiliates; or
(d) your breaching materially the terms of your employee
confidentiality and proprietary information agreement with the Company.
No act, or failure to act, by you shall be considered "willful" if
done, or omitted to be done, by you in good faith and in your reasonable belief
that your act or omission was in the best interest of the Company and/or
required by applicable law.
Anything contained in this Section 4 to the contrary notwithstanding,
you shall not be deemed to have been terminated for Cause unless and until there
shall have been delivered to you a copy of a resolution duly adopted by the
affirmative vote of not less than a majority of the entire membership of the
Board at a meeting of the Board called and held for that purpose
<PAGE>
April 1, 1999
Page 8
(after reasonable notice to and an opportunity for you, together with your
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board, you were guilty of conduct set forth in this Section 4 and
specifying the particulars thereof in detail.
5. TERMINATION FOR GOOD REASON. Your employment with the Company
may be regarded as having been constructively terminated by the Company, and you
may therefore terminate your employment for Good Reason and thereupon become
entitled to compensation pursuant to Section 3 above, if, after a Change in
Control, one or more of the following events shall occur (unless such event(s)
applies generally to all officers of the Company and any successor to the
Company, or applies to a person solely in his capacity as a member of the
Board):
(a) without your express written consent, the assignment to you of
any duties or the significant reduction of your duties, either of which is
inconsistent with your position as CEO with the Company (or the duties and
responsibilities of the CEO position) immediately prior to a Change in Control,
or your removal from or any failure to re-elect you to any such position;
(b) without your express written consent, the substantial
reduction, without good business reasons, of the facilities and perquisites
(including office space and location) available to you immediately prior to a
Change in Control;
(c) a reduction by the Company in your salary or in any bonus
compensation formula applicable to you as in effect immediately prior to a
Change in Control, or the failure by the Company to increase such base salary
each year following a Change in Control by an amount which equals at least
one-half (1/2), on a percentage basis, of the average annual percentage increase
in base salary for all officers of the Company (and any successor of the
Company) during the prior two full calendar years;
(d) a material reduction by the Company in the kind or level of
employee benefits to which you were entitled prior to a Change in Control with
the result that your overall benefits package is significantly reduced after the
Change in Control; or the taking of any action by the Company which would
materially and adversely affect your participation in any plan, program or
policy generally applicable to executives or employees of the Company or any
successor of the Company (including but not limited to paid vacation days), or
deprive you in a material and substantial way of any fringe benefits enjoyed by
you prior to a Change in Control;
(e) the Company's requiring you to be based at a location that is
more than 25 miles from your then present location without your consent (except
for required travel on the
<PAGE>
April 1, 1999
Page 9
Company's business to an extent substantially consistent with your present
business travel obligations);
(f) any purported termination of your employment by the Company
which is not effected for Disability or for Cause, or any purported termination
for which the grounds relied upon are not valid; or
(g) the failure of the Company to obtain the assumption of this
Agreement by any successor as contemplated in Section 10 hereof.
6. PARACHUTE PAYMENTS. In the event that any payment or benefit
received or to be received by you in connection with a termination of your
employment with the Company or any corporation which is a related corporation
within the meaning of section 280G(e) of the Internal Revenue Code of 1986 (the
"CODE") (collectively, the "SEVERANCE PAYMENTS") would (i) constitute a
"parachute payment" within the meaning of section 280G of the Code or any
similar or successor provision and (ii) but for this Section 6, be subject to
the excise tax imposed by section 4999 of the Code or any similar or successor
provision (the "EXCISE TAX"), then, subject to the provisions of Section 7
hereof, such Severance Payments (which Severance Payments shall collectively be
referred to herein as the "SEVERANCE PARACHUTE PAYMENTS") shall be reduced to
the largest amount which you, in your sole discretion, determine would result in
no portion of the Severance Parachute Payments being subject to the Excise Tax.
The determination of any required reduction pursuant to this Section 6
(including the determination as to which specific Severance Parachute Payments
shall be reduced) shall be made by you in your sole discretion, and such
determination shall be conclusive and binding upon the Company or any related
corporation for all purposes. The Company and its related corporations waive
all claims and rights against you with respect thereto except as specifically
set forth in the next sentence. If the Internal Revenue Service (the "IRS")
determines that a Severance Parachute Payment is subject to the Excise Tax, then
the Company or any related corporation, as their exclusive remedy, shall seek to
enforce the provisions of Section 7 hereof. Such enforcement of Section 7
hereof shall be the only remedy, under any and all applicable state and federal
laws or otherwise, for your failure to reduce the Severance Parachute Payments
so that no portion thereof is subject to the Excise Tax. The Company or related
corporation shall reduce a Severance Parachute Payment in accordance with
Section 6 only upon written notice by you indicating the amount of such
reduction, if any.
7. REMEDY. If, notwithstanding the reduction described in Section
6 hereof, the IRS determines that you are liable for the Excise Tax as a result
of the receipt of a Severance Parachute Payment, then you shall, subject to the
provisions of this Agreement, be obligated to pay to the Company (the "REPAYMENT
OBLIGATION") an amount of money equal to the "REPAYMENT AMOUNT." The Repayment
Amount with respect to a Severance Parachute Payment
<PAGE>
April 1, 1999
Page 10
shall be the smallest such amount, if any, as shall be required to be paid to
the Company so that your net proceeds with respect to any Severance Parachute
Payment (after taking into account the payment of the Excise Tax imposed on such
Severance Parachute Payment) shall be maximized. Notwithstanding the foregoing,
the Repayment Amount with respect to a Severance Parachute Payment shall be zero
if a Repayment Amount of more than zero would not eliminate the Excise Tax
imposed on such Severance Parachute Payment. If the Excise Tax is not eliminated
through the performance of the Repayment Obligation, you shall pay the Excise
Tax. The Repayment Obligation shall be performed within 30 days of either (i)
your entering into a binding agreement with the IRS as to the amount of your
Excise Tax liability or (ii) a final determination by the IRS or a court
decision requiring you to pay the Excise Tax with respect to such a Severance
Parachute Payment from which no appeal is available or is timely taken.
8. DISPUTES. To dispute a termination for Good Reason by you, the
Company must give you written notice of such dispute within ten business days
after your effective date of termination. To dispute a termination by the
Company or any failure to make payments claimed to be due hereunder, you must
give written notice of such dispute to the Company within 30 days after
receiving a notice of termination, or within 30 days after the date on which a
payment claimed by you to be due hereunder was due to be made, as the case may
be.
If any such dispute is finally determined in your favor, the Company
shall pay all reasonable fees and expenses, including attorneys' and
consultants' fees, that you incur in good faith in connection therewith.
9. NO MITIGATION.
(a) You shall not be required to mitigate the amount of any payment
provided for in Section 3 hereof by seeking other employment or otherwise, nor
shall the amount of such payment be reduced by reason of compensation or other
income you receive for services rendered after your termination of employment
with the Company, subject to Section 18; PROVIDED, HOWEVER, that the amount of
any payment provided for in Section 3 may be offset by the Company by the amount
of any indebtedness you may have to the Company at the time of your termination
of employment.
(b) In addition to the Termination Payment payable pursuant to
Section 3 hereof, you shall be entitled to receive all benefits payable to you
under any benefit plan of the Company in which you participate.
10. COMPANY'S SUCCESSORS. The Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation, or otherwise)
to all or substantially all of the business and/or assets of the Company, to
expressly assume and agree to
<PAGE>
April 1, 1999
Page 11
perform the obligations under this Agreement in the same manner and to the same
extent that the Company would be required to perform if no such succession had
taken place. As used in this Section 10, "COMPANY" includes any successor to
its business or assets as aforesaid which executes and delivers this Agreement
or which otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law.
11. NOTICE. Notices and all other communications provided for in
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or five (5) days after deposit with postal authorities
transmitted by United States registered or certified mail, return receipt
requested, postage prepaid, addressed to the applicable address set forth on the
first page of this Agreement, or to such other address as either party may have
furnished to the other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
12. AMENDMENT OR WAIVER. No provisions of this Agreement may be
modified, waived, or discharged unless such waiver, modification, or discharge
is agreed to in writing by you and the Company. No waiver of either party at
any time of the breach of, or lack of compliance with, any conditions or
provisions of this Agreement shall be deemed a waiver of other provisions or
conditions hereof.
13. SOLE AGREEMENT. This Agreement represents the entire agreement
between you and the Company with respect to the matters set forth herein. No
agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter of this Agreement will be made by either party
which are not set forth expressly herein.
14. EMPLOYEE'S SUCCESSORS. This Agreement shall inure to the
benefit of and be enforceable by your personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees, and
legatees. If you should die while any amounts are still payable to you
hereunder, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to your devisee, legatee, or other
designee or, if there be no such designees, to your estate.
15. VALIDITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
16. APPLICABLE LAW. This Agreement shall be interpreted and
enforced in accordance with the laws of the State of California.
<PAGE>
April 1, 1999
Page 12
17. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
18. RIGHTS NOT DUPLICATIVE. Any amounts paid or payable to you
hereunder shall be reduced and offset by any amounts paid to you under the terms
of the supplemental letter agreement dated the date hereof between the Company
and you pertaining to the effects of a change in the corporate control of SGI.
If the foregoing conforms with your understanding of the matters
described herein, please indicate your agreement to the terms hereof by signing
where indicated below and returning one copy of this Agreement to the
undersigned.
Very truly yours,
MIPS TECHNOLOGIES, INC.
By: /s/ Sandy Creighton
-------------------------------
Name: Sandy Creighton
Title: Vice President and
General Counsel
ACCEPTED AND AGREED TO AS OF
THE DATE FIRST SET FORTH ABOVE:
/s/ John Bourgoin
- -------------------------
Name: John Bourgoin
<PAGE>
Exhibit 10.16
EXECUTION COPY
MIPS TECHNOLOGIES, INC.
1225 Charleston Road
Mountain View, CA 94043-1353
April 1, 1999
John Bourgoin
President and Chief Executive Officer
MIPS Technologies, Inc.
1225 Charleston Road
Mountain View, CA 94043-1353
SUPPLEMENT TO CHANGE IN CONTROL AGREEMENT
Dear John:
Reference is hereby made to the letter agreement between you and MIPS
Technologies, Inc. (the "COMPANY"), dated the date hereof (the "CHANGE IN
CONTROL AGREEMENT"), pursuant to which the Company has undertaken to provide you
with certain benefits in the event of a Change in Control and upon certain
terminations of your employment following a Change in Control (capitalized terms
not otherwise defined herein shall have the meanings ascribed thereto in the
Change in Control Agreement). The Company's Board, in recognition of the unique
circumstances presented by the Company's current majority ownership and control
by SGI and the contemplated Recapitalization and Spin-Off, has determined that
appropriate measures should be taken to provide the Company's senior management
with certain protections against a termination of their employment following a
change in control of SGI while SGI maintains control over the Company.
In order to induce you to remain in the employ of the Company and in
consideration of your agreement set forth in Section 2(g) hereof, the Company
agrees that you shall receive the benefits set forth in this supplemental
agreement (this "AGREEMENT") under the circumstances described below.
1. TERM OF AGREEMENT. This Agreement shall commence on the date
hereof and shall continue in effect until the earlier of (a) the date on which
your employment with the Company is terminated other than after an SGI Change in
Control (as defined in Section 2(i)) or (b) the first date on which SGI no
longer maintains control over the Company, unless sooner terminated by written
agreement of the Company and you. For purposes of this Agreement, SGI
<PAGE>
April 1, 1999
Page 2
shall be deemed to maintain control over the Company until the later of (i) the
date on which SGI, any successor to SGI and any of their respective affiliates
dispose of all shares of Class B Common Stock of the Company then held by them
and (ii) the date on which SGI, any successor to SGI and any of their respective
affiliates first hold securities representing less than 50% of the outstanding
voting power in the election of the Company's directors.
2. DEFINITIONS. As used in this Agreement:
(a) "BENEFICIAL OWNER" shall have the meaning ascribed to such term
in Rule 13d-3 of the General Rules and Regulations under the Securities Exchange
Act of 1934, as amended (the "EXCHANGE ACT").
(b) "BOARD" shall mean, with respect to any corporation, such
corporation's board of directors.
(c) "BUSINESS COMBINATION" means and includes each and all of the
following occurrences:
(i) a consolidation or merger pursuant to which more than 75%
of SGI's voting stock is transferred to different holders, except for a
transaction intended primarily to change the state of SGI's incorporation;
(ii) more than 75% of the assets of SGI are sold or otherwise
disposed of; or
(iii) SGI dissolves or liquidates or effects a partial
liquidation involving more than 75% of its assets;
PROVIDED, HOWEVER, that no transaction in furtherance of a Spin-Off shall
constitute a Business Combination.
(d) "CURRENT COMPENSATION" shall mean your monthly base salary, as
in effect immediately prior to your termination of employment with the Company.
(e) "DISABILITY" shall mean a physical or mental illness or injury
which, as determined by the Company, continuously prevents you from performing
your duties with the Company for a period of six months prior to termination.
<PAGE>
April 1, 1999
Page 3
(f) "GOOD REASON" shall mean grounds for termination by you of your
employment by the Company based upon prior constructive termination by the
Company as provided in Section 5 hereof.
(g) "POTENTIAL SGI CHANGE IN CONTROL" shall be deemed to have
occurred if (i) SGI enters into an agreement or letter of intent, the
consummation of which would result in the occurrence of an SGI Change in
Control; (ii) any person (including SGI) publicly announces an intention to take
or to consider taking actions which if consummated would constitute an SGI
Change in Control; (iii) any person, other than a trustee or other fiduciary
holding securities under an employee benefit plan for SGI, who is or becomes the
beneficial owner, directly or indirectly, of securities of SGI representing 9.5%
or more of the combined voting power of SGI's then outstanding securities,
increases his beneficial ownership of such securities by five (5) percentage
points or more over the percentage so owned by such person; or (iv) the
Company's Board adopts a resolution to the effect that, for purposes of this
Agreement, a Potential SGI Change in Control has occurred. You agree that,
subject to the terms and conditions of this Agreement, in the event of a
Potential SGI Change in Control, you will remain in the employ of the Company
(or the subsidiary thereof by which you are employed at the date such Potential
SGI Change in Control occurs) until the earliest of (x) a date which is six
months from the occurrence of such Potential SGI Change in Control of the
Company, (y) the termination by you of your employment by reason of Disability
or (z) the occurrence of an SGI Change in Control.
(h) "SGI" means Silicon Graphics, Inc., a Delaware corporation.
(i) "SGI CHANGE IN CONTROL" means and includes each and all of the
following occurrences:
(i) A Business Combination.
(ii) When any "person" as defined in Section 3(a)(9) of the
Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a
"group" as defined in Section 13(d) of the Exchange Act but excluding SGI
and any subsidiary and any employee benefit plan sponsored or maintained by
SGI or any subsidiary (including any trustee of such plan acting as
trustee), directly or indirectly, becomes the Beneficial Owner of
securities of SGI representing fifty percent (50%) or more of the combined
voting power of SGI's then outstanding securities with respect to the
election of the directors of SGI; PROVIDED, HOWEVER, that no crossing of
such 50% threshold shall be a "Change in Control" if it is caused (i)
solely as a result of an acquisition by SGI of its voting securities or
(ii) solely as a result of an acquisition of SGI's voting securities
directly from SGI, in either case until such time thereafter as such person
acquires additional voting securities other than directly from SGI and,
after giving effect to such
<PAGE>
April 1, 1999
Page 4
transaction, such person owns 50% or more of the combined voting power of
SGI's then outstanding securities with respect to the election of the
directors of SGI.
(iii) During any period of three (3) consecutive years (not
including any period prior to the date hereof), individuals who, at the
beginning of such period, constitute SGI's Board (the "INCUMBENT BOARD")
cease for any reason to constitute at least a majority of SGI's Board;
PROVIDED, that any person becoming a director subsequent to the date hereof
whose election, or nomination for election by the Company's shareholders,
was approved by the vote of at least a majority of the directors then
comprising the Incumbent Board (other than an election or nomination of any
individual whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of the
directors of SGI, as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) shall be, for purposes of this
Agreement, considered as though such person were a member of the Incumbent
Board.
For purposes of this Agreement, the Company's Board may by
resolution, clarify the date as of which an SGI Change in Control shall be
deemed to have occurred.
(j) "SPIN-OFF" means (i) any transaction or series of transactions
as a result of which, after such transaction or series of transactions, the
stockholders of SGI prior to such transaction or series of transactions hold
independent interests representing the Company's business and SGI's business or
(ii) any other transaction or series of transactions as a result of which all or
substantially all of the Company's outstanding voting securities are directly or
indirectly held by the public.
(k) "TERMINATION PAYMENT" shall mean the severance pay to which you
are entitled upon termination of your employment within 12 months after an SGI
Change in Control as provided in Section 3(a) hereof.
3. COMPENSATION FOLLOWING A CHANGE IN CONTROL.
(a) Subject to Sections 6 and 7 below, if your employment with the
Company is terminated within 12 months after an SGI Change in Control:
(i) you shall be entitled to a Termination Payment, payable
in cash, in an amount equal to 24 months of your Current Compensation at
the rate in effect immediately prior to such SGI Change in Control; and
<PAGE>
April 1, 1999
Page 5
(ii) (A) any stock option granted to you by the Company shall
become fully vested and exercisable and shall remain exercisable in
accordance with the terms of the applicable option award agreement, and
(B) you shall have the right during the period of six months following such
termination of employment to have any such option "cashed out" at its
market value determined as provided herein. The cash out proceeds shall be
paid to you or, in the event of your death prior to payment, the
representative of your estate. For this purpose, the market value of an
outstanding option shall be measured as the difference between the option
exercise price and the closing market price on the date of your termination
of employment; and
(iii) all forfeiture restrictions applicable to restricted
stock granted to you by the Company shall lapse and such restricted stock
shall be released from the Company's repurchase right set forth in the
applicable restricted stock agreement.
(b) Any cash payable to you under Section 3(a)(i) shall be payable
between 30 and 60 calendar days after your termination of employment. Any cash
payable to you under Section 3(a)(ii) shall be made within 30 calendar days
after the date the Company receives your written notice electing to be cashed
out on the value of your options.
(c) Anything contained in Section 3(a) above to the contrary
notwithstanding, the Company shall have no obligation to pay you a Termination
Payment, to accelerate the vesting of your options, to cash out your options or
to release your restricted shares from their forfeiture restrictions or
repurchase rights under this Agreement (i) in the event of a termination of your
employment prior to an SGI Change in Control or (ii) if, after an SGI Change in
Control, the Company terminates your employment for "Cause" or if your
employment terminates due to your death, retirement or resignation other than
for "Good Reason." Furthermore, if it is determined by SGI's Board, upon
receipt of a written opinion of SGI's independent public accountants that for
the Company to accelerate the vesting of your options, to cash out your options
or to release your restricted shares from their forfeiture restrictions or
repurchase rights under this Agreement would preclude accounting for the
acquisition of SGI as a pooling of interests, and SGI's Board otherwise desires
to approve a proposed acquisition of SGI by an acquiring company which requires
as a condition to closing of the acquisition that the acquisition be accounted
for as a pooling of interests, then the Company shall not be obligated to
accelerate or cash out your options or release your restricted shares from their
forfeiture restrictions or repurchase rights under this Agreement to the extent
necessary to enable the acquisition to be accounted for as a pooling of
interests, and shall not take any such action without the express written
consent of SGI.
<PAGE>
April 1, 1999
Page 6
(d) In the event that the terms of this Agreement relating to
options or restricted stock conflict with the terms of any option, stock award
or related agreement between you and the Company, the terms that are more
favorable to you will control.
4. TERMINATION FOR CAUSE. Termination of your employment with the
Company shall be regarded as termination for Cause only upon:
(a) your termination of employment in the ordinary course of
business due to your failure to satisfactorily perform the duties assigned to
you, in the good faith determination of the Company's chief executive officer
or, if such position is vacant, the Company's Board, in either case based upon
documented reports regarding your performance;
(b) your willfully engaging in gross misconduct which is materially
and demonstrably injurious to the Company;
(c) your committing a felony or an act of fraud against the Company
or its affiliates; or
(d) your breaching materially the terms of your employee
confidentiality and proprietary information agreement with the Company.
No act, or failure to act, by you shall be considered "willful" if
done, or omitted to be done, by you in good faith and in your reasonable belief
that your act or omission was in the best interest of the Company and/or
required by applicable law.
Anything contained in this Section 4 to the contrary notwithstanding,
you shall not be deemed to have been terminated for Cause under Section 4(b) or
(c) unless and until there shall have been delivered to you a copy of a
resolution duly adopted by the affirmative vote of not less than a majority of
the entire membership of the Company's Board at a meeting of the Company's Board
called and held for that purpose (after reasonable notice to and an opportunity
for you, together with your counsel, to be heard before the Company's Board),
finding that in the good faith opinion of the Company's Board, you were guilty
of conduct set forth in Section 4(b) or (c) and specifying the particulars
thereof in detail.
5. TERMINATION FOR GOOD REASON. Your employment with the Company
may be regarded as having been constructively terminated by the Company, and you
may therefore terminate your employment for Good Reason and thereupon become
entitled to compensation pursuant to Section 3 above, if, after an SGI Change in
Control, one or more of the following events shall occur (unless such event(s)
applies generally to all officers of the
<PAGE>
April 1, 1999
Page 7
Company and any successor to the Company, or applies to a person solely in his
capacity as a member of the Company's Board):
(a) the assignment to you of duties (or the significant reduction
of your duties) which are inconsistent with the position of the CEO of the
Company, provided that you resign your employment within 30 days after the
effectiveness of such assignment or reduction and you cite this Section 5(a) as
the reason for your resignation in a formal letter of resignation addressed to
the Company's Board;
(b) a reduction by the Company in your salary or in any bonus
compensation formula applicable to you as in effect immediately prior to the SGI
Change in Control, or the failure by the Company to increase such base salary in
the year following such SGI Change in Control by an amount which equals at least
one-half (1/2), on a percentage basis, of the average annual percentage increase
in base salary for all officers of the Company (and any successor of the
Company) during the prior two full calendar years;
(c) a material reduction by the Company in the kind or level of
employee benefits to which you were entitled prior to the SGI Change in Control
with the result that your overall benefits package is significantly reduced
after the SGI Change in Control; or the taking of any action by the Company
which would materially and adversely affect your participation in any plan,
program or policy generally applicable to executives or employees of the Company
or any successor of the Company (including but not limited to paid vacation
days), or deprive you in a material and substantial way of any fringe benefits
enjoyed by you prior to the SGI Change in Control;
(d) the Company's requiring you to be based at a location that is
more than 35 miles from your then present location without your consent (except
for required travel on the Company's business to an extent substantially
consistent with your present business travel obligations); or
(e) any purported termination of your employment by the Company
which is not effected for Disability or for Cause, or any purported termination
for which the grounds relied upon are not valid.
6. PARACHUTE PAYMENTS. In the event that any payment or benefit
received or to be received by you in connection with a termination of your
employment with the Company or any corporation which is a related corporation
within the meaning of section 280G(e) of the Internal Revenue Code of 1986 (the
"CODE") (collectively, the "SEVERANCE PAYMENTS") would (i) constitute a
"parachute payment" within the meaning of section 280G of the Code or any
similar or successor provision and (ii) but for this Section 6, be subject to
the excise tax imposed
<PAGE>
April 1, 1999
Page 8
by section 4999 of the Code or any similar or successor provision (the "EXCISE
TAX"), then, subject to the provisions of Section 7 hereof, such Severance
Payments (which Severance Payments shall collectively be referred to herein as
the "SEVERANCE PARACHUTE PAYMENTS") shall be reduced to the largest amount which
you, in your sole discretion, determine would result in no portion of the
Severance Parachute Payments being subject to the Excise Tax. The determination
of any required reduction pursuant to this Section 6 (including the
determination as to which specific Severance Parachute Payments shall be
reduced) shall be made by you in your sole discretion, and such determination
shall be conclusive and binding upon the Company or any related corporation for
all purposes. The Company and its related corporations waive all claims and
rights against you with respect thereto except as specifically set forth in the
next sentence. If the Internal Revenue Service (the "IRS") determines that a
Severance Parachute Payment is subject to the Excise Tax, then the Company or
any related corporation, as their exclusive remedy, shall seek to enforce the
provisions of Section 7 hereof. Such enforcement of Section 7 hereof shall be
the only remedy, under any and all applicable state and federal laws or
otherwise, for your failure to reduce the Severance Parachute Payments so that
no portion thereof is subject to the Excise Tax. The Company or related
corporation shall reduce a Severance Parachute Payment in accordance with
Section 6 only upon written notice by you indicating the amount of such
reduction, if any.
7. REMEDY. If, notwithstanding the reduction described in Section
6 hereof, the IRS determines that you are liable for the Excise Tax as a result
of the receipt of a Severance Parachute Payment, then you shall, subject to the
provisions of this Agreement, be obligated to pay to the Company (the "REPAYMENT
OBLIGATION") an amount of money equal to the "REPAYMENT AMOUNT." The Repayment
Amount with respect to a Severance Parachute Payment shall be the smallest such
amount, if any, as shall be required to be paid to the Company so that your net
proceeds with respect to any Severance Parachute Payment (after taking into
account the payment of the Excise Tax imposed on such Severance Parachute
Payment) shall be maximized. Notwithstanding the foregoing, the Repayment Amount
with respect to a Severance Parachute Payment shall be zero if a Repayment
Amount of more than zero would not eliminate the Excise Tax imposed on such
Severance Parachute Payment. If the Excise Tax is not eliminated through the
performance of the Repayment Obligation, you shall pay the Excise Tax. The
Repayment Obligation shall be performed within 30 days of either (i) your
entering into a binding agreement with the IRS as to the amount of your Excise
Tax liability or (ii) a final determination by the IRS or a court decision
requiring you to pay the Excise Tax with respect to such a Severance Parachute
Payment from which no appeal is available or is timely taken.
8. DISPUTES. To dispute a termination for Good Reason by you, the
Company must give you written notice of such dispute within ten business days
after your effective date of termination. To dispute a termination by the
Company or any failure to make payments claimed to be due hereunder, you must
give written notice of such dispute to the
<PAGE>
April 1, 1999
Page 9
Company within 30 days after receiving a notice of termination, or within 30
days after the date on which a payment claimed by you to be due hereunder was
due to be made, as the case may be.
If any such dispute is finally determined in your favor, the Company
shall pay all reasonable fees and expenses, including attorneys' and
consultants' fees, that you incur in good faith in connection therewith.
9. NO MITIGATION.
(a) You shall not be required to mitigate the amount of any payment
provided for in Section 3 hereof by seeking other employment or otherwise, nor
shall the amount of such payment be reduced by reason of compensation or other
income you receive for services rendered after your termination of employment
with the Company, subject to Section 18; PROVIDED, HOWEVER, that the amount of
any payment provided for in Section 3 may be offset by the Company by the amount
of any indebtedness you may have to the Company at the time of your termination
of employment.
(b) In addition to the Termination Payment payable pursuant to
Section 3 hereof, you shall be entitled to receive all benefits payable to you
under any benefit plan of the Company in which you participate.
10. COMPANY'S SUCCESSORS. The Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation, or otherwise)
to all or substantially all of the business and/or assets of the Company, to
expressly assume and agree to perform the obligations under this Agreement in
the same manner and to the same extent that the Company would be required to
perform if no such succession had taken place. As used in this Section 10,
"COMPANY" includes any successor to its business or assets as aforesaid which
executes and delivers this Agreement or which otherwise becomes bound by all the
terms and provisions of this Agreement by operation of law.
11. NOTICE. Notices and all other communications provided for in
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or five (5) days after deposit with postal authorities
transmitted by United States registered or certified mail, return receipt
requested, postage prepaid, addressed to the applicable address set forth on the
first page of this Agreement, or to such other address as either party may have
furnished to the other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
12. AMENDMENT OR WAIVER. No provisions of this Agreement may be
modified, waived, or discharged unless such waiver, modification, or discharge
is agreed to in
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April 1, 1999
Page 10
writing by you and the Company. No waiver of either party at any time of the
breach of, or lack of compliance with, any conditions or provisions of this
Agreement shall be deemed a waiver of other provisions or conditions hereof.
13. SOLE AGREEMENT. This Agreement represents the entire agreement
between you and the Company with respect to the matters set forth herein. No
agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter of this Agreement will be made by either party
which are not set forth expressly herein.
14. EMPLOYEE'S SUCCESSORS. This Agreement shall inure to the
benefit of and be enforceable by your personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees, and
legatees. If you should die while any amounts are still payable to you
hereunder, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to your devisee, legatee, or other
designee or, if there be no such designees, to your estate.
15. VALIDITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
16. APPLICABLE LAW. This Agreement shall be interpreted and
enforced in accordance with the laws of the State of California.
17. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
18. RIGHTS NOT DUPLICATIVE. Any amounts paid or payable to you
hereunder shall be reduced and offset by any amounts paid to you under the terms
of the Change in Control Agreement.
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April 1, 1999
Page 11
If the foregoing conforms with your understanding of the matters
described herein, please indicate your agreement to the terms hereof by signing
where indicated below and returning one copy of this Agreement to the
undersigned.
Very truly yours,
MIPS TECHNOLOGIES, INC.
By: /s/ Sandy Creighton
-------------------------------
Name: Sandy Creighton
Title: Vice President and General
Counsel
ACCEPTED AND AGREED TO AS OF
THE DATE FIRST SET FORTH ABOVE:
/s/ John Bourgoin
- ----------------------------
Name: John Bourgoin
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
July 20, 1998, in Amendment No. 3 to the Registration Statement (Form S-1 No.
333-73071) and related Prospectus of MIPS Technologies, Inc. for the
registration of 6,900,000 shares of its common stock.
ERNST & YOUNG LLP
San Jose, California
April 21, 1999
