<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
FILING BY:
MIPS TECHNOLOGIES, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
5) Total fee paid:
-----------------------------------------------------------------------
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE>
MIPS TECHNOLOGIES, INC.
1225 CHARLESTON ROAD
MOUNTAIN VIEW, CALIFORNIA 94043
FEBRUARY 26, 1999
Dear Stockholder:
You are cordially invited to attend a Special Meeting of stockholders of
MIPS Technologies, Inc., a Delaware corporation ("MIPS Technologies"), to be
held on Wednesday, March 31, 1999 at Hyatt Rickeys Hotel, 4219 El Camino Real,
Palo Alto, California, commencing at 2:00 p.m., local time.
At the Special Meeting, you will be asked to consider and vote upon a
proposed recapitalization of MIPS Technologies, including the approval and
adoption of certain changes to its certificate of incorporation and by-laws,
pursuant to which each issued and outstanding share of MIPS Technologies common
stock will be redesignated as one share of newly created and issued Class A
common stock. Immediately upon the consummation of the recapitalization, Silicon
Graphics, Inc., a Delaware corporation ("Silicon Graphics") and the holder of
approximately 85% of the outstanding common stock of MIPS Technologies, will
exchange each share of Class A common stock it owns for one share of newly
created and issued Class B common stock. Following the recapitalization (if
approved), holders of the Class A common stock, voting separately as a class,
will be entitled to elect 20% of MIPS Technologies' Board of Directors, and in
no event less than one director, and Silicon Graphics, as holder of all of the
Class B common stock, will be entitled to elect the remaining directors. The
accompanying Proxy Statement presents the details of the proposed
recapitalization.
The MIPS Technologies Board of Directors believes that the recapitalization
is fair to, and in the best interests of, MIPS Technologies and its stockholders
and has unanimously approved the recapitalization. Prior to the Board of
Directors' approval, a specially constituted committee of the Board of
Directors, composed of its two independent directors, determined that the
recapitalization is fair to MIPS Technologies and its public stockholders and
recommended the recapitalization to the MIPS Technologies Board of Directors.
THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS HAVE UNANIMOUSLY APPROVED THE
RECAPITALIZATION AND RECOMMEND THAT YOU VOTE FOR ITS APPROVAL AND ADOPTION.
YOUR PARTICIPATION AND VOTE IS IMPORTANT. THE RECAPITALIZATION WILL NOT BE
EFFECTED WITHOUT THE AFFIRMATIVE VOTE OF AT LEAST A MAJORITY OF THE MIPS
TECHNOLOGIES OUTSTANDING COMMON STOCK HELD BY PUBLIC STOCKHOLDERS (I.E.
STOCKHOLDERS OTHER THAN SILICON GRAPHICS), PRESENT AND VOTING AT THE SPECIAL
MEETING.
FOR FURTHER INFORMATION REGARDING THE RECAPITALIZATION, I URGE THAT YOU
CAREFULLY READ THE ACCOMPANYING PROXY STATEMENT, DATED FEBRUARY 26, 1999, AND,
SPECIFICALLY, THE SECTIONS ENTITLED "THE RECAPITALIZATION--REASONS FOR THE
RECAPITALIZATION; RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE MIPS BOARD OF
DIRECTORS" BEGINNING ON PAGE 19. If you have more questions about the
recapitalization or would like additional copies of the accompanying Proxy
Statement, you should contact Kevin C. Eichler, Chief Financial Officer of MIPS
Technologies, 1225 Charleston Road, Mountain View, California, 94043; telephone:
(650) 567-5000. Even if you plan to attend the Special Meeting in person, please
complete, sign, date and promptly return the enclosed proxy card in the enclosed
postage-prepaid envelope. This will not limit your right to attend or vote at
the Special Meeting.
Sincerely,
[SIG]
John E. Bourgoin
CHIEF EXECUTIVE OFFICER
AND PRESIDENT
The accompanying Proxy Statement is dated February 26, 1999 and is first
being mailed to stockholders on or about March 3, 1999.
<PAGE>
MIPS TECHNOLOGIES, INC.
1225 CHARLESTON ROAD
MOUNTAIN VIEW, CALIFORNIA 94043
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD MARCH 31, 1999
To the Stockholders of
MIPS TECHNOLOGIES, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of MIPS
Technologies, Inc., a Delaware corporation ("MIPS Technologies"), will be held
on Wednesday, March 31, 1999, at Hyatt Rickeys Hotel, 4219 El Camino Real, Palo
Alto, California, commencing at 2:00 p.m., local time, for the following
purposes:
1. To consider and vote upon a proposal to recapitalize the authorized
capital stock of MIPS Technologies, including (a) the approval and
adoption of the proposed amended and restated certificate of
incorporation of MIPS Technologies (the "Amended Certificate of
Incorporation") and the proposed amended and restated by-laws of MIPS
Technologies (the "Amended By-laws") pursuant to which each issued and
outstanding share of MIPS Technologies common stock will be redesignated
as one share of newly created and issued Class A common stock and (b) the
exchange by Silicon Graphics, Inc. ("Silicon Graphics"), upon the
consummation of the recapitalization, of each share of Class A common
stock it will own for one share of newly created and issued Class B
common stock; and
2. To transact such other business as may properly be brought before the
special meeting or any adjournment or postponement of the special
meeting.
Copies of the forms of the Amended Certificate of Incorporation and the
Amended By-laws, which will define certain of the rights of the holders of the
Class A and Class B common stock if the recapitalization is approved, are
attached as Annex A and Annex B, respectively, to the accompanying Proxy
Statement. In addition, MIPS Technologies and Silicon Graphics will enter into
an exchange agreement if the recapitalization is approved, the form of which is
attached as Annex C to the accompanying Proxy Statement.
Stockholders of record at the close of business on February 19, 1999 are
entitled to notice of, and to vote at, the special meeting and any adjournment
or postponement of the special meeting. A complete list of stockholders entitled
to vote at the special meeting will be available for inspection by any
stockholder for any purpose germane to the special meeting for 10 days prior to
the special meeting during ordinary business hours at MIPS Technologies'
headquarters located at 1225 Charleston Road, Mountain View, California 94043.
All stockholders are cordially invited to attend the meeting in person.
HOWEVER, TO ENSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE URGED TO
COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE
IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. THIS WILL NOT LIMIT YOUR RIGHT TO
ATTEND OR VOTE AT THE SPECIAL MEETING.
By Order of the Board of Directors
of MIPS Technologies, Inc.
[SIG]
Sandy Creighton
SECRETARY
Mountain View, California
February 26, 1999
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN AND
DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. DO
NOT SEND ANY STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY................................ 1
The Company.......................... 1
Relationship with Silicon Graphics... 1
The Recapitalization................. 2
The Exchange Agreement............... 6
The Special Meeting.................. 8
COMPARISON OF CURRENT AND PROPOSED
PROVISIONS OF MIPS TECHNOLOGIES
CERTIFICATE OF INCORPORATION AND
BYLAWS............................... 9
THE SPECIAL MEETING.................... 14
General; Date, Time and Place........ 14
Purposes of the Special Meeting...... 14
Recommendation of the MIPS Board and
Special Committee.................. 14
Stockholders Entitled to Vote; Vote
Required........................... 14
Proxies.............................. 15
THE RECAPITALIZATION................... 17
Background of the Recapitalization... 17
Reasons for the Recapitalization;
Recommendation of the Special
Committee and the MIPS Board of
Directors.......................... 19
Effect of the Recapitalization....... 21
Proposed Tax Legislation............. 24
The MIPS Board of Directors Following
the Recapitalization............... 24
Interests of Certain Persons in the
Recapitalization................... 25
Certain Federal Income Tax
Consequences....................... 25
Nasdaq Approvals..................... 25
Federal Securities Laws
Consequences....................... 25
No Appraisal Rights.................. 26
THE EXCHANGE AGREEMENT................. 27
Exchange of Class A Shares for Class
B Shares by Silicon Graphics....... 27
Silicon Graphics' Obligation to
Purchase New MIPS Common Stock..... 27
Distribution Tax Indemnification
Agreement.......................... 28
Required Exchange of Class B Shares
for Class A Shares by Silicon
Graphics........................... 29
Indemnification and Expenses......... 29
CAUTIONARY STATEMENT CONCERNING FORWARD
LOOKING STATEMENTS................... 30
MIPS TECHNOLOGIES...................... 31
The Company.......................... 31
Stock Ownership of Certain Beneficial
Owners and Management.............. 31
Relationship with Silicon Graphics... 32
MARKET PRICE AND DIVIDEND
INFORMATION.......................... 34
Market Prices........................ 34
Dividends............................ 34
DESCRIPTION OF MIPS CAPITAL STOCK PRIOR
TO AND FOLLOWING THE
RECAPITALIZATION..................... 35
Authorized Capital Stock............. 35
Common Stock......................... 35
Preferred Stock...................... 39
Corporate Opportunities.............. 39
Certificate of Incorporation and
By-law Provisions That May Have an
Anti-Takeover Effect............... 41
Section 203 of Delaware General
Corporation Law.................... 43
Limitation of Liability.............. 44
Listing.............................. 44
Transfer Agent and Registrar......... 44
STOCKHOLDER PROPOSALS.................. 45
EXPERTS................................ 45
WHERE YOU CAN FIND MORE INFORMATION.... 45
LIST OF DEFINED TERMS.................. 47
</TABLE>
<TABLE>
<S> <C>
Annex A -- Form of Amended and Restated
Certificate of Incorporation
Annex B -- Form of Amended and Restated
By-laws
Annex C -- Form of Exchange Agreement
</TABLE>
i
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE
RECAPITALIZATION FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF
THE RECAPITALIZATION, YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE
DOCUMENTS TO WHICH WE HAVE REFERRED YOU. SEE "WHERE YOU CAN FIND MORE
INFORMATION" (PAGE 45). THE PROPOSED AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION OF MIPS TECHNOLOGIES, THE AMENDED AND RESTATED BY-LAWS OF MIPS
TECHNOLOGIES AND THE FORM OF EXCHANGE AGREEMENT ARE ATTACHED AS ANNEX A, ANNEX B
AND ANNEX C, RESPECTIVELY, TO THIS DOCUMENT. WE ENCOURAGE YOU TO READ THESE
DOCUMENTS BECAUSE THEY ARE THE LEGAL DOCUMENTS THAT WILL GOVERN SOME OF THE
RIGHTS OF THE HOLDERS OF THE CLASS A AND CLASS B COMMON STOCK IF THE
RECAPITALIZATION IS APPROVED. FOR THE LOCATION OF DEFINITIONS OF CAPITALIZED
TERMS USED IN THIS DOCUMENT, PLEASE SEE "LIST OF DEFINED TERMS" (PAGE 47).
THE COMPANY
MIPS Technologies, Inc.
1225 Charleston Road
Mountain View, California 94043
MIPS Technologies is a leading designer of high-performance embedded, 32-
and 64-bit RISC processors and related intellectual property. MIPS Technologies'
32- and 64-bit architectures enable a wide variety of increasingly sophisticated
consumer devices and business equipment. MIPS Technologies is the only company
that currently offers embedded 64-bit processor designs for high-volume digital
consumer products applications. MIPS Technologies licenses its core processor
designs and related intellectual property to semiconductor manufacturing
companies, fabless semiconductor companies and system original equipment
manufacturers. Together with its licensees, MIP Technologies offers a variety of
high-performance, scalable processors in standard, custom, semi-custom and
application-specific products. MIPS Technologies' 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.
On July 6, 1998, MIPS Technologies completed an initial public offering of
5,500,000 shares of its common stock, of which 4,250,000 shares were sold by
Silicon Graphics, Inc. and the remainder were sold by MIPS Technologies.
Presently, Silicon Graphics owns approximately 85% of MIPS Technologies'
outstanding common stock. Prior to its initial public offering, MIPS
Technologies was a wholly owned subsidiary of Silicon Graphics, and MIPS
Technologies' business was conducted by Silicon Graphics primarily through its
MIPS Group, a division of Silicon Graphics.
RELATIONSHIP WITH SILICON GRAPHICS
As the beneficial owner of approximately 85% of MIPS Technologies'
outstanding common stock, Silicon Graphics presently has the ability to direct
the election of all of the members of the Board of Directors of MIPS
Technologies and to exercise a controlling influence over its business and
affairs. Currently, the seven member Board of Directors of MIPS Technologies
includes four employees of Silicon Graphics, the chief executive officer of MIPS
Technologies, and two independent directors.
In connection with MIPS Technologies' initial public offering and the
separation of its business from that of Silicon Graphics at that time, MIPS
Technologies and Silicon Graphics entered into certain agreements governing
various interim and ongoing relationships between them. Among these agreements
is a corporate agreement, which includes, among other things, provisions
granting Silicon Graphics registration rights with respect to the common stock
of MIPS Technologies it owns, as well as the right to purchase additional shares
of capital stock of MIPS Technologies under certain circumstances. In addition,
MIPS Technologies' current certificate of incorporation includes certain
provisions regarding the allocation of business opportunities that may be
suitable for both MIPS Technologies and Silicon Graphics.
1
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THE RECAPITALIZATION
BACKGROUND
On January 14, 1999, Silicon Graphics announced its intention to divest its
entire interest in MIPS Technologies by September 30, 2000. Silicon Graphics has
advised MIPS Technologies 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 MIPS Technologies to the stockholders of Silicon Graphics in
a transaction intended to generally qualify as a tax-free distribution under the
Internal Revenue Code of 1986, as amended. The actual timing and form of any
divestiture will be subject to market and other conditions. Silicon Graphics
could dispose of the shares of MIPS Technologies' 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 the underwritten public offering
referred to below, Silicon Graphics has not formulated any definitive plans
regarding the divestiture of its interest in MIPS Technologies.
Unless certain requirements are met, Silicon Graphics would incur
significant taxable gain if a distribution to its stockholders of a significant
portion of its interest in MIPS Technologies were taxable. In addition, such a
distribution generally would be taxable to Silicon Graphics' stockholders. 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 such a distribution, capital stock of MIPS
Technologies representing at least 80% of the voting power of MIPS Technologies,
and that Silicon Graphics distribute all of such stock to its stockholders in a
single transaction. Consequently, to effect a tax-free distribution if the
recapitalization is not effected, Silicon Graphics would be required to
distribute not less than 29.8 million shares of MIPS Technologies common stock
(80% of the shares currently issued and outstanding) in a single transaction. If
the recapitalization is effected, Silicon Graphics could reduce its economic
interest in MIPS Technologies below 80% through secondary market sales and other
transactions while preserving its ability, under current tax law, to effect a
tax-free distribution.
If the recapitalization is approved, Silicon Graphics intends to sell a
portion of the MIPS Technologies common stock it owns in the second quarter of
1999, subject to prevailing market and other conditions, and may dispose of
additional shares of MIPS Technologies common stock in subsequent transactions.
On February 26, 1999, MIPS Technologies filed a registration statement with the
Securities and Exchange Commission covering the sale by Silicon Graphics of up
to 6,900,000 shares of MIPS Technologies common stock in an underwritten public
offering. However, Silicon Graphics is not obligated, and will not become
obligated as a result of the recapitalization or the filing of the registration
statement, to effect any sale or distribution (including a tax-free
distribution) of any MIPS Technologies common stock it owns in multiple
transactions or otherwise. There can be no assurance that any such sales or
distribution will occur. For information regarding recently proposed tax
legislation which, if enacted, could affect Silicon Graphics' ability to effect
a tax-free distribution, see "Proposed Tax Legislation" on page 24. If the
recapitalization is not approved, Silicon Graphics expects that it would not
complete the public offering described above but, instead, would continue to
hold all of the MIPS Technologies common stock it presently owns.
The proposed changes to MIPS Technologies' certificate of incorporation and
by-laws as described in this document are designed to permit an orderly,
multi-step divestiture of Silicon Graphics' interest in MIPS Technologies, while
preserving Silicon Graphics' ability, under current tax law, to effect a
tax-free distribution of its investment in MIPS Technologies, and reflect only
those changes that MIPS Technologies believes are appropriate to achieve this
result.
If the recapitalization is approved, MIPS Technologies and Silicon Graphics
will enter into the exchange agreement, which will govern certain matters
between the parties following the recapitalization.
2
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REASONS FOR THE RECAPITALIZATION
A specially constituted committee of the Board of Directors of MIPS
Technologies, consisting of its two independent directors, unanimously
determined that the recapitalization is fair to MIPS Technologies and its public
stockholders, and recommended the recapitalization to the full Board of
Directors for approval. The Board of Directors of MIPS Technologies unanimously
determined that the recapitalization is fair to, and in the best interests of,
MIPS Technologies and its stockholders. In reaching their decisions to approve
the recapitalization, the Special Committee and the Board of Directors
considered a number of factors, including the following:
- the belief that the recapitalization may encourage Silicon Graphics to
divest its controlling interest in MIPS Technologies sooner than it
otherwise might by providing Silicon Graphics with additional flexibility
with respect to its investment in MIPS Technologies and the ability to
consummate a tax and market efficient distribution of the shares of MIPS
Technologies common stock it owns;
- the potential benefits to MIPS Technologies' public stockholders of an
orderly, multi-step increase in the public float of its common stock,
which is expected to increase investor interest in MIPS Technologies and
enhance trading efficiencies and liquidity of its common stock;
- the potential benefits of the divestiture by Silicon Graphics of its
interest in MIPS Technologies in multiple transactions, which is expected
to be less disruptive on the trading market for MIPS Technologies' common
stock than if Silicon Graphics divested its entire present interest in
MIPS Technologies in a single transaction;
- the ability of MIPS Technologies' public stockholders to elect 20% of its
Board of Directors, and in no event less than one director, after the
recapitalization compared to such stockholders' present inability to elect
any directors in light of Silicon Graphics' control;
- the terms of the recapitalization which require that, 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 in order to exercise its Class B common stock
voting rights in the election of directors;
- the automatic conversion and exchange features of the recapitalization
which are designed, in part, to provide MIPS Technologies with the
ability, if permitted under then-existing tax law, to reduce the period of
time following a tax-free distribution during which MIPS Technologies must
continue to have a dual class capital structure; and
- the "sunset" provisions designed to ensure that Silicon Graphics retains
control of the Board of Directors of MIPS Technologies only if it has a
substantial economic interest in MIPS Technologies.
In addition, the Special Committee and the Board of Directors of MIPS
Technologies also considered and balanced against the potential benefits of the
recapitalization a number of potentially negative factors, including the
following:
- the potential effect that the dual class capital structure may have on the
trading price and liquidity of the Class A common stock;
- the potential impact of the dual class capital structure on MIPS
Technologies' corporate governance and control issues; and
- the potential impact of the recapitalization on MIPS Technologies'
financial flexibility, including as a result of limitations on its ability
to issue additional shares of its common stock following a tax-free
distribution.
To review the reasons for the recapitalization in greater detail, see pages
19 through 21.
EFFECT OF THE RECAPITALIZATION
MIPS Technologies currently has a single class of common stock, and each
share of existing common stock is entitled to one vote in all matters submitted
to a vote of stockholders, including the election of directors. If the
recapitalization is
3
<PAGE>
approved, each share of MIPS Technologies common stock (including each share
owned by Silicon Graphics) will be redesignated as one share of newly created
and issued Class A common stock. Upon consummation of the recapitalization,
Silicon Graphics will exchange each share of Class A common stock it owns for
one share of newly created and issued Class B common stock. Following this
exchange, Silicon Graphics will continue to own approximately 85% of the common
stock of MIPS Technologies, consisting entirely of Class B common stock.
The holders of the Class A common stock, voting separately as a class, will
be entitled to elect 20% of the members of Board of Directors of MIPS
Technologies, and in no event less than one director, and the holders of the
Class B common stock will be entitled to elect the remaining directors. After a
tax-free distribution by Silicon Graphics of its interest in MIPS Technologies,
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 Class B common stock voting rights in the election of directors.
The Class A common stock and the Class B common stock will have
substantially identical rights and preferences in all other respects, including
with respect to all other matters submitted to a vote of stockholders (except as
otherwise required by law) and with respect to dividend rights and rights upon
liquidation.
PROPOSED TAX LEGISLATION
On February 1, 1999, the United States Treasury Department proposed
legislation which if enacted would generally require a distributing company to
hold at least 80% of the value of a subsidiary's stock (in addition to 80% of
the voting power) in order to effect a tax-free spin-off or split-off of that
subsidiary. At the present time, it is uncertain whether this proposal 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 of its interest in MIPS Technologies. If the legislation
is enacted substantially as proposed and without transitional relief, Silicon
Graphics could be required to effect a tax-free distribution of its interest in
MIPS Technologies shortly after the recapitalization is effected 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. In such event, under the terms of an exchange agreement
between Silicon Graphics and MIPS Technologies to be entered into if the
recapitalization is approved, Silicon Graphics would be required to exchange all
of its shares of Class B common stock for shares of Class A common stock, and it
could elect to hold such shares of Class A common stock indefinitely.
CONVERSION AND EXCHANGE OF CLASS B COMMON STOCK
Under the terms of the proposed amended and restated certificate of
incorporation, the shares of Class B common stock may be converted into or
exchanged for shares of Class A common stock under certain circumstances and/or
subject to certain conditions. See pages 10 through 12 for a summary of these
conversion and exchange provisions.
Under the terms of the exchange agreement, Silicon Graphics will be required
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 MIPS
Technologies.
THE MIPS BOARD OF DIRECTORS FOLLOWING THE RECAPITALIZATION
If the recapitalization is approved, the Board of Directors of MIPS
Technologies will continue to have seven members and will consist of one Class A
director and six Class B directors. The holders of Class A common stock will be
entitled to elect one Class A director at MIPS Technologies' 1999 annual meeting
of stockholders, and the
4
<PAGE>
Class A director so elected will hold office until the expiration of his or her
initial term at the annual meeting of stockholders in 2002.
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE MIPS BOARD OF DIRECTORS
The Special Committee and the Board of Directors of MIPS Technologies each
have unanimously approved the recapitalization and each unanimously recommends
that you vote in favor of the approval and adoption of the recapitalization.
FEDERAL INCOME TAX CONSEQUENCES
Implementation of the recapitalization will be tax-free for federal income
tax purposes to MIPS Technologies and its stockholders based upon the facts and
law as of the date of this document.
STOCK EXCHANGE QUOTATION
MIPS Technologies expects to obtain the necessary approvals and waivers from
The Nasdaq Stock Market, Inc. in order to effect the recapitalization.
MIPS Technologies will apply to The Nasdaq Stock Market to redesignate the
existing common stock as Class A common stock. In the event of a tax-free
distribution, MIPS Technologies expects that the Class B common stock will be
quoted on the Nasdaq National Market or on such other exchange on which the
Class A common stock may then be listed or quoted.
NO APPRAISAL RIGHTS
You have no right to an appraisal of the value of your shares in connection
with the recapitalization.
5
<PAGE>
THE EXCHANGE AGREEMENT
IF THE RECAPITALIZATION IS APPROVED, MIPS TECHNOLOGIES AND SILICON GRAPHICS
WILL ENTER INTO AN EXCHANGE AGREEMENT WHICH WILL GOVERN CERTAIN MATTERS BETWEEN
THE PARTIES FOLLOWING THE RECAPITALIZATION. WE ENCOURAGE YOU TO READ THE
EXCHANGE AGREEMENT, A FORM OF WHICH IS ATTACHED TO THIS DOCUMENT AS ANNEX C, IN
ITS ENTIRETY.
EXCHANGE OF CLASS A SHARES FOR CLASS B SHARES BY SILICON GRAPHICS
Immediately after the amended and restated certificate of incorporation
becomes effective, Silicon Graphics will exchange each share of Class A common
stock it beneficially owns for one share of Class B common stock.
INDEMNIFICATION AND EXPENSES
Pursuant to the exchange agreement, Silicon Graphics will indemnify and hold
harmless MIPS Technologies and its affiliates, officers, directors and employees
from and against any and all liabilities, losses, damages, claims and costs
(including attorneys' fees) arising out of or resulting from any claim of any
third party to the extent arising out of the recapitalization or any subsequent
distribution by Silicon Graphics of its interest in MIPS Technologies. This
indemnity will not extend to liabilities to the extent that such liabilities
relate to any secondary sales by Silicon Graphics following the
recapitalization. Silicon Graphics will also agree to pay certain expenses
incurred by MIPS Technologies in connection with the recapitalization and any
such distribution covered by such indemnity, including the fees of the financial
advisor to the Special Committee, budgeted legal fees and other reasonable
out-of-pocket expenses.
DISTRIBUTION TAX INDEMNIFICATION AGREEMENT
The exchange agreement will also contain a covenant obligating MIPS
Technologies and Silicon Graphics to enter into a distribution tax
indemnification agreement prior to a tax-free distribution by Silicon Graphics
of its interest in MIPS Technologies. The distribution tax indemnification
agreement will contain covenants limiting, among other things, MIPS
Technologies' ability to issue its capital stock in 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 MIPS Technologies. MIPS
Technologies will indemnify Silicon Graphics against all taxes imposed on
Silicon Graphics as a result of the distribution failing to qualify under
section 355 of the Internal Revenue Code or otherwise being taxable under
section 355(e) of the Internal Revenue Code as a result of a breach of these
covenants or as a result of certain other actions by MIPS Technologies,
including the issuance of MIPS Technologies' stock, in each case subject to
certain exceptions. The limitations on MIPS Technologies' ability to issue
shares of its capital stock could have a negative impact on its financial
flexibility following a tax-free distribution. Additional information regarding
the distribution tax indemnification agreement can be found on pages 28 and 29.
SILICON GRAPHICS' OBLIGATION TO PURCHASE MIPS COMMON STOCK
If Silicon Graphics has not disposed of its entire interest in MIPS
Technologies prior to December 31, 2000 (whether through a tax-free distribution
or otherwise), on the last day of each quarter beginning with the quarter ending
December 31, 2000, Silicon Graphics will become obligated to purchase a
pre-determined number of shares of MIPS Technologies common stock within the 30
day period immediately following the public announcement of MIPS Technologies'
financial results for such quarter. At its option, Silicon Graphics may satisfy
this obligation by purchasing newly issued shares of Class B common stock from
MIPS Technologies or by purchasing outstanding shares of Class A common stock
from a third party. Silicon Graphics' obligation to make such purchases will end
on the last day of the fiscal quarter immediately preceding the disposition by
Silicon Graphics of its entire interest in MIPS Technologies, and will also
terminate upon the exchange by Silicon Graphics of its Class B shares for Class
A shares following a change in tax law.
Silicon Graphics will not be required to purchase shares of MIPS
Technologies common stock if and to the extent that the independent directors
and chief executive officer of MIPS Technologies unanimously determine that such
purchase is not
6
<PAGE>
in the interests of MIPS Technologies and its public stockholders.
Additional information regarding Silicon Graphics' obligation to purchase
shares of MIPS Technologies common stock can be found on pages 27 and 28.
REQUIRED EXCHANGE OF SHARES BY SILICON GRAPHICS
The exchange agreement will also require 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, there is a change in federal income tax law that
would apply to Silicon Graphics which provides, in effect, that, generally, 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 immediately prior to such spin-off or split-off.
On February 1, 1999, the United States Treasury Department proposed
legislation which, if enacted, could trigger Silicon Graphics' obligation to
exchange its shares of Class B common stock for shares of Class A common stock
pursuant to the above provision. At the present time, it is uncertain whether
this or any similar proposal will be enacted or, if enacted, what form the final
legislation will take. If Silicon Graphics is required to exchange its shares of
Class B common stock for shares of Class A common stock as a result of a change
in tax law, it could elect to hold such shares of Class A common stock
indefinitely.
7
<PAGE>
THE SPECIAL MEETING
PURPOSE OF THE SPECIAL MEETING
The purpose of the special meeting is to consider and vote upon:
- a proposal to recapitalize the authorized capital stock of MIPS
Technologies, including the approval and adoption of the proposed amended
and restated certificate of incorporation and amended and restated by-laws
of MIPS Technologies and the exchange by Silicon Graphics of each share of
Class A common stock it will own for one share of Class B common stock;
and
- such other business as may properly be brought before the special meeting.
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The special meeting will be held on Wednesday, March 31, 1999, at Hyatt
Rickeys Hotel, 4219 El Camino Real, Palo Alto, California, commencing at 2:00
p.m., local time.
STOCKHOLDERS ENTITLED TO VOTE AT THE SPECIAL MEETING; VOTE REQUIRED
Under Delaware law and MIPS Technologies' current certificate of
incorporation, Silicon Graphics, as beneficial owner of approximately 85% of
MIPS Technologies' outstanding common stock, has the ability to approve the
recapitalization (including approval of the proposed amended and restated
certificate of incorporation and amended and restated by-laws) without the
consent of any other stockholder of MIPS Technologies. Silicon Graphics intends
to vote in favor of the recapitalization proposal.
However, although not required by law or MIPS Technologies' current
certificate of incorporation, the Board of Directors of MIPS Technologies has
determined that its public stockholders (i.e., stockholders other than Silicon
Graphics and its affiliates), will also have a separate vote on the
recapitalization proposal. Accordingly, the recapitalization will not be
effected without the affirmative vote of at least a majority of the outstanding
MIPS Technologies common stock, present and voting at the special meeting, held
by its public stockholders. Holders of record of MIPS Technologies common stock
on February 19, 1999 are entitled to notice of, and to vote at, the special
meeting.
INTERESTS OF CERTAIN PERSONS/STOCK OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS
OF MIPS
In determining how to vote at the special meeting, you should be aware that
certain officers and directors of MIPS Technologies are also officers and/or
stockholders of Silicon Graphics and, therefore, may have interests in the
recapitalization that are different from your own.
To review these interests in greater detail, see page 25.
SURRENDER OF CERTIFICATES
After the recapitalization, your shares of MIPS Technologies common stock
will be automatically redesignated as shares of Class A common stock. You will
not need to exchange your stock certificates representing shares of MIPS
Technologies common stock for certificates representing shares of Class A common
stock. YOU SHOULD NOT SEND ANY STOCK CERTIFICATES AT THIS TIME.
MARKET PRICES OF THE COMMON STOCK
MIPS Technologies' common stock has been quoted on the Nasdaq National
Market under the symbol "MIPS" since June 30, 1998. On January 13, 1999, the
last full trading day prior to the public announcement of the recapitalization
proposal, the reported last sale price per share of the existing common stock on
the Nasdaq National Market was $32.25. On February 25, 1999, the most recent
practicable date prior to the printing of this document, the reported last sale
price of the existing common stock on the Nasdaq National Market was $40.38 per
share. You should read the table on page 34 of this document which presents the
range of high and low reported last sales prices per share for the common stock
during each of the calendar quarters since MIPS Technologies' initial public
offering.
8
<PAGE>
COMPARISON OF CURRENT AND PROPOSED PROVISIONS
OF MIPS TECHNOLOGIES CERTIFICATE OF INCORPORATION AND BY-LAWS
THE FOLLOWING IS A GENERAL DESCRIPTION OF CERTAIN PROVISIONS OF MIPS
TECHNOLOGIES' CURRENT CERTIFICATE OF INCORPORATION AND BY-LAWS AND THE SAME
PROVISIONS AS THEY WILL BE AMENDED PURSUANT TO THE TERMS OF THE
RECAPITALIZATION. WE ENCOURAGE YOU TO REVIEW THE PROPOSED AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION AND AMENDED AND RESTATED BY-LAWS ATTACHED TO THIS
DOCUMENT AS ANNEX A AND ANNEX B, RESPECTIVELY.
<TABLE>
<CAPTION>
MIPS TECHNOLOGIES CERTIFICATE OF INCORPORATION
<S> <C> <C>
CURRENT PROVISION PROPOSED PROVISION
------------------------------------ ------------------------------------------------
AUTHORIZED CAPITAL
STOCK................. 200,000,000 shares authorized: 300,000,000 shares authorized:
COMMON STOCK............ - 150,000,000 shares of 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 - 50,000,000 shares of preferred stock, issuable
stock, issuable in series in series
VOTING RIGHTS
ELECTION OF
DIRECTORS......... Each share of common stock is - Holders of Class A common stock, voting as a
entitled to one vote in the election separate class, will be entitled to elect 20%
of directors and all shares of of the directors, and in no event less than
common stock vote together as a one director.
single class.
- Holders of Class B common stock, voting as a
separate class, will be entitled to elect the
remaining directors.
ALL OTHER
MATTERS............. Each share of common stock is Each share of Class A common stock and Class B
entitled to one vote in all other common stock is entitled to one vote, voting
matters submitted to a vote of together as a single class, in all other matters
stockholders. submitted to a vote of stockholders (except as
otherwise required by law). 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.
DIVIDENDS............... Holders of common stock are entitled Holders of Class A common stock and Class B
to such dividends as may be declared common stock will share, equally on a per share
by the Board of Directors from time basis, in all dividends declared by the Board of
to time. Directors from time to time; provided that with
respect to stock dividends, holders of 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
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
MIPS TECHNOLOGIES CERTIFICATE OF INCORPORATION
CURRENT PROVISION PROPOSED PROVISION
------------------------------------ ------------------------------------------------
<S> <C> <C>
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.
CONVERSION.............. The common stock is not presently Shares of Class B common stock are convertible
convertible. into shares of Class A common stock upon the
occurrence of certain events, including:
- 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.
- Automatically if, prior to a tax-free
distribution, Silicon Graphics owns less than
50% of the total number of shares of Class A
common stock and Class B common stock
outstanding, unless the independent directors
and chief executive officer of MIPS
Technologies determine that such automatic
conversion is not in the interests of MIPS
Technologies or its public stockholders.
- Automatically 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.
- Automatically if MIPS Technologies is
acquired; provided, however, that such
automatic conversion will not occur if the
inclusion of this conversion provision in the
amended and restated 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 MIPS
Technologies would be tax-free.
- Automatically on the fifth anniversary of a
tax-free distribution and with the approval of
the holders of a majority of the Class A
common stock and Class B common
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
MIPS TECHNOLOGIES CERTIFICATE OF INCORPORATION
CURRENT PROVISION PROPOSED PROVISION
------------------------------------ ------------------------------------------------
<S> <C> <C>
stock, voting as a class; provided, however,
that such automatic conversion will not occur
if the vote of the stockholders to approve the
conversion 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 MIPS
Technologies would be tax-free.
Under current tax law, it is uncertain whether
the last two automatic conversion provisions in
the proposed amended and restated certificate of
incorporation of MIPS Technologies described
above would have a material adverse effect on
Silicon Graphics' ability to timely obtain a
ruling from the Internal Revenue Service that
the distribution to its stockholders of its
interest in MIPS Technologies would be tax-free.
EXCHANGE................ The common stock is not presently Under the terms of the amended and restated
exchangeable. certificate of incorporation and the exchange
agreement, 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 by Silicon Graphics
of its interest in MIPS Technologies, 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 MIPS Technologies.
At any time following a tax-free distribution,
MIPS Technologies 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 the amended
and restated certificate of incorporation would
have a material adverse effect on Silicon
Graphics'
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
MIPS TECHNOLOGIES CERTIFICATE OF INCORPORATION
CURRENT PROVISION PROPOSED PROVISION
------------------------------------ ------------------------------------------------
<S> <C> <C>
ability to timely obtain a favorable ruling from
the Internal Revenue Service regarding the
tax-free status of the tax-free distribution.
Even if this exchange provision remains
available, Silicon Graphics may limit MIPS
Technologies' ability to effect such an exchange
under the terms of the distribution tax
indemnification agreement.
Under current tax law, it is uncertain whether
the inclusion of the above exchange provision in
the proposed amended and restated certificate of
incorporation of MIPS Technologies would have a
material adverse effect on Silicon Graphics'
ability to timely obtain an Internal Revenue
Service tax ruling that the distribution to its
stockholders of its interest in MIPS
Technologies would be tax-free.
MERGERS AND
REORGANIZATIONS....... All shares of common stock are All shares of Class A common stock and Class B
entitled to receive the same kind common stock are entitled to receive equally on
and amount of consideration in the a per share basis the same kind and amount of
event of any merger, reorganization consideration in the event of any merger,
or consolidation of MIPS reorganization or consolidation of MIPS
Technologies with any other company. Technologies 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 MIPS
Technologies in which all or substantially all
of its 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.
LIQUIDATION............. All shares of common stock are All shares of Class A common stock and Class B
entitled to receive, pro rata, all common stock are entitled to receive equally on
assets available for distribution to a per share basis all assets available for
stockholders. distribution to stockholders.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
MIPS TECHNOLOGIES CERTIFICATE OF INCORPORATION
CURRENT PROVISION PROPOSED PROVISION
------------------------------------ ------------------------------------------------
<S> <C> <C>
CORPORATE
OPPORTUNITIES......... Provisions allocating business No change if the recapitalization is
opportunities that may be suitable consummated.
for both MIPS Technologies and
Silicon Graphics.
</TABLE>
<TABLE>
<CAPTION>
MIPS TECHNOLOGIES BY-LAWS
<S> <C> <C>
CURRENT PROVISION PROPOSED PROVISION
------------------------------------ ------------------------------------------------
DIRECTORS
NUMBER OF DIRECTORS... The Board of Directors consists of The Board of Directors consists of not less than
not less than three and not more five and not more than 10 directors, with the
than 10 directors, with the exact exact number to be determined by the Board of
number to be determined by the Board Directors.
of Directors.
CLASSIFICATION OF
INITIAL CLASS A
DIRECTOR.............. Presently there is no Class A Each director initially appointed on behalf of
Director. the holders of the Class A common stock shall
hold office initially for a term expiring at the
1999 annual meeting of stockholders.
</TABLE>
13
<PAGE>
THE SPECIAL MEETING
GENERAL; DATE, TIME AND PLACE
This Proxy Statement is being furnished by the Board of Directors (the "MIPS
Board of Directors") of MIPS Technologies, Inc. ("MIPS Technologies") to holders
of its common stock, par value $0.001 per share (the "Existing Common Stock"),
in connection with the solicitation of proxies by the MIPS Board of Directors
for use at the Special Meeting of stockholders (the "Special Meeting") to be
held on Wednesday, March 31, 1999 at Hyatt Rickeys Hotel, 4219 El Camino Real,
Palo Alto, California, commencing at 2:00 p.m., local time, and at any
adjournment or postponement thereof.
This Proxy Statement and the accompanying form of proxy are first being
mailed to stockholders of MIPS Technologies on or about March 3, 1999.
PURPOSES OF THE SPECIAL MEETING
At the Special Meeting, holders of shares of Existing Common Stock will be
asked to consider and vote upon (i) a proposal (the "Recapitalization Proposal")
to approve and adopt the recapitalization of MIPS Technologies (the
"Recapitalization") including (a) the approval and adoption of the proposed
Amended and Restated Certificate of Incorporation of MIPS Technologies (the
"Amended Certificate of Incorporation") and the proposed Amended and Restated
By-laws of MIPS Technologies (the "Amended By-laws"), pursuant to which each
share of Existing Common Stock, including such shares held by Silicon Graphics,
Inc. ("Silicon Graphics") and its affiliates, will be redesignated as one share
of newly created and issued Class A common stock, par value $0.001 per share
(the "Class A Common Stock"), of MIPS Technologies, and (b) the exchange by
Silicon Graphics, immediately upon the consummation of the Recapitalization and
pursuant to the Exchange Agreement (as defined below), of each share of Class A
Common Stock it will own for one share of newly created and issued Class B
common stock, par value $0.001 per share (the "Class B Common Stock"), of MIPS
Technologies (the Class B Common Stock, together with the Class A Common Stock,
the "New MIPS Common Stock"), and (ii) such other matters as may properly be
brought before the Special Meeting or any adjournment or postponement thereof.
RECOMMENDATION OF THE MIPS BOARD AND SPECIAL COMMITTEE
The MIPS Board of Directors unanimously determined that the Recapitalization
is fair to, and in the best interests of, MIPS Technologies and its stockholders
and has unanimously approved the Recapitalization. Prior to the MIPS Board of
Directors' approval, a specially constituted committee of the MIPS Board of
Directors, comprised of certain non-management directors who are not affiliated
with Silicon Graphics (the "Special Committee"), determined that the
Recapitalization is fair to MIPS Technologies and its public stockholders, and
recommended the Recapitalization to the MIPS Board of Directors. THE SPECIAL
COMMITTEE AND THE MIPS BOARD OF DIRECTORS HAVE UNANIMOUSLY APPROVED THE
RECAPITALIZATION AND RECOMMEND THAT YOU VOTE FOR ITS APPROVAL AND ADOPTION.
STOCKHOLDERS ENTITLED TO VOTE; VOTE REQUIRED
The MIPS Board of Directors has fixed the close of business on February 19,
1999 as the record date for the determination of the holders of Existing Common
Stock entitled to notice of and to vote at the Special Meeting (the "Record
Date"). Accordingly, only holders of record of Existing Common Stock on the
Record Date will be entitled to notice of, and to vote at, the Special Meeting.
As of the Record Date, there were outstanding and entitled to vote 37,292,286
shares of Existing Common Stock (constituting all of the voting stock of MIPS
Technologies), which shares were held by approximately 21 holders of record.
Each holder of record of shares of Existing Common Stock on the Record Date is
entitled to one vote per share, which may be cast either in person or by
properly executed proxy, at the Special Meeting. A complete list of stockholders
entitled to vote at the Special Meeting will be available for inspection by any
stockholder for any purpose germane to the Special Meeting for 10 days prior to
the Special Meeting
14
<PAGE>
during ordinary business hours at MIPS Technologies' headquarters located at
1225 Charleston Road, Mountain View, California 94043. The presence, in person
or by properly executed proxy, of the holders of a majority of the outstanding
shares of Existing Common Stock entitled to vote at the Special Meeting is
necessary to constitute a quorum at the Special Meeting. Silicon Graphics
intends to attend the Special Meeting and, therefore, a quorum will be present.
Based on its ownership of approximately 85% of the currently outstanding
shares of Existing Common Stock, Silicon Graphics has the voting power to adopt
and approve the Recapitalization Proposal without the vote of any other
stockholder of MIPS Technologies. Silicon Graphics intends to vote all of the
shares of Existing Common Stock it owns in favor of the Recapitalization
Proposal.
However, even though not required by law or the current Certificate of
Incorporation of MIPS Technologies (the "Existing Certificate of
Incorporation"), the MIPS Board of Directors has determined that in light of
Silicon Graphics' control of MIPS Technologies, it is appropriate for the public
stockholders of MIPS Technologies (i.e., stockholders other than Silicon
Graphics and its affiliates) (the "MIPS Public Stockholders") to have a separate
vote on the Recapitalization Proposal. Accordingly, the Recapitalization
Proposal will not be adopted without the approval of the holders of at least a
majority of the outstanding Existing Common Stock held by the MIPS Public
Stockholders present and voting on the Recapitalization Proposal at the Special
Meeting.
Shares of Existing Common Stock represented in person or by proxy will be
counted for the purpose of determining whether a quorum is present at the
Special Meeting. Shares which abstain from voting, and shares held by a broker
nominee in "street name" which indicates on a proxy that it does not have
discretionary authority to vote as to a particular matter, will be treated as
shares that are present and entitled to vote at the Special Meeting for purposes
of determining whether a quorum exists, but will not be considered as votes cast
and, accordingly, will have no effect on the outcome of the vote with respect to
the Recapitalization Proposal.
PROXIES
This Proxy Statement is being furnished to MIPS Technologies stockholders in
connection with the solicitation of proxies by, and on behalf of, the MIPS Board
of Directors for use at the Special Meeting, and is accompanied by a form of
proxy.
All shares of Existing Common Stock which are entitled to vote and are
represented at the Special Meeting by properly executed proxies received prior
to or at the Special Meeting, and not revoked, will be voted at such Special
Meeting in accordance with the instructions indicated on such proxies. If no
instructions are indicated (other than in the case of broker non-votes), such
proxies will be voted for approval and adoption of the Recapitalization
Proposal.
If any other matters are properly presented at the Special Meeting for
consideration, including, among other things, consideration of a motion to
adjourn such Special Meeting to another time and/or place (including, without
limitation, for the purposes of soliciting additional proxies), the persons
named in the enclosed forms of proxy and acting thereunder will have discretion
to vote on such matters in accordance with their judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of MIPS Technologies, at or before the taking of the vote at
the Special Meeting, a written notice of revocation bearing a later date than
the proxy, (ii) duly executing a later dated proxy relating to the same shares
and delivering it to MIPS Technologies before the taking of the vote at the
Special Meeting or (iii) attending the Special Meeting and voting in person
(although attendance at the Special Meeting will not in and of itself constitute
a revocation of the proxy). Any written notice of revocation or subsequent proxy
should be sent to MIPS Technologies, Inc.,
15
<PAGE>
1225 Charleston Road, Mountain View, California 94043, Attention: Secretary, or
hand delivered to the Secretary of MIPS Technologies at or before the taking of
the vote at the Special Meeting.
All expenses of MIPS Technologies' solicitation of proxies, and the cost of
preparing and mailing this Proxy Statement to MIPS Technologies stockholders,
will be paid by Silicon Graphics pursuant to the terms of an exchange agreement
that MIPS Technologies and Silicon Graphics will enter into if the
Recapitalization is approved by the MIPS Public Stockholders (the "Exchange
Agreement"). See "The Exchange Agreement--Indemnification and Expenses." In
addition to solicitation by use of the mails, proxies may be solicited from MIPS
Technologies stockholders by directors, officers and employees of MIPS
Technologies in person or by telephone, telegram or other means of
communication. Such directors, officers and employees will not be additionally
compensated, but may be reimbursed for reasonable out-of-pocket expenses in
connection with such solicitation. MIPS Technologies has retained Innisfree to
act as its information agent to provide ministerial assistance in connection
with the solicitation of proxies for the Special Meeting. Innisfree will be paid
a flat fee of approximately $7,500, plus reimbursement of reasonable
out-of-pocket expenses and will be specifically instructed that it may not make
any recommendation regarding the approval or disapproval of any proposal to be
voted on at the Special Meeting. Arrangements will be made with brokerage
houses, custodians, nominees and fiduciaries for forwarding of proxy materials
to beneficial owners of shares held of record by such brokerage houses,
custodians, nominees and fiduciaries and for reimbursement of their reasonable
expenses incurred in connection therewith.
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS.
16
<PAGE>
THE RECAPITALIZATION
BACKGROUND OF THE RECAPITALIZATION
GENERAL. On July 6, 1998, MIPS Technologies completed an initial public
offering (the "Offering") of 5,500,000 shares of Existing Common Stock. Of the
shares of Existing Common Stock sold in the Offering, 4,250,000 shares were sold
by Silicon Graphics and the remainder were sold by MIPS Technologies. Presently,
Silicon Graphics owns approximately 85% of the outstanding Existing Common
Stock. Prior to the Offering, MIPS Technologies was a wholly owned subsidiary of
Silicon Graphics and its business was conducted by Silicon Graphics primarily
through its MIPS Group, a division of Silicon Graphics.
On January 14, 1999, Silicon Graphics announced its intention to divest its
entire interest in MIPS Technologies by September 30, 2000. Silicon Graphics has
advised MIPS Technologies 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 MIPS Technologies to the stockholders of Silicon Graphics in
a transaction intended to generally qualify under Section 355 of the Internal
Revenue Code of 1986, as amended (the "Code") (a "Tax-Free Distribution"). The
actual timing and form of any disposition will be subject to market and other
conditions. Silicon Graphics could dispose of the shares of MIPS Technologies'
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 the
underwritten public offering referred to below, Silicon Graphics has not
formulated any definitive plans regarding the divestiture of its interest in
MIPS Technologies.
Unless certain requirements are met, Silicon Graphics would incur a
significant taxable gain if a distribution to its stockholders of a significant
portion of its interest in MIPS Technologies were taxable. In addition, such a
distribution generally would be taxable to Silicon Graphics' stockholders. To
effect a Tax-Free Distribution for Silicon Graphics and its stockholders,
current tax law requires, among other things, that Silicon Graphics own, at the
time of such a transaction, capital stock of MIPS Technologies representing at
least 80% of the voting power of MIPS Technologies, and that Silicon Graphics
distribute all of such stock to its stockholders in a single transaction.
Consequently, to effect a Tax-Free Distribution if the Recapitalization is not
effected, Silicon Graphics would be required to distribute not less than 29.8
million shares of Existing Common Stock (80% of the shares of Existing Common
Stock currently issued and outstanding) in a single transaction. If the
Recapitalization is effected, Silicon Graphics could reduce its economic
interest in MIPS Technologies below 80% through secondary market sales and other
transactions, while preserving its ability, under current tax law, to effect a
Tax-Free Distribution.
If the Recapitalization is approved, Silicon Graphics intends to sell a
portion of the New MIPS Common Stock it owns in the second quarter of 1999,
subject to prevailing market and other conditions, and may dispose of additional
shares of New MIPS Common Stock in subsequent transactions. On February 26,
1999, MIPS Technologies filed a registration statement with the Securities and
Exchange Commission covering the sale by Silicon Graphics of up to 6,900,000
shares of Class A Common Stock in an underwritten public offering. However,
Silicon Graphics is not obligated, and will not become obligated as a result of
the Recapitalization or the filing of the registration statement, to effect any
sale or distribution (including a Tax-Free Distribution) of any New MIPS Common
Stock it owns in multiple transactions or otherwise. There can be no assurance
that any such sales or distribution will occur. In addition, the United States
Treasury Department has recently proposed tax legislation which, if enacted,
could affect Silicon Graphics' ability to effect a Tax-Free Distribution. See
"Proposed Tax Legislation." If the Recapitalization is not approved, Silicon
Graphics expects that it would not complete the public offering described above
but, instead, would continue to hold all of the Existing Common Stock it
presently owns. Silicon Graphics is under no contractual obligation to continue
to hold such shares other than pursuant to a lock-up agreement entered into in
connection with the Offering in which Silicon Graphics agreed not to sell or
dispose of any shares of Existing Common Stock prior to June 30, 1999 without
the consent of the representative of the underwriters for the Offering.
17
<PAGE>
The proposed changes to the Existing Certificate of Incorporation and the
current By-laws of MIPS Technologies (the "Existing By-laws") as described in
this Proxy Statement are designed to permit an orderly, multi-step increase in
the number of shares of MIPS Technologies common stock that are publicly traded
while preserving the ability of Silicon Graphics, under current tax law, to
effect a Tax-Free Distribution of its investment in MIPS Technologies, and
reflect only those changes that MIPS Technologies believes are appropriate to
achieve this result. Following a Tax-Free Distribution, it is expected that MIPS
Technologies would continue to have the dual class capital structure only for so
long as may be required for Silicon Graphics to maintain the tax-free status of
the Tax-Free Distribution.
THE SPECIAL COMMITTEE. On November 23, 1998, a special meeting of the MIPS
Board of Directors was held. Five of the seven members of the MIPS Board of
Directors were present, in person or telephonically. At the special meeting
William M. Kelly, Senior Vice President, Corporate Operations of Silicon
Graphics and a director of MIPS Technologies, outlined the proposed terms of the
Recapitalization and Silicon Graphics' reasons for proceeding with the
transaction. The MIPS Board of Directors then approved the creation of the
Special Committee consisting of Anthony B. Holbrook and Fred M. Gibbons, the two
directors of MIPS Technologies who are not directors, officers or employees of
Silicon Graphics or officers or employees of MIPS Technologies. The Special
Committee was authorized to review, evaluate and consider whether the terms of
the Recapitalization would be fair to the MIPS Public Stockholders, and to make
a recommendation to the full MIPS Board of Directors with respect to the
Recapitalization. The MIPS Board of Directors also authorized the Special
Committee to retain legal counsel and other advisors as it deemed appropriate.
In late November 1998, the Special Committee retained an independent
financial advisor and independent legal counsel to assist the Special Committee
in its consideration of the proposed Recapitalization.
On December 7, 1998, the Special Committee met with representatives of its
financial advisor and legal counsel. During this meeting, the proposed terms of
the Recapitalization were summarized for the Special Committee. In addition, the
Special Committee's advisors made presentations on precedent transactions and
issues faced by companies with a dual class capital structure. The Special
Committee instructed its advisors to continue their analysis of the
Recapitalization, including the effect of a dual class capital structure on MIPS
Technologies and the tax issues related to a possible Tax-Free Distribution by
Silicon Graphics.
On December 11, 1998, the Special Committee again met with its advisors. The
independent financial advisor reviewed with the Special Committee the historical
trading information and capital structure of companies which had consummated
transactions which the financial advisor deemed similar to the proposed
Recapitalization and the relative trading values of the dual classes of stock of
such companies and other companies with dual classes of stock. The Special
Committee's legal counsel reviewed the possible effects of the Recapitalization
and the dual class capital structure with respect to the corporate governance
and financial flexibility of MIPS Technologies, as well as certain tax issues
related to a possible Tax-Free Distribution by Silicon Graphics. The Special
Committee's legal counsel were instructed to meet with counsel to Silicon
Graphics to discuss the proposed terms of the Recapitalization.
During the period from December 12 through December 14, 1998, legal counsel
for the Special Committee and Silicon Graphics had numerous conference calls to
discuss the proposed terms of the Recapitalization.
On December 14, 1998, the Special Committee met with its legal counsel to
review certain accounting issues relating to the Recapitalization. The Special
Committee instructed its legal advisors to discuss the Special Committee's
concerns regarding the proposed terms of the Recapitalization with Silicon
Graphics and its advisors.
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On December 17, 1998, representatives of MIPS Technologies and Silicon
Graphics and their respective legal counsel met to discuss the terms of the
Recapitalization. A representative from MIPS Technologies' independent
accountant also was at this meeting to address certain "pooling-of-interests"
accounting matters.
At a meeting of the Special Committee held on December 18, 1998, legal
counsel to the Special Committee summarized the discussions from the meeting
held on December 17, 1998 with Silicon Graphics and its advisors. The Special
Committee instructed its legal counsel to present to Silicon Graphics and its
advisors certain revised terms of the Recapitalization intended to address,
among other things, the impact of a Tax-Free Distribution on the financial
flexibility of MIPS Technologies, including the limitations on MIPS
Technologies' ability to issue additional shares of New MIPS Common Stock, the
impact of the proposed dual class capital structure on corporate governance and
control issues and "pooling-of interests" accounting matters.
From December 18 through January 3, 1999, the legal advisors of the Special
Committee and Silicon Graphics had numerous meetings and conference calls to
negotiate the proposed terms of the Recapitalization.
On January 4, 1999, the Special Committee held a meeting to review the
status of the negotiations with its legal counsel. The Special Committee
instructed its legal counsel to continue its negotiations with Silicon Graphics.
During the period from January 4 through January 10, the Special Committee,
Silicon Graphics and their respective legal advisors, held numerous meetings and
conference calls to negotiate the final terms of the proposed Recapitalization.
On January 11, 1999, the Special Committee met with representatives of its
financial advisor and legal advisors. The legal advisors reviewed the principal
terms of the Recapitalization. The financial advisor compared the final terms of
the Recapitalization with the terms of precedent transactions. After a full
discussion, the Special Committee determined that the terms of the
Recapitalization were fair to MIPS Technologies and the MIPS Public
Stockholders. The Special Committee then unanimously determined to recommend to
the MIPS Board of Directors that the Recapitalization be approved.
At a special meeting of the MIPS Board of Directors held on January 13,
1999, the MIPS Board of Directors unanimously determined that the
Recapitalization was fair to, and in the best interests of, MIPS Technologies
and its stockholders and recommended that its stockholders vote to approve and
adopt the Recapitalization.
REASONS FOR THE RECAPITALIZATION; RECOMMENDATION OF THE SPECIAL COMMITTEE AND
THE MIPS BOARD OF DIRECTORS
At a meeting held on January 11, 1999, the Special Committee unanimously
determined that the Recapitalization was fair to MIPS Technologies and the MIPS
Public Stockholders, and unanimously determined to recommend the
Recapitalization to the full MIPS Board of Directors. At a meeting held on
January 13, 1999, at which all of the directors of MIPS Technologies were
present, based on the unanimous recommendation of the Special Committee, the
MIPS Board of Directors unanimously approved and adopted the terms of the
Recapitalization, unanimously determined that the terms of the Recapitalization
are fair to, and in the best interests of, MIPS Technologies and its
stockholders, and unanimously determined to recommend to the MIPS Public
Stockholders that they vote to approve and adopt the Recapitalization.
THE SPECIAL COMMITTEE. In determining to recommend to the MIPS Board of
Directors that it approve and adopt the terms of the Recapitalization, and in
evaluating the fairness of the terms of the
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Recapitalization, the Special Committee considered a number of potential
benefits, including without limitation, the following:
- the belief that the Recapitalization may encourage Silicon Graphics to
divest its controlling interest in MIPS Technologies sooner that it
otherwise might by providing Silicon Graphics with additional flexibility
with respect to its investment in MIPS Technologies and the ability to
consummate a tax and market efficient distribution of the shares of
Existing Common Stock that it owns;
- the potential benefits to the MIPS Public Stockholders of an orderly,
multi-step increase in the public float of its common stock, which is
expected to increase investor interest in MIPS Technologies and enhance
trading efficiencies and liquidity of its common stock;
- the potential benefits of the divestiture by Silicon Graphics of its
interest in MIPS Technologies in multiple transactions, which is expected
to be less disruptive on the trading market for MIPS Technologies common
stock than if Silicon Graphics divested its entire present interest in
MIPS Technologies in a single transaction;
- the terms of the Recapitalization which provide the MIPS Public
Stockholders the right to elect 20% of the MIPS Board of Directors, but in
no event less than one director, after the Recapitalization, compared with
such stockholders' present inability to elect any directors of the MIPS
Board of Directors in light of Silicon Graphics 85% ownership of the
outstanding Existing Common Stock;
- the terms of the Recapitalization which require that, after a Tax-Free
Distribution, a person or group of persons acting in concert holding 10%
or more of the outstanding shares of Class B Common Stock must own at
least an equal percentage of the outstanding shares of Class A Common
Stock in order to exercise its or their Class B Common Stock voting rights
in the election of directors, which are designed to ensure that a
stockholder's voting rights in the election of directors is not
significantly disproportionate to its economic interest in MIPS
Technologies;
- the automatic conversion and exchange features of the Recapitalization
which are designed, in part, to provide MIPS Technologies with the
ability, if permitted under then existing tax law, to reduce the length of
time following a Tax-Free Distribution during which MIPS Technologies must
continue to have a dual class capital structure; and
- the "sunset" provisions designed to ensure that Silicon Graphics retains
control of the MIPS Board of Directors only if it has a substantial
economic interest in MIPS Technologies.
In reaching its determination that the Recapitalization is fair to MIPS
Technologies and the MIPS Public Stockholders, and to recommend to the MIPS
Board of Directors that it approve and adopt the terms of the Recapitalization,
the Special Committee also considered and balanced against the potential
benefits of the Recapitalization a number of potentially negative factors,
including, without limitation:
- the potential effect of two classes of common stock on the trading price
and liquidity of the Class A Common Stock;
- the potential impact of the dual class capital structure on MIPS
Technologies' corporate governance and control issues; and
- the potential impact of the Recapitalization on MIPS Technologies'
financial flexibility, including as a result of limitations on its ability
to issue additional shares of New MIPS Common Stock following a Tax-Free
Distribution.
After detailed consideration of these factors, the Special Committee concluded
that the Recapitalization is fair to MIPS Technologies and the MIPS Public
Stockholders.
THE BOARD OF DIRECTORS. The MIPS Board of Directors has considered the
unanimous recommendation of the Special Committee, as well as the factors
(enumerated above) considered by the Special
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<PAGE>
Committee, and has unanimously determined that the Recapitalization is fair to,
and in the best interests of, MIPS Technologies and its stockholders, has
approved and adopted the terms of the Recapitalization and recommends that the
MIPS Public Stockholders vote to approve and adopt the Recapitalization
Proposal.
The foregoing discussion addresses the material factors considered by the
Special Committee and the MIPS Board of Directors in their consideration of the
Recapitalization. The Special Committee and the MIPS Board of Directors did not
quantify or attach any particular weight to the various factors that it
considered in reaching its determination that the Recapitalization is advisable
and fair to MIPS Technologies and the MIPS Public Stockholders. Different
Special Committee and MIPS Board of Directors members may have assigned
different weights to different factors. In reaching its determination, the
Special Committee and the MIPS Board of Directors took the various factors into
account collectively. The Special Committee and the MIPS Board of Directors did
not perform a factor-by-factor analysis, but rather its determination was made
in consideration of all of the factors as a whole.
EFFECT OF THE RECAPITALIZATION
GENERAL. MIPS Technologies currently has a single class of common stock
outstanding, and each share of Existing Common Stock is entitled to one vote in
all matters submitted to a vote of stockholders, including the election of
directors. If the Recapitalization is adopted, each share of Existing Common
Stock will be redesignated as one share of Class A Common Stock. Immediately
thereafter and pursuant to the Exchange Agreement, Silicon Graphics will
exchange each share of Class A Common Stock it owns for one share of Class B
Common Stock. Immediately following the Recapitalization, Silicon Graphics would
continue to own approximately 85% of the common equity of MIPS Technologies,
consisting of 31,750,000 shares of Class B Common Stock, and the MIPS Public
Stockholders would continue to own approximately 15% of the common equity of
MIPS Technologies, consisting of 5,542,286 shares of Class A Common Stock.
VOTING RIGHTS. Pursuant to the terms of the Recapitalization, the current
share capital of MIPS Technologies will be converted into two classes of common
stock: (i) the Class A Common Stock, which will entitle the holders thereof to
vote, separately as a single class, for the election of 20% (rounded downward,
if necessary, to the nearest whole number) of the directors of MIPS
Technologies, but in no event less than one director (the "Class A Directors");
and (ii) the Class B Common Stock, which will entitle the holders thereof to
vote, separately as a class, for the election of the remaining directors of MIPS
Technologies (the "Class B Directors"). In the event that all outstanding shares
of Class B Common Stock are converted into or exchanged for shares of Class A
Common Stock, the Class A Common Stock will be the only class of common stock
outstanding and the holders of the Class A Common Stock will be entitled to
elect 100% of the MIPS Board of Directors. References herein to the number of
directors on the MIPS Board of Directors do not include any directors whom the
holders of any shares of Preferred Stock have the exclusive right to elect.
The holders of Class A Common Stock and Class B Common Stock will in all
other matters vote together as a single class, with each share of Class A Common
Stock and Class B Common Stock having one vote, except as required by law and
except with respect to any proposed amendment to the Amended Certificate of
Incorporation which would alter the special rights of the Class A Common Stock
or the Class B Common Stock, in which case the affected class shall also be
entitled to vote on such amendment separately as a class.
The Amended Certificate of Incorporation will also provide that, following a
Tax-Free Distribution, a person or group of persons acting in concert holding
10% or more of the outstanding shares of Class B Common Stock will be required
to own at least an equal percentage of the outstanding shares of Class A Common
Stock in order 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 as long as the
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<PAGE>
Class B Common Stock retains its special voting rights, a holder of such shares
will not have voting rights with respect to the MIPS Board of Directors that are
significantly disproportionate to its economic interest in MIPS Technologies.
DIVIDENDS. Following the Recapitalization, the holders of Class A Common
Stock and the holders of Class B Common Stock will share equally, on a per-share
basis, all dividends and other distributions in cash, stock of any corporation
other than MIPS Technologies or property of MIPS Technologies as such dividend
or distribution is declared by the MIPS Board of Directors. In the case of
dividends or other distributions payable in New MIPS Common Stock, only shares
of Class A Common Stock will be paid with respect to shares of Class A Common
Stock and only shares of Class B Common Stock will be paid with respect to
shares of Class B Common Stock. The number of shares of Class A Common Stock and
Class B Common Stock so paid will be equal in number on a per-share basis.
COMMON STOCK OWNED BY SILICON GRAPHICS. Prior to a Tax-Free Distribution
and for so long as Silicon Graphics owns shares of Class B Common Stock, any
shares of Class A Common Stock acquired by Silicon Graphics or any of its
subsidiaries will automatically convert into shares of Class B Common Stock on a
one-for-one basis. Following a Tax-Free Distribution, shares of New MIPS Common
Stock acquired by Silicon Graphics will retain their status as shares of Class A
Common Stock or Class B Common Stock, as the case may be.
CONVERSION. Following the Recapitalization and prior to a Tax-Free
Distribution, each share of Class B Common Stock transferred to any person or
entity other than Silicon Graphics or any of its subsidiaries will automatically
convert into one share of Class A Common Stock upon such transfer. However, the
shares of Class B Common Stock will not convert into shares of Class A Common
Stock in connection with a Tax-Free Distribution or upon transfer by the holders
of the Class B Common Stock to another party after a Tax-Free Distribution.
Immediately after the consummation of a Tax-Free Distribution, Silicon Graphics'
stockholders will be the holders of the Class B Common Stock.
If at any time prior to a Tax-Free Distribution the number of shares of
Class B Common Stock held by Silicon Graphics and/or its affiliates represents
less than 50% of the aggregate number of shares of New MIPS Common Stock then
outstanding, the Class B Common Stock will be automatically converted into
shares of Class A Common Stock; provided, however, that such automatic
conversion will not occur if the independent directors on the MIPS Board of
Directors and the Chief Executive Officer of MIPS Technologies unanimously
determine that such automatic conversion is not in the interests of MIPS
Technologies and the MIPS Public Stockholders. In any event, the Class B Common
Stock held by Silicon Graphics will automatically convert into Class A Common
Stock if the number of shares of Class B Common Stock held by Silicon Graphics
and/or its affiliates represents less than 30% of the aggregate number of shares
of New MIPS Common Stock then outstanding. These provisions are intended to
ensure that Silicon Graphics retains control of the MIPS Board of Directors only
if it has a substantial economic interest in MIPS Technologies. These automatic
conversion provisions will not apply following a Tax-Free Distribution.
In addition, prior to a Tax-Free Distribution and upon the closing of any
merger or consolidation involving Silicon Graphics or a tender offer for the
capital stock of Silicon Graphics, if the stockholders of Silicon Graphics
immediately prior to such transaction own less than 50% of the outstanding
shares of Silicon Graphics (or, if the capital stock of Silicon Graphics is
exchanged or converted in any such transaction for capital stock of another
corporation, such corporation) immediately after such transaction, each share of
Class B Common Stock held by Silicon Graphics or its successor will
automatically convert into one share of Class A Common Stock.
Following a Tax-Free Distribution, each share of Class B Common Stock will
be automatically converted into one share of Class A Common Stock on the fifth
anniversary of such Tax-Free Distribution if, at a meeting of stockholders
called to approve such conversion, such conversion receives the approval of
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<PAGE>
a majority of the votes entitled to be cast by the holders of the Class A Common
Stock and the holders of the Class B Common Stock present and voting, voting
together as a single class, unless, prior to such Tax-Free Distribution, Silicon
Graphics delivers to MIPS Technologies an opinion of counsel, reasonably
satisfactory to MIPS Technologies, to the effect that, based in part on
conversations with the Internal Revenue Service ("IRS") disclosed to MIPS
Technologies, such vote would have a material adverse effect on the ability of
Silicon Graphics to timely obtain a favorable ruling from the IRS regarding the
tax-free status of the Tax-Free Distribution. See "Description of Capital
Stock."
Following the Recapitalization, if, pursuant to any merger, consolidation or
reorganization of MIPS Technologies with another entity, the stockholders of
MIPS Technologies immediately prior to such transaction will own less than 50%
of the outstanding stock of such other entity immediately after such
transaction, each share of Class B Common Stock will automatically convert into
one share of Class A Common Stock immediately prior to the effectiveness of such
transaction, unless, prior to a Tax-Free Distribution, Silicon Graphics delivers
an opinion of counsel, reasonably satisfactory to MIPS Technologies, to the
effect that, based in part on conversations with the IRS disclosed to MIPS
Technologies, such automatic conversion would have a material adverse effect on
the ability of Silicon Graphics to timely obtain a favorable ruling from the IRS
regarding the tax-free status of the Tax-Free Distribution.
Under current tax law, it is uncertain whether the conversion provisions
described in the two preceding paragraphs would have a material adverse effect
on Silicon Graphics' ability to timely obtain a favorable ruling from the IRS
regarding the tax-free status of the Tax-Free Distribution.
EXCHANGE. Under the terms of the Amended Certificate of Incorporation and
the Exchange Agreement, 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, and such amendment
would apply to a Tax-Free Distribution.
At any time following a Tax-Free Distribution, MIPS Technologies 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 (the "MIPS
Exchange Right") unless, prior to a Tax-Free Distribution, Silicon Graphics
delivers to MIPS Technologies an opinion of counsel, reasonably satisfactory to
MIPS Technologies, to the effect that, based in part on conversations with the
IRS disclosed to MIPS Technologies, the inclusion of the MIPS Exchange Right
provision in the Amended Certificate of Incorporation would have a material
adverse effect on the ability of Silicon Graphics to timely obtain a favorable
ruling from the IRS regarding the tax-free status of the Tax-Free Distribution.
In addition, Silicon Graphics may limit MIPS Technologies' ability to exercise
the MIPS Exchange Right pursuant to the Distribution Tax Agreement (as defined
below) which will be entered into by MIPS Technologies and Silicon Graphics
prior to a Tax-Free Distribution. See "The Exchange Agreement--Distribution Tax
Indemnification Agreement." The MIPS Exchange Right is designed, in part, to
provide additional flexibility to MIPS Technologies to reduce, if then existing
tax laws so permit, the length of time following a Tax-Free Distribution during
which MIPS Technologies must continue to have the dual class capital structure.
Under current tax law, it is uncertain whether the MIPS Exchange Right
provision would have a material adverse effect on Silicon Graphics' ability to
timely obtain a favorable ruling from the IRS regarding the tax-free status of
the Tax-Free Distribution.
MERGER OR REORGANIZATION. The Amended Certificate of Incorporation will
provide that 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, consolidation or reorganization of
MIPS Technologies 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, then (i) in any such transaction,
the holders of shares of Class A Common Stock and the holders of shares
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of Class B Common Stock may receive different kinds of shares of stock if the
only difference in such shares is the inclusion of voting rights which maintain
the different voting rights of the holders of Class A Common Stock and holders
of Class B Common Stock with respect to the election of the applicable
percentage of the authorized number of directors on the MIPS Board of Directors
as described above and (ii) if all or substantially all of the New MIPS Common
Stock is exchanged for capital stock of another entity and such transaction is
required to be accounted for by the "pooling-of-interests" method, the holders
of shares of Class A Common Stock and the holders of shares of Class B Common
Stock shall receive shares of stock of the acquiring entity based on the
relative fair value of a share of Class A Common Stock and a share of Class B
Common Stock measured as of the announcement date for such transaction. See
"Description of MIPS Capital Stock Prior to and Following the Recapitalization--
Common Stock--Merger or Reorganization."
PROPOSED TAX LEGISLATION
On February 1, 1999, the United States Treasury Department proposed
legislation which, if enacted, would generally require a distributing company to
hold at least 80% of the value of a subsidiary's stock (in addition to 80% of
the voting power) in order to effect a tax-free spin-off or split-off of that
subsidiary. At the present time, it is uncertain whether this proposal 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 the Recapitalization is effected 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. In such event, under the terms of the Exchange Agreement,
Silicon Graphics would be required to exchange its shares of Class B Common
Stock for shares of Class A Common Stock, and it could elect to hold such shares
of Class A Common Stock indefinitely.
THE MIPS BOARD OF DIRECTORS FOLLOWING THE RECAPITALIZATION
The Existing Certificate of Incorporation and Existing Bylaws provide that
the MIPS Board of Directors will consist of not less than three and not more
than ten directors, with the exact number to be fixed by the MIPS Board of
Directors. The MIPS Board of Directors presently consists of the following seven
members: John E. Bourgoin, the Chief Executive Officer and President of MIPS
Technologies; Dr. Forest Baskett, Kenneth L. Coleman, William M. Kelly and
Teruyasu Sekimoto, each of whom is an officer or employee of Silicon Graphics;
and Anthony B. Holbrook and Fred M. Gibbons, each of whom is an independent
director not affiliated with MIPS Technologies or Silicon Graphics. The MIPS
Board of Directors is divided into three classes of directors serving staggered
three-year terms, with Classes I and II having two directors each and Class III
having three directors. The terms of office of the directors presently expire as
follows: Messrs. Bourgoin and Coleman (the current class I directors) at the
annual meeting of stockholders in 1999, Messrs. Sekimoto and Gibbons (the
current Class II directors) at the annual meeting of stockholders in 2000, and
Dr. Baskett and Messrs. Kelly and Holbrook (the current Class III directors) at
the annual meeting of stockholders in 2001.
If the Recapitalization is approved, the Amended Certificate of
Incorporation and Amended Bylaws will provide that the MIPS Board of Directors
will consist of not less than five and not more than ten directors, with the
exact number to be fixed by the MIPS Board of Directors. However, initially the
MIPS Board of Directors will continue to have seven members and will consist of
one Class A Director and six Class B Directors. In order to provide the holders
of the Class A Common Stock the opportunity to elect the Class A Director at the
annual meeting of stockholders of MIPS Technologies in 1999, it is anticipated
that the number of directors in Class I will be increased by one and the Class A
Director will be included in Class I. In addition, the number of directors in
Class III will be decreased by one. It is expected that, prior to the annual
meeting of stockholders in 1999, Mr. Holbrook will be appointed by the MIPS
Board of
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Directors as the initial Class A Director and a member of Class I. The holders
of the Class A Common Stock will be entitled to elect one Class A Director at
the annual meeting of stockholders in 1999 and the Class A Director so elected
will hold office until the expiration of his or her term at the annual meeting
of stockholders in 2002. In order to ensure that the holders of the Class A
Common Stock will at all times be entitled to elect at least one director, the
Amended Certificate of Incorporation will provide that the total number of
directors must consist of at least five persons. The Existing Certificate of
Incorporation provides for a minimum of only three directors.
INTERESTS OF CERTAIN PERSONS IN THE RECAPITALIZATION
In considering the recommendation of the Special Committee and the MIPS
Board of Directors, the stockholders of MIPS Technologies should be aware that
certain officers and directors of MIPS Technologies are also stockholders and/or
employees of Silicon Graphics and may have certain interests in the
Recapitalization that are different from, or in addition to, the interests of
the MIPS Public Stockholders.
OWNERSHIP OF EXISTING COMMON STOCK. As of December 31, 1998, the directors
and executive officers of MIPS Technologies beneficially owned an aggregate of
26,054 shares of Existing Common Stock, including shares that may be acquired
within 60 days of such date upon the exercise of outstanding stock options (or
less than one percent of the then outstanding shares of Existing Common Stock).
OWNERSHIP OF SILICON GRAPHICS COMMON STOCK. As of December 31, 1998, the
directors and executive officers of MIPS Technologies beneficially owned an
aggregate of 1,450,245 shares of common stock, par value $0.001 per share (the
"Silicon Graphics Common Stock"), of Silicon Graphics, including shares that may
be acquired within 60 days of such date upon the exercise of outstanding stock
options (or less than one percent of the then outstanding shares of Silicon
Graphics Common Stock).
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Implementation of the Recapitalization will be tax-free for federal income
tax purposes to MIPS Technologies and its stockholders based upon the facts and
law as of the date of this Proxy Statement.
NASDAQ APPROVALS
MIPS Technologies expects to obtain the necessary approvals and waivers from
The Nasdaq Stock Market, Inc. ("Nasdaq") in order to effect the
Recapitalization.
In connection with the Recapitalization, application will be made to Nasdaq
to redesignate the Existing Common Stock as Class A Common Stock. In the event
of a Tax-Free Distribution, MIPS Technologies expects that the Class B Common
Stock also will be quoted on the Nasdaq National Market or on such other
exchange as the Class A Common Stock is then listed or quoted.
FEDERAL SECURITIES LAWS CONSEQUENCES
All shares of Class A Common Stock received in the Recapitalization by
holders of the Existing Common Stock will be freely transferable, except that
shares of Class A Common Stock received by persons who are deemed to be
affiliates of MIPS Technologies may be resold by them only in transactions
permitted by the resale provision of Rule 144 promulgated under the Securities
Act of 1933, as amended (the "Securities Act"), or otherwise in compliance with
(or pursuant to an exemption from) the registration requirements of the
Securities Act. Persons deemed to be affiliates of MIPS Technologies are those
individuals or entities that control, are controlled by, or are under common
control with, MIPS Technologies and generally include the executive officers and
directors of MIPS Technologies, as well as certain principal stockholders of
MIPS Technologies.
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NO APPRAISAL RIGHTS
Holders of Existing Common Stock are not entitled to appraisal rights under
Section 262 of the General Corporation Law of the State of Delaware (the "DGCL")
in connection with the Recapitalization because the Recapitalization is not a
transaction for which appraisal rights are available under the DGCL.
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THE EXCHANGE AGREEMENT
IF THE RECAPITALIZATION IS APPROVED, MIPS TECHNOLOGIES AND SILICON GRAPHICS
WILL ENTER INTO THE EXCHANGE AGREEMENT WHICH WILL GOVERN CERTAIN MATTERS BETWEEN
THE PARTIES FOLLOWING THE RECAPITALIZATION. THE FOLLOWING IS A SUMMARY OF THE
MATERIAL TERMS OF THE EXCHANGE AGREEMENT, A FORM OF WHICH IS ATTACHED TO THIS
PROXY STATEMENT AS ANNEX C. THE FOLLOWING DOES NOT PROPOSE TO BE COMPLETE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FORM OF THE EXCHANGE AGREEMENT
ATTACHED AS ANNEX C.
EXCHANGE OF CLASS A SHARES FOR CLASS B SHARES BY SILICON GRAPHICS
Subject to the terms and conditions of the Exchange Agreement and in
accordance with the DGCL, immediately after the effectiveness of the Amended
Certificate of Incorporation under the DGCL, Silicon Graphics will exchange each
share of Class A Common Stock it owns for one share of Class B Common Stock.
SILICON GRAPHICS' OBLIGATION TO PURCHASE NEW MIPS COMMON STOCK
Subject to terms and conditions of the Exchange Agreement, if Silicon
Graphics has not disposed of its entire interest in MIPS Technologies (whether
through a Tax-Free Distribution or otherwise) prior to December 31, 2000,
Silicon Graphics shall, on the last day of each fiscal quarter beginning on
December 31, 2000 and ending on the last day of the fiscal quarter immediately
preceding any such disposition, accrue an obligation to purchase the number of
shares of New MIPS Common Stock set forth below (the "Required Purchase
Amount"):
<TABLE>
<CAPTION>
QUARTER ENDING: REQUIRED PURCHASE AMOUNT
- ------------------------------------------------------------------- -------------------------
<S> <C>
December 31, 2000.................................................. 1,800,000
March 31, 2001..................................................... 1,700,000
June 30, 2001...................................................... 1,800,000
September 30, 2001................................................. 1,700,000
December 31, 2001.................................................. 1,800,000
March 31, 2002..................................................... 1,700,000
June 30, 2002...................................................... 1,700,000
September 30, 2002................................................. 2,000,000
December 31, 2002 and each quarter thereafter until a distribution
or an exchange of Class B shares following a Change in Tax Law... 2,000,000
</TABLE>
Silicon Graphics shall make such purchase or purchases of shares of New MIPS
Common Stock equal to the Required Purchase Amount prior to the date (the
"Purchase Date") which is thirty (30) days following the public announcement by
MIPS Technologies of its financial results for the applicable fiscal quarter.
If, prior to the Purchase Date for any Required Purchase Amount, MIPS
Technologies notifies Silicon Graphics in writing that the independent directors
and the Chief Executive Officer of MIPS Technologies have unanimously determined
that the purchase of shares of New MIPS Common Stock by Silicon Graphics equal
to the Required Purchase Amount is not in the interests of MIPS Technologies and
the MIPS Public Stockholders, then the Required Purchase Amount for such
quarterly period will be reduced by the number set forth in such notice.
At its sole option, Silicon Graphics may satisfy its obligation to purchase
shares of New MIPS Common Stock equal to a Required Purchase Amount by
purchasing (i) newly issued shares of Class B Common Stock from MIPS
Technologies, (ii) issued and outstanding shares of Class A Common Stock in the
public market or otherwise from a third party (which shares will be converted
into shares of Class B Common Stock upon such acquisition under the terms of the
Amended Certificate of Incorporation) or (iii) any combination of (i) and (ii)
above, in each case on or prior to the applicable Purchase Date. In
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<PAGE>
determining whether Silicon Graphics has satisfied its obligation to purchase
shares of New MIPS Common Stock equal to the Required Purchase Amount with
respect to a quarterly period, each share of Class A Common Stock purchased by
Silicon Graphics in the public market or otherwise from a third party shall be
counted as four shares of New MIPS Common Stock purchased in satisfaction of the
Required Purchase Amount and each share of Class B Common Stock purchased by
Silicon Graphics from the Company shall be counted as one share of New MIPS
Common Stock purchased in satisfaction of the Required Purchase Amount. Shares
of Class A Common Stock and Class B Common Stock purchased by Silicon Graphics
shall only be applied in satisfaction of a Required Purchase Amount one time.
Silicon Graphics will have registration rights with respect to the shares of New
MIPS Common Stock it acquires in satisfaction of the Required Purchase Amount.
Silicon Graphics will not be obligated to purchase the Required Purchase Amount
for the quarter in which Silicon Graphics disposes of its entire interest in
MIPS Technologies (including through a Tax-Free Distribution) or in which
Silicon Graphics exchanges its shares of Class B Common Stock for Class A Common
Stock as a result of a Change in Tax Law (as defined herein) and for each
quarter thereafter.
Shares of Class B Common Stock may be purchased from MIPS Technologies at a
price per share equal to the average closing price of the Class A Common Stock
on the Nasdaq National Market for the last ten trading days of the quarter with
respect to which such obligation accrues.
Silicon Graphics has submitted a ruling request with the IRS that the
Tax-Free Distribution qualifies generally as a tax-free distribution under
Section 355 of the Code. The ruling request also asks the IRS to consider the
cumulative conversion provisions and the MIPS Exchange Right. The Exchange
Agreement provides that Silicon Graphics will use good faith and reasonable best
efforts to obtain the requested rulings from the IRS.
DISTRIBUTION TAX INDEMNIFICATION AGREEMENT
The Exchange Agreement will also contain a covenant obligating MIPS
Technologies and Silicon Graphics to enter into a Distribution Tax
Indemnification Agreement (the "Tax Agreement") prior to a Tax-Free
Distribution. The principal terms of the Tax Agreement are set forth in Appendix
A to the Exchange Agreement which is attached hereto as Annex C. The Tax
Agreement generally will limit the ability of MIPS Technologies to undertake
certain actions after the Tax-Free Distribution that would cause the Tax-Free
Distribution to become taxable to Silicon Graphics. The Tax Agreement will
contain covenants under which MIPS Technologies may not:
- issue capital stock in an acquisition or private or public offering within
the 30-month period following the Tax-Free Distribution, except (a)
pursuant to the exercise of employee, director or consultant stock options
or awards and (b) the issuance of up to a cumulative amount of 10% of the
outstanding stock of MIPS Technologies at the time of the Tax-Free
Distribution;
- amend its certificate of incorporation in a manner that affects the voting
rights with respect to the Class B Common Stock or Class A Common Stock
(but not including pursuant to the automatic conversion provisions of the
Company's Amended Certificate of Incorporation) 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 (but not including pursuant
to the automatic conversion provisions of the Company's Amended
Certificate of Incorporation) during the five-year period following the
Tax-Free Distribution;
- knowingly and voluntarily take any other actions (other than the permitted
stock issuances described above and certain other actions) during the
30-month period following the Tax-Free Distribution which it believes will
more likely than not result in the Tax-Free Distribution becoming taxable;
or
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<PAGE>
- take any other action that would be a breach of certain reasonable
covenants or representations related to MIPS Technologies and that are
within its reasonable control in the initial or any supplemental ruling
request submitted to the IRS.
Under the terms of the Tax Agreement, MIPS Technologies 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 the stock of MIPS Technologies (taking into account permitted
issuances described above) during the 30-month period following the Tax-Free
Distribution, unless (a) a supplemental ruling is obtained from the IRS to the
effect that such proposed action will not cause the Tax-Free Distribution to
become taxable, (b) Silicon Graphics consents to such action or (c) MIPS
Technologies delivers 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 MIPS Technologies' capital stock and other restrictions
discussed above could have a negative impact on MIPS Technologies' financial
flexibility following a Tax-Free Distribution.
The Tax Agreement will contain other customary provisions.
REQUIRED EXCHANGE OF CLASS B SHARES FOR CLASS A SHARES BY SILICON GRAPHICS
The Exchange Agreement will also provide that Silicon Graphics will be
required 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 Code is amended
(a "Change in Tax Law") to provide, in effect, that, generally, 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 the subsidiary's stock, and such Change in Tax Law
would apply to a Tax-Free Distribution by Silicon Graphics of its interest in
MIPS Technologies.
INDEMNIFICATION AND EXPENSES
Silicon Graphics will indemnify and hold harmless MIPS Technologies and its
affiliates, officers, directors, employees, agents, successors and assigns from
and against any and all liabilities, losses, damages, claims, costs and
expenses, interest, awards, judgments and penalties (including, without
limitation, attorneys' and consultants' fees and expenses) actually suffered or
incurred by them, arising out of or resulting from any claim or cause of action
by any third party to the extent arising out of the Recapitalization or any
subsequent distribution of all of its interest in MIPS Technologies. This
indemnity will not extend to liabilities to the extent that such liabilities
relate to any secondary sales by Silicon Graphics following the
Recapitalization.
Pursuant to the Exchange Agreement, Silicon Graphics has agreed to reimburse
MIPS Technologies for the fees and expenses of legal counsel in connection with
the Recapitalization and any distribution covered by the indemnity described
above, whether or not the Recapitalization or any such distribution is
consummated, in an amount set forth in a budget to be agreed to between the
parties. Silicon Graphics has also agreed to reimburse MIPS Technologies for the
reasonable fees and expenses of the financial advisor to the Special Committee
and all other reasonable out-of-pocket expenses incurred by MIPS Technologies in
connection with the Recapitalization and any such distribution, whether or not
the Recapitalization or any such distribution is consummated. Silicon Graphics
will be responsible for all of the fees, costs and expenses incurred by Silicon
Graphics in connection with the Recapitalization and any distribution.
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CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS
This document and the information incorporated herein by reference contain
forward looking statements that include assumptions as to events that may occur
following a Recapitalization, including sales and other dispositions by Silicon
Graphics of its interest in MIPS Technologies as well as MIPS Technologies'
future operating performance. You will find many of these statements in the
following sections:
- "The Recapitalization--Reasons for the Recapitalization; Recommendation of
the Special Committee and the MIPS Board of Directors" beginning on page
19; and
- Under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Part II of MIPS Technologies'
Annual Report on Form 10-K for the fiscal year ended June 30, 1998, in
Part I of MIPS Technologies' Quarterly Reports on Form 10-Q for the
quarters ended September 30, 1998 and December 31, 1998 and in the Current
Report on Form 8-K dated February 26, 1999 which information is
incorporated by reference in this Proxy Statement.
Also, words like "may," "may not," "believes," "does not believe,"
"intends," "expects," "does not expect," "anticipates," "does not anticipate"
and similar expressions, signal forward looking statements. Such statements
should be viewed with caution.
Actual events or results could differ materially from the forward looking
statements as a result of many factors, including, but not limited to,
fluctuations in the operating results of MIPS Technologies or Silicon Graphics
or significant changes in their respective businesses, prevailing market
conditions for the capital stock of MIPS Technologies and Silicon Graphics, any
shift in MIPS Technologies' or Silicon Graphics' strategic directions and
changes in tax or other laws relevant to the Recapitalization. In making forward
looking statements in this document and in the information that is incorporated
by reference, MIPS Technologies claims the protection of the safe harbor for
forward looking statements contained in the Private Securities Litigation Reform
Act of 1995. MIPS Technologies does not assume any obligation to update these
forward looking statements to reflect actual results, changes in assumptions or
changes in other factors affecting such forward looking statements.
MIPS Technologies' stockholders should consider carefully the information
set forth herein and in the information incorporated herein by reference.
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MIPS TECHNOLOGIES
THE COMPANY
MIPS Technologies is a leading designer of high-performance 32- and 64-bit
RISC processors and related intellectual property for the digital consumer and
business equipment markets. MIPS Technologies and its licensees offer a variety
of standard, custom, semi-custom and application specific processors. MIPS
Technologies licenses its intellectual property to semiconductor manufacturing
and fabless semiconductor companies, as well as system original equipment
manufacturers. To date, the MIPS RISC architecture has been used to create over
60 standard processors which have a cumulative installed base of over 120
million units in a variety of products such as video games, color printers and
handheld personal computers. 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, MIPS Technologies believes that more than one third
of these units were based on the MIPS RISC architecture.
MIPS Technologies 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 MIPS Technologies designs to develop
differentiated and innovative products for a variety of embedded applications
within demanding time-to-market requirements. The advantages of the MIPS RISC
architecture relate primarily to scalability of die size and performance.
Products incorporating the MIPS RISC 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, the MIPS RISC
architectures have been incorporated in a number of low-power applications such
as the Philips Nino and the NEC MobilePro handheld personal computers. The MIPS
RISC 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.
On July 6, 1998, MIPS Technologies completed the Offering. Prior to the
Offering, MIPS Technologies was a wholly owned subsidiary of Silicon Graphics
and its business was conducted by Silicon Graphics primarily through its MIPS
Group, a division of Silicon Graphics. In order to increase the focus of the
MIPS Group on the design and development of processors, cores and related
designs for 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 Silicon Graphics approved a transaction
pursuant to which Silicon Graphics transferred to MIPS Technologies the assets
and liabilities related to the design and development of processor intellectual
property for embedded market applications (the "Separation"). The MIPS Group's
predecessor, MIPS Computer Systems, Inc., was founded in 1984 and was engaged in
the design and development of RISC microprocessors for the computer systems and
embedded markets. MIPS Computer Systems, Inc. was acquired by Silicon Graphics
in June 1992.
MIPS Technologies was incorporated in Delaware in June 1992. MIPS
Technologies has its principal executive offices at 1225 Charleston Road,
Mountain View, California 94043-1353, and its telephone number at that address
is (650) 567-5000.
Additional information concerning MIPS Technologies is included in MIPS
Technologies' reports filed under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), portions of which are incorporated by reference in
this Proxy Statement. See "Where You Can Find More Information" beginning on
page 45.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of February 19, 1999
as to the beneficial ownership of Existing Common Stock by (i) each person known
to MIPS Technologies to own beneficially,
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<PAGE>
as defined in Rule 13d-3 under the Exchange Act, five percent or more of the
outstanding shares of Existing Common Stock, based on MIPS Technologies'
records, (ii) each director of MIPS Technologies, (iii) the Chief Executive
Officer and the two other executive officers of MIPS Technologies whose salary
and bonus exceeded $100,000 during the fiscal year ended June 30, 1998, and (iv)
all directors and executive officers as a group. No options to purchase MIPS
Technologies common stock were exercisable on February 19, 1999 or within 60
days thereafter.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENTAGE OF
NAME OF BENEFICIAL OWNER OWNED(1)(2) SHARES
- --------------------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Silicon Graphics, Inc............................................................ 31,750,000 85%
2011 North Shoreline Boulevard
Mountain View, California 94043
John E. Bourgoin................................................................. 17,168 *
Lavi Lev......................................................................... 1,970 *
Derek Meyer...................................................................... 2,079 *
Dr. Forest Baskett............................................................... -- --
Kenneth L. Coleman............................................................... 1,285 *
Fred M. Gibbons.................................................................. -- --
Anthony B. Holbrook.............................................................. -- --
William M. Kelly................................................................. -- --
Teruyasu Sekimoto................................................................ -- --
All executive officers and directors as a group (11 persons)..................... 26,054 *
</TABLE>
- ------------------------
* Less than 1%
(1) The inclusion herein of any shares as beneficially owned does not constitute
an admission of beneficial ownership of those shares.
(2) Does not include shares of common stock that may be acquired under MIPS
Technologies' Employee Stock Purchase Plan in connection with the current
offering period ending April 30, 1999.
RELATIONSHIP WITH SILICON GRAPHICS
GENERAL. As a result of its beneficial ownership of approximately 85% of
the currently outstanding Existing Common Stock, Silicon Graphics presently has
the ability to direct the election of all of the members of the MIPS Board of
Directors and to exercise a controlling influence over the business and affairs
of MIPS Technologies. If the Recapitalization is adopted, the MIPS Public
Stockholders, by virtue of their ownership of all of the issued and outstanding
shares of Class A Common Stock, will be entitled to elect the Class A Directors,
and prior to a Tax-Free Distribution (unless the shares of Class B Common Stock
have been converted into or exchanged for shares of Class A Common Stock) or
other disposition by Silicon Graphics of its Class B Common Stock, Silicon
Graphics will be entitled to elect all of the Class B Directors. In addition, if
the Recapitalization is adopted, so long as Silicon Graphics owns more than 50%
of the New MIPS Common Stock, it will have the ability to remove the Class A
Directors for cause and the Class B Directors with or without cause. Silicon
Graphics presently has the ability to remove any and all directors with or
without cause. Finally, whether or not the Recapitalization is adopted, Silicon
Graphics will continue to have the ability to call special meetings of
stockholders and to effect stockholder action by written consent in lieu of a
meeting of stockholders. These rights currently are not available to MIPS Public
Stockholders, nor will they be after Silicon Graphics ceases to own in excess of
50% of the common equity of MIPS Technologies. See "Description of MIPS Capital
Stock Prior to and Following the Recapitalization--Certificate of Incorporation
and By-law Provisions That May Have an Anti-Takeover Effect."
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CERTAIN AGREEMENTS. In connection with the Separation and the Offering,
MIPS Technologies and Silicon Graphics entered into various agreements intended
to define the relationship between them on a going forward basis. Because these
agreements were entered into at a time when MIPS Technologies was still a wholly
owned subsidiary of Silicon Graphics, they are not the result of arms-length
negotiations between the parties. These agreements include the following:
- MANAGEMENT SERVICES AGREEMENT, pursuant to which Silicon Graphics agreed
to provide certain services, including accounting, treasury, tax,
facilities and information services, to MIPS Technologies following the
Separation on a interim or transitional basis.
- TECHNOLOGY AGREEMENT, pursuant to which Silicon Graphics assigned or
licensed certain intellectual property rights to MIPS Technologies, and
MIPS Technologies licensed back to Silicon Graphics certain intellectual
property rights.
- TRADEMARK AGREEMENT, pursuant to which Silicon Graphics assigned or
licensed certain trademark and trademark-related rights to MIPS
Technologies, and MIPS Technologies licensed certain rights back to
Silicon Graphics.
- TAX SHARING AGREEMENT, under which MIPS Technologies and Silicon Graphics
have agreed, among other things, to make payments between them such that,
with respect to any period, the amount of taxes to be paid by MIPS
Technologies, subject to certain adjustments, will be determined as if
MIPS Technologies filed separate federal, state and local income tax
returns.
- FACILITIES LEASE AGREEMENT, pursuant to which MIPS Technologies subleases
approximately 27,500 square feet of office space from Silicon Graphics,
with an option to increase to 55,000 square feet.
- CORPORATE AGREEMENT, pursuant to which (i) MIPS Technologies granted to
Silicon Graphics a continuing option to purchase, under certain
circumstances, additional shares of common stock and shares of non-voting
capital stock of MIPS Technologies, (ii) MIPS Technologies granted to
Silicon Graphics registration rights related to the common stock of MIPS
Technologies owned by Silicon Graphics and (iii) MIPS Technologies agreed
to refrain from engaging in certain actions for so long as Silicon
Graphics owns a majority of MIPS Technologies outstanding common stock.
If the Recapitalization is approved, MIPS Technologies and Silicon Graphics
will enter into the Exchange Agreement. In connection with a Tax-Free
Distribution, MIPS Technologies and Silicon Graphics expect to enter into the
Tax Agreement.
Additional information concerning MIPS Technologies' relationship with Silicon
Graphics is included in MIPS Technologies' Annual Report on Form 10-K for the
fiscal year ended June 30, 1998. See "Where You Can Find More Information"
beginning on Page 45.
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MARKET PRICE AND DIVIDEND INFORMATION
MARKET PRICES
On June 30, 1998, MIPS Technologies commenced an initial public offering of
the Existing Common Stock at $14.00 per share. On June 30, 1998, the reported
last sale price of the Existing Common Stock was $13.44 per share. The table
below sets forth, for the calendar quarters indicated, the high and low reported
last sale prices per share of the Existing Common Stock on the Nasdaq National
Market.
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
<S> <C> <C>
HIGH LOW
--------- ---------
1998
Quarter ended September 30, 1998............................................................ $ 23.25 $ 10.63
Quarter ended December 31, 1998............................................................. $ 32.00 $ 14.84
1999
Quarter ending March 31, 1999 (through February 25, 1999)................................... $ 45.00 $ 28.25
</TABLE>
On January 13, 1998, the last full trading day prior to the public
announcement of the Recapitalization, the reported last sale price of Existing
Common Stock on the Nasdaq National Market was $32.25 per share.
On February 25, 1999, the most recent practicable date prior to the printing
of this Proxy Statement, the reported last sale price of Existing Common Stock
on the Nasdaq National Market was $40.38 per share.
MIPS STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE
EXISTING COMMON STOCK.
DIVIDENDS
MIPS Technologies has not paid any dividends since its incorporation and
currently intends to retain any earnings to fund the development and growth of
its business, and therefore does not currently anticipate paying cash or stock
dividends on the Existing Common Stock, or the New MIPS Common Stock if the
Recapitalization is adopted, in the foreseeable future. MIPS Technologies'
future dividend policy will be determined by the MIPS Board of Directors on the
basis of various factors, including MIPS Technologies' results of operations and
financial condition and any legal and contractual restrictions.
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DESCRIPTION OF MIPS CAPITAL STOCK PRIOR TO
AND FOLLOWING THE RECAPITALIZATION
If the Recapitalization is adopted, the Existing Certificate of
Incorporation will be amended. The following is a general description of the
relative rights of the holders of MIPS Technologies capital stock at the present
time and such rights if the Recapitalization is adopted.
AUTHORIZED CAPITAL STOCK
Upon the consummation of the Recapitalization, the authorized capital stock
of MIPS Technologies will consist of 300,000,000 shares, of which (i)
150,000,000 shares will be Class A Common Stock, par value $0.001 per share,
(ii) 100,000,000 shares will be Class B Common Stock, par value $0.001 per share
and (iii) 50,000,000 shares will be preferred stock, par value $0.001 per share
(the "Preferred Stock"), issuable in series. After giving effect to the
Recapitalization and the exchange by Silicon Graphics of its shares of Class A
Common Stock for shares of Class B Common Stock, there will be 5,542,286 shares
of Class A Common Stock outstanding and 31,750,000 shares of Class B Common
Stock outstanding.
At present, MIPS Technologies authorized capital stock consists of
150,000,000 shares of common stock, par value $0.001 per share, and 50,000,000
shares of Preferred Stock, par value $0.001 per share, issuable in series. As of
the Record Date, there were 37,292,286 outstanding shares of Existing Common
Stock held by approximately 21 holders of record.
COMMON STOCK
VOTING RIGHTS. Upon the consummation of the Recapitalization, with respect
to the election of directors, holders of Class A Common Stock, voting separately
as a class, will be entitled to elect 20% of the directors on the MIPS Board of
Directors (or, if such 20% is not a whole number, then the next lower whole
number of directors that is closest to 20% of such membership, provided that in
no event will there be less than one director elected by the holders of the
Class A Common Stock). Each share of Class A Common Stock shall have one vote in
the election of such directors. The holders of the Class B Common Stock, voting
separately as a class, will be entitled to elect the remaining directors. Each
share of Class B Common Stock will have one vote in the election of such
directors. References herein to the number of directors do not include any
directors whom the holders of any Preferred Stock may have the exclusive right
to elect.
If, at any time, all the outstanding shares of Class B Common Stock have
been converted into or exchanged for shares of Class A Common Stock, subject to
the rights of holders of Preferred Stock, the holders of the Class A Common
Stock, voting as a class, will be entitled to elect all the directors on the
MIPS Board of Directors.
The holders of Class A Common Stock and Class B Common Stock will in all
other matters vote together as a single class, with each share of Class A Common
Stock and Class B Common Stock having one vote, except as required by law and
except with respect to any proposed amendment to the Amended Certificate of
Incorporation which would alter the special rights of the Class A Common Stock
or the Class B Common Stock, in which case the affected class shall also be
entitled to vote on such amendment separately as a class. Notwithstanding the
foregoing, the affirmative vote of the holders of a majority of the New MIPS
Common Stock, voting together as a single class, will be required to approve the
conversion, if not automatically converted pursuant to the terms of the Amended
Certificate of Incorporation, of the Class B Common Stock to Class A Common
Stock following a Tax-Free Distribution and the lapse of five years of the date
of such distribution.
Following a Tax-Free Distribution, for so long as any person or group of
persons acting in concert beneficially owns 10% or more of the outstanding
shares of Class B Common Stock, such person or group will not have any voting
powers in respect of such shares of Class B Common Stock in any election of
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<PAGE>
directors unless such person or group is also the beneficial owner of at least
an equivalent percentage of the outstanding shares of Class A Common Stock.
At present, the holders of shares of Existing Common Stock are entitled to
one vote for each share on all matters voted on by MIPS Technologies'
stockholders, including elections of directors, and except as otherwise required
by law and subject to any voting rights granted to holders of any series of
Preferred Stock, the holders of such shares possess all the voting power.
The Existing Certificate of Incorporation does not, and the Amended
Certificate of Incorporation will not, provide for cumulative voting in the
election of directors.
DIVIDENDS. Upon the consummation of the Recapitalization and subject to the
rights of the holders of any series of Preferred Stock, the holders of Class A
Common Stock and the holders of Class B Common Stock will be entitled to receive
such dividends and other distributions in cash, stock of any corporation (other
than New MIPS Common Stock) or property of MIPS Technologies as may be declared
thereon from time to time by the MIPS Board of Directors from funds legally
available therefor. The holders of the New MIPS Common Stock will share equally
on a per share basis in all such dividends and other distributions; provided,
however, in the case of dividends or other distributions payable in, or
reclassifications involving, New MIPS Common Stock, including distributions
pursuant to stock splits or divisions of New MIPS Common Stock, only shares of
Class A Common Stock will be paid or distributed with respect to shares of Class
A Common Stock and only shares of Class B Common Stock will be paid or
distributed with respect to 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. In addition, MIPS Technologies may not
subdivide or combine shares of either class of New MIPS Common Stock without at
the same time proportionally subdividing or combining shares of the other class.
At present, subject to any preferential rights of any outstanding series of
Preferred Stock created by the MIPS Board of Directors from time to time, the
holders of shares of Existing Common Stock are entitled to such dividends as may
be declared from time to time by the Board of Directors from funds legally
available therefor.
COMMON STOCK OWNED BY SILICON GRAPHICS. Prior to a Tax-Free Distribution
and for so long as Silicon Graphics or any of its subsidiaries owns shares of
Class B Common Stock, any shares of Class A Common Stock acquired by Silicon
Graphics or any of its subsidiaries will automatically convert into shares of
Class B Common Stock, on a one-for-one basis. Following a Tax-Free Distribution,
any shares of New MIPS Common Stock acquired by Silicon Graphics or its
subsidiaries will retain their status as shares of Class A Common Stock or Class
B Common Stock, as the case may be.
CONVERSION. Prior to a Tax-Free Distribution, any share of Class B Common
Stock transferred to a person, other than Silicon Graphics or any of its
subsidiaries, will automatically convert into one share of Class A Common Stock
upon such disposition. Shares of Class B Common Stock will not be automatically
converted into shares of Class A Common Stock (i) in any transfer effected in
connection with a distribution of shares of Class B Common Stock to stockholders
of Silicon Graphics in a transaction (including any distribution in exchange for
shares of capital stock or other securities of Silicon Graphics) intended to
qualify as a Tax-Free Distribution or (ii) 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.
Shares of Class B Common Stock will automatically convert into shares of
Class A Common Stock on the fifth anniversary of the Tax-Free Distribution if,
at a meeting of stockholders called to approve such conversion, such conversion
receives the approval of a majority of the votes entitled to be cast by the
holders of the Class A Common Stock and the holders of the Class B Common Stock
present and voting, voting together as a single class, unless prior to such
Tax-Free Distribution, Silicon Graphics delivers to MIPS Technologies an opinion
of counsel, reasonably satisfactory to MIPS Technologies, to the effect that,
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<PAGE>
based in part on conversations with the IRS disclosed to MIPS Technologies, such
vote would have a material adverse effect on the ability of Silicon Graphics to
timely obtain a favorable ruling from the IRS regarding the tax-free status of
such Tax-Free Distribution. No assurance can be given that such conversion would
occur.
All shares of Class B Common Stock will automatically convert into Class A
Common Stock if, at any time prior to a Tax-Free Distribution, the aggregate
number of outstanding shares of Class B Common Stock beneficially owned by
Silicon Graphics and/or any of its subsidiaries is less than 50% of the
aggregate number of outstanding shares of New MIPS Common Stock; provided,
however, that such automatic conversion will not occur if, prior to the closing
of any transaction or the occurrence of any event which would reduce the
aggregate number of outstanding shares of Class B Common Stock owned by Silicon
Graphics and/or any of its subsidiaries to less than 50% of the aggregate number
of shares of New MIPS Common Stock then outstanding, the independent directors
of the Board of Directors and the Chief Executive Officer of MIPS Technologies
unanimously determine that such automatic conversion is not in the interests of
MIPS Technologies and the MIPS Public Stockholders. Upon the closing of any
subsequent transaction or the occurrence of any event which would further reduce
the percentage of the shares of New MIPS Common Stock then outstanding held by
Silicon Graphics, each share of Class B Common Stock will automatically convert
into one share of Class A Common Stock unless, prior to the closing of any such
transaction or the occurrence of any such event, the independent directors of
the MIPS Board of Directors and the Chief Executive Officer of MIPS Technologies
unanimously determine that such automatic conversion is not in the interests of
MIPS Technologies and the MIPS Public Stockholders. In any event, all shares of
Class B Common Stock will automatically convert into shares of Class A Common
Stock if the aggregate number of outstanding shares of Class B Common Stock held
by Silicon Graphics and/or any of its affiliates is less than 30% of the
aggregate number of outstanding shares of New MIPS Common Stock.
In the case of any merger or consolidation of MIPS Technologies pursuant to
which all or substantially all of the capital stock of MIPS Technologies is
exchanged for the stock of another entity and the stockholders of MIPS
Technologies immediately prior to such merger or consolidation own less than 50%
of the outstanding shares of such other entity immediately after such merger or
consolidation, each share of Class B Common Stock will automatically convert
into one share of Class A Common Stock immediately prior to the effectiveness of
such merger or consolidation, unless, prior to a Tax-Free Distribution, Silicon
Graphics delivers to MIPS Technologies an opinion of counsel, reasonably
satisfactory to MIPS Technologies, to the effect that, based in part on
conversations with the IRS disclosed to MIPS Technologies, such automatic
conversion would have a material adverse effect on the ability of Silicon
Graphics to timely obtain a favorable ruling from the IRS regarding the tax-free
status of the Tax-Free Distribution.
Prior to a Tax-Free Distribution and upon the closing of a merger or
consolidation involving Silicon Graphics or a tender offer for shares of Silicon
Graphics capital stock, if the stockholders of Silicon Graphics immediately
prior to such merger, consolidation or tender offer own less than 50% of the
outstanding shares of Silicon Graphics (or, if the capital stock of Silicon
Graphics is exchanged or converted in any such transaction for capital stock of
another corporation, such corporation) immediately after such merger,
consolidation or tender offer, each share of Class B Common Stock held by
Silicon Graphics or its successor will automatically convert into one share of
Class A Common Stock.
All conversions of Class B Common Stock into Class A Common Stock will be
effected on a share-for-share basis.
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 (other than
MIPS Technologies) will automatically be converted into shares of Class B Common
Stock on a one-for-one basis. Shares of Class A Common Stock will not be
convertible into shares of Class B Common Stock at any other time or under any
other circumstances.
Shares of Existing Common Stock have no conversion rights.
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MERGER OR REORGANIZATION. Upon the consummation of the Recapitalization, in
the event of any merger, consolidation or reorganization of MIPS Technologies
with or into another entity in connection with which shares of New MIPS Common
Stock are converted into or exchangeable for shares of stock, other securities
or property (including cash), all holders of New MIPS Common Stock, regardless
of class, will be entitled to receive the same kind and amount of shares of
stock and other securities and property (including cash); 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, then (i) in any
such transaction, the holders of shares of Class A Common Stock and the holders
of shares of Class B Common Stock may receive different kinds of shares of stock
if the only difference in such shares is the inclusion of voting rights which
maintain the different voting rights of the holders of Class A Common Stock and
holders of Class B Common Stock with respect to the election of the applicable
percentage of the authorized number of directors on the MIPS Board of Directors
as described above or (ii) if all or substantially all of the New MIPS Common
Stock is exchanged for capital stock of another entity and such transaction is
required to be accounted for as a "pooling-of-interests", the holders of shares
of Class A Common Stock and the holders of shares of Class B Common Stock shall
receive shares of stock in the acquiring entity based on the relative fair value
of a share of Class A Common Stock and a share of Class B Common Stock measured
as of the announcement date for such transaction.
At present, all shares of Existing Common Stock are entitled to receive the
same kind and amount of shares of stock and other securities and property
(including cash) in the event of any merger, consolidation or reorganization of
MIPS Technologies with and into another company.
EXCHANGE OF CLASS B COMMON STOCK The Amended Certificate of Incorporation
will provide that 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, and such amendment
would apply to a Tax-Free Distribution. Silicon Graphics also is obligated to
make such an exchange under the terms of the Exchange Agreement.
The Amended Certificate of Incorporation will provide that, at any time
following a Tax-Free Distribution, MIPS Technologies 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, this provision
will have no force or effect if, prior to such Tax-Free Distribution, Silicon
Graphics delivers to MIPS Technologies an opinion of counsel, reasonably
satisfactory to MIPS Technologies, to the effect that, based in part on
conversation with the IRS disclosed to MIPS Technologies, the inclusion of this
provision in the Amended Certificate of Incorporation would have a material
adverse effect on the ability of Silicon Graphics to timely obtain a favorable
ruling from the IRS regarding the tax-free status of the Tax-Free Distribution.
Silicon Graphics may limit MIPS Technologies' ability to effect such an exchange
following a Tax-Free Distribution pursuant to the Tax Agreement. See "The
Exchange Agreement-- Distribution Tax Indemnification Agreement."
Shares of Existing Common Stock are not subject to exchange at the option of
MIPS Technologies or otherwise.
LIQUIDATION. Upon the consummation of the Recapitalization, in the event of
any liquidation, dissolution or winding-up of MIPS Technologies, whether
voluntary or involuntary, after payment in full of the amounts required to be
paid to holders of Preferred Stock, if any, the remaining assets and funds of
MIPS Technologies will be distributed pro rata to the holders of the Class A
Common Stock and Class B Common Stock.
At present, subject to any preferential rights of any outstanding series of
Preferred Stock created by the MIPS Board of Directors from time to time, upon
the liquidation, dissolution or winding-up of MIPS
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Technologies, the holders of shares of Existing Common Stock will be entitled to
receive, pro rata, all assets of MIPS Technologies available for distribution to
such holders.
OTHER RIGHTS. At present and upon the consummation of the Recapitalization,
no shares of Existing Common Stock are, and no shares of New MIPS Common Stock
will be, subject to redemption or have preemptive or preferential rights to
purchase additional shares of common stock of MIPS Technologies.
Upon consummation of the Recapitalization, all the outstanding shares of
Class A Common Stock and Class B Common Stock will be legally issued, fully paid
and nonassessable.
PREFERRED STOCK
The following provisions of the Existing Certificate of Incorporation
regarding the Preferred Stock will not be amended by the Amended Certificate of
Incorporation if the Recapitalization is consummated.
The Preferred Stock is issuable from time to time 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 shall be stated in the
resolutions providing for designation and issue of each such series adopted by
the MIPS Board of Directors. The MIPS Board of Directors is authorized by the
Existing Certificate of Incorporation to determine, among other things, the
voting, dividend, redemption, conversion and liquidation powers, rights and
preferences and the limitations thereon of such series. MIPS Technologies
believes that the ability of the MIPS Board of Directors to issue one or more
series of Preferred Stock will provide MIPS Technologies with flexibility in
structuring possible future financings and acquisitions, and in meeting other
corporate needs that may arise. The authorized shares of Preferred Stock, as
well as shares of Existing Common Stock, or New MIPS Common Stock, as the case
may be, will be available for issuance without further action by MIPS
Technologies stockholders, unless such action is required by applicable law or
the rules of any stock exchange or automated quotation system on which the MIPS
Technologies securities may be listed or traded.
Although the MIPS 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. The MIPS Board of Directors will make any
determination to issue such shares based on its judgment as to the best
interests of MIPS Technologies and its stockholders. The MIPS Board of Directors
could issue Preferred Stock with voting and other rights that could adversely
effect the voting power of the holders of the Existing Common Stock, or New MIPS
Common Stock, as the case may be, and that could discourage an acquisition
attempt through which an acquiror may be able to change the composition of MIPS
Board of Directors, including a tender offer or other transaction that some, or
a majority, of MIPS Technologies 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.
CORPORATE OPPORTUNITIES
The following provisions regarding corporate opportunities, presently
contained in the Existing Certificate of Incorporation, will also be included in
the Amended Certificate of Incorporation if the Recapitalization is consummated.
Silicon Graphics will have no duty to refrain from engaging in the same or
similar activities or lines of business as MIPS Technologies, and neither
Silicon Graphics nor any officer or director thereof (except as provided below),
will be liable to MIPS Technologies or its stockholders for breach of any
fiduciary duty by reason of any such activities of Silicon Graphics. In the
event that Silicon Graphics acquires knowledge of a potential transaction or
matter which may be a corporate opportunity for both Silicon Graphics and MIPS
Technologies, Silicon Graphics will have no duty to communicate or offer such
corporate opportunity to MIPS Technologies and will not be liable to MIPS
Technologies or its stockholders for breach of any
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fiduciary duty as a stockholder of MIPS Technologies 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 MIPS Technologies.
In the event that a director or officer of MIPS Technologies 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 MIPS
Technologies and Silicon Graphics, such director or officer of MIPS Technologies
will have fully satisfied and fulfilled the fiduciary duty of such director or
officer to MIPS Technologies and its stockholders with respect to such corporate
opportunity if such director or officer acts in a manner consistent with the
following policy:
(i) a corporate opportunity offered to any person who is an officer of MIPS
Technologies, and who is also a director but not an officer of Silicon
Graphics, shall belong to MIPS Technologies;
(ii) a corporate opportunity offered to any person who is a director but not
an officer of MIPS Technologies, and who is also a director or officer
of Silicon Graphics, shall belong to MIPS Technologies if such
opportunity is expressly offered to such person in writing solely in
his or her capacity as a director of MIPS Technologies, and otherwise
shall belong to Silicon Graphics; and
(iii) a corporate opportunity offered to any person who is an officer of both
MIPS Technologies and Silicon Graphics shall belong to MIPS
Technologies if such opportunity is expressly offered to such person in
writing solely in his or her capacity as an officer of MIPS
Technologies, and otherwise shall belong to Silicon Graphics.
For purposes of the foregoing:
(i) a director of MIPS Technologies who is chairman of the MIPS Board of
Directors or of a committee thereof will not be deemed to be an officer
of MIPS Technologies by reason of holding such position (without regard
to whether such position is deemed an office of MIPS Technologies under
its by-laws), unless such person is a full-time employee of MIPS
Technologies; and
(ii) (a) the term "MIPS Technologies" will mean MIPS Technologies and all
corporations, partnerships, joint ventures, associations and other
entities in which MIPS Technologies beneficially owns (directly or
indirectly) fifty percent or more of the outstanding voting stock,
voting power, partnership interest or similar voting interests, and (b)
the term "Silicon Graphics" will mean Silicon Graphics, Inc. and all
corporations, partnerships, joint ventures, associations and other
entities (other than MIPS Technologies, defined in accordance with
clause (a) of this section (ii)) in which Silicon Graphics beneficially
owns (directly or indirectly) fifty percent or more of the outstanding
voting stock, voting power, partnership interests or similar voting
interests.
The foregoing provisions will expire on the date that Silicon Graphics
ceases to own beneficially Existing Common Stock representing at least 20% of
the total voting power of all classes of outstanding Existing Common Stock, or
New MIPS Common Stock, as the case may be, and no person who is a director or
officer of MIPS Technologies is also a director or officer of Silicon Graphics
or any of its subsidiaries (other than MIPS Technologies).
In addition to any vote of the stockholders required by the certificate of
incorporation of MIPS Technologies, until the time that Silicon Graphics ceases
to own beneficially Existing Common Stock, or New MIPS Common Stock, as the case
may be, representing at least 20% of the total voting power of all classes of
outstanding Existing Common Stock, or New MIPS Common Stock, as the case may be,
the affirmative vote of the holders of more than 80% of the total voting power
of all classes of outstanding Existing Common Stock, or New MIPS Common Stock,
as the case may be, shall be required to alter, amend or repeal in a manner
adverse to the interests of Silicon Graphics and its subsidiaries (other than
MIPS Technologies), or adopt any provision adverse to the interests of Silicon
Graphics and its subsidiaries (other than MIPS Technologies), or inconsistent
with, the corporate opportunity provisions described
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above. Accordingly, so long as Silicon Graphics beneficially owns Existing
Common Stock, or New MIPS Common Stock, as the case may be, representing at
least 20% of the total voting power of all classes of outstanding Existing
Common Stock, or New MIPS Common Stock, as the case may be, it can prevent any
such alteration, amendment, repeal or adoption.
Any person purchasing or otherwise acquiring common stock of MIPS
Technologies will be deemed to have notice of, and to have consented to, the
foregoing provisions regarding corporate opportunities.
CERTIFICATE OF INCORPORATION AND BY-LAW PROVISIONS THAT MAY HAVE AN
ANTI-TAKEOVER EFFECT
Certain provisions of the certificate of incorporation and by-laws of MIPS
Technologies 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. Upon the consummation of the Recapitalization, the
Amended Certificate of Incorporation will provide that, subject to any rights of
holders of Preferred Stock to elect additional directors under specified
circumstances, the number of directors of MIPS Technologies will be not less
than five and not more than 10, with the exact number to be fixed from time to
time by resolution of the MIPS Board of Directors. The directors, other than
those who may be elected by the holders of Preferred Stock, will be classified,
with respect to the time for which they severally hold office, into three
classes, as nearly equal in number as possible; provided, however, that in the
event that there is only one Class A Director, such Class A Director shall be in
the class of directors whose initial term ends on the date of the 1999 annual
meeting of stockholders of MIPS Technologies. Each director will hold office
until such person's successor is duly elected and qualified. In addition, the
Amended Certificate of Incorporation and Amended By-Laws will provide that,
subject to any rights of holders of Preferred Stock, and unless the MIPS 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% (or, if 20% is not a whole number, then the next lower whole
number of directors that is closest to 20% of such membership) of the number of
the directors on the MIPS Board of Directors, as so increased, excluding the
number of directors whom the holders of any series of Preferred Stock shall have
the exclusive right to elect, consists of directors elected by (or appointed on
behalf of) the holders of Class A Common Stock. Any director elected or
appointed in accordance with the preceding sentence shall hold office for the
remainder of the full term of the class of director in which the new
directorship was created and until such director's successor shall have been
elected and qualified.
Any vacancies on the MIPS 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. Notwithstanding the immediately preceding sentence, any vacancy on the
MIPS 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 a vacancy created by the death,
resignation, disqualification or removal of a director shall hold office for the
remainder of the full term of the director whose vacancy is being filled and
until such director's successor shall have been elected and qualified. No
decrease in the number of directors constituting the MIPS Board of Directors
shall shorten the term of any incumbent director. Subject to any preferential
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 New MIPS Common Stock, voting
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as a single class; provided, however, that 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.
At present, the Existing Certificate of Incorporation and the Existing
By-laws provide that, subject to any rights of holders of Preferred Stock to
elect additional directors under specified circumstances, the number of
directors of MIPS Technologies will be not more than 10 and not less than three.
In addition, the Existing Certificate of Incorporation and Existing By-laws
provide that directors, other than those who may be elected by the holders of
Preferred Stock, will be classified, with respect to the time for which they
severally hold office, into three classes, as nearly equal in number as possible
and further provided that, subject to any rights of holders of Preferred Stock,
and unless the MIPS Board of Directors otherwise determines, newly created
directorships resulting from any increase in the number of directors and any
vacancies on the MIPS Board of Directors resulting from death, resignation,
disqualification, removal or other cause will be filled by the affirmative vote
of a majority of the remaining directors then in office, even though less than a
quorum, or by the sole remaining director, and not by the stockholders. Subject
to the rights of holders of Preferred Stock, any director may be removed from
office only for cause by the affirmative vote of the holders of at least a
majority of the Existing Common Stock; provided, however, that prior to the
Trigger Date (as defined below), any director may be removed from office, with
or without cause, by the affirmative vote of the holders of at least a majority
of the Existing Common Stock.
The provisions of the corporate documents described above would preclude a
third-party from removing incumbent directors and simultaneously gaining control
of MIPS Board of Directors by filling the vacancies created by removal with its
own nominees. Under the classified board provision described above, it would
take at least two elections of directors for any individual or group to gain
control of the MIPS 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 MIPS Technologies.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS. At present, and
upon the consummation of the Recapitalization, 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 Existing Common Stock, or New MIPS
Common Stock, as the case may be (the "Trigger Date"), any action required or
permitted to be taken by the stockholders may be effected only at a duly called
annual or special meeting of stockholders and may not be effected by a written
consent in lieu of such a meeting. Effective as of the Trigger Date, except as
otherwise required by law and subject to the rights of the holders of any
Preferred Stock, special meetings of stockholders of MIPS Technologies for any
purpose may be called only by certain specified officers of MIPS Technologies or
by any officer at the request in writing of a majority of the MIPS Board of
Directors and, effective as of the Trigger Date, the power of the stockholders
to call a special meeting is specifically denied. In addition, prior to the
Trigger Date, MIPS Technologies will call a special meeting of stockholders
promptly upon the request of Silicon Graphics. These provisions may have the
effect of delaying consideration of a stockholder proposal until the next annual
meeting unless a special meeting is called by the MIPS Board of Directors or
certain specified officers.
ADVANCE NOTICE PROCEDURES. At present, and upon the consummation of the
Recapitalization, an advance notice procedure for the nomination, other than by
or at the direction of MIPS 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 MIPS Technologies 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
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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. At present, the Existing Certificate of Incorporation
provides that the affirmative vote of the holders of at least 80% of the
outstanding Common Stock is required to amend, repeal or adopt any provision
inconsistent with the foregoing provisions of such Certificate of Incorporation.
The Existing Certificate of Incorporation further provides that certain
provisions of the Existing By-laws may be altered, amended or repealed by the
affirmative vote of directors constituting not less than a majority of the
entire MIPS Board of Directors (if effected by action of the MIPS 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).
The foregoing provisions of the Existing Certificate of Incorporation
regarding charter amendments will not be amended by the Amended Certificate of
Incorporation if the Recapitalization is approved.
SECTION 203 OF DELAWARE GENERAL CORPORATION LAW
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, an "interested stockholder" of a Delaware corporation shall
not engage in any business combination, including mergers or consolidations or
acquisitions of additional shares of the corporation, with the corporation for a
three-year period following the date that such stockholder becomes an interested
stockholder unless (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares), or (iii) on or subsequent to such date,
the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock of the
corporation which is not owned by the interested stockholder. Except as
otherwise specified in Section 203, an interested stockholder is defined to
include (x) any person that is the owner of 15% or more of the outstanding
voting securities of the corporation, or is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock of
the corporation at any time within three years immediately prior to the date of
determination and (y) the affiliates and associates of any such person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period. MIPS Technologies has
not, and will not, if the Recapitalization is consummated, elect 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 MIPS Technologies to negotiate in
advance with the MIPS Board of Directors, since the stockholder approval
requirement would be avoided if a majority of the directors then in office
approves either the business combination or the transaction which results in any
such person becoming an interested stockholder. Such provisions also may have
the effect of preventing changes in the management of MIPS Technologies. It is
possible that such provisions could make it more difficult to accomplish
transactions which MIPS Technologies' stockholders may otherwise deem to be in
their best interests.
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LIMITATION OF LIABILITY
The Existing Certificate of Incorporation provides that a director of MIPS
Technologies will not be personally liable to MIPS Technologies or its
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 (i)
for breach of the director's duty of loyalty to MIPS Technologies 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, which concerns unlawful payments of dividends, stock purchases or
redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit. Neither the amendment or repeal of such provision
will eliminate or reduce the effect of such provision in respect of any matter
occurring, or any cause of action, suit or claim that, but for such provision,
would accrue or arise prior to such amendment or repeal. While the Existing
Certificate of Incorporation provides directors with protection from monetary
damages for breaches from their duty of care, it does not eliminate such duty.
Accordingly, the Existing 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.
The foregoing provisions of the Existing Certificate of Incorporation
regarding limitation of liability will not be amended by the Amended Certificate
of Incorporation if the Recapitalization is approved.
LISTING
Application will be made to The Nasdaq Stock Market, Inc. to redesignate the
Existing Common Stock as Class A Common Stock. The Class A Common Stock will be
quoted on the Nasdaq National Market under the symbol "MIPS".
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the New MIPS Common Stock will be
Boston EquiServe Limited Partnership located at 150 Royall Street, Canton,
Massachusetts. Its phone number is (781) 575-2000.
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STOCKHOLDER PROPOSALS
MIPS Technologies will hold a 1999 Annual Meeting of Stockholders (the
"Annual Meeting"). The deadline for stockholders to submit proposals pursuant to
Rule 14a-8 of the Exchange Act for inclusion in MIPS Technologies' proxy
statement and form of proxy for the Annual Meeting is August 26, 1999. If notice
of a stockholder proposal submitted outside of the processes of Rule 14a-8 of
the Exchange Act is received by MIPS Technologies after August 26, 1999, then
MIPS Technologies' proxy for the Annual Meeting may confer discretionary
authority to vote on such matter without any discussion of such matter in the
proxy statement for the Annual Meeting.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements included in our Annual Report on Form 10-K for the year ended June
30, 1998, as set forth in their report, which is incorporated in this proxy
statement by reference. Our financial statements are incorporated by reference
in reliance upon their report given on their authority as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
MIPS Technologies is subject to the informational requirements of the
Exchange Act and, in accordance therewith, files reports, proxy statements and
other information with the Commission. The reports, proxy statements and other
information filed by MIPS Technologies with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
Regional Offices located at 7 World Trade Center, 13th floor, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such material also can be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, Washington, D.C. 20549.
Information regarding the Public Reference Room may be obtained by calling the
Commission at (800) 732-0330. In addition, MIPS Technologies is required to file
electronic versions of such material with the Commission through the
Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system.
The Commission maintains a World Wide Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. Existing
Common Stock is listed on the Nasdaq National Market and reports and other
information concerning MIPS Technologies can also be inspected at the offices of
the National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20001-1500.
The Commission allows us to "incorporate by reference" information into this
Proxy Statement, which means that we can disclose important information to you
by referring you to another document filed separately with the Commission.
Statements contained in this Proxy Statement or in any information incorporated
by reference in this Proxy Statement as to the contents of any contract or other
document referred to herein or therein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document (if
any) filed as an exhibit to such other document, each such statement being
qualified in all respects by such reference. The information incorporated by
reference is deemed to be part of this Proxy Statement. This Proxy Statement
incorporates by reference the portions of the documents set forth below that
MIPS Technologies has previously filed with the Commission. These documents
contain important information about MIPS Technologies and its finances.
MIPS Technologies (File No. 000-24487) incorporates by reference herein the
following portions of the following documents previously filed with the
Commission:
1. Items 7, 7A, 8 and 9 in Part II of MIPS Technologies' Annual Report on
Form 10-K for the fiscal year ended June 30, 1998 (as amended on Form
10-K/A filed November 17, 1998) (the "Form 10-K"); and
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2. Items 1, 2 and 3 in Part I of MIPS Technologies' Quarterly Reports on
Form 10-Q for the quarters ended September 30, 1998 and December 31, 1998
(the "Forms 10-Q").
3. MIPS Technologies' Current Report on Form 8-K dated February 26, 1999.
Any statement contained in any information incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Proxy
Statement to the extent that a statement contained herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this Proxy
Statement.
The Proxy Statement incorporates important business and financial
information about MIPS Technologies that is not included in this Proxy
Statement. The Form 10-K, the Forms 10-Q and the Form 8-K are being delivered,
together with this Proxy Statement, to holders of shares of Existing Common
Stock as of the Record Date. The Form 10-K, the Forms 10-Q and the Form 8-K are
available to any person, including any beneficial owner, to whom this Proxy
Statement is delivered, on written or oral request, without charge, to MIPS
Technologies, Inc., 1225 Charleston Road, Mountain View, California, 94043
(telephone number: (650) 567-5000), Attention: Secretary. In order to ensure
timely delivery of any of such documents, any request should be made by March
24, 1999.
No persons have been authorized to give any information or to make any
representation other than those contained in this Proxy Statement in connection
with the solicitations of proxies or the offering of securities made hereby and,
if given or made, such information or representation must not be relied upon as
having been authorized by MIPS Technologies or any other person. This Proxy
Statement does not constitute an offer to sell, or a solicitation of an offer to
buy, any securities, or the solicitation of a proxy, in any jurisdiction to or
from any person to whom it is not lawful to make any such offer or solicitation
in such jurisdiction. Neither the delivery of this Proxy Statement nor any
distribution of securities made hereunder shall under any circumstances create
an implication that there has been no change in the affairs of MIPS Technologies
since the date hereof or that the information herein is correct as of any time
subsequent to its date.
By Order of the Board of Directors
of MIPS Technologies, Inc.
[SIG]
Sandy Creighton
SECRETARY
46
<PAGE>
LIST OF DEFINED TERMS
<TABLE>
<S> <C>
Amended By-laws....................................................................... 14
Amended Certificate of Incorporation.................................................. 14
Annual Meeting........................................................................ 45
Change in Tax Law..................................................................... 29
Class A Common Stock.................................................................. 14
Class A Directors..................................................................... 21
Class B Common Stock.................................................................. 14
Class B Directors..................................................................... 21
Code.................................................................................. 17
Existing By-Laws...................................................................... 18
Existing Certificate of Incorporation................................................. 15
Existing Common Stock................................................................. 14
MIPS Exchange Right................................................................... 23
MIPS Public Stockholders.............................................................. 15
New MIPS Common Stock................................................................. 14
Recapitalization...................................................................... 14
Recapitalization Proposal............................................................. 14
Record Date........................................................................... 14
Required Purchase Amount.............................................................. 27
Special Committee..................................................................... 14
Special Meeting....................................................................... 14
Tax-Free Distribution................................................................. 17
Trigger Date.......................................................................... 42
</TABLE>
47
<PAGE>
ANNEX A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MIPS TECHNOLOGIES, INC.
MIPS TECHNOLOGIES, INC., a Delaware corporation, hereby certifies as
follows:
1. The name of the corporation is MIPS Technologies, Inc. (the
"Corporation"). The date of filing of its original Certificate of Incorporation
with the Secretary of State of the State of Delaware (the "Delaware Secretary of
State") was June 8, 1992, and the Restated Certificate of Incorporation was
filed with the Secretary of State of the State of Delaware on June 30, 1998. The
original name of the Corporation was MIPS Technologies, Inc.
2. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware (the "DGCL"), this Amended and Restated Certificate of
Incorporation restates and integrates and further amends the provisions of the
Restated Certificate of Incorporation of this Corporation. Pursuant to and in
accordance with Sections 242 and 245 of the DGCL, this Amended and Restated
Certificate of Incorporation was proposed by the directors of the Corporation
and adopted by the holders of a majority of the outstanding shares of capital
stock of the Corporation entitled to vote at a special meeting of the
stockholders.
3. The text of the Certificate of Incorporation is hereby amended and
restated in its entirety to read as follows:
ARTICLE I
NAME
The name of the corporation is MIPS Technologies, Inc. (the "Corporation").
ARTICLE II
REGISTERED AGENT
The address of the Corporation's registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle. The name of the Corporation's registered agent at such
address is The Corporation Trust Company.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware (the "DGCL") as the same exists or may hereafter be amended.
ARTICLE IV
CAPITAL STOCK
SECTION 1. (a) The total number of shares of all classes of capital stock
that the Corporation shall have the authority to issue is 300,000,000 shares, of
which (i) 150,000,000 shares shall be Class A Common Stock, par value $0.001 per
share (the "Class A Common Stock"), (ii) 100,000,000 shares shall be Class B
Common Stock, par value $0.001 per share (the "Class B Common Stock", and
together with the Class A Common Stock, the "Common Stock") and (iii) 50,000,000
shares shall be preferred stock, par value $0.001 per share (the "Preferred
Stock").
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(b) Any amendment to this Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation") which shall increase or decrease the number
of authorized shares of any class or classes of stock may be adopted by the
affirmative vote of the holders of a majority of the outstanding shares of
Common Stock of the Corporation, irrespective of the provisions of Section
242(b)(2) of the DGCL or any corresponding provision hereinafter enacted.
(c) Immediately upon the effectiveness of this Certificate of Incorporation,
each share of common stock of the Corporation, par value $0.001 per share,
issued and outstanding immediately prior to such effectiveness, shall be changed
into and reclassified as one share of Class A Common Stock.
SECTION 2. The following is a statement of the relative powers,
preferences, rights, qualifications, limitations and restrictions of the shares
of Class A Common Stock and Class B Common Stock:
(a) GENERAL. Except as otherwise expressly provided herein or as
provided by law, the relative powers, preferences, rights, and the relative
participating, optional and other special rights, and the qualifications,
limitations and restrictions of the shares of Class A Common Stock and Class
B Common Stock shall be identical in all respects.
(b) DIVIDENDS OR DISTRIBUTIONS OF CASH OR PROPERTY. Subject to the
rights of the holders of any series of Preferred Stock, and except as
otherwise provided for herein, the holders of Class A Common Stock and the
holders of Class B Common Stock shall be entitled to receive such dividends
and other distributions in cash, stock of any corporation (other than Common
Stock of the Corporation) or property of the Corporation as may be declared
thereon by the Board of Directors of the Corporation (the "Board of
Directors") from time to time out of assets of the Corporation legally
available therefor and shall share equally on a per share basis in all such
dividends and other distributions.
(c) DIVIDENDS OR DISTRIBUTIONS OF COMMON STOCK. In the case of
dividends or other distributions payable in, or reclassifications involving,
Common Stock, including distributions pursuant to stock splits or divisions
of Common Stock, only shares of Class A Common Stock shall be paid or
distributed with respect to shares of Class A Common Stock and only shares
of Class B Common Stock shall be paid or distributed with respect to shares
of Class B Common Stock. The number of shares of Class A Common Stock and
Class B Common Stock so paid or distributed shall be equal in number on a
per share basis.
(d) STOCK SUBDIVISIONS AND COMBINATIONS. The Corporation shall not
subdivide, reclassify or combine stock of either class of Common Stock
without at the same time making a proportionate subdivision,
reclassification or combination of the other class.
(e) VOTING. Voting power shall be divided between the classes and
series of stock as follows:
(i) Subject to Section (2)(e)(ii) of this Article IV, with respect
to the election of directors of the Corporation, holders of Class A
Common Stock, voting separately as a class, shall be entitled to elect
that number of directors (the "Class A Directors") which constitutes 20%
of the number of members of the Board of Directors determined as provided
in Section 2 of Article V (or, if such 20% is not a whole number, then
the next lower whole number of directors that is closest to 20% of such
membership). Each share of Class A Common Stock shall have one vote in
the election of such directors. Subject to Section (2)(e)(ii) of this
Article IV, holders of Class B Common Stock, voting separately as a
class, shall be entitled to elect the remaining directors (other than
directors elected by the holders of Preferred Stock). Each share of Class
B Common Stock shall have one vote in the election of such directors. For
purposes of this Section 2(e) and Section 2(f) of this Article IV,
references to the number of members of the Board of Directors shall not
include any directors whom the holders of any shares of Preferred Stock
may have the exclusive right to elect as granted in accordance with
Section 6(a) of this Article IV.
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(ii) At such time as all outstanding shares of Class B Common Stock
shall have been converted into or exchanged for shares of Class A Common
Stock in accordance with the provisions of this Article IV, then Section
2(e)(i) of this Article IV shall have no further force or effect, and
thereafter, subject to the rights of the holders of Preferred Stock, the
holders of the Class A Common Stock, voting as a class, shall be entitled
to elect all members of the Board of Directors.
(iii) Except as otherwise specified herein, the holders of Class A
Common Stock and holders of Class B Common Stock (A) shall in all matters
not otherwise specified in this Section (2)(e) or Section (2)(f) of this
Article IV vote together as a single class (including, without
limitation, with respect to increases or decreases in the authorized
number of shares of any class of Common Stock), with each share of Class
A Common Stock and Class B Common Stock having one vote, and (B) shall be
entitled to vote as separate classes only when required by law to do so
under mandatory statutory provisions that may not be excluded or
overridden by a provision of this Certificate of Incorporation.
(iv) Except as set forth in this Section (2)(e) or Section (2)(f) of
this Article IV, the holders of Class A Common Stock shall have exclusive
voting power (except for any voting powers of any series of Preferred
Stock) on all matters at any time when no Class B Common Stock is issued
and outstanding, and the holders of Class B Common Stock shall have
exclusive voting power (except for any voting powers of any series of
Preferred Stock) on all matters at any time when no Class A Common Stock
is issued and outstanding.
(v) Notwithstanding anything to the contrary contained in this
Section 2(e) of this Article IV, following a Tax-Free Spin-Off (as
defined in Section 2(i)(i) of this Article IV), for so long as any person
or entity or group of persons or entities acting in concert beneficially
own 10% or more of the outstanding shares of Class B Common Stock, such
person, entity or group shall not, with respect to any such shares of
Class B Common Stock, have any voting powers in any election of directors
or be entitled to exercise any voting rights in any election of directors
unless such person or entity is also the beneficial owner of at least an
equivalent percentage of the outstanding shares of Class A Common Stock.
For purposes of this Section (2)(e)(v), a "beneficial owner" of Common
Stock includes any person or entity or group of persons or entities who,
directly or indirectly, including through any contract, arrangement,
understanding, relationship or otherwise, written or oral, formal or
informal, control the voting power (which includes the power to vote or
to direct the voting) of such Common Stock.
(f) VACANCIES. Any vacancy in the office of a director 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 (or the sole
remaining director) elected by (or appointed on behalf of) the same class of
stock that elected the director (or on behalf of which the director was
appointed) whose death, resignation, disqualification or removal created the
vacancy, unless there are no such directors or no outstanding shares of such
class of stock, 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. Notwithstanding anything in this Section (2)(f)
or Section (2)(e) of this Article IV to the contrary, any vacancy in the
office of a director 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 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 a vacancy created by
the death, resignation, disqualification or removal of a director shall hold
office for the remainder of the full term of the director whose vacancy is
being filled and until such director's successor shall have been elected and
qualified unless removed and replaced pursuant to Section 4(c) of Article V
and this Section 2(f).
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<PAGE>
Subject to the rights, if any, of the holders of any series of Preferred
Stock then outstanding, any vacancy on the Board of Directors that results
from an increase in the number of directors shall be filled by the vote of
the majority of the directors then in office; PROVIDED that (unless all of
the outstanding shares of Class B Common Stock shall have been converted
into or exchanged for shares of Class A Common Stock) following such
appointment, 20% of the number of members of the Board of Directors as so
increased (or, if such 20% is not a whole number, then the next lower whole
number of directors that is closest to 20% of such membership) consist of
directors elected by (or appointed on behalf of) the holders of Class A
Common Stock and the remaining members of the Board of Directors consist of
directors elected by (or appointed on behalf of) the holders of the Class B
Common Stock. Any director elected (or appointed) in accordance with the
preceding sentence shall hold office for the remainder of the full term of
the class of directors in which the new directorship was created and until
such director's successor shall have been elected and qualified, unless such
director is removed and replaced pursuant to Section 4(c) of Article V and
this Section 2(f).
(g) MERGER OR REORGANIZATION. In the case of any reorganization or any
consolidation of the Corporation with one or more other entities or a merger
of the Corporation with another entity, each holder of a share of Class A
Common Stock shall be entitled to receive with respect to such share the
same kind and amount of shares of stock and other securities and property
(including cash) receivable upon such reorganization, consolidation or
merger by a holder of a share of Class B Common Stock, and each holder of a
share of Class B Common Stock shall be entitled to receive with respect to
such share the same kind and amount of shares of stock and other securities
and property (including cash) receivable upon such reorganization,
consolidation or merger by a holder of a share of Class A Common Stock;
PROVIDED, HOWEVER, that, in the event that all of the outstanding shares of
Class B Common Stock have not been converted into or exchanged for shares of
Class A Common Stock, then (i) in any such reorganization, consolidation, or
merger, the holders of shares of Class A Common Stock and the holders of
shares of Class B Common Stock may receive different kinds of shares of
stock if the only difference in such shares is the inclusion of voting
rights which maintain the different voting rights of the holders of Class A
Common Stock and holders of Class B Common Stock with respect to the
election of the applicable percentage of the authorized number of members of
the Board of Directors as described in Section (2)(e)(i) of this Article IV
and (ii) if, pursuant to any such transaction all or substantially all of
the Common Stock is exchanged for stock of another entity and such
transaction is required to be accounted for as a pooling-of-interests under
U.S. generally accepted accounting principles, the holders of shares of
Class A Common Stock and the holders of shares of Class B Common Stock shall
receive shares of stock in the acquiring entity based on the relative fair
value of a share of Class A Common Stock and a share of Class B Common
Stock. For purposes of this Section (2)(g), fair value shall be measured as
of the announcement date for such transaction.
(h) LIQUIDATION. In the event of any liquidation, dissolution or
winding-up of the affairs of the Corporation, whether voluntary or
involuntary, after payment in full of the amounts required to be paid to the
holders of Preferred Stock, the remaining assets and funds of the
Corporation shall be distributed pro rata to the holders of the Class A
Common Stock and the holders of Class B Common Stock. For purposes of this
Section 2(h), the voluntary sale, conveyance, lease, exchange or transfer
(for cash, shares of stock, securities or other consideration) of all or
substantially all of the assets of the Corporation or a consolidation or
merger of the Corporation with one or more other entities (whether or not
the Corporation is the corporation surviving such consolidation or merger)
shall not be deemed to be a liquidation, dissolution or winding-up, whether
voluntary or involuntary.
(i) CONVERSION.
(i) Prior to the date on which shares of Class B Common Stock are
distributed to the stockholders of Silicon Graphics, Inc., a Delaware
corporation (Silicon Graphics, Inc., together with its successors,
"Silicon Graphics"), in a Tax-Free Spin-Off (as defined below), each
share of
A-4
<PAGE>
Class B Common Stock shall automatically convert into one share of Class
A Common Stock upon the transfer of such share if, after such transfer,
such share is not beneficially owned by Silicon Graphics or any
subsidiary of Silicon Graphics. Shares of Class B Common Stock shall not
convert into shares of Class A Common Stock (A) in any transfer effected
in connection with a distribution of Class B Common Stock to stockholders
of Silicon Graphics in a transaction (including any distribution in
exchange for shares of capital stock or other securities of Silicon
Graphics) intended generally to qualify under Section 355 of the Internal
Revenue Code of 1986, as amended from time to time (the "Code") (a
"Tax-Free Spin-Off") or (B) in any transfer after a Tax-Free Spin-Off.
Following a Tax-Free Spin-Off, shares of Class B Common Stock shall no
longer be convertible into shares of Class A Common Stock except as set
forth in Section (2)(i)(ii)-(v) of this Article IV.
For purposes of this Section (2)(i), a Tax-Free Spin-Off shall be
deemed to have occurred at the time shares are first transferred to
stockholders of Silicon Graphics following receipt of an affidavit
described in Section 2(i)(viii)(C) of this Article IV. For purposes of
this Section (2)(i), the term "beneficially owned" with respect to shares
of Class B Common Stock means ownership by a person or entity that,
directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise, controls the voting power (which includes the
power to vote or to direct the voting) of such Class B Common Stock and
the term "subsidiary" means, as to any person or entity, all corporations
(other than the Corporation), partnerships, joint ventures, associations
or other entities in which such person or entity beneficially owns
(directly or indirectly) 50% or more of the outstanding voting stock,
voting power, partnership interests or similar voting interests.
(ii) In the event of a Tax-Free Spin-Off, each share of Class B
Common Stock shall automatically convert into one share of Class A Common
Stock on the fifth anniversary of the date on which shares of Class B
Common Stock are first transferred to stockholders of Silicon Graphics in
a Tax-Free Spin-Off if, at a meeting of stockholders called to approve
such conversion, such conversion receives the approval of a majority of
the votes entitled to be cast by the holders of the Class A Common Stock
and the holders of the Class B Common Stock present and voting, voting
together as a single class, unless, prior to such Tax-Free Spin-Off,
Silicon Graphics delivers to the Corporation an opinion of counsel,
reasonably satisfactory to the Corporation, to the effect that, based in
part on conversations with the Internal Revenue Service (the "IRS")
disclosed to the Corporation, such vote would have a material adverse
effect on the ability of Silicon Graphics to timely obtain a favorable
ruling from the IRS regarding the tax-free status of the Tax-Free
Spin-Off. At the meeting of stockholders called for such purpose, every
holder of Common Stock shall be entitled to one vote in person or by
proxy for each share of Common Stock standing in his or her name on the
transfer books of the Corporation. Approval of such conversion. The
holders of the Class B Common Stock shall not be entitled to a separate
class vote. Such conversion shall be effective on the date on which such
approval is given at a meeting of stockholders called for such purpose.
(iii) In the case of any merger or consolidation of the Corporation
pursuant to which all or substantially all of the capital stock of the
Corporation is exchanged for the stock of another entity and the
stockholders of the Corporation immediately prior to such merger or
consolidation own less than 50% of the outstanding shares of such other
entity immediately after such merger or consolidation, each share of
Class B Common Stock shall automatically convert into one share of Class
A Common Stock immediately prior to the effectiveness of such merger or
consolidation, unless, prior to a Tax-Free Spin-Off, Silicon Graphics
delivers to the Corporation an opinion of counsel, reasonably
satisfactory to the Corporation, to the effect that, based in part on
conversations with the IRS disclosed to the Corporation, such automatic
conversion would have a material
A-5
<PAGE>
adverse effect on the ability of Silicon Graphics to timely obtain a
favorable ruling from the IRS regarding the tax-free status of the
Tax-Free Spin-Off.
(iv) Prior to a Tax-Free Spin-Off, upon the closing of a merger or
consolidation involving Silicon Graphics or a tender offer for the
capital stock of Silicon Graphics, if the stockholders of Silicon
Graphics immediately prior to such merger, consolidation or tender offer
own less than 50% of the outstanding shares of capital stock of Silicon
Graphics (or, if the capital stock of Silicon Graphics is exchanged or
converted in any such transaction for capital stock of another
corporation, such corporation) immediately after such merger,
consolidation or tender offer, each share of Class B Common Stock held by
Silicon Graphics or its successor shall automatically convert into one
share of Class A Common Stock.
(v) Prior to a Tax-Free Spin-Off, each share of Class B Common Stock
shall automatically convert into one share of Class A Common Stock if at
any time prior to such Tax-Free Spin-Off the aggregate number of
outstanding shares of Class B Common Stock owned by Silicon Graphics
and/or any of its subsidiaries is less than 50% of the aggregate number
of shares of Common Stock then outstanding; PROVIDED, HOWEVER, that such
automatic conversion shall not occur if, prior to the closing of any
transaction or the occurrence of any event which would reduce the
aggregate number of outstanding shares of Class B Common Stock owned by
Silicon Graphics and/or any of its subsidiaries to less than 50% of the
aggregate number of shares of Common Stock then outstanding, the
independent directors of the Board of Directors and the Chief Executive
Officer of the Corporation unanimously determine that such automatic
conversion is not in the interests of the Corporation and its
stockholders, other than Silicon Graphics, which determination shall be
irrevocable and final. Upon the closing of any subsequent transaction or
the occurrence of any event which would further reduce the percentage of
the shares of Common Stock then outstanding held by Silicon Graphics,
each share of Class B Common Stock shall automatically convert into one
share of Class A Common Stock, unless, prior to the closing of any such
transaction or the occurrence of any such event, the independent
directors of the Board of Directors and the Chief Executive Officer of
the Corporation unanimously determine that such automatic conversion is
not in the interests of the Corporation and its stockholders, other than
Silicon Graphics, which determination shall be irrevocable and final.
Notwithstanding the foregoing, prior to a Tax-Free Spin-Off, each
share of Class B Common Stock shall automatically convert into one share
of Class A Common Stock if at any time prior to such Tax-Free Spin-Off
the aggregate number of outstanding shares of Class B Common Stock owned
by Silicon Graphics and/or any of its subsidiaries is less than 30% of
the aggregate number of shares of Common Stock then outstanding.
(vi) The Corporation will provide notice of any automatic conversion
of all outstanding shares of Class B Common Stock to holders of record of
the Common Stock as soon as practicable following such conversion;
PROVIDED, HOWEVER, that the Corporation may satisfy such notice
requirement by providing such notice prior to such conversion. Such
notice shall be provided by mailing notice of such conversion, first
class postage prepaid, to each holder of record of the Common Stock, at
such holder's address as it appears on the transfer books of the
Corporation; PROVIDED, HOWEVER, that neither the failure to give such
notice nor any defect therein shall affect the validity of the automatic
conversion of any shares of Class B Common Stock. Each such notice shall
state, as appropriate, the following:
(A) the automatic conversion date;
(B) that all outstanding shares of Class B Common Stock are
automatically converted;
(C) the place or places at which certificates for such shares
are to be surrendered for conversion; and
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<PAGE>
(D) that no dividends will be declared on the shares of Class B
Common Stock converted after such conversion date.
Immediately upon such conversion, the rights of the holders of shares
of Class B Common Stock as such shall cease and such holders shall be
treated for all purposes as having become the record owners of the shares
of Class A Common Stock issued upon such conversion; PROVIDED, HOWEVER,
that such persons shall be entitled to receive when paid any dividends
declared on the Class B Common Stock as of a record date preceding the
time of such conversion and unpaid as of the time of such conversion,
subject to Section (2)(i)(vii) of this Article IV.
(vii) Prior to a Tax-Free Spin-Off, no one other than those persons
in whose names shares of Class B Common Stock become originally
registered on the stock ledger of the Corporation by reason of their
record ownership of shares of Class A Common Stock which were exchanged
for shares of Class B Common Stock in accordance with the terms of the
Exchange Agreement, effective upon the effectiveness of this Certificate
of Incorporation, between the Corporation and Silicon Graphics or Section
2(k) of this Article IV, or transferees or successive transferees who
receive shares of Class B Common Stock in connection with a transfer
which meets the qualifications set forth in Section 2(i)(viii) of this
Article IV below, shall, by virtue of the acquisition of a certificate
representing shares of Class B Common Stock, have the status of an owner
or holder of shares of Class B Common Stock or be recognized as such by
the Corporation or be otherwise entitled to enjoy the benefit of the
special voting rights of a holder of shares of Class B Common Stock.
(viii) Prior to a Tax-Free Spin-Off, shares of Class B Common Stock
shall be transferred on the books of the Corporation and a new
certificate therefor issued, upon presentation at the office of the
Secretary of the Corporation (or at such additional place or places as
may from time to time be designated by the Secretary or any Assistant
Secretary of the Corporation) of the certificate representing such
shares, in proper form for transfer and accompanied by all requisite
stock transfer tax stamps, only if such certificate when so presented
shall also be accompanied by any one of the following:
(A) an affidavit from Silicon Graphics stating that such
certificate is being presented to effect a transfer by Silicon
Graphics of such shares to a subsidiary of Silicon Graphics; or
(B) an affidavit from Silicon Graphics stating that such
certificate is being presented to effect a transfer by any subsidiary
of Silicon Graphics of such shares to Silicon Graphics or another
subsidiary of Silicon Graphics; or
(C) an affidavit from Silicon Graphics stating that such
certificate is being presented to effect a transfer by Silicon
Graphics of such shares to the stockholders of Silicon Graphics in
connection with a Tax-Free Spin-Off.
Each affidavit of a record holder furnished pursuant to this Section
2(i)(viii) shall be verified as of a date not earlier than five days
prior to the date of delivery thereof, and, if such record holder is a
corporation or partnership, shall be verified by an officer of such
corporation or by a general partner of such partnership, as the case may
be.
If a record holder of shares of Class B Common Stock shall deliver a
certificate representing such shares, endorsed by him or her for transfer
or accompanied by an instrument of transfer signed by him or her, to a
person who receives such shares in connection with a transfer which does
not meet the qualifications set forth in this Section 2(i)(viii), then
such person or any successive transferee of such certificate may treat
such endorsement or instrument as authorizing him or her on behalf of
such record holder to convert such shares into shares of Class A Common
Stock in the manner above provided, for the purpose of the transfer to
himself or herself of the shares of Class A Common Stock issuable upon
such conversion, and to give on behalf of such
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record holder the written notice of conversion above required, and may
convert such shares of Class B Common Stock accordingly.
If such shares of Class B Common Stock shall have been improperly
registered in the name of such a person (or in the name of any successive
transferee of such certificate) and a new certificate therefor issued,
such person or transferee shall surrender such new certificate for
cancellation, accompanied by the written notice of conversion above
required, in which case (A) such person or transferee shall be deemed to
have elected to treat the endorsement on (or instrument of transfer
accompanying) the certificate so delivered by such former record holder
as authorizing such person or transferee on behalf of such former record
holder so to convert such shares and so to give such notice, (B) the
shares of Class B Common Stock registered in the name of such former
record holder shall be deemed to have been surrendered for conversion for
the purpose of the transfer to such person or transferee of the shares of
Class A Common Stock issuable upon conversion and (C) the appropriate
entries shall be made on the books of the Corporation to reflect such
action.
In the event that the Board of Directors (or any committee of the
Board of Directors, or any officer of the Corporation, designated for the
purpose by the Board of Directors) shall determine, upon the basis of
facts not disclosed in any affidavit or other document accompanying the
certificate representing shares of Class B Common Stock when presented
for transfer, that such shares of Class B Common Stock have been
registered in violation of the provisions of Section 2(i)(viii), or shall
determine that a person is enjoying for his or her own benefit the
special rights and powers of shares of Class B Common Stock in violation
of such provisions, then the Corporation shall take such action at law or
in equity as is appropriate under the circumstances. An unforeclosed
pledge made to secure a bona fide obligation shall not be deemed to
violate such provisions.
(ix) Prior to the occurrence of a Tax-Free Spin-Off, every
certificate representing shares of Class B Common Stock shall bear a
legend on the face thereof reading as follows:
"The shares of Class B Common Stock represented by this
certificate may not be transferred to any person in connection with a
transfer that does not meet the qualifications set forth in Section
2(i)(viii) of Article IV of the Amended and Restated Certificate of
Incorporation of this Corporation, as amended, and no person who
receives such shares in connection with a transfer which does not
meet the qualifications prescribed by Section 2(i)(viii) of said
Article IV is entitled to own or to be registered as the record
holder of such shares of Class B Common Stock. Each holder of this
certificate, by accepting the same, accepts and agrees to all of the
foregoing."
Upon and after the transfer of shares in a Tax-Free Spin-Off, shares
of Class B Common Stock shall no longer bear the legend set forth above
in this Section 2(i)(ix).
(x) Upon any conversion of shares of Class B Common Stock into
shares of Class A Common Stock pursuant to the provisions of this Section
(2)(i), any dividend for which the record date or payment date shall be
subsequent to such conversion which may have been declared on the shares
of Class B Common Stock so converted shall be deemed to have been
declared, and shall be payable, with respect to the shares of Class A
Common Stock into or for which such shares of Class B Common Stock shall
have been so converted, and any such dividend which shall have been
declared on such shares payable in shares of Class B Stock shall be
deemed to have been declared, and shall be payable, in shares of Class A
Common Stock.
(xi) The Corporation shall at all times reserve and keep available,
out of its authorized but unissued Common Stock, such number of shares of
Class A Common Stock as would become issuable upon the conversion of all
shares of Class B Common Stock then outstanding.
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(xii) The Corporation will not be required to pay any documentary,
stamp or similar issue or transfer taxes payable in respect of the issue
or delivery of shares of Class A Common Stock on the conversion of shares
of Class B Common Stock pursuant to Section (2)(i) of this Article IV,
and no such issue or delivery shall be made unless and until the person
requesting such issue has paid to the Corporation the amount of such tax
or has established, to the satisfaction of the Corporation, that such tax
has been paid.
(j) EXCHANGE. (i) If, prior to a Tax-Free Spin-Off (A) the Code has
been amended by the 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 (such change in the Code
being a "Change in Tax Law") and (ii) Silicon Graphics receives from the
Corporation an opinion of counsel reasonably satisfactory to Silicon
Graphics that such Change in Tax Law would apply to a Tax-Free Spin-Off,
then Silicon Graphics shall, and shall cause each of its subsidiaries (other
than the Corporation) to, exchange all of the shares of Class B Common Stock
that it owns, directly or indirectly, for shares of Class A Common Stock on
a one-for-one basis.
(ii) In the event a Tax-Free Spin-Off has occurred, the Corporation
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, this Section (2)(j)(ii) of this Article IV
shall have no further force or effect if, prior to a Tax-Free Spin-Off,
Silicon Graphics delivers to the Corporation an opinion of counsel,
reasonably satisfactory to the Corporation, to the effect that, based in
part on conversations with the IRS disclosed to the Corporation, the
inclusion of this Section (2)(j)(ii) of this Article IV would have a
material adverse effect on the ability of Silicon Graphics to timely
obtain a favorable ruling from the IRS regarding the tax-free status of
the Tax-Free Spin-Off.
(k) COMMON STOCK OWNED BY SILICON GRAPHICS. Prior to the occurrence of
a Tax-Free Spin-Off and if all of the shares of Class B Common Stock held by
Silicon Graphics and any Subsidiary (as defined in Section 2(i)(i)) of
Silicon Graphics have not been previously converted into or exchanged for
shares of Class A Common Stock, each share of Class A Common Stock held by
Silicon Graphics and any Subsidiary (as defined in Section 2(i)(i)) of
Silicon Graphics, however acquired, shall, immediately upon such
acquisition, automatically convert into one share of Class B Common Stock.
Notwithstanding the foregoing, after the occurrence of a Tax-Free Spin-Off,
any shares of Class A Common Stock held by Silicon Graphics and any
Subsidiary (as defined in Section 2(i)(i)) of Silicon Graphics, however
acquired, shall remain shares of Class A Common Stock.
SECTION 3. The Corporation shall not reissue or resell any shares of Class
B Common Stock which shall have been converted into or exchanged for shares of
Class A Common Stock pursuant to or as permitted by the provisions of Section
(2)(i) or Section 2(j) of this Article IV, or any shares of Class B Common Stock
which shall have been acquired by the Corporation in any other manner. The
Corporation shall, from time to time, take such appropriate action as may be
necessary to retire such shares and to reduce the authorized number of shares of
Class B Common Stock accordingly.
SECTION 4. The holders of shares of Common Stock shall have no preemptive
or preferential rights of subscription to any shares of any class of capital
stock of the Corporation or any securities convertible into or exchangeable for
shares of any class of capital stock of the Corporation.
SECTION 5. No stockholder shall be entitled to exercise any right of
cumulative voting.
SECTION 6. The Preferred Stock may be issued, if so determined by the Board
of Directors, either as a class without series or from time to time in one or
more series and with such designation for such class or each issue of such class
or each such series as may be adopted by the Board of Directors. The Board of
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Directors in any such resolution or resolutions is expressly authorized to state
and express for such class or each such series:
(a) Voting rights, if any, including, without limitation, the authority
to confer multiple votes per share, voting rights as to specified matters or
issues or, subject to the provisions of this Certificate of Incorporation,
voting rights to be exercised either together with the holders of Common
Stock as a single class, or independently as a separate class;
(b) The rate per annum and the times at and conditions upon which the
holders of shares of such class or series shall be entitled to receive
dividends, the conditions and dates upon which such dividends shall be
payable and whether such dividends shall be cumulative or noncumulative,
and, if cumulative, the terms upon which such dividends shall be cumulative;
(c) Redemption, repurchase, retirement and sinking fund rights,
preferences and limitations, if any, the amount payable on shares of such
class or series in the event of such redemption, repurchase or retirement,
the terms and conditions of any sinking fund, the manner of creating such
fund or funds and whether any of the foregoing shall be cumulative or
noncumulative;
(d) The rights to which the holders of the shares of such class or
series shall be entitled upon any voluntary or involuntary liquidation,
dissolution or winding-up of the Corporation;
(e) The terms, if any, upon which the shares of such class or series
shall be convertible into or exchangeable for shares of stock of any other
class or classes or of any other series of the same or any other class or
classes, including the price or prices or the rate or rates of conversion or
exchange and the terms of adjustment, if any; and
(f) Any other designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or
restrictions thereof so far as they are not inconsistent with the provisions
of this Certificate of Incorporation (as it may be amended from time to
time) and to the full extent now or hereafter permitted by the laws of the
State of Delaware.
SECTION 7. All shares of Preferred Stock, if issued as a class without
series, or all shares of the Preferred Stock of any one series, if issued in
series, shall be identical to each other in all respects and shall entitle the
holders thereof to the same rights and privileges, except that shares of any one
series issued at different times may differ as to the dates from which dividends
thereon, if cumulative, shall be cumulative.
SECTION 8. Except as otherwise provided by law, and subject to any rights
of the holders of Preferred Stock, the provisions of this Article IV (other than
Section 1 hereof) shall not be modified, revised, altered or amended, repealed
or rescinded in whole or in part, without the affirmative vote of the holders of
at least a majority of the then outstanding shares of Class A Common Stock and
the Class B Common Stock, voting together as a single class; PROVIDED, HOWEVER,
that with respect to any proposed amendment to this Certificate of Incorporation
which would alter or change the powers, preferences or special rights of the
shares of Class A Common Stock or Class B Common Stock so as to affect them
adversely, the affirmative vote of the holders of at least a majority of the
then outstanding shares of the class affected by the proposed amendment, voting
separately as a class, shall be obtained in addition to the affirmative vote of
the holders of at least a majority of the Class A Common Stock and the Class B
Common Stock, voting together as a single class as provided above.
ARTICLE V
BOARD OF DIRECTORS
SECTION 1. The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors, which may exercise all the
powers of the Corporation and do all such lawful acts and things that are not
conferred upon or reserved to the stockholders by law, by this Certificate of
Incorporation or by the By-laws of the Corporation.
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SECTION 2. The Board of Directors shall consist of not less than five (5)
and not more than ten (10) directors, the exact number of directors to be
determined by resolution of the Board of Directors. The directors shall be
divided into three classes, designated Class I, Class II and Class III. Each
class shall consist, as nearly as possible, of one third of the total number of
directors constituting the entire Board of Directors, as determined by the Board
of Directors, and directors elected by a class of stock shall be divided as
evenly as possible, as determined by the Board of Directors, among Class I,
Class II and Class III; PROVIDED, HOWEVER, that, in the event that there shall
be only one Class A Director, such Class A Director shall be in Class I. The
term of the initial Class I directors shall terminate on the date of the 1999
annual meeting of stockholders of the Corporation; the term of the initial Class
II directors shall terminate on the date of the 2000 annual meeting of
stockholders of the Corporation; and the term of the initial Class III directors
shall terminate on the date of the 2001 annual meeting of stockholders of the
Corporation. Directors elected by a class of stock shall be divided as evenly as
possible, as determined by the Board of Directors, among Class I, Class II and
Class III. At each annual meeting of stockholders, beginning with the 1999
annual meeting of stockholders, successors to the class of directors whose terms
expire at that annual meeting shall be elected for a three-year term. If the
number of directors is changed, any increase or decrease shall be apportioned
among the classes of directors established pursuant to this Article V to
maintain the number of directors in each class as nearly equal as possible. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director. Notwithstanding the foregoing, each
director initially appointed on behalf of the Class A Common Stock shall hold
office initially for a term expiring at the 1999 annual meeting of stockholders.
Subject to the immediately preceding sentence, a director shall hold office
until the annual meeting for the year in which his or her term expires and until
his or her successor shall be elected and shall qualify, SUBJECT, HOWEVER, to
prior death, resignation, retirement, disqualification or removal from office.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of Preferred Stock issued by the Corporation shall have the
right, voting separately by class or series, to elect directors at an annual or
special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Certificate of Incorporation (as it may be amended from time to
time) or the resolution or resolutions adopted by the Board of Directors
pursuant to Section 4 of Article IV, and such directors so elected shall not be
divided into classes pursuant to this Section 2 of Article V unless expressly
provided by such terms.
SECTION 3. Election of directors need not be by written ballot unless the
By-laws of the Corporation so provide.
SECTION 4. The following provisions are inserted for the management of the
business and for the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of its directors and
stockholders:
(a) The By-laws of the Corporation may be altered, amended or repealed
and new By-laws may be adopted by the affirmative vote of directors
constituting not less than a majority of the total authorized number of
directors fixed from time to time by the Board of Directors pursuant to
Section 2 of this Article V.
(b) Advance notice of stockholder nominations for the election of
directors and of the proposal of business by stockholders shall be given in
the manner provided in the By-laws of the Corporation, as amended and in
effect from time to time.
(c) Subject to any preferential rights of any outstanding series of
Preferred Stock, any Class A Director may be removed from office, only with
cause, by the affirmative vote of the holders of at least a majority of the
outstanding Class A Common Stock and any director elected by the holders of
the Class B Common Stock may be removed, only with cause, by the affirmative
vote of the holders of at least a majority of the outstanding Class B Common
Stock; PROVIDED, HOWEVER, that prior to a Tax-Free Spin-Off, any director
elected by the holders of the Class B Common Stock may be removed, with or
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without cause, by the affirmative vote of the holders of at least a majority
of the outstanding Class B Common Stock.
(d) Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at
least 80% of the Common Stock, voting as a single class, shall be required
to amend, repeal or adopt any provision inconsistent with this Article V.
ARTICLE VI
STOCKHOLDER ACTION
SECTION 1. Any corporate action required or permitted to be taken at any
annual or special meeting of stockholders may be taken without a meeting,
without prior notice and without a vote, if a consent or consents in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted and shall be delivered to the Corporation
(either by hand or by certified or registered mail, return receipt requested) at
its registered office in the State of Delaware or its principal place of
business, or to an officer or agent of the Corporation having custody of the
book in which proceedings of meetings of stockholders are recorded; PROVIDED,
HOWEVER, that effective as of the date on which Silicon Graphics and its
affiliates cease to be the beneficial owner of an aggregate of at least a
majority of the then outstanding shares of Common Stock (the "Trigger Date"),
any corporate action required or permitted to be taken at any annual or special
meeting of stockholders may be taken only at a duly called annual or special
meeting of stockholders and may not be taken by written consent in lieu of such
a meeting.
SECTION 2. Effective as of the Trigger Date, unless otherwise prescribed by
law and subject to any preferential rights of any outstanding series of
Preferred Stock, special meetings of the stockholders of the Corporation for any
purpose or purposes may be called at any time by the Chairman of the Board of
Directors, the President or, at the request in writing of a majority of the
members of the Board of Directors, any officer of the Corporation, and effective
as of the Trigger Date, any power of the stockholders of the Corporation to call
a special meeting is specifically denied.
SECTION 3. Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at least
80% of the Common Stock, voting as a single class, shall be required to amend,
repeal or adopt any provision inconsistent with this Article VI.
ARTICLE VII
INDEMNIFICATION
SECTION 1. Each person who was or is made a party to or is threatened to be
made a party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative, investigative or otherwise (hereinafter a
"proceeding"), by reason of the fact that he or she, or a person of whom he or
she is the legal representative, is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a director
or officer of another corporation or of a partnership, joint venture, trust or
other enterprise, including service with respect to employee benefit plans,
whether the basis of such proceeding is alleged action in an official capacity
as a director or officer or in any other capacity while serving as a director or
officer, shall be indemnified to the fullest extent authorized by the DGCL, as
the same exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than said law permitted the Corporation
to provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, amounts paid or to be paid in settlement and excise
taxes or penalties imposed on fiduciaries with respect to (i) employee benefit
plans, (ii) charitable organizations or (iii) similar matters) reasonably
incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of
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such person's heirs, executors and administrators; PROVIDED, HOWEVER, that the
Corporation shall indemnify any such person seeking indemnity in connection with
a proceeding (or part thereof) initiated by such person (other than pursuant to
Section 2 of this Article VII) only if such proceeding (or part thereof) was
authorized by the Board of Directors. The right to indemnification conferred in
this Section 1 of Article VII shall be a contract right and shall include the
right to be paid by the Corporation the expenses incurred in defending any such
proceeding in advance of its final disposition; PROVIDED, HOWEVER, that, if the
DGCL requires, the payment of such expenses incurred by a director or officer in
his or her capacity as a director or officer (and not in any other capacity in
which service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding shall be made only upon delivery to the
Corporation of an undertaking, by or on behalf of such director or officer, to
repay all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified under this Section 1 of
Article VII or otherwise.
SECTION 2. If a claim the Corporation is obligated to pay under Section 1
of this Article VI is not paid in full by the Corporation within 60 days after a
written claim has been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim and, if successful in whole or in part, the claimant shall be entitled
to be paid also the expense of prosecuting such claim against the Corporation.
It shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in defending any proceeding in advance of
its final disposition where the required undertaking, if any is required, has
been tendered to the Corporation) that the claimant has not yet established that
it meets the standards of conduct which make it permissible under the DGCL for
the Corporation to indemnify the claimant for the amount claimed, but the burden
of proving such defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
DGCL, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel or its stockholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
SECTION 3. The right to indemnification and the payment of expenses
incurred in defending a proceeding in advance of its final disposition conferred
in this Article VII shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, provision of this Certificate
of Incorporation, By-law of the Corporation, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office.
SECTION 4. The Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, against any expense, liability or
loss, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under the DGCL.
SECTION 5. The Corporation may, to the extent authorized from time to time
by the Board of Directors, grant rights to indemnification, and rights to be
paid by the Corporation the expenses incurred in defending any proceeding in
advance of its final disposition, to any employee or agent of the Corporation to
the fullest extent of the provisions in this Article VII with respect to the
indemnification and advancement of expenses of directors and officers of the
Corporation.
SECTION 6. If any part of this Article VII should be found to be invalid or
ineffective in any proceeding, the validity and effect of the remaining
provisions shall not be affected. Any repeal or modification of this Article VII
by the stockholders of the Corporation shall not adversely affect any rights
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to indemnification and to advancement of expenses that any person may have at
the time of such repeal or modification with respect to any acts or omissions
occurring prior to such repeal or modification.
ARTICLE VIII
BY-LAWS
SECTION 1. The By-laws of the Company may be altered, amended or repealed
and new By-laws may be adopted (i) at any annual or special meeting of
stockholders, by the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock, voting together as a single class, entitled
to vote thereat, PROVIDED, HOWEVER, that any proposed alteration, amendment or
repeal of, or the adoption of any By-law inconsistent with, Sections 3, 5 or 10
of Article II of the By-laws or Sections 1 or 5 of Article III of the By-laws by
the stockholders shall require the affirmative vote of the holders of at least
80% of the Common Stock, voting as a single class, or (ii) by the affirmative
vote of directors constituting not less than a majority of the total number of
directors which the Corporation would have if there were no vacancies.
SECTION 2. Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at least
80% of the Common Stock, voting as a single class, shall be required to amend,
repeal or adopt any provision inconsistent with this Article VIII.
ARTICLE IX
LIMITATION ON LIABILITY OF DIRECTORS
SECTION 1. A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit.
ARTICLE X
CORPORATE OPPORTUNITIES
SECTION 1. As the Corporation recently ceased to be a wholly owned
subsidiary of Silicon Graphics, but Silicon Graphics remains a substantial
stockholder of the Corporation, and in anticipation that the Corporation and
Silicon Graphics may engage in the same or similar activities or lines of
business and have an interest in the same areas of corporate opportunities, and
in recognition of the benefits to be derived by the Corporation through its
continued contractual, corporate and business relations with Silicon Graphics
(including possible service of officers and directors of Silicon Graphics as
officers and directors of the Corporation), the provisions of this Article are
set forth to regulate and define the conduct of certain affairs of the
Corporation as they may involve Silicon Graphics and its officers and directors,
and the powers, rights, duties and liabilities of the Corporation and its
officers, directors and stockholders in connection therewith.
SECTION 2. Silicon Graphics shall have no duty to refrain from engaging in
the same or similar activities or lines of business as the Corporation, and
neither Silicon Graphics nor any officer or director thereof (except as provided
in Section 3 below) shall be liable to the Corporation or its stockholders for
the breach of any fiduciary duty by reason of any such activities of Silicon
Graphics. In the event that Silicon Graphics acquires knowledge of a potential
transaction or matter which may be a corporate opportunity for both Silicon
Graphics and the Corporation, Silicon Graphics shall have no duty to communicate
or offer such corporate opportunity to the Corporation and shall not be liable
to the Corporation or its stockholders for breach of any fiduciary duty as a
stockholder of the Corporation by reason of the fact that
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Silicon Graphics pursues or acquires such corporate opportunity for itself,
directs such corporate opportunity to another person, or does not communicate
information regarding such corporate opportunity to the Corporation.
SECTION 3. In the event that a director or officer of the Corporation who
is also a director or officer of Silicon Graphics acquires knowledge of a
potential transaction or matter which may be a corporate opportunity for both
the Corporation and Silicon Graphics, such director or officer of the
Corporation shall have fully satisfied and fulfilled the fiduciary duty of such
director or officer to the Corporation and its stockholders with respect to such
corporate opportunity, if such director or officer acts in a manner consistent
with the following policy: (i) a corporate opportunity offered to any person who
is an officer of the Corporation, and who is also a director but not an officer
of Silicon Graphics, shall belong to the Corporation; (ii) a corporate
opportunity offered to any person who is a director but not an officer of the
Corporation, and who is also a director or officer of Silicon Graphics shall
belong to the Corporation if such opportunity is expressly offered to such
person in writing solely in his or her capacity as a director of the
Corporation, and otherwise shall belong to Silicon Graphics; and (iii) a
corporate opportunity offered to any person who is an officer of both the
Corporation and Silicon Graphics shall belong to the Corporation if such
opportunity is expressly offered to such person in writing solely in his or her
capacity as an officer of the Corporation, and otherwise shall belong to Silicon
Graphics.
SECTION 4. Any person purchasing or otherwise acquiring any interest in
shares of the capital stock of the Corporation shall be deemed to have notice of
and to have consented to the provisions of this Article.
SECTION 5. For purposes of this Article only:
(a) A director of the Corporation who is Chairman of the Board of
Directors or of a committee thereof shall not be deemed to be an officer of
the Corporation by reason of holding such position (without regard to
whether such position is deemed an office of the Corporation under the
By-laws of the Corporation), unless such person is a full-time employee of
the Corporation; and
(b) (i) The term "Corporation" shall mean the Corporation and all
corporations, partnerships, joint ventures, associations and other entities
in which the Corporation beneficially owns (directly or indirectly) 50% or
more of the outstanding voting stock, voting power, partnership interests or
similar voting interests, and (ii) the term "Silicon Graphics," for the
purpose of this Article only, shall mean Silicon Graphics and all
corporations, partnerships, joint ventures, associations and other entities
(other than the Corporation, defined in accordance with clause (i) of this
Section 5(b)) in which Silicon Graphics beneficially owns (directly or
indirectly) 50% or more of the outstanding voting stock, voting power,
partnership interests or similar voting interests.
SECTION 6. Notwithstanding anything in this Certificate of Incorporation to
the contrary, (i) the foregoing provisions of this Article shall expire on the
date that Silicon Graphics ceases to beneficially own Common Stock representing
at least 20% of the outstanding shares of Common Stock and no person who is a
director or officer of the Corporation is also a director or officer of Silicon
Graphics; and (ii) in addition to any vote of the stockholders required by this
Certificate of Incorporation, until the time that Silicon Graphics ceases to
beneficially own Common Stock representing at least 20% of the outstanding
shares of Common Stock, the affirmative vote of the holders of more than 80% of
the outstanding shares of Common Stock, voting as a single class, shall be
required to alter, amend or repeal in a manner adverse to the interests of
Silicon Graphics, or adopt any provision adverse to the interests of Silicon
Graphics and inconsistent with, any provision of this Article. Neither the
alteration, amendment or repeal of this Article nor the adoption of any
provision of this Certificate of Incorporation inconsistent with this Article
shall eliminate or reduce the effect of this Article in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article,
would accrue or arise, prior to such alteration, amendment, repeal or adoption.
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ARTICLE XI
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right to amend, alter, restate, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by the laws of the State of Delaware, and all
rights of the stockholders herein are granted subject to this reservation.
This Amended and Restated Certificate of Incorporation shall become
effective at (Wilmington, Delaware time), , 1999.
IN WITNESS WHEREOF, MIPS TECHNOLOGIES, INC. has caused this certificate to
be signed by John E. Bourgoin, its President and Chief Executive Officer, and
attested by Kevin C. Eichler, its Vice President and Chief Financial Officer, on
this day of , 1999.
<TABLE>
<S> <C> <C>
MIPS TECHNOLOGIES, INC.
By:
-----------------------------------------
Name: John E. Bourgoin
Title: President and Chief Executive
Officer
ATTEST:
- ------------------------------
Name: Kevin C. Eichler
Title: Vice President and
Chief Financial Officer
</TABLE>
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ANNEX B
AMENDED AND RESTATED BY-LAWS
OF
MIPS TECHNOLOGIES, INC.
ARTICLE I
OFFICES
The registered office of the Corporation shall be in the City of Wilmington,
County of New Castle, State of Delaware. The Corporation may also have one or
more offices at such other places, either inside or outside of the State of
Delaware, as the Board of Directors may from time to time determine or as the
business of the Corporation may require. The books and records of the
Corporation may be kept (subject to the provisions of the laws of the State of
Delaware) at any place, either inside or outside of the State of Delaware, as
from time to time may be determined by the Board of Directors.
ARTICLE II
STOCKHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of stockholders (whether annual or
special) shall be held at such place, either inside or outside of the State of
Delaware, as the Board of Directors shall from time to time determine.
Section 2. ANNUAL MEETING. The annual meeting of the stockholders of the
Corporation shall be held on such date and at such time as may be fixed by
resolution of the Board of Directors.
Section 3. SPECIAL MEETINGS. Unless otherwise prescribed by law or by the
Corporation's Amended and Restated Certificate of Incorporation, as amended from
time to time (the "Charter"), and subject to any preferential rights of any
outstanding series of Preferred Stock (as defined in the Charter), special
meetings of stockholders of the Corporation for any purpose or purposes may be
called only by the Chairman of the Board of Directors, the President, or, at the
request in writing of a majority of the Board of Directors, by any officer. Such
request shall state the purpose or purposes of the proposed meeting. In
addition, prior to the Trigger Date (as defined in the Charter), the Corporation
shall call a special meeting of stockholders of the Corporation promptly upon
request by Silicon Graphics, Inc., a Delaware corporation, or any of its
affiliates, in each case if such entity is a stockholder of the Corporation.
Section 4. NOTICE OF MEETINGS. Except as otherwise provided by law,
written or printed notice, stating the place, day and hour of the meeting and
the purpose or purposes for which the meeting is called shall be delivered by
the Corporation not less than ten (10) calendar days nor more than sixty (60)
calendar days before the date of the meeting, either personally or by mail, to
each stockholder of record entitled to vote at such meeting. Meetings may be
held without notice if all stockholders entitled to vote are present, or if
notice is waived by those not present in accordance with Section 2 of Article X
of these By-laws. Any previously scheduled meeting of the stockholders may be
postponed, and any special meeting of the stockholders may be canceled, by
resolution of the Board of Directors upon public notice given prior to the date
previously scheduled for such meeting of stockholders.
Section 5. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS.
(a) Annual Meetings of Stockholders.
(i) Nominations of persons for election to the Board of Directors and
the proposal of business to be considered by the stockholders may be made at
an annual meeting of stockholders (A) pursuant to the Corporation's notice
of meeting delivered pursuant to Section 4 of this Article II, (B) by or at
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the direction of the Board of Directors, (C) by any stockholder of the
Corporation who was a stockholder of record at the time of the giving of the
notice provided for in this Section 5, who is entitled to vote at the
meeting and who complies with the notice procedures set forth in this
Section 5, or (D) prior to the Trigger Date, by Silicon Graphics, Inc., a
Delaware corporation ("Silicon Graphics"), or any of its affiliates that is
a stockholder of the Corporation.
(ii) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (C) of paragraph (a)(i)
of this Section 5, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation, and, if the stockholder is
proposing other business, such other business must be a proper subject for
stockholder action, and, if the stockholder is nominating a person or
persons for election to the Board of Directors, such nominating stockholder
must be entitled to vote for the election of the director to be nominated.
To be timely, a stockholder's notice shall be delivered to the Secretary at
the principal executive offices of the Corporation not less than sixty (60)
days nor more than ninety (90) days prior to the first anniversary of the
preceding year's annual meeting; PROVIDED, HOWEVER, that, in the event that
the date of the annual meeting is advanced by more than thirty (30) days or
delayed by more than sixty (60) days from such anniversary date, notice by
the stockholder to be timely must be so delivered not earlier than the
ninetieth day prior to such annual meeting and not later than the close of
business on the later of the sixtieth day prior to such annual meeting or
the tenth day following the day on which public announcement of the date of
such meeting is first made by the Corporation. For purposes of determining
whether a stockholder's notice shall have been delivered in a timely manner
for the annual meeting of stockholders in 1999, the first anniversary of the
previous year's meeting shall be deemed to be October 29, 1999. In no event
shall the public announcement of an adjournment of an annual meeting
commence a new time period for the giving of a stockholder's notice as
described above. Such stockholder's notice shall set forth (A) as to each
person whom the stockholder proposes to nominate for election or reelection
as a director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors in an
election contest, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and Rule 14a-11 thereunder (including such person's written
consent to being named in the proxy statement as a nominee and to serving as
a director if elected) and the class of stock which such director will
represent; (B) as to any other business that the stockholder proposes to
bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and
the beneficial owner, if any, on whose behalf the proposal is made; and (C)
as to the stockholder giving the notice and the beneficial owner, if any, on
whose behalf the nomination or proposal is made, (1) the name and address of
such stockholder, as they appear on the Corporation's books, and of such
beneficial owner and (2) the class and number of shares of the Corporation
which are owned beneficially and of record by such stockholder and such
beneficial owner.
(iii) Notwithstanding anything in the second sentence of paragraph
(a)(ii) of this Section 5 to the contrary, in the event that the number of
directors to be elected to the Board of Directors is increased and there is
no public announcement by the Corporation naming all of the nominees for
director or specifying the size of the increased Board of Directors made by
the Corporation at least seventy (70) days prior to the first anniversary of
the preceding year's annual meeting, a stockholders' notice required by this
Section 5 shall also be considered timely, but only with respect to nominees
for any new positions created by such increase, if it shall be delivered to
the Secretary at the principal executive offices of the Corporation not
later than the close of business on the tenth day following the day on which
such public announcement is first made by the Corporation.
(b) Special Meetings of Stockholders. Only such business shall be conducted
at a special meeting of stockholders as shall have been brought before the
meeting pursuant to the Corporation's notice of
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meeting pursuant to Section 4 of this Article II. Nominations of persons for
election to the Board of Directors may be made at a special meeting of
stockholders at which directors are to be elected pursuant to the Corporation's
notice of meeting (i) by or at the direction of the Board of Directors, (ii) by
any stockholder of the Corporation who was a stockholder of record at the time
of the giving of the notice provided for in this Section 5, who is entitled to
vote for the election of the director to be nominated at the special meeting,
and who complies with the notice procedures set forth in this Section 5, or
(iii) prior to the Trigger Date and with respect to the directors that the
holders of the Class B Common Stock (as defined in the Charter) are entitled to
elect, by Silicon Graphics, or any of its affiliates that is a stockholder of
the Corporation. In the event that the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the Board of
Directors, any stockholder entitled to vote for the election of the director to
be nominated may nominate such person or persons (as the case may be), for
election to the Board of Directors, if the requirements of paragraph (a)(ii) of
this Section 5 shall be met and the stockholder's notice required thereby is
delivered to the Secretary of the Corporation at the principal executive offices
of the Corporation not earlier than the ninetieth day prior to such special
meeting and not later than the close of business on the later of the sixtieth
day prior to such special meeting or the tenth day following the day on which
public announcement by the Corporation is first made of the date of the special
meeting and of the nominees proposed by the Board of Directors to be elected at
such meeting.
(c) General.
(i) Only persons who are nominated in accordance with the procedures set
forth in this Section 5 shall be eligible to serve as directors and only
such business shall be conducted at a meeting of stockholders as shall have
been brought before the meeting in accordance with the procedures set forth
in this Section 5. Except as otherwise provided by law, the Charter or these
By-laws, the chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought before
the meeting was made in accordance with this Section 5 and, if any proposed
nomination or business is not in compliance with this Section 5, to declare
that such defective proposal or nomination shall be disregarded.
(ii) For purposes of this Section 5, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service,
Associated Press or a comparable national news service or in a document
publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(iii) Notwithstanding the foregoing provisions of this Section 5, a
stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this Section 5. Nothing in this Section 5 shall be
deemed to affect any rights (A) of stockholders to request inclusion of
proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under
the Exchange Act or (B) of the holders of any series or Preferred Stock to
elect directors.
Section 6. QUORUM. Except as otherwise provided by law or in the Charter,
at any meeting of stockholders, the holders of a majority of the aggregate
voting power of all outstanding shares of all classes of capital stock of the
Corporation entitled to vote at such meeting (the "Voting Stock"), represented
in person or by proxy, shall constitute a quorum at such meeting, except when
specified business is required to be voted on by a class or series of stock
voting as a class, the holders of a majority of the shares of such class or
series shall constitute a quorum of such class or series for the transaction of
such business. At any meeting of stockholders at which a quorum is not present,
the person serving as chairman of the meeting or the holders of a majority in
interest of the stockholders present in person or by proxy and who are entitled
to vote on every matter that is to be voted on without regard to class at such
meeting may adjourn the meeting. No notice of the time and place of adjourned
meetings need be given except as required by law.
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Section 7. ORGANIZATION AND CONDUCT OF BUSINESS. The Chairman of the Board
of Directors shall act as chairman of meetings of the stockholders. The Board of
Directors may designate any other officer or director of the Corporation to act
as chairman of any meeting in the absence of the Chairman of the Board of
Directors, and the Board of Directors may further provide for determining who
shall act as chairman of any stockholder's meeting in the absence of the
Chairman of the Board of Directors and such designee. The person serving as
chairman of any meeting of stockholders shall determine the order of business
and the procedure at the meeting, including such regulation of the manner of
voting and the conduct of discussion as seem to him or her in order.
The Secretary of the Corporation shall act as secretary of all meetings of
the stockholders, but in the absence of the Secretary the presiding officer may
appoint any other person to act as secretary of any meeting.
Section 8. PROXIES AND VOTING. At any meeting of stockholders, every
stockholder entitled to vote may vote in person or by proxy authorized by an
instrument executed in writing (or in such manner prescribed by the General
Corporation Law of the State of Delaware) by the stockholder, or by such
person's duly authorized attorney in fact.
Election of directors at all meetings of the stockholders at which directors
are to be elected shall be by ballot, and, subject to the rights of the holders
of any series of Preferred Stock to elect directors, a plurality of the shares
present in person or represented by proxy at the meeting, entitled to vote in
the election and actually cast shall elect the directors. Except as otherwise
provided by law, the Charter and these By-laws and subject to the rights of the
holders of any series of Preferred Stock, in all matters other than the election
of directors, the affirmative vote of a majority of the voting power of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the matter shall be the act of the stockholders.
Section 9. INSPECTORS OF ELECTION. The Board of Directors may, and to the
extent required by law shall, in advance of any meeting of stockholders, appoint
one or more inspectors to act at the meeting, decide upon the qualification of
voters, count the votes, decide the results and make a written report thereof in
accordance with the General Corporation Law of the State of Delaware. The Board
of Directors may designate one or more persons as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate is able to
act at a meeting of stockholders, the person presiding at the meeting shall
appoint one or more inspectors to act at the meeting. Each inspector, before
entering upon the discharge of his or her duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of his or her ability. The inspector(s) shall have the
duties prescribed by law.
Section 10. NO STOCKHOLDER ACTION BY WRITTEN CONSENT. Effective as of the
Trigger Date, any action required or permitted to be taken by the stockholders
of the Corporation must be effected at a duly called annual or special meeting
of such holders and may not be effected by any consent in writing by such
holders.
ARTICLE III
BOARD OF DIRECTORS
Section 1. NUMBER AND TERM OF OFFICE. Subject to the rights, if any, of
holders of preferred stock of the Corporation, the number of directors of the
Corporation shall be fixed from time to time exclusively by resolution of the
Board of Directors adopted by the affirmative vote of directors constituting not
less than a majority of the Whole Board (as hereinafter defined), but shall
consist of not more than ten (10) nor less than five (5) directors. The
directors, other than those who may be elected by the holders of any class or
series of preferred stock of the Corporation, shall be classified, with respect
to the time they severally hold office, into three classes, as nearly equal in
number as possible, one class to be initially elected for a term expiring at the
annual meeting of stockholders to be held in 1999, another class to be initially
elected for a
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term expiring at the annual meeting of stockholders to be held in 2000, and
another class to be initially elected for a term expiring at the annual meeting
of stockholders to be held in 2001, with each director to serve until his or her
successor shall have been elected and shall have qualified, PROVIDED, HOWEVER,
that, in the event that there shall be only one Class A Director (as defined in
the Charter), such Class A Director shall be in the class of directors whose
initial term expires at the annual meeting of stockholders to be held in 1999.
Directors elected by a class of stock shall be divided as evenly as possible, as
determined by the Board of Directors, among the three classes of directors. At
each succeeding annual meeting of stockholders, directors elected to succeed
those directors whose terms then expire shall be elected for a term of office to
expire at the third succeeding annual meeting of stockholders after their
election, with each director to serve until his or her successor shall have been
elected and shall have qualified. If the number of directors is changed, any
increase or decrease shall be apportioned among the classes of directors
established pursuant to Article V of the Charter to maintain the number of
directors in each class as nearly equal as possible. No decrease in the number
of directors constituting the Board of Directors shall shorten the term of any
incumbent director. Notwithstanding the foregoing, each director initially
appointed on behalf of the Class A Common Stock shall hold office initially for
a term expiring at the 1999 annual meeting of stockholders. Subject to the
immediately preceding sentence, a director shall hold office until the annual
meeting for the year in which his or her term expires and until his or her
successor shall be elected and shall qualify, SUBJECT, HOWEVER, to prior death,
resignation, retirement, disqualification or removal from office.
For purposes of these By-laws, the term "Whole Board" shall mean the total
number of directors fixed by resolution of the Board of Directors pursuant to
Section 1 of this Article III.
Section 2. MEETINGS. Regular meetings of the Board of Directors may be
held at such place, either inside or outside of the State of Delaware, and at
such time, as may from time to time be designated by the Chairman of the Board
of Directors or resolution of the Board of Directors or as may be specified in
the call of any meeting. An annual meeting of the Board of Directors shall be
held on the same day as, and as soon as practicable following, the annual
meeting of stockholders or at such other time or place as shall be determined by
the Board of Directors at its regular meeting next preceding said annual meeting
of stockholders.
Special meetings of the Board of Directors may be held at any time on the
call of the Chairman of the Board of Directors, the President or a majority of
the Board of Directors then in office. The person or persons authorized to call
special meetings of the Board of Directors may fix the time and place of the
meetings. Meetings may be held at any time or place without notice if all the
directors are present or if those not present waive notice of the meeting in
writing.
Section 3. NOTICE OF MEETINGS. Notice of the time and place of meetings of
the Board of Directors (excepting the annual meeting of directors) shall be
given to each director by the Secretary or an Assistant Secretary of the
Corporation by (i) mailing or sending via courier such notice not later than
during the second day preceding the day on which such meeting is to be held, or
(ii) by (a) sending a facsimile transmission or other form of electronic
communication containing such notice or (b) delivering such notice personally or
by telephone, in each case, not later than during the first day preceding the
day on which such meeting is to be held. Unless otherwise stated in the notice
thereof, any and all business may be transacted at any meeting.
Section 4. QUORUM AND ORGANIZATION OF MEETINGS. Subject to Section 5 of
this Article III, a number of directors equal to at least a majority of the
Whole Board shall constitute a quorum for the transaction of business, but if at
any meeting of the Board of Directors there shall be less than a quorum present,
a majority of the directors present may adjourn the meeting from time to time
without further notice. The act of a majority of the directors present at a
meeting at which a quorum is present shall be the act of the Board of Directors.
The directors present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough directors
to leave less than a quorum.
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Meetings shall be presided over by the Chairman of the Board of Directors
or, in his or her absence, by such other person as the Board of Directors may
designate or the members present may select.
Section 5. VACANCIES. Any vacancy in the office of a director 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 (or the sole
remaining director) elected by (or appointed on behalf of) the same class of
stock that elected that director (or on behalf of which that director was
appointed) whose death, resignation, disqualification or removal created the
vacancy, unless there are no such directors or no outstanding shares of such
class of stock, 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. Notwithstanding anything in Section (2)(f) or Section
(2)(e) of Article IV of the Charter to the contrary, any vacancy in the office
of a director 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 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 holders of the holders of the remaining class
of stock. Any director elected to fill a vacancy created by the death,
resignation, disqualification or removal of a director shall hold office for the
remainder of the full term of the director whose vacancy is being filled and
until such director's successor shall have been elected and qualified unless
removed and replaced pursuant to Section 4(c) of Article V of the Charter and
Section (2)(f) of Article IV of the Charter.
Subject to the rights, if any, of the holders of any series of Preferred
Stock then outstanding, any vacancy on the Board of Directors that results from
an increase in the number of directors shall be filled by the vote of the
majority of the directors then in office. In filling such vacancies, the Board
of Directors shall take all necessary actions to ensure that, following the
appointment to such vacancies (unless prior thereto all of the outstanding
shares of Class B Common Stock shall have been converted into or exchanged for
shares of Class A Common Stock), 20% of the number of members of the Board of
Directors as so increased (or, if such 20% is not a whole number, then the next
lower whole number of directors that is closest to 20% of such membership)
consists of directors elected by (or appointed on behalf of) the holders of
Class A Common Stock, and the remaining members of the Board of Directors as so
increased consists of directors elected by (or appointed on behalf of) the
holders of Class B Common Stock. Any director elected (or appointed) in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of directors in which the new directorship was
created and until such director's successor shall have been elected and
qualified, unless such director is removed and replaced pursuant to Section 4(c)
of Article V and Section (2)(f) of Article IV of the Charter.
Section 6. POWERS. In addition to the powers and authorities by these
By-laws expressly conferred upon them, the Board of Directors shall have and may
exercise all such powers of the Corporation and do all such lawful acts and
things that are not by statute, the Charter or these By-laws directed or
required to be exercised or done by the stockholders.
Section 7. RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director, each
member of any committee designated by the Board of Directors and each officer,
in the performance of his or her duties, shall be fully protected in relying in
good faith upon such information, opinions, reports or statements presented to
the Corporation by any of its officers or employees, or by committees of the
Board of Directors, or by any other person, as to matters such director, member
or officer, as the case may be, reasonably believes are within such person's
professional or expert competence and who has been selected with reasonable care
by the Board of Directors or by any such committee, or in relying in good faith
upon other records of the Corporation.
Section 8. COMPENSATION OF DIRECTORS. Directors, as such, may receive,
pursuant to resolution of the Board of Directors, fixed fees and other
compensation for their services as directors, including, without limitation,
services as members of committees of the Board of Directors; PROVIDED, HOWEVER,
that nothing
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herein contained shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
Section 9. MEETINGS BY MEANS OF CONFERENCE TELEPHONE. Unless otherwise
provided by the Charter or these By-laws, members of the Board of Directors, or
any committee designated by the Board of Directors, may participate in a meeting
of the Board of Directors or such committee by means of a conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear each other, and participation in a meeting pursuant to
this Section 9 shall constitute presence in person at such meeting.
Section 10. ACTIONS BY WRITTEN CONSENT. Any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
ARTICLE IV
COMMITTEES OF THE BOARD OF DIRECTORS
Section 1. COMMITTEES OF THE BOARD OF DIRECTORS. There are hereby
established as committees of the Board of Directors an Audit Committee and a
Compensation Committee, each of which shall have the powers and functions set
forth in Sections 2 and 3 hereof, respectively, and such additional powers as
may be delegated to it by the Board of Directors. The Board of Directors may
from time to time establish additional standing committees or special committees
of the Board of Directors, each of which shall have such powers and functions as
may be delegated to it by the Board of Directors. The Board of Directors may
abolish any committee established by or pursuant to this Section 1 as it may
deem advisable. Each such committee shall consist of two or more directors, the
exact number being determined from time to time by the Board of Directors.
Designations of the chairman and members of each such committee, and, if
desired, a vice chairman and alternates for members, shall be made by the Board
of Directors. In the absence or disqualification of any member of any committee
and any alternate member in his or her place, the member or members of the
committee present at the meeting, and not disqualified from voting whether or
not he or she or they constitute a quorum, may by unanimous vote appoint another
member of the Board of Directors to act at the meeting in the place of the
absent or disqualified member. Each committee shall have a secretary who shall
be designated by its chairman. A vice chairman of a committee shall act as the
chairman of the committee in the absence or disability of the chairman. Nothing
herein shall be deemed to prevent the Board of Directors from appointing one or
more committees consisting in whole or in part of persons who are not directors
of the Corporation; PROVIDED, HOWEVER, that no such committee shall have or may
exercise any authority of the Board of Directors.
Section 2. AUDIT COMMITTEE. The Audit Committee shall select and engage,
on behalf of the Corporation, independent public accountants to (a) audit the
books of account and other corporate records of the Corporation and (b) perform
such other duties as the Audit Committee may from time to time prescribe. The
Audit Committee shall transmit financial statements certified by such
independent public accountants to the Board of Directors after the close of each
fiscal year. The selection of independent public accountants for each fiscal
year shall be made in advance of the annual meeting of stockholders in such
fiscal year and shall be submitted for ratification or rejection at such
meeting. The Audit Committee shall confer with such accountants and review and
approve the scope of the audit of the books of account and other corporate
records of the Corporation. The Audit Committee shall have the power to confer
with and direct the officers of the Corporation to the extent necessary to
review the internal controls, accounting practices, financial structure and
financial reporting of the Corporation. From time to time the Audit Committee
shall report to and advise the Board of Directors concerning the results of its
consultation and review and such other matters relating to the internal
controls, accounting practices, financial structure and financial reporting of
the Corporation as the Audit Committee believes merit
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review by the Board of Directors. The Audit Committee also shall perform such
other functions and exercise such other powers as may be delegated to it from
time to time by the Board of Directors.
Section 3. COMPENSATION COMMITTEE. The Compensation Committee shall fix
from time to time the salaries of members of the Board of Directors who are
officers or employees of the Corporation and of all Senior Vice Presidents,
Executive Vice Presidents and Vice Presidents of the Corporation. It also shall
perform such functions as may be delegated to it under the provisions of any
bonus, supplemental compensation, special compensation or stock option plan of
the Corporation.
Section 4. RULES AND PROCEDURES. Each committee may fix its own rules and
procedures and shall meet at such times and places as may be provided by such
rules, by resolution of the committee or by call of the chairman or vice
chairman of such committee. Notice of each meeting of each committee, other than
of regular meetings provided for by its rules or resolutions, shall be given to
committee members. The presence of a majority of its members, but not less than
two, shall constitute a quorum of any committee, and all questions shall be
decided by a majority vote of the members present at the meeting. All actions
taken at each committee meeting shall be recorded in minutes of the meeting.
Section 5. APPLICATION OF ARTICLE. Whenever any provision of any other
document relating to any committee of the Corporation named therein shall be in
conflict with any provision of this Article IV, the provisions of this Article
IV shall govern, except that if such other document shall have been approved by
the stockholders or by the Board of Directors, the provisions of such other
document shall govern.
ARTICLE V
OFFICERS
Section 1. OFFICERS. The officers of the Corporation shall include a
Chairman of the Board of Directors, who shall be chosen from among the
directors, a President, a Chief Financial Officer, one or more Executive Vice
Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a
Treasurer, a General Counsel and a Secretary, each of whom shall be elected by
the Board of Directors to hold office until his or her successor shall have been
chosen and shall have qualified for office. The Board of Directors, the Chairman
of the Board of Directors and the Chief Executive Officer may elect or appoint
one or more Controllers, one or more Assistant Vice Presidents, one or more
Assistant Treasurers, one or more Assistant General Counsels and one or more
Assistant Secretaries, and the Board of Directors may elect or appoint such
other officers as it may deem necessary, or desirable, each of whom shall have
such authority, shall perform such duties and shall hold office for such term as
may be prescribed by the Board of Directors from time to time. Any person may
hold at one time more than one office, excepting that the duties of the
President and Secretary shall not be performed by one person.
Section 2. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board
of Directors may be, but need not be, the Chief Executive Officer of the
Corporation. Subject to the provisions of these By-laws and to the direction of
the Board of Directors, he or she shall have ultimate authority for decisions
relating to the general management and control of the affairs and business of
the Corporation and shall perform all other duties and exercise all other powers
commonly incident to the position of chairman or which are or from time to time
may be delegated to him or her by the Board of Directors, or which are or may at
any time be authorized or required by law. He or she shall preside at all
meetings of the Board of Directors. He or she shall make reports to the Board of
Directors and stockholders, and shall see that all orders and resolutions of the
Board of Directors and any committee thereof are carried into effect. The
Chairman of the Board may also serve as President, if so elected by the Board of
Directors. The Board of Directors may also elect a Vice Chairman to act in the
place of the Chairman upon his or her absence or inability to act.
Section 3. PRESIDENT. Subject to the provisions of these By-laws and to
the direction of the Board of Directors and of the Chief Executive Officer, the
President shall have such powers and shall perform such duties as from time to
time may be delegated to him or her by the Board of Directors or by the Chief
Executive Officer, or which are or may at any time be authorized or required by
law.
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Section 4. EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS AND VICE
PRESIDENTS. Each of the Executive Vice Presidents, each of the Senior Vice
Presidents and each of the other Vice Presidents shall have such powers and
shall perform such duties as may be delegated to him or her by the Board of
Directors, the Chairman of the Board of Directors, the President or such other
officer or officers to whom he or she is directly responsible.
Section 5. TREASURER AND ASSISTANT TREASURER. The Treasurer, subject to
the direction of the Board of Directors, shall have the care and custody of all
funds and securities of the Corporation. When necessary or proper he or she
shall endorse on behalf of the Corporation for collection, checks, notes and
other obligations, and shall deposit all funds of the Corporation in such banks
or other depositaries as may be designated by the Board of Directors or by such
officers or employees as may be authorized by the Board of Directors so to
designate. He or she shall perform all acts incident to the office of Treasurer,
subject to the control of the Board of Directors and such other officer or
officers to whom he or she is directly responsible. He or she may be required to
give a bond for the faithful discharge of his or her duties, in such sum and
upon such conditions as the Board of Directors may require.
At the request and direction of the Treasurer or, in the case of his or her
absence or inability to act, any Assistant Treasurer may act in his or her
place. In the case of the death of the Treasurer, or in the case of his or her
absence or inability to act without having designated an Assistant Treasurer to
act temporarily in his or her place, the Assistant Treasurer or other person so
to perform the duties of the Treasurer shall be designated by the Chairman of
the Board of Directors, the President or an Executive Vice President.
Section 6. SECRETARY AND ASSISTANT SECRETARY. The Secretary shall keep
full and accurate minutes of the meetings of the stockholders and of the Board
of Directors in the proper record book of the Corporation provided therefor,
and, when required, the minutes of meetings of the committees, and shall be
responsible for the custody of all such minutes. Subject to the direction of the
Board of Directors, the Secretary shall have custody of the stock ledgers and
documents of the Corporation. He or she shall have custody of the corporate seal
of the Corporation and shall affix and attest such seal to any instrument whose
execution under seal shall have been duly authorized. He or she shall give due
notice of meetings and, subject to the direction of the Board of Directors,
shall perform all other duties commonly incident to his or her office or as
properly required of him or her by the Chairman of the Board of Directors and
such other officer or officers to whom he or she is directly responsible and
shall enjoy all other powers commonly incident to his or her office.
At the request and direction of the Secretary or, in the case of his or her
absence or inability to act, any Assistant Secretary may act in his or her
place. In the case of the death of the Secretary, or in the case of his or her
absence or inability to act without having designated an Assistant Secretary to
act temporarily in his or her place, the Assistant Secretary or other person so
to perform the duties of the Secretary shall be designated by the Chairman of
the Board of Directors, the President or an Executive Vice President.
Section 7. ASSISTANT VICE PRESIDENTS AND OTHER OFFICERS. Each Assistant
Vice President and other officers shall perform such duties commonly incident to
his or her office or as properly required of him or her by the Chairman of the
Board of Directors and such other officer or officers to whom he or she is
directly responsible.
Section 8. GENERAL COUNSEL. The General Counsel shall have general
supervision of all matters of a legal nature concerning the Corporation. He or
she shall perform all such duties commonly incident to his or her office or as
properly required of him or her by the Chairman of the Board of Directors and
such other officer or officers to whom he or she is directly responsible.
Section 9. SALARIES. Salaries of officers, agents or employees shall be
fixed from time to time by the Board of Directors or by such committee or
committees, or person or persons, if any, to whom such power shall have been
delegated by the Board of Directors. An employment contract, whether with an
officer, agent or employee, if expressly approved or specifically authorized by
the Board of Directors, may fix a
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<PAGE>
term of employment thereunder; and such contract, if so approved or authorized,
shall be valid and binding upon the Corporation in accordance with the terms
thereof, PROVIDED that this provision shall not limit or restrict in any way the
right of the Corporation at any time to remove from office, discharge or
terminate the employment of any such officer, agent or employee prior to the
expiration of the term of employment under any such contract.
Section 10. VACANCIES. A vacancy in any office filled by election of the
Board of Directors may be filled by the Board of Directors by the election of a
new officer who shall hold office, subject to the provisions of this Article V,
until the regular meeting of the directors following the next annual meeting of
the stockholders and until his or her successor is elected.
Section 11. REMOVAL OR DISCHARGE. Any officer may be removed or discharged
by the Chairman of the Board of Directors at any time excepting an officer who
is also a director. Any officer who also is a director may be discharged at any
time by the Board of Directors.
ARTICLE VI
RESIGNATIONS
Any director or officer of the Corporation, whether elected or appointed,
may resign at any time by giving written notice of such resignation to the
Chairman of the Board of Directors, the President, or the Secretary, and such
resignation shall be deemed effective as of the close of business on the date
said notice is received by the Chairman of the Board of Directors, the
President, or the Secretary, or at such later time as is specified therein. No
formal action shall be required of the Board of Directors or the stockholders to
make any such resignation effective.
ARTICLE VII
CAPITAL STOCK; DIVIDENDS; SEAL
Section 1. STOCK CERTIFICATES AND TRANSFERS. The interest of each
stockholder of the Corporation shall be evidenced by certificates for shares of
stock in such form as the appropriate officers of the Corporation may from time
to time prescribe. The shares of the stock of the Corporation shall be
transferred on the books of the Corporation by the holder thereof in person or
by such person's attorney upon surrender for cancellation of certificates for at
least the same number of shares, with an assignment and power of transfer
endorsed thereon or attached thereto, duly executed, and with such proof of the
authenticity of the signature as the Corporation or its agents may reasonably
require. The certificates of stock shall be numbered and signed by the Chairman
of the Board of Directors, the President, an Executive Vice President, a Senior
Vice President or a Vice President, and also by the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary. Any and all signatures
may be facsimiles. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate has
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the Corporation with the same effect as if he or
she were such officer, transfer agent or registrar at the date of issue.
Section 2. LOST, DESTROYED OR STOLEN CERTIFICATES. Any person claiming a
stock certificate in lieu of one lost, destroyed or stolen, shall give the
Corporation an affidavit as to his, her or its ownership of the certificate and
of the facts which go to prove that it has been lost, destroyed or stolen. If
required by the Board of Directors or any financial officer of the Corporation,
he, she or it also shall give the Corporation a bond, in such form as may be
approved by the Board of Directors or such financial officer, sufficient to
indemnify the Corporation against any claim that may be made against it on
account of the alleged loss of the certificate or the issuance of a new
certificate. A new certificate shall be issued upon receipt of such an affidavit
and, if required, upon the giving of such a bond.
Section 3. RECORD OF HOLDER OF SHARES. The Corporation shall be entitled
to treat the holder of record of any share or shares as the holder in fact
thereof, and accordingly shall not be bound to recognize
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<PAGE>
any equitable or other claims to or interest in such shares on the part of any
other person, whether or not it shall have express or other notice thereof, save
as expressly provided by the General Corporation Law of the State of Delaware.
The Corporation shall be entitled to recognize the exclusive right of a person
registered on its books as the owner of shares to receive dividends and to vote
as such owner.
Section 4. DIVIDENDS. The Board of Directors may from time to time
declare, and the Corporation may pay, dividends on its outstanding shares of
capital stock in the manner and upon the terms and conditions provided by law
and the Charter.
Section 5. CORPORATE SEAL. The corporate seal shall be in such form as
shall from time to time be approved by the Board of Directors. If and when so
authorized by the Board of Directors, a duplicate of the seal may be kept and
used by the Secretary or Treasurer or by any Assistant Secretary or Assistant
Treasurer.
ARTICLE VIII
EXECUTION OF CONTRACTS AND OTHER DOCUMENTS
Section 1. CONTRACTS, ETC. Except as otherwise required by law, the
Charter or these By-laws, such officers, employees or agents of the Corporation
as shall be specified by the Board of Directors shall sign, in the name and on
behalf of the Corporation, all deeds, bonds, contracts, mortgages and other
instruments or documents, the execution of which shall be authorized by the
Board of Directors; and such authority may be general or confined to specific
instances. Except as so authorized by the Board of Directors, no officer, agent
or employee of the Corporation shall have the power or authority to bind the
Corporation by any contract or engagement or to pledge, mortgage, sell or
otherwise dispose of its credit or any of its property or to render it
pecuniarily liable for any purpose or in any amount.
Section 2. CHECKS, DRAFTS, ETC. Except as otherwise provided in these
By-laws, all checks, drafts, notes, bonds, bills of exchange or other orders,
instruments or obligations for the payment of money shall be signed by such
officer or officers, employee or employees, or agent or agents, as the Board of
Directors shall by resolution direct. The Board of Directors may, in its
discretion, also provide by resolution for the countersignature or registration
of any or all such orders, instruments or obligations for the payment of money.
Section 3. PROXIES. Unless otherwise prescribed by resolution adopted by
the Board of Directors, the Chairman of the Board of Directors, the President or
any Executive Vice President, Senior Vice President or Vice President may from
time to time appoint an attorney or attorneys or agent or agents of the
Corporation, in the name and on behalf of the Corporation, to cast the votes
which the Corporation may be entitled to cast as the holder of stock or other
securities in any other corporation, any of whose stock or other securities may
be held by the Corporation, at meetings of the holders of the stock or other
securities of such other corporation, or to consent in writing, in the name of
the Corporation as such holder, to any action by such other corporation, and may
instruct the person or persons so appointed as to the manner of casting such
votes or giving such consent, and may execute or cause to be executed in the
name and on behalf of the Corporation and under its corporate seal or otherwise,
all such written proxies or other instruments as he or she may deem necessary or
proper in the premises.
ARTICLE IX
FISCAL YEAR
The fiscal year of the Corporation shall begin the first day of July in each
year.
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<PAGE>
ARTICLE X
MISCELLANEOUS
Section 1. NOTICES AND WAIVERS THEREOF. Whenever any notice is required by
these By-laws, the Charter or any of the laws of the State of Delaware to be
given to any stockholder, director or officer, such notice, except as otherwise
provided by the laws of the State of Delaware, may be given personally or by
telephone or be given by facsimile transmission or other form of electronic
communication, addressed to such stockholder at such person's address as it
appears on the stock transfer books of the Corporation, or to such director or
officer at his or her Corporation location, if any, or at such address as
appears on the books of the Corporation, or the notice may be given in writing
by depositing the same in a post office, or in a regularly maintained letter
box, or by sending it via courier, postage prepaid, in a sealed wrapper
addressed to such stockholder at such person's address as it appears on the
stock transfer books of the Corporation, or to such director or officer at his
or her Corporation location, if any, or such address as appears on the books of
the Corporation.
Any notice given by facsimile transmission or other form of electronic
communication shall be deemed to have been given when it shall have been
transmitted. Any notice given by mail or courier shall be deemed to have been
given when it shall have been mailed or delivered to the courier.
A waiver of any such notice in writing, including by facsimile transmission,
signed or dispatched by the person entitled to such notice or by his or her duly
authorized attorney, whether before or after the time stated therein, shall be
deemed equivalent to the notice required to be given, and the presence at any
meeting of any person entitled to notice thereof shall be deemed a waiver of
such notice as to such person.
Section 2. AUDITS. The accounts, books and records of the Corporation
shall be audited upon the conclusion of each fiscal year by an independent
certified public accountant selected by the Audit Committee and approved by the
Board of Directors, and it shall be the duty of the Board of Directors to cause
such audit to be done annually.
ARTICLE XI
AMENDMENTS
These By-laws may be altered, amended or repealed, and new By-laws may be
adopted (a) at any annual or special meeting of stockholders by the affirmative
vote of the holders of a majority of the voting power of the stock issued and
outstanding and entitled to vote thereat, PROVIDED, HOWEVER, that any proposed
alteration, amendment or repeal of, or the adoption of any By-law inconsistent
with, Section 3, 5 or 10 of Article II or Section 1 or 5 of Article III of these
By-laws by the stockholders shall require the affirmative vote of the holders of
at least 80% of the voting power of all Voting Stock then outstanding, voting
together as a single class, and PROVIDED FURTHER, HOWEVER, that, in the case of
any such stockholder action at a special meeting of stockholders, notice of the
proposed alteration, amendment, repeal or adoption of the new By-law or By-laws
must be contained in the notice of such special meeting, or (b) by the
affirmative vote of a majority of the Whole Board.
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<PAGE>
ANNEX C
EXCHANGE AGREEMENT
BETWEEN
SILICON GRAPHICS, INC.
AND
MIPS TECHNOLOGIES, INC.
DATED AS OF , 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<C> <S> <C>
ARTICLE I
THE EXCHANGE
1.01. The Exchange...................................................................................... C-1
1.02. Closing Date...................................................................................... C-1
1.03. Exchange of Certificates.......................................................................... C-2
ARTICLE II
PURCHASE OBLIGATION
2.01. Required Purchase Amount.......................................................................... C-2
2.02. Common Stock to be Purchased...................................................................... C-2
2.03. Purchase Price for Shares of Class B Common Stock................................................. C-3
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
3.01. Organization and Qualification.................................................................... C-3
3.02. Certificate of Incorporation and By-Laws.......................................................... C-4
3.03. Capitalization.................................................................................... C-4
3.04. Authority Relative to This Agreement.............................................................. C-4
3.05. No Conflict; Required Filings and Consents........................................................ C-5
3.06. Brokers........................................................................................... C-5
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SILICON GRAPHICS
4.01. Organization and Qualification; Subsidiaries...................................................... C-5
4.02. Certificate of Incorporation and By-Laws.......................................................... C-6
4.03. Authority Relative to This Agreement.............................................................. C-6
4.04. No Conflict; Required Filings and Consents........................................................ C-6
4.05. Ability to Consummate the Distribution............................................................ C-6
4.06. Brokers........................................................................................... C-6
ARTICLE V
ADDITIONAL AGREEMENTS
5.01. Ability to Consummate the Distribution............................................................ C-7
5.02. Indemnification by Silicon Graphics............................................................... C-7
5.03. Transfer Restrictions............................................................................. C-8
5.04. Distribution Tax Indemnification Agreement........................................................ C-8
5.05. Exchange of Shares upon Change in Tax Law......................................................... C-8
5.06. Ruling Request.................................................................................... C-8
ARTICLE VI
CONDITIONS TO THE EFFECTIVENESS OF THE AGREEMENT
6.01. Conditions to the Obligations of Each Party....................................................... C-9
6.02. Conditions to the Obligations of Silicon Graphics................................................. C-9
6.03. Conditions to the Obligations of the Company...................................................... C-9
</TABLE>
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<TABLE>
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<C> <S> <C>
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.01. Termination....................................................................................... C-10
7.02. Effect of Termination............................................................................. C-10
7.03. Amendment......................................................................................... C-10
7.04. Waiver............................................................................................ C-10
7.05. Expenses.......................................................................................... C-10
ARTICLE VIII
GENERAL PROVISIONS
8.01. Notices........................................................................................... C-11
8.02. Certain Definitions............................................................................... C-10
8.03. Severability...................................................................................... C-11
8.04. Assignment; Binding Effect; Benefit............................................................... C-11
8.05. Specific Performance.............................................................................. C-12
8.06. Governing Law..................................................................................... C-12
8.07. Headings.......................................................................................... C-12
8.08. Counterparts...................................................................................... C-12
8.09. Entire Agreement.................................................................................. C-12
</TABLE>
<TABLE>
<C> <S> <C>
ANNEX A Certain Terms and Provisions of Tax Indemnification Agreement
</TABLE>
C-ii
<PAGE>
EXCHANGE AGREEMENT dated and effective as of the Closing Date (this
"AGREEMENT") between SILICON GRAPHICS, INC., a Delaware corporation ("SILICON
GRAPHICS"), and MIPS TECHNOLOGIES, INC., a Delaware corporation (the "COMPANY").
W I T N E S S E T H
WHEREAS, on the date hereof, the authorized capital stock of the Company
consists of 200,000,000 shares, of which 150,000,000 shares are common stock,
par value $0.001 per share (the "EXISTING COMMON STOCK"), and 50,000,000 shares
are preferred stock, par value $0.001 per share (the "PREFERRED STOCK");
WHEREAS, pursuant to an amended and restated certificate of incorporation of
the Company (the "AMENDED AND RESTATED CERTIFICATE OF INCORPORATION"), the
Company intends to effect a recapitalization (the "RECAPITALIZATION") pursuant
to which (i) the authorized capital stock of the Company will increase to
300,000,000 shares, of which 150,000,000 shares will be shares of Class A Common
Stock, par value $0.001 per share (the "CLASS A COMMON STOCK"), 100,000,000
shares will be shares of Class B Common Stock, par value $0.001 per share (the
"CLASS B COMMON STOCK" and, together with the Class A Common Stock, the "COMMON
STOCK"), and 50,000,000 shares will be shares of Preferred Stock, and (ii) each
issued and outstanding share of Existing Common Stock will be changed into and
reclassified as one share of Class A Common Stock.
WHEREAS, immediately following the Recapitalization, Silicon Graphics will
be the beneficial owner of 31,750,000 shares of Class A Common Stock;
WHEREAS, upon the terms and subject to the conditions contained in this
Agreement, Silicon Graphics has agreed to exchange all of the issued and
outstanding shares of Class A Common Stock it will beneficially own immediately
following the Recapitalization for an equal number of shares of Class B Common
Stock (the "EXCHANGE");
WHEREAS, Silicon Graphics has indicated its present intention to divest of
its interest in the Company in one or more public and/or private offerings
followed by a distribution (the "DISTRIBUTION") generally intended to qualify
under Section 355 of the United States Internal Revenue Code of 1986, as amended
(the "CODE"); and
WHEREAS, in the event that the Distribution has not occurred prior to
December 31, 2000, Silicon Graphics shall become obligated to purchase a
specified number of shares of Common Stock on a quarterly basis, upon the terms
and subject to the conditions of this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Silicon Graphics and the Company hereby agree as follows:
ARTICLE I
THE EXCHANGE
SECTION 1.01. THE EXCHANGE. Upon the terms and subject to the conditions
set forth in Article VI, on the Closing Date (as defined below), each share of
Class A Common Stock beneficially owned by Silicon Graphics immediately
following the Recapitalization shall, in accordance with Section 1.03 herein, be
exchanged by Silicon Graphics for one share of Class B Common Stock, with each
such share of Class B Common Stock having the relative powers, preferences,
rights, qualifications, limitations and restrictions attaching to the Class B
Common Stock as specified in the Amended and Restated Certificate of
Incorporation.
SECTION 1.02. CLOSING DATE. The term "CLOSING DATE" means the date when
the Amended and Restated Certificate of Incorporation becomes effective under
the General Corporation Law of the State
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of Delaware. On the Closing Date, a closing will be held at the offices of
Shearman & Sterling, 555 California Street, 20(th) Floor, San Francisco, CA
94104 (or such other place as the parties may agree).
SECTION 1.03. EXCHANGE OF CERTIFICATES. On or prior to the Closing Date,
Silicon Graphics shall deposit, or shall cause to be deposited, with the Company
the certificate or certificates representing the shares of Class A Common Stock
beneficially owned by Silicon Graphics as of the Closing Date. On the Closing
Date, the Company shall issue to Silicon Graphics a new certificate or
certificates representing an aggregate number of shares of Class B Common Stock
equal to the aggregate number of shares of Class A Common Stock beneficially
owned by Silicon Graphics as of the Closing Date.
ARTICLE II
PURCHASE OBLIGATION
SECTION 2.01. REQUIRED PURCHASE AMOUNT. (a) Subject to terms and
conditions of this Agreement, if Silicon Graphics shall not have disposed of its
entire interest in the Company (whether through a Distribution or otherwise)
prior to December 31, 2000, Silicon Graphics shall, on the last day of each
fiscal quarter of the Company beginning on December 31, 2000 (the last day of
each such quarter being a "QUARTER END DATE"), and ending on the last day of the
fiscal quarter immediately preceding any such disposition (the "Required
Purchase Termination Date") accrue an obligation to purchase, with respect to
such Quarter End Date, the number of shares of Common Stock set forth below (the
total number of shares of Common Stock with respect to any Quarter End Date, as
reduced in accordance with Section 2.01(b) below, being a "REQUIRED PURCHASE
AMOUNT"):
<TABLE>
<CAPTION>
QUARTER END DATE REQUIRED PURCHASE AMOUNT
- --------------------------------------------------------------------------------------- -------------------------
<S> <C>
December 31, 2000...................................................................... 1,800,000
March 31, 2001......................................................................... 1,700,000
June 30, 2001.......................................................................... 1,800,000
September 30, 2001..................................................................... 1,700,000
December 31, 2001...................................................................... 1,800,000
March 31, 2002......................................................................... 1,700,000
June 30, 2002.......................................................................... 1,700,000
September 30, 2002..................................................................... 2,000,000
December 31, 2002 and each Quarter End Date thereafter until the Required Purchase
Termination Date..................................................................... 2,000,000
</TABLE>
(b) If, prior to the Purchase Date (as defined in Section 2.02) for any
Required Purchase Amount, the Company notifies Silicon Graphics in writing (such
writing hereinafter referred to as a "PURCHASE WAIVER") that the independent
directors and the Chief Executive Officer of the Company have unanimously
determined that the purchase of shares of Common Stock equal to such Required
Purchase Amount is not in the interests of the Company and its stockholders
(other than Silicon Graphics and its affiliates), then the Required Purchase
Amount with respect to the related Quarter End Date shall be reduced by the
number of shares of Common Stock set forth in such Purchase Waiver.
(c) Notwithstanding anything to the contrary in this Agreement, Silicon
Graphics' obligation under this Section 2.01 to purchase shares of Common Stock
equal to the Required Purchase Amount shall terminate on the Quarter End Date
immediately preceding the day on which each of Silicon Graphics and each of its
subsidiaries (other than the Company) completes the exchange of all of its
shares of Class B Common Stock for shares of Class A Common Stock pursuant to an
exchange of such shares by the Company under Section 5.05 of this Agreement.
SECTION 2.02. COMMON STOCK TO BE PURCHASED. (a) At its sole option,
Silicon Graphics may satisfy its obligation to purchase shares of Common Stock
equal to any Required Purchase Amount by purchasing (i) newly issued shares of
Class B Common Stock from the Company, (ii) issued and outstanding shares of
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<PAGE>
Class A Common Stock in the public market or otherwise from a third party or
(iii) any combination of Class B Common Stock and Class A Common Stock pursuant
to (i) and (ii) above, in each case on or prior to the applicable Purchase Date.
If Silicon Graphics elects to purchase shares of Class B Common Stock from the
Company in full or partial satisfaction of its obligation to purchase shares of
Common Stock equal to the Required Purchase Amount, Silicon Graphics shall,
prior to the relevant Purchase Date for such Required Purchase Amount, deliver
to the Company a written notice (a "PURCHASE NOTICE") to such effect specifying
(A) the number of shares of Class B Common Stock to be purchased by Silicon
Graphics from the Company and (B) a calculation of the purchase price for such
shares as determined pursuant to the terms of Section 2.03 of this Agreement. As
soon as practicable following receipt by the Company of a Purchase Notice, the
Company will deliver to Silicon Graphics, against payment therefor, certificates
(issued in the name of Silicon Graphics) representing the shares of Class B
Common Stock being purchased pursuant to such Purchase Notice. Payment for such
shares of Class B Common Stock shall be made by wire transfer of immediately
available funds to such account as shall be specified by the Company for the
full purchase price of such shares. The parties hereto intend that each share of
Common Stock purchased by Silicon Graphics pursuant to this Section 2.02 shall
be a "Registrable Security" as defined in the Corporate Agreement, dated as of
July 6, 1998, between the Company and Silicon Graphics (the "CORPORATE
AGREEMENT"), and the parties hereby agree to amend the Corporate Agreement to
effect the foregoing.
(b) The following shall apply in determining whether Silicon Graphics has
satisfied its obligation to purchase shares of Common Stock equal to the
Required Purchase Amount with respect to any Quarter End Date: (i) each share of
Class A Common Stock purchased by Silicon Graphics in the public market or
otherwise from a third party on or prior to the applicable Purchase Date shall
be counted as four (4) shares of Common Stock purchased in satisfaction of the
Required Purchase Amount and (ii) each share of Class B Common Stock purchased
by Silicon Graphics from the Company on or prior to the applicable Purchase Date
shall be counted as one (1) share of Common Stock purchased in satisfaction of
the Required Purchase Amounts. Shares of Class A Common Stock purchased by
Silicon Graphics in the public market or otherwise from a third party, and
shares of Class B Common Stock purchased by Silicon Graphics from the Company,
shall only be applied in satisfaction of a Required Purchase Amount one time.
(c) With respect to each Quarter End Date, Silicon Graphics shall make such
purchase or purchases of shares of Common Stock equal to the Required Purchase
Amount prior to the date (the "PURCHASE DATE") which is thirty (30) days
following the public announcement by the Company of its financial results for
the fiscal quarter ending on such Quarter End Date.
SECTION 2.03. PURCHASE PRICE FOR SHARES OF CLASS B COMMON STOCK. The
purchase price per share for any newly issued shares of Class B Common Stock
purchased by Silicon Graphics from the Company in satisfaction of Silicon
Graphics' obligation to purchase a Required Purchase Amount shall be the average
of the closing prices per share of the Class A Common Stock on the Nasdaq
National Market (or, if the Class A Common Stock is no longer traded on the
Nasdaq National Market, on such other market or exchange as the Class A Common
Stock is then listed or quoted) for the last ten (10) trading days of the
quarter immediately preceding the applicable Purchase Date.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Silicon Graphics that as of
the Closing Date:
SECTION 3.01. ORGANIZATION AND QUALIFICATION. The Company is a corporation
duly incorporated, validly existing and in good standing under the laws of
Delaware and has all requisite corporate power and authority and all necessary
governmental approvals to own, lease and operate its properties and to carry on
its business as it is now being conducted, except where the failure to be so
organized, existing or in good
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<PAGE>
standing or to have such corporate power, authority and governmental approvals
have not had, and could not reasonably be expected to have, individually or in
the aggregate, a Company Material Adverse Effect (as defined below). The Company
is duly qualified or licensed as a foreign corporation to do business, and is in
good standing, in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its business makes such qualification
or licensing necessary, except for such failures to be so qualified or licensed
and in good standing that have not had, and could not reasonably be expected to
have, individually or in the aggregate, a Company Material Adverse Effect. The
term "COMPANY MATERIAL ADVERSE EFFECT" means any change in or effect on the
business of the Company that is materially adverse to the financial condition or
results of operations of the Company.
SECTION 3.02. CERTIFICATE OF INCORPORATION AND BY-LAWS. The Company has
heretofore made available to Silicon Graphics a complete and correct copy of the
Amended and Restated Certificate of Incorporation and the Amended and Restated
By-Laws of the Company. Upon filing and effectiveness of the Amended and
Restated Certificate of Incorporation, the Company will not be in violation of
any of the provisions of the Amended and Restated Certificate of Incorporation
or the Amended and Restated By-Laws.
SECTION 3.03. CAPITALIZATION. Effective as of the Closing Date, the
authorized capital stock of the Company will consist of (a) 250,000,000 shares
of Common Stock, of which 150,000,000 shares will be designated as Class A
Common Stock and 100,000,000 shares will be designated as Class B Common Stock
and (b) 50,000,000 shares of Preferred Stock. As of the Closing Date (after
giving effect to the Recapitalization but prior to giving effect to the Exchange
contemplated hereby), (i) 37,292,286 shares of Class A Common Stock will be
issued and outstanding, all of which will be validly issued, fully paid and
nonassessable, (ii) no shares of Class B Common Stock will be issued and
outstanding, (iii) no shares of Common Stock will be held in the treasury of the
Company, (iv) no shares of the Preferred Stock will be issued and outstanding
and (v) 7,200,000 shares are reserved for future issuance pursuant to the 1998
Long-Term Incentive Plan and the Directors' Stock Option Plan (the "COMPANY
STOCK OPTION PLANS"). Other than pursuant to the Company Stock Option Plans, the
Employee Stock Purchase Plan, the Non-U.S. Stock Purchase Plan and the Corporate
Agreement, there are no options, warrants or other rights, agreements,
arrangements or commitments of any character relating to the issued or unissued
capital stock of the Company or obligating the Company to issue or sell any
shares of capital stock of, or other equity interests in, the Company. All
shares of Common Stock subject to issuance as aforesaid, upon issuance on the
terms and conditions specified in the instruments pursuant to which they are
issuable, will be duly authorized, validly issued, fully paid and nonassessable.
There are no outstanding contractual obligations of the Company to repurchase,
redeem or otherwise acquire any shares of Common Stock.
SECTION 3.04. AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has all
necessary corporate power and authority to execute and deliver this Agreement
and, subject to the filing of the Amended and Restated Certificate of
Incorporation of the Company with the Secretary of State of the State of
Delaware, to perform its obligations hereunder and to consummate the
transactions contemplated by this Agreement. The Recapitalization has been
approved and adopted by (i) the affirmative vote of the holders of a majority of
the issued and outstanding shares of Existing Common Stock and (ii) the
affirmative vote of the holders of a majority of the issued and outstanding
shares of Existing Common Stock (excluding Silicon Graphics and its affiliates
as a stockholder for the purposes of this clause (ii)) and in accordance with
the Company's Restated Certificate of Incorporation. The execution and delivery
of this Agreement by the Company and the consummation by the Company of the
Recapitalization and the transactions contemplated by this Agreement have been
duly and validly authorized by all necessary corporate action and, except for
the filing of the Amended and Restated Certificate of Incorporation of the
Company with the Secretary of State of the State of Delaware, no other corporate
proceedings on the part of the Company are necessary to authorize the
Recapitalization, this Agreement or to consummate the transactions contemplated
by this Agreement. This Agreement has been duly and validly executed and
delivered
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by the Company and, assuming the due authorization, execution and delivery by
Silicon Graphics, constitutes a legal, valid and binding obligation of the
Company.
SECTION 3.05. NO CONFLICT; REQUIRED FILINGS AND CONSENTS. (a) The
execution and delivery of this Agreement by the Company do not, and the
performance of this Agreement by the Company will not, (i) conflict with or
violate the Amended and Restated Certificate of Incorporation or the Amended and
Restated By-laws of the Company, (ii) conflict with or violate any foreign or
domestic law, statute, ordinance, rule, regulation, order, judgment or decree
("LAW") applicable to the Company or by which any property or asset of the
Company is bound or affected, or (iii) result in any breach of or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any right of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or other
encumbrance on any property or asset of the Company pursuant to, any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation, except, with respect to clause (iii), for any
such conflicts, violations, breaches, defaults or other occurrences that have
not had, and could not reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect, and that could not reasonably be
expected to prevent or materially delay the consummation of the transactions
contemplated by this Agreement.
(b) The execution and delivery of this Agreement by the Company do not, and
the performance of this Agreement by the Company will not, require any consent,
approval, authorization or permit of, or filing with or notification to, any
domestic or foreign governmental or regulatory authority ("GOVERNMENTAL
ENTITY"), except (i) for applicable requirements, if any, of the Securities
Exchange Act of 1934, as amended (together with the rules and regulations
promulgated thereunder, the "EXCHANGE ACT"), state securities or "blue sky" laws
("BLUE SKY LAWS") and The Nasdaq Stock Market, Inc. and (ii) where failure to
obtain such consents, approvals, authorizations or permits, or to make such
filings or notifications, has not had, and could not reasonably be expected to
have, individually or in the aggregate, a Company Material Adverse Effect, and
could not reasonably be expected to prevent or materially delay the consummation
of the transactions contemplated by this Agreement.
SECTION 3.06. BROKERS. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
Recapitalization or the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SILICON GRAPHICS
Silicon Graphics hereby represents and warrants to the Company that as of
the Closing Date:
SECTION 4.01. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. Each of
Silicon Graphics and each subsidiary of Silicon Graphics other than the Company
(the "SILICON GRAPHICS SUBSIDIARIES") is a corporation duly incorporated,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation and has all corporate requisite power and authority and all
necessary governmental approvals to own, lease and operate its properties and to
carry on its business as it is now being conducted, except where the failure to
be so organized, existing or in good standing or to have such corporate power,
authority and governmental approvals have not had, and could not reasonably be
expected to have, individually or in the aggregate, a Silicon Graphics Material
Adverse Effect (as defined below). Each of Silicon Graphics and the Silicon
Graphics Subsidiaries is duly qualified or licensed as a foreign corporation to
do business, and is in good standing, in each jurisdiction where the character
of the properties owned, leased or operated by it or the nature of its business
makes such qualification or licensing necessary, except for such failures to be
so qualified or licensed and in good standing that have not had, and could not
reasonably be expected to have, individually or in the aggregate, a Silicon
Graphics Material Adverse Effect. The term "SILICON GRAPHICS MATERIAL ADVERSE
EFFECT" means any change in or effect on the business
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of Silicon Graphics or the Silicon Graphics Subsidiaries that is materially
adverse to the financial condition or results of operations of Silicon Graphics
and the Silicon Graphics Subsidiaries taken as a whole.
SECTION 4.02. CERTIFICATE OF INCORPORATION AND BY-LAWS. Silicon Graphics
has heretofore made available to the Company a complete and correct copy of the
Certificate of Incorporation and the By-Laws of Silicon Graphics. Such
Certificate of Incorporation and By-Laws are in full force and effect. Silicon
Graphics is not in violation of any of the provisions of its Certificate of
Incorporation or By-Laws.
SECTION 4.03. AUTHORITY RELATIVE TO THIS AGREEMENT. Silicon Graphics has
all necessary corporate power and authority to execute and deliver this
Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated by this Agreement. The execution and delivery of this
Agreement by Silicon Graphics and the consummation by Silicon Graphics of the
transactions contemplated by this Agreement have been duly and validly
authorized by all necessary corporate action and no other corporate proceedings
on the part of Silicon Graphics are necessary to authorize this Agreement or to
consummate the transactions contemplated by this Agreement. This Agreement has
been duly and validly executed and delivered by Silicon Graphics and, assuming
the due authorization, execution and delivery by the Company, constitutes a
legal, valid and binding obligation of Silicon Graphics.
SECTION 4.04. NO CONFLICT; REQUIRED FILINGS AND CONSENTS. (a) The
execution and delivery of this Agreement by Silicon Graphics do not, and the
performance of this Agreement by Silicon Graphics will not, (i) conflict with or
violate the certificate of incorporation or by-laws of Silicon Graphics or any
other Silicon Graphics Subsidiary, (ii) conflict with or violate any Law
applicable to Silicon Graphics or any Silicon Graphics Subsidiary or by which
any property or asset of Silicon Graphics or any Silicon Graphics Subsidiary is
bound or affected, or (iii) result in any breach of or constitute a default (or
an event which with notice or lapse of time or both would become a default)
under, or give to others any right of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or other encumbrance on any
property or asset of Silicon Graphics or any Silicon Graphics Subsidiary
pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation, except, with
respect to clause (iii), for any such conflicts, violations, breaches, defaults,
or other occurrences that have not had, and could not reasonably be expected to
have, individually or in the aggregate, a Silicon Graphics Material Adverse
Effect, and that could not reasonably be expected to prevent or materially delay
the consummation of the transactions contemplated by this Agreement.
(b) The execution and delivery of this Agreement by Silicon Graphics do not,
and the performance of this Agreement by Silicon Graphics will not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any Governmental Entity, except (i) for applicable requirements, if any, of
the Exchange Act and Blue Sky Laws, and (ii) where failure to obtain such
consents, approvals, authorizations or permits, or to make such filings or
notifications, has not had, and could not reasonably be expected to have,
individually or in the aggregate, a Silicon Graphics Material Adverse Effect,
and could not reasonably be expected to prevent or materially delay the
consummation of the transactions contemplated by this Agreement
SECTION 4.05. ABILITY TO CONSUMMATE THE DISTRIBUTION. As of the date of
this Agreement, Silicon Graphics is not aware of any legal or contractual
restriction affecting it or any of its assets or properties that could
reasonably be expected to prevent or materially delay the consummation of the
Distribution.
SECTION 4.06. BROKERS. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
Recapitalization or the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Silicon Graphics.
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ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.01. ABILITY TO CONSUMMATE THE DISTRIBUTION. Silicon Graphics
shall use its reasonable efforts to avoid becoming voluntarily or involuntarily
subject to any legal or contractual restriction that could reasonably be
expected to prevent the consummation of the Distribution; PROVIDED, HOWEVER,
that Silicon Graphics shall be permitted to enter into commercially reasonable
agreements in the ordinary course of business and consistent with past practice
which may contain provisions restricting Silicon Graphics' ability to consummate
the Distribution, including, but not limited to, provisions that restrict the
ability of Silicon Graphics to declare, set aside or pay any dividend or other
distribution in respect of its capital stock.
SECTION 5.02. INDEMNIFICATION BY SILICON GRAPHICS. (a) Silicon Graphics
shall indemnify and hold harmless the Company, its affiliates and their
successors and assigns, and the officers, directors, employees and agents of the
Company, its affiliates and their successors and assigns (each an "INDEMNIFIED
PARTY") from and against any and all liabilities, losses, damages, claims, costs
and expenses, interest, awards, judgments and penalties (including, without
limitation, attorneys' and consultants' fees and expenses) actually suffered or
incurred by them (including, without limitation, any action brought or otherwise
initiated by any of them) (hereinafter a "LOSS") by reason of or in connection
with any claim or cause of action of any third party (a "THIRD PARTY CLAIM"), to
the extent, but only to the extent, such Third Party Claim arises out of the
Recapitalization or a distribution; PROVIDED, HOWEVER, that any such Third Party
Claim shall have been brought prior to the expiration of the applicable statute
of limitations period governing such claim.
(b) Notwithstanding anything to the contrary in Section 5.02(a), Silicon
Graphics shall not be obligated under Section 5.02(a) to indemnify and hold
harmless any Indemnified Party for any Losses suffered or incurred by an
Indemnified Party by reason of or in connection with any secondary sales by
Silicon Graphics of Common Stock (other than in connection with a Distribution)
following the Recapitalization.
(c) If an Indemnified Party shall receive notice of any Third Party Claim,
the Indemnified Party shall give Silicon Graphics notice of such Third Party
Claim within 30 days of the receipt by the Indemnified Party of such notice;
PROVIDED, HOWEVER, that the failure to provide such notice shall not release
Silicon Graphics from any of its obligations under this Section 5.02 except to
the extent Silicon Graphics is materially prejudiced by such failure and shall
not relieve Silicon Graphics from any other obligation or liability that it may
have to any Indemnified Party otherwise than under this Section 5.02. If Silicon
Graphics acknowledges in writing its obligation to indemnify the Indemnified
Party hereunder against any Losses that may result from such Third Party Claim,
then Silicon Graphics shall be entitled to assume and control the defense of
such Third Party Claim at its expense and through counsel of its choice if it
gives notice of its intention to do so to the Indemnified Party within five days
of the receipt of such notice from the Indemnified Party; PROVIDED, HOWEVER,
that if there exists or is reasonably likely to exist a conflict of interest
that would make it inappropriate in the judgment of the Indemnified Party, in
its sole and absolute discretion, for the same counsel to represent both the
Indemnified Party and Silicon Graphics, then the Indemnified Party shall be
entitled to retain its own counsel, in each jurisdiction for which the
Indemnified Party determines counsel is required, at the expense of Silicon
Graphics. In the event Silicon Graphics exercises the right to undertake any
such defense against any such Third Party Claim as provided above, the
Indemnified Party shall cooperate with Silicon Graphics in such defense and make
available to Silicon Graphics, at Silicon Graphics' expense, all witnesses,
pertinent records, materials and information in the Indemnified Party's
possession or under the Indemnified Party's control relating thereto as is
reasonably required by Silicon Graphics. Similarly, in the event the Indemnified
Party is, directly or indirectly, conducting the defense against any such Third
Party Claim, Silicon Graphics shall cooperate with the Indemnified Party in such
defense and make available to the Indemnified Party, at Silicon Graphics'
expense, all such witnesses, records, materials and information in Silicon
Graphics' possession or under
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Silicon Graphics' control relating thereto as is reasonably required by the
Indemnified Party. No such Third Party Claim may be settled by Silicon Graphics
without the prior written consent of the Indemnified Party.
SECTION 5.03. TRANSFER RESTRICTIONS. Silicon Graphics has been advised and
understands that all shares of Class B Common Stock acquired by Silicon Graphics
in satisfaction of its obligations under Article II or as a result of the
automatic conversion of shares of Class A Common Stock into shares of Class B
Common Stock in accordance with Article IV of the Amended and Restated
Certificate of Incorporation have not been registered under the Securities Act
of 1933, as amended (the "SECURITIES ACT"). The parties hereto agree that such
shares may be resold, pledged or otherwise transferred by Silicon Graphics only
(a) to the Company (upon exchange or redemption thereof or otherwise), (b)
pursuant to an exemption from registration under the Securities Act, or (c) in
accordance with Article III of the Corporate Agreement.
SECTION 5.04. DISTRIBUTION TAX INDEMNIFICATION AGREEMENT. Prior to the
Distribution, the Company and Silicon Graphics shall enter into a Distribution
Tax Indemnification Agreement regarding such Distribution which shall contain
(i) each of the terms and provisions included in Appendix A hereto and (ii) such
other terms and provisions as are customary for such agreements and as shall be
mutually agreed to by the parties.
SECTION 5.05. EXCHANGE OF SHARES UPON CHANGE IN TAX LAW. (a) If, prior to
a Distribution, (i) the Code has been amended by the 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 (such change in the Code being a "CHANGE IN TAX LAW") AND (ii) Silicon
Graphics receives from the Company an opinion of counsel reasonably satisfactory
to Silicon Graphics that such Change in Tax Law would apply to a Distribution,
then Silicon Graphics shall, and shall cause each of its subsidiaries (other
than the Company) to, exchange all of the shares of Class B Common Stock it
owns, directly or indirectly, for shares of Class A Common Stock on a
one-for-one basis.
(b) Within twenty (20) days of its receipt of the opinion referred to in
clause (ii) of Section 5.05(a), Silicon Graphics shall, and shall cause each of
its subsidiaries (other than the Company) to, deliver to the Company the
certificate or certificates representing the shares of Class B Common Stock it
owns and, upon receipt of such certificate or certificates, the Company shall
issue a certificate or certificates to Silicon Graphics or such subsidiary, as
the case may be, for the aggregate number of shares of Class A Common Stock
issuable in exchange therefor pursuant to Section 5.05(a).
SECTION 5.06. RULING REQUEST. Silicon Graphics has submitted to the
Internal Revenue Service (the "IRS") a ruling request seeking a favorable ruling
from the IRS that the Distribution qualifies generally as a tax-free
distribution under Section 355 of the Code (the "Ruling Request"). A copy of the
Ruling Request has been provided to the Company. In the Ruling Request, Silicon
Graphics has requested that the IRS consider, among other things, whether the
provisions contained in (a) Article IV, Section 2(i)(ii) and 2(i)(iii) of the
Amended and Restated Certificate of Incorporation regarding the automatic
conversion of shares of Class B Common Stock into shares of Class A Common Stock
and (b) Article IV, Section 2(j)(ii) of the Amended and Restated Certificate of
Incorporation regarding the exchange of shares of Class B Common Stock for
shares of Class A Common Stock, would not cause the Distribution to not qualify
generally as a tax-free distribution under Section 355 of the Code. Silicon
Graphics agrees to use good faith and reasonable best efforts to obtain the
requested rulings from the IRS. Silicon Graphics shall not take any affirmative
action for the primary purpose of rendering unavailable any transition relief
with respect to a Change in Tax Law.
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ARTICLE VI
CONDITIONS TO THE EFFECTIVENESS OF THE AGREEMENT
SECTION 6.01. CONDITIONS TO THE OBLIGATIONS OF EACH PARTY. The obligations
of the Company and Silicon Graphics to consummate this Agreement are subject to
the satisfaction or waiver (where permissible) of the following conditions:
(a) the Amended and Restated Certificate of Incorporation shall have
become effective in accordance with the General Corporation Law of the State
of Delaware;
(b) no Governmental Entity or court of competent jurisdiction located or
having jurisdiction in the United States shall have enacted, issued,
promulgated, enforced or entered any law, rule, regulation, judgment,
decree, executive order or award (an "Order") which is then in effect and
has the effect of making the Recapitalization or the transactions
contemplated by this Agreement illegal or otherwise prohibiting consummation
of the Recapitalization or the transactions contemplated by this Agreement;
(c) the shares of Class A Common Stock to be issued in the
Recapitalization shall have been approved for quotation on the Nasdaq
National Market, subject to notice of issuance;
(d) a registration statement on Form 8-A (the "REGISTRATION STATEMENT")
registering the Class A Common Stock under the Exchange Act shall have
become effective upon filing with the Securities and Exchange Commission
("SEC") and no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceeding for that purpose shall
have been initiated by the SEC; and
(e) all consents, approvals and authorizations legally required to be
obtained to consummate this Agreement shall have been obtained from and made
with all Governmental Entities, except for such consents, approvals and
authorizations the failure of which to obtain would not have a material
adverse effect on the ability of the Company or Silicon Graphics to
consummate the transactions contemplated hereby.
SECTION 6.02. CONDITIONS TO THE OBLIGATIONS OF SILICON GRAPHICS. The
obligations of Silicon Graphics to consummate this Agreement are subject to the
satisfaction or waiver (where permissible) of the following additional
conditions:
(a) Silicon Graphics shall have received a certificate of the Chief
Executive Officer or Chief Financial Officer of the Company to the effect
that each of the representations and warranties of the Company contained in
this Agreement shall be true and correct as of the Closing Date, except
where failure to be so true and correct would not have a Company Material
Adverse Effect, and except that those representations and warranties which
address matters only as of a particular date shall remain true and correct
as of such date, except where failure to be so true and correct would not
have a Company Material Adverse Effect; and
(b) the Company shall have performed or complied with in all material
respects all agreements and covenants required by this Agreement to be
performed or complied with by it on or prior to the Closing Date, and
Silicon Graphics shall have received a certificate of the Chief Executive
Officer or Chief Financial Officer of the Company to that effect.
SECTION 6.03. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The
obligations of the Company to consummate this Agreement are subject to the
satisfaction or waiver (where permissible) of the following additional
conditions:
(a) the Company shall have received a certificate of an executive
officer of Silicon Graphics to the effect that each of the representations
and warranties of Silicon Graphics contained in this Agreement shall be true
and correct as of the Closing Date, except where the failure to be so true
and correct
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would not have a Silicon Graphics Material Adverse Effect, and except that
those representations and warranties which address matters only as of a
particular date shall remain true and correct as of such date, except where
the failure to be so true and correct would not have a Silicon Graphics
Material Adverse Effect; and
(b) Silicon Graphics shall have performed or complied with in all
material respects all agreements and covenants required by this Agreement to
be performed or complied with by it on or prior to the Closing Date, and the
Company shall have received a certificate of an executive officer of Silicon
Graphics to such effect.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.01. TERMINATION. This Agreement, including without limitation
the obligations of Silicon Graphics under Article II hereof, may be terminated,
and the other transactions contemplated by this Agreement may be abandoned at
any time, notwithstanding any requisite approval and adoption of this Agreement
and the transactions contemplated by this Agreement, as follows:
(a) by mutual written consent of the parties, duly authorized by their
respective boards of directors based on, in the case of the Company, the
unanimous recommendation of the independent directors of the Company; and
(b) by either party, upon the exchange by Silicon Graphics of all of its
shares of Class B Common Stock for shares of Class A Common Stock under
Section 5.05 of this Agreement.
SECTION 7.02. EFFECT OF TERMINATION. In the event of termination of this
Agreement pursuant to Section 7.01, this Agreement shall forthwith become void,
there shall be no liability under this Agreement on the part of Silicon Graphics
or the Company or any of their respective officers or directors, and all rights
and obligations of each party hereto shall cease; PROVIDED, HOWEVER, that
nothing herein shall relieve any party from liability for the wilful breach of
any of its representations, warranties, covenants or agreements set forth in
this Agreement; and PROVIDED, FURTHER, that the obligations of Silicon Graphics
(i) under Section 5.02(a) to indemnify an Indemnified Party for Losses suffered
or incurred by reason of or in connection with a Third Party Claim arising out
of the Recapitalization or Distribution and (ii) under Section 7.05 to reimburse
certain fees and expenses incurred by the Company in connection with the
Recapitalization and the Distribution, shall survive.
SECTION 7.03. AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed by the parties hereto.
SECTION 7.04. WAIVER. At any time any party hereto may (a) extend the time
for the performance of any obligation or other act of any other party hereto,
(b) waive any inaccuracy in the representations and warranties contained herein
or in any document delivered pursuant hereto, and (c) waive compliance with any
agreement or condition contained herein. Any such extension or waiver shall be
valid if set forth in an instrument in writing signed by the party to be bound
thereby.
SECTION 7.05. EXPENSES. Silicon Graphics shall reimburse the Company for
the fees and expenses of legal counsel incurred by the Company in connection
with the Recapitalization and any distribution covered by the indemnification
provided by Silicon Graphics pursuant to Section 5.02 of this Agreement, whether
or not the Recapitalization or such distribution is consummated, in an amount
set forth in a budget to be agreed to between the parties (the "BUDGET"). In the
event that the scope or expected amount of legal work on which the Budget was
based changes, the parties shall agree to a revised budget for legal fees and
expenses (the "REVISED BUDGET") and Silicon Graphics shall pay for such revised
legal fees and expenses in accordance with the Revised Budget. Silicon Graphics
shall also reimburse the Company for (i) the reasonable fees and expenses of its
financial advisor and (ii) all other reasonable out-of-pocket expenses incurred
by the Company in connection with the Recapitalization and any distribution
covered by
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the indemnification provided by Silicon Graphics pursuant to Section 5.02 of
this Agreement. Silicon Graphics will be responsible for all of the fees, costs
and expenses incurred by Silicon Graphics in connection with the
Recapitalization and any distribution, whether or not consummated.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.01. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by cable,
telecopy, facsimile, telegram or telex or by registered or certified mail
(postage prepaid, return receipt requested) to the respective parties at the
following addresses (or at such other address for a party as shall be specified
in a notice given in accordance with this Section 8.01):if to Silicon Graphics:
Silicon Graphics, Inc.
2011 N. Shoreline Boulevard
Mountain View, CA 94043
Facsimile No.: (650) 933-7096
Attention: Director, Corporate Legal Services
if to the Company:
MIPS Technologies, Inc.
1225 Charleston Avenue
Mountain View, CA 94043
Facsimile No.: (650) 567-5150
Attention: Chief Executive Officer
SECTION 8.02. CERTAIN DEFINITIONS. For purposes of this Agreement, the
term:
(a) "AFFILIATE" of a specified person means a person who directly or
indirectly through one or more intermediaries controls, is controlled by, or
is under common control with such specified person;
(b) "CONTROL" (including the terms "CONTROLLED BY" and "UNDER COMMON
CONTROL WITH") means the possession, directly or indirectly or as trustee or
executor, of the power to direct or cause the direction of the management
and policies of a person, whether through the ownership of voting
securities, as trustee or executor, by contract or credit arrangement or
otherwise; and
(c) "PERSON" means an individual, corporation, partnership, limited
partnership, syndicate, person (including, without limitation, a "PERSON" as
defined in section 13(d)(3) of the Exchange Act), trust, association or
entity or government, political subdivision, agency or instrumentality of a
government.
SECTION 8.03. SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of Law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated by this Agreement is not affected in
any manner materially adverse to any party. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the transactions contemplated by this Agreement
be consummated as originally contemplated to the fullest extent possible.
SECTION 8.04. ASSIGNMENT; BINDING EFFECT; BENEFIT. Neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
any of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other party. Subject to the preceding sentence,
this Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their
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respective successors and assigns. Except as provided in Section 5.02, nothing
in this Agreement, expressed or implied, is intended to confer on any person
other than the parties hereto or their respective successors and assigns any
rights, remedies, obligations or liabilities under or by reason of this
Agreement.
SECTION 8.05. SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
SECTION 8.06. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California applicable to
contracts executed in and to be performed in that state and without regard to
any applicable conflicts of law.
SECTION 8.07. HEADINGS. The descriptive headings contained in this
Agreement are included for convenience of reference only and shall not affect in
any way the meaning or interpretation of this Agreement.
SECTION 8.08. COUNTERPARTS. This Agreement may be executed and delivered
(including by facsimile transmission) in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
and delivered shall be deemed to be an original but all of which taken together
shall constitute one and the same agreement.
SECTION 8.09. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all prior agreements and understandings among the parties with
respect thereto. No addition to or modification of any provision of this
Agreement shall be binding upon any party hereto unless made in writing and
signed by all parties hereto.
IN WITNESS WHEREOF, Silicon Graphics and the Company have caused this
Agreement to be effective as of the Closing Date by their respective officers
thereunto duly authorized.
<TABLE>
<S> <C> <C> <C>
SILICON GRAPHICS, INC.
Attest
by: By
------------------------------------ ------------------------------------
Name: Name:
Title: Title:
MIPS TECHNOLOGIES, INC.
Attest
by: By
------------------------------------ ------------------------------------
Name: Name:
Title: Title:
</TABLE>
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APPENDIX A
CERTAIN TERMS AND PROVISIONS OF DISTRIBUTION TAX INDEMNIFICATION AGREEMENT
1. DISTRIBUTION. The Company and Silicon Graphics acknowledge that Silicon
Graphics intends to distribute the remaining portion of its interest in the
Company to Silicon Graphics stockholders in a transaction intended to qualify
generally as a tax-free distribution under Section 355 of the Internal Revenue
Code (the "Distribution").
2. LIMITATIONS ON CERTAIN ACTIONS. The Company covenants and agrees that
following the Distribution it will not take, or cause or allow any Company
Affiliate to take, any of the following actions:
(A) for the thirty (30)-month period beginning on the date of the
Distribution, issue stock of the Company in an acquisition or public or
private offering, except that the Company or any Company Affiliate may issue
stock:
(1) pursuant to the exercise of employee, director or consultant
stock options, stock awards, stock purchase rights or other employment
related arrangements under any stock incentive plan then in existence;
and
(2) up to a cumulative amount of ten percent (10%) of the outstanding
stock of the Company at the time of the Distribution (in addition to the
stock that may be issued under (A)(1) above);
(B) for the five (5)-year period beginning on the date of the
Distribution, amend its certificate of incorporation (or other
organizational documents), whether through a stockholder vote or otherwise
(but not including any conversion of Class B Stock into Class A Stock in
accordance with the Company's Amended and Restated Certificate of
Incorporation, other than the Company Exchange Right), in a manner that
affects the relative voting rights of the separate classes of the Common
Stock;
(C) for the five (5)-year period beginning on the date of the
Distribution, exchange any shares of Class B Stock for Class A Stock,
including pursuant to the Company Exchange Right (but not including any
conversion of Class B Stock into Class A Stock in accordance with the
Company's Amended and Restated Certificate of Incorporation);
(D) take any action that would constitute a breach of, or an inaccuracy
in, certain reasonable representations or covenants in the Ruling Documents,
Ruling, Supplemental Ruling Documents or Supplemental Ruling with respect to
the Company that are within the reasonable control of the Company (other
than any representation or covenant related to the stock issuances
permissible under (A)(1) or (2) above or to the extent the representation or
covenant is a Non-Required Representation or Covenant (as defined below)).
(E) for the thirty (30)-month period beginning on the date of the
Distribution, knowingly and voluntarily take any other action (other than
any action which is (i) described in (A)(1) or (2) above, (ii) being
undertaken or planned at the time of the Distribution or (iii) pursuant to
the Company's Amended and Restated Certificate of Incorporation) which it
believes will more likely than not result in the Distribution failing to
qualify under Section 355 of the Code or cause the Distribution otherwise to
be taxable under Section 355(e) of the Code.
3. INDEMNITY BY THE COMPANY. Except as provided in Section 4, the Company
and each Company Affiliate shall jointly and severally indemnify Silicon
Graphics and hold it harmless from and against any federal, state or local
income or franchise taxes imposed as a result of the Distribution failing to
qualify under Section 355 of the Code or otherwise being taxable under Section
355(e) of the Code as a result (and, in each case, any analogous provision under
state or local law) of:
(A) the Company or a Company Affiliate breaching any of the covenants
contained in Section 2;
C-13
<PAGE>
(B) for the thirty (30)-month period beginning on the date of the
Distribution, any acquisition of stock of the Company (other than any
issuance of stock by the Company covered in Section 2(A)(1) or (2) above) by
any person or persons (including, without limitation, as a merger of another
entity with and into the Company) in excess of the amount of stock permitted
to be issued under Section 2(A)(2) above, but taking into account any prior
or subsequent issuances of stock covered by Section 2(A)(2) during such
thirty (30)-month period.
Notwithstanding anything to the contrary, Silicon Graphics shall be liable for
any federal, state or local income or franchise taxes imposed on Silicon
Graphics as a result of the Distribution failing to qualify under Section 355 of
the Code or otherwise being taxable under Section 355(e) of the Code (and, in
each case, any analogous provision under state or local law) for any reason
other than as set forth in (A) or (B) of this Section 3.
4. PERMITTED ACTIONS. Notwithstanding the provisions of Section 2 and 3,
the Company and each Company Affiliate shall have no obligation to indemnify
under Section 3 (and may take any action otherwise prohibited by Section 2) if:
(A) Silicon Graphics obtains a Supplemental Ruling issued to Silicon
Graphics that rules that such action will not cause the Distribution to fail
to qualify under Section 355 of the Code or otherwise to be taxable under
Section 355(e) of the Code;
(B) Silicon Graphics consents to such action; or
(C) the Company delivers to Silicon Graphics an opinion, in form
reasonably satisfactory to Silicon Graphics (which determination by Silicon
Graphics may take into account, among other things, whether it is the type
of action with respect to which it is reasonably satisfactory to rely on an
opinion of counsel in light of the fact that Silicon Graphics previously
obtained the Ruling with respect to the Distribution), of nationally
recognized tax counsel, to the effect that such action will not cause the
Distribution to fail to qualify under Section 355 of the Code or otherwise
to be taxable under Section 355(e) of the Code.
5. SUPPLEMENTAL RULINGS; COOPERATION.
(A) REQUEST BY SILICON GRAPHICS. Silicon Graphics shall have the right
to obtain a Supplemental Ruling in its sole and exclusive discretion. If
Silicon Graphics determines to obtain a Supplemental Ruling, the Company
shall cooperate with Silicon Graphics and take any and all actions
reasonably requested by Silicon Graphics in connection with obtaining the
Supplemental Ruling (including, without limitation, by making any reasonable
representation or covenant or providing any materials or information
requested by the Internal Revenue Service; provided that, the Company shall
not be required to make any unreasonable representation or covenant or any
other representation or covenant that is inconsistent with historical facts
or its reasonable business objectives or as to future matters or events
outside its reasonable control (a "Non-Required Representation or
Covenant")). In connection with obtaining a Supplemental Ruling, (i) Silicon
Graphics shall cooperate with and keep the Company informed in a timely
manner of all material actions taken or proposed to be taken by Silicon
Graphics in connection therewith; (ii) Silicon Graphics shall (A) reasonably
in advance of the submission of any Supplemental Ruling Documents, provide
the company with a draft copy thereof, (B) reasonably consider the Company's
comments on such draft copy, and (C) provide the Company with a final copy;
and (iii) Silicon Graphics shall provide the Company with notice reasonably
in advance of, and the Company shall have the right to attend, directly
and/or through its representatives, any formally scheduled meetings with the
Internal Revenue Service (subject to the approval of the Internal Revenue
Service) that relate to such Supplemental Ruling.
(B) REQUEST BY THE COMPANY. Silicon Graphics agrees that, if the
Company desires to obtain a Supplemental Ruling or other guidance from the
Internal Revenue Service with respect to the treatment of the Distribution
under Section 355 of the Code (which may include, among other things,
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<PAGE>
instances in which the Company desires certain actions to fall within
Section 4(A) (e.g., because the Company prefers to seek a Supplemental
Ruling or because such actions do not fall within Sections 4(B) or (C)), at
the reasonable request of the Company Silicon Graphics shall cooperate with
the Company and use its reasonable best efforts to seek to obtain, as
expeditiously as possible, such Supplemental Ruling or other guidance. In no
event shall Silicon Graphics be required to file any Supplemental Ruling
under this Section 4 unless the Company represents that (1) it has read the
request for the Supplemental Ruling and any Supplemental Ruling Documents
and (2) all information and representations, if any, relating to the Company
and any Company Affiliate contained in the Supplemental Ruling Documents are
true, correct and complete in all material respects. The Company shall
reimburse Silicon Graphics for all reasonable costs and expenses incurred by
Silicon Graphics in obtaining a Supplemental Ruling requested by the
Company. The Company hereby agrees that Silicon Graphics shall have sole and
exclusive control subject to the provisions hereof over the process of
obtaining a Supplemental Ruling. In connection with obtaining any such
Supplemental Ruling, (i) Silicon Graphics shall cooperate with and keep the
Company informed in a timely manner of all material actions taken or
proposed to be taken by Silicon Graphics in connection therewith; (ii)
Silicon Graphics shall (A) reasonably in advance of the submission of any
Supplemental Ruling Documents, provide the Company with a draft copy
thereof, (B) reasonably consider the Company's comments on such draft copy,
and (C) provide the Company with a final copy; and (iii) Silicon Graphics
shall provide the Company with notice reasonably in advance of, and the
Company shall have the right to attend, directly and/or through its
representatives, any formally scheduled meetings with the Internal Revenue
Service (subject to the approval of the Internal Revenue Service) that
relate to such Supplemental Ruling.
(C) COOPERATION. The Company and Silicon Graphics agree to cooperate
with each other in obtaining the Ruling, any Supplemental Rulings or any
other rulings from the Internal Revenue Service or other taxing authority or
any opinions or counsel.
C-15
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- ------------------------------------------------------------------------------------------------------
<C> <S>
99.1 Annual Report on Form 10-K for the fiscal year ended June 30, 1998.
99.2 Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
99.3 Quarterly Report on Form 10-Q for the quarter ended December 31, 1998.
99.4 Current Report on Form 8-K dated February 26, 1999.
</TABLE>
<PAGE>
EXHIBIT 99.1
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended June 30, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________.
Commission file number 000-24487
----------------
MIPS Technologies, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0322161
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
1225 CHARLESTON ROAD, MOUNTAIN VIEW, CA 94043-1353
(Address of principal executive offices)
Registrants' telephone number, including area code: (650) 567-5000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
(Title of class)
-----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes / / No /X/
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. / /
Aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant as of September 1, 1998 was approximately
$94.0 million based upon the closing price reported for such date on the
Nasdaq National Market. For purposes of this disclosure, shares of Common
Stock held by persons who hold more than 5% of the outstanding shares of
Common Stock and shares held by officers and directors of the Registrant have
been excluded because such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The number of outstanding shares of the Registrant's Common Stock, $.001
par value, was 37,250,000 as of September 1, 1998.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this report. Except for the
historical information contained in this Annual Report on Form 10-K, the matters
discussed herein may contain forward-looking statements that are subject to
certain risks and uncertainties that could cause the Company's actual results to
differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause such differences include, but are not
limited to, those identified herein under "Factors That May Affect Our
Business," and other risks detailed below and included from time to time in the
Company's other Securities and Exchange Commission ("SEC") reports and press
releases, copies of which are available from the Company upon request. The
forward-looking statements within this Annual Report on Form 10-K are identified
by words such as "believes," "anticipates," "expects," "intends," "may" and
other similar expressions. However, these words are not the exclusive means of
identifying such statements. The Company assumes no obligation to update any
forward-looking statements contained herein.
Overview
The Company's predecessor, MIPS Computer Systems, Inc., was founded in 1984
and was engaged in the design and development of RISC microprocessors for the
computer systems and embedded markets. Silicon Graphics adopted the MIPS
architecture for its computer systems in 1988 and acquired MIPS Computer
Systems, Inc. in 1992. Following the acquisition, Silicon Graphics continued the
MIPS microprocessor business through its MIPS Group (a division of Silicon
Graphics), which focused primarily on the development of high-performance
microprocessors for Silicon Graphics' workstations and servers. Until the last
few years, cost considerations limited the broader use of these microprocessors.
However, as the cost to design and manufacture microprocessors based on the MIPS
technology decreased, the MIPS Group sought to penetrate the consumer market,
both through supporting and coordinating the efforts of the MIPS semiconductor
partners and, most notably, by partnering with Nintendo in its design of the
Nintendo 64 video game player and related cartridges. Revenue related to sales
of Nintendo 64 video game players and related cartridges currently accounts for
the substantial majority of the Company's revenue. Based on reports provided by
the Company's semiconductor partners, sales of MIPS-based devices have grown
from 320,000 units in calendar year 1992 to over 48 million units in calendar
year 1997.
The financial statements discussed below reflect the historical results of
operations, financial position and cash flows of the MIPS Group, certain
portions of which were transferred to the Company by Silicon Graphics in the
Separation. The financial statements contained herein and discussed below have
been carved out from the financial statements of Silicon Graphics using the
historical results of operations and historical basis of the assets and
liabilities of such business, as adjusted to reflect allocations of certain
corporate charges that management believes are reasonable. However, the
financial information included herein may not necessarily reflect the results of
operations, financial position and cash flows of the Company in the future or
what the results of operations, financial position and cash flows would have
been had the MIPS Group been a separate, stand-alone entity during the periods
presented. This is due to the historical operation of the MIPS Group as a part
of the larger Silicon Graphics enterprise. The financial information included
herein, does not reflect the many significant changes that have ocurred in the
funding and operations of the Company and the sources and costs of the Company's
revenue as a result of both the Separation and the Company's recent shift in
strategic direction.
The Company's revenue consists of royalties and contract revenue earned
under contracts with its semiconductor partners and under its agreement with
Nintendo. The Company's contracts with its semiconductor partners are typically
subject to periodic renewal or extension and expire at various dates from
January 1999 through December 2007. The Company generates royalties from the
sale by semiconductor manufacturers of products incorporating the Company's
technology. The Company also receives royalties from Nintendo relating to sales
of Nintendo 64 video game players and related cartridges. Royalties may be
calculated as a percentage of the revenue received by the seller on sales of
such products or on a per unit basis. Contract revenue includes technology
license fees and engineering service fees earned primarily under contracts with
Nintendo and the Company's semiconductor manufacturing partners. Technology
license fees range from several hundred thousand dollars for a single-use
license to millions of dollars for an unlimited license to use the Company's
technology. Part of these fees may be payable up-front and part may be due upon
the achievement of certain milestones such as provision of deliverables by the
Company or production of semiconductor chips by the licensee. In fiscal 1996 the
Company's total revenue was split relatively equally between royalties and
contract revenue. Royalties in fiscal 1996 were earned primarily from NEC, while
contract revenue for those periods primarily reflected engineering service fees
from Nintendo
11
<PAGE>
related to the Nintendo 64 video game system prior to its commercial
introduction. In fiscal 1997 and fiscal 1998, the Company's revenue mix changed
significantly, with royalties representing over 90% of the Company's total
revenue during those periods, due primarily to royalties earned from Nintendo,
and to a lesser extent NEC, on sales of Nintendo 64 video game players and
related cartridges.
In the near term, the Company's revenue will consist primarily of royalties
received from Nintendo and NEC on sales of Nintendo 64 video game players and
related cartridges. For the fiscal year ended June 30, 1998, such royalties
accounted for approximately 79% of the Company's total revenue. The Company
receives royalties from NEC based on a percentage of the revenue derived by NEC
from sales of the microprocessor included in the Nintendo 64 video game player.
The Company's agreement with Nintendo provides for the payment of royalties
based on unit sales of Nintendo 64 video game players and unit sales of related
video game cartridges. Total royalties from Nintendo with respect to sales of
Nintendo 64 video game players had a cap based on unit sales that was reached in
the second quarter of fiscal 1998. There is no cap on royalties from NEC with
respect to its sale of microprocessors to Nintendo for Nintendo 64 video game
players or on royalties from Nintendo with respect to sales of Nintendo 64 video
game cartridges. The Company anticipates that revenue related to sales of
Nintendo 64 video game cartridges will represent a substantial portion of its
total revenue for the next several years. However, competition in the market for
home entertainment products is intense and the introduction of new products or
technologies as well as shifting consumer preferences could negatively impact
video game cartridge sales. There can be no assurance as to the amount and
timing of sales of Nintendo 64 video game players and related cartridges and,
consequently, there can be no assurance as to the royalty stream to the Company
from such sales. In particular, the eventual introduction of the next generation
Nintendo video game system is expected to result in declining sales of Nintendo
64 video game players and related cartridges, although sales of video game
cartridges would be likely to continue for some time. In the near term, factors
negatively affecting sales of Nintendo 64 video game cartridges could have a
material adverse effect on the Company's results of operations and financial
condition.
The Company expects that royalties will continue to represent a significant
percentage of its total revenue over the next several years due to its
relationship with Nintendo. The amount, timing and relative mix of royalties and
contract revenue is difficult for the Company to predict. The amount and timing
of future royalties will depend on the adoption of the Company's technology by
digital consumer product manufacturers, consumer acceptance of products
incorporating the Company's technology, changes in the average selling prices of
semiconductor and digital consumer products and fluctuations in currency
exchange rates. Moreover, the Company's royalty arrangements will vary from
licensee to licensee depending on a number of factors, including the amount of
any license fee paid and the marketing and engineering support required by the
licensee. The amount and timing of future contract revenue will depend upon the
financial terms of the Company's contractual arrangements with its semiconductor
partners (which may require significant up-front payments or payments based on
the achievement of certain milestones) and the adoption of the Company's
technology by semiconductor manufacturers, which is influenced by a number of
factors including competitive conditions in the market for microprocessor
intellectual property. In addition, contract revenue may fluctuate significantly
from period to period and any increase or decrease in such revenue will not be
indicative of future period-to-period increases or decreases.
The Company's primary costs and expenses are research and development and
sales and marketing. The Separation has had a significant impact on the
Company's research and development cost structure. Silicon Graphics' design
efforts have required a significant staffing level because its complex
microprocessor requirements and the development and maintenance of proprietary
design tools have demanded large design teams. By contrast, the Company uses
smaller design teams and relies largely on industry standard third-party design
tools, which has reduced staffing requirements and costs. The Company reduced
its research and development staff from 221 persons at December 31, 1997 to 40
persons at June 30, 1998, principally due to the transfer to Silicon Graphics of
employees engaged in the development of next generation microprocessors for
Silicon Graphics' systems as well as other staff reductions associated with the
Company's change in strategic direction.
Sales and marketing expenses include salaries, travel expenses and costs
associated with trade shows, advertising and other marketing efforts. Costs of
technical support are also included in sales and marketing expenses. The
Company's sales and marketing efforts are principally directed at establishing
and supporting strategic relationships with semiconductor manufacturers. At June
30, 1998, the Company's sales and marketing staff totaled 16 persons.
12
<PAGE>
Results of Operations -- Years Ended June 30, 1998, 1997 and 1996
Total revenue was $56.8 million, $40.3 million and $37.0 million in fiscal
1998, 1997 and 1996, respectively. Royalties for fiscal 1998 and 1997 consisted
of royalties from sale by semiconductor manufacturers of products incorporating
the Company's technology and from sales of Nintendo 64 video game players and
related cartridges. Revenue for fiscal 1996 consisted of royalties from the sale
by semiconductor manufacturers of products incorporating the Company's
technology. The significant increase in royalties in fiscal 1998 from fiscal
1997 and in fiscal 1997 from fiscal 1996 reflects royalties received from
Nintendo and NEC related to sales of Nintendo 64 video game players and related
cartridges. The Company earned its first significant royalties from Nintendo 64
video game system sales in the third quarter of fiscal 1997, following the
commercial introduction of that system. In the second quarter of fiscal 1998,
royalties from the graphics chip included in the Nintendo game player reached
its cap. Contract revenue for fiscal 1998 consisted principally of license fees
related to code compression technology, and for fiscal 1997 consisted
principally of engineering service fees from Nintendo related to development
efforts for Nintendo 64 video game products. Fiscal 1996 contract revenue
included engineering service fees related to development efforts for the
Nintendo 64 video game system as well as approximately $10.0 million in license
fees from three licensees. The decrease in contract revenue in fiscal 1997
reflected substantial completion in fiscal 1996 of the Nintendo 64 video game
system development prior to its commercial introduction by Nintendo. Under the
terms of the Company's contracts with three of its semiconductor partners, such
partners pay royalties to the Company on sales to Silicon Graphics of certain
products incorporating the Company's technology. For fiscal 1998 the Company
estimates that less than 5% of its total revenue was related to such sales. The
Company expects that revenue related to such sales will decrease in the future.
Cost of contract revenue was $375,000, $1.3 million and $5.6 million in
fiscal 1998, 1997 and 1996, respectively. Cost of contract revenue in fiscal
1998 was principally attributable to sublicense fees and in fiscal 1997 and 1996
was principally attributable to non-recurring engineering fees related to
Nintendo 64 video game system development. The decrease in fiscal 1997 from 1996
was principally attributable to the completion in fiscal 1996 of the Nintendo 64
video game system development. The Company believes that future cost of contract
revenue will be minimal.
Research and development expenses were $43.4 million, $68.8 million and
$48.4 million in fiscal 1998, 1997 and 1996, respectively. The decrease in
research and development expenses in fiscal 1998 was primarily due to the
reduction in the Company's research and development staff from 221 persons at
December 31, 1997 to 40 persons at June 30, 1998. This reduction reflects the
transfer to Silicon Graphics of employees engaged in the development of next
generation microprocessors for Silicon Graphics' systems as well as other staff
reductions associated with the Company's change in strategic direction. The
increase in research and development expenses in fiscal 1997 was attributable to
additional personnel, including consultants, working on next generation
microprocessor development projects.
Sales and marketing expenses were $5.3 million, $6.2 million and $6.0
million in fiscal 1998, 1997 and 1996, respectively. The decrease in fiscal 1998
was primarily due to a decrease in advertising and promotional spending. General
and administrative expenses remained relatively unchanged as such costs were
$4.7 million, $4.8 million and $4.6 million in fiscal 1998, 1997 and 1996,
respectively.
The restructuring charge taken in the second quarter of fiscal 1998
included $500,000 in severance related costs and $2.1 million in asset
write-downs related to the Company's shift in strategic direction.
Prior to the Separation, the Company did not have a tax sharing agreement
in place but, rather, was included in the income tax returns filed by Silicon
Graphics and its subsidiaries in various domestic and foreign jurisdictions.
Pursuant to the tax sharing agreement, the Company will realize no income tax
benefit, nor bear any income tax liability, related to its operations prior to
the completion of its initial public offering. Moreover, in light of historical
losses, on a stand-alone basis, the Company's tax provision for fiscal 1998
would have been immaterial. Therefore, no provision or benefit for income taxes
has been recorded for the periods presented in the accompanying financial
statements.
Impact of Currency
Certain of the Company's international licensees pay royalties based on
revenues that are reported in a local currency (currently yen) and translated
into U.S. dollars at the exchange rate in effect when such revenues are reported
by the licensee. To date, substantially all of the Company's revenue from
international customers has been denominated in U.S. dollars. However, to the
extent that sales to digital consumer product manufacturers by the
13
<PAGE>
Company's manufacturing partners are denominated in foreign currencies,
royalties received by the Company on such sales could be subject to fluctuations
in currency exchange rates. In addition, if the effective price of the
technology sold by the Company to its partners were to increase as a result of
fluctuations in foreign currency exchange rates, demand for the Company's
technology could fall which would, in turn, reduce the Company's royalties. The
Company is unable to predict the amount of non-U.S. dollar denominated revenue
earned by its licensees and, therefore, has not attempted to mitigate the effect
that currency fluctuations may have on its royalty revenue.
Liquidity and Capital Resources
On July 6, 1998 the Company completed its initial public offering of
5,500,000 shares ot its common stock. Of the 5,500,000 shares offered, 1,250,000
shares were offered by the Company and 4,250,000 shares were offered by Silicon
Graphics. The Company raised approximately $16M from the initial public
offering. The Company's principal capital requirements are to fund working
capital needs and capital expenditures in order to support the Company's revenue
growth. Prior to its initial public offering and during the periods presented,
these capital requirements have been satisfied by funds provided by Silicon
Graphics. Silicon Graphics historically has performed cash management services
for the Company, whereby the Company's cash flow was directed to Silicon
Graphics and Silicon Graphics provided cash to the Company to fund its operating
expenses and capital expenditures. Subsequent to the Separation, the Company has
not participated in Silicon Graphics' cash management system and Silicon
Graphics has not provided additional funds to the Company to finance its
operations.
The Company's future liquidity and capital requirements are expected to
vary greatly from quarter to quarter, depending on numerous factors, including,
among others, the cost, timing and success of product development efforts, the
cost and timing of sales and marketing activities, the extent to which the
Company's existing and new technologies gain market acceptance, the level and
timing of contract revenues and royalties, competing technological and market
developments and the costs of maintaining and enforcing patent claims and other
intellectual property rights. The Company believes that cash generated by its
operations, together with the net proceeds to the Company from its initial
public offering, will be sufficient to meet its projected operating and capital
requirements. The Company may elect to raise additional funds through public or
private financing, strategic relationships or other arrangements. Additional
equity financing may be dilutive to holders of the Common Stock, and debt
financing, if available, may involve restrictive covenants. Moreover, strategic
relationships, if necessary to raise additional funds, may require that the
Company relinquish its rights to certain of its technologies. As long as Silicon
Graphics desires to maintain its percentage ownership interest in the Company,
the Company may be constrained in its ability to issue Common Stock in
connection with acquisitions or to raise equity capital. Any failure of the
Company to raise capital when needed could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company has had no direct third-party indebtedness. The Company intends
to enter into a revolving credit facility with a bank or other financial
institution to provide for certain of its working capital needs.
Year 2000 Compliance
The Company is currently examining the Year 2000 issue. The Company
believes its products are Year 2000 compliant; however, the Company is
initiating a program to prepare its information technology ("IT") and related
non-IT and processes for the Year 2000 and plans to have changes to critical
systems completed by the third quarter of calendar year 1999 to allow time for
testing.
Management is assessing the Year 2000 project costs and expects the
assessment to be complete by the end of the second quarter of fiscal 1999, but
based on preliminary estimates, the costs of any necessary actions are not
expected to be material to the Company's results of operations or financial
condition.
The Company intends to cooperate with its manufacturing partners and others
with which it does business to coordinate Year 2000 compliance with operational
processes and marketed products, although the Company is unable to evaluate the
Year 2000 compliance of products and technology developed by third parties that
incorporates the Company's technology. To the extent that any such third-party
product or technology fails to be Year 2000 compliant, the Company may be
adversely affected due to its association with such product or technology. The
Company will also be contacting critical suppliers of products and services to
determine that the suppliers' operations and the products and services they
provide are Year 2000 capable or to monitor their progress toward Year 2000
capability. There can be no assurance that another company's failure to ensure
Year 2000 capability would not have an adverse effect on the Company.
14
<PAGE>
Factors That May Affect Our Business
Risks Associated with Recent Shift in Strategic Direction. The Company's
research and development efforts historically focused primarily on the
development of high-performance microprocessor and related designs for Silicon
Graphics' workstations and servers. However, as the cost to design and
manufacture microprocessors based on the Company's technology decreased, the
Company has sought to penetrate the market for high-volume, high-performance
embedded applications by supporting and coordinating the efforts of its
semiconductor partners in that area. In connection with the Separation and the
Offering, the Company has formulated a new strategic direction in which its
primary focus is the development of microprocessors and related designs for
applications in the embedded market, including digital consumer products such as
video game products, handheld personal computers and digital set-top boxes. The
design and development of high-performance microprocessors for the next
generation Silicon Graphics' product line is carried out by persons who have
been transferred to Silicon Graphics in connection with the Separation. The
Company's shift in strategic direction involves several risks, including (i)
increased reliance on the evolving and highly competitive digital consumer
products industry; (ii) the need for the Company to refocus its research and
development efforts from microprocessors primarily for high-performance computer
systems to microprocessors and related designs for use in a wide range of
digital consumer products; and (iii) increased importance of the Company's sales
and marketing activities and its limited experience in this area. Any failure by
the Company to adequately address any of these risks could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Limited Relevance of Historical Financial Information. The historical
financial information included herein, particularly for periods prior to the
third quarter of fiscal 1998, does not reflect the many significant changes in
the Company's cost structure that occurred as a result of the Separation and the
Company's recent shift in strategic direction nor the changes that occurred in
the funding and operations of the Company due to its status as a separate,
stand-alone entity. The Company has reduced its research and development staff
from 221 persons at December 31, 1997 to 40 persons at June 30, 1998. This
reduction primarily reflects the transfer to Silicon Graphics of employees
engaged in the development of next generation microprocessors for Silicon
Graphics' systems. Because the employees transferred to Silicon Graphics were
primarily engaged in research and development activities that did not generate
any material revenue for the Company, however, the reduction in the Company's
research and development staff resulting from the Separation and the shift in
strategic direction is not expected to have a material effect on the Company's
revenue in future periods. In addition, sales and marketing activities are
expected to increase as the Company shifts its focus from the design of
microprocessors addressing the needs of Silicon Graphics to the development,
marketing and licensing of microprocessor and related designs for a wide variety
of applications in the digital consumer products industry.
Unpredictable and Fluctuating Operating Results. The Company experiences
significant fluctuations in its quarterly operating results due to a variety of
factors, many of which are outside of its control. Moreover, because many of the
Company's revenue components fluctuate and are difficult to predict and the
Company's expenses are largely independent of its revenue in any particular
period, it is difficult for the Company to accurately forecast operating
results. The Company's revenue in any particular quarter is dependent on a
number of factors, including the demand for and average selling prices of
semiconductor products that incorporate the Company's technology, the financial
terms of the Company's contractual arrangements with its semiconductor partners
(which may require significant up-front payments or payments based on the
achievement of certain milestones), the relative mix of contract revenue and
royalties, and competitive pressures resulting in lower contract revenue or
royalty rates. In addition, contract revenue may fluctuate significantly from
period to period and any increase or decrease in such revenue will not be
indicative of future period-to-period increases or decreases. Because the
Company's expense levels are based, in part, on management's expectations
regarding future revenue, if revenue is below expectations in any quarter, the
adverse effect may be magnified by the Company's inability to adjust spending in
a timely manner to compensate for any such revenue shortfall.
Factors that may adversely affect the Company's quarterly operating results
include the Company's ability to develop, introduce and market new
microprocessor intellectual property, the demand for and average selling prices
of semiconductor products that incorporate the Company's technology, the
establishment or loss of strategic relationships with semiconductor
manufacturing partners or manufacturers of digital consumer products, the timing
of new products and product enhancements by the Company and its competitors,
changes in the Company's and digital consumer product manufacturers' development
schedules and levels of expenditures on research and development and product
support and general economic conditions. As a result, the Company's total
revenue and
15
<PAGE>
operating results in any future period cannot be predicted with certainty, and
its operating results in any quarter may not be indicative of its future
performance. Moreover, the Company expects to experience seasonal fluctuations
in its revenue and operating results.
Revenue Concentration. The Company is subject to revenue concentration
risks at both the product and semiconductor manufacturing partner levels. To
date, a substantial portion of the Company's total revenue has been derived from
contract revenue and royalties earned on sales of video game products that use
the Company's RISC-based microprocessor technology. In particular, royalties and
contract revenue from Nintendo and NEC relating to sales of Nintendo 64 video
game players and related cartridges accounted for 79%, 69% and 23% of the
Company's total revenue for the fiscal years ended June 30, 1998, 1997 and 1996,
respectively.
The Company anticipates that royalties related to sales of Nintendo 64
video game cartridges will represent a substantial portion of its total revenue
for the next several years. However, competition in the market for home
entertainment products is intense and the introduction of new products or
technologies, as well as shifting consumer preferences, could negatively impact
Nintendo 64 video game cartridge sales. There can be no assurance as to the
amount and timing of sales of Nintendo 64 video game players and related
cartridges and, consequently, there can be no assurance as to the royalty stream
to the Company from such sales. In particular, the eventual introduction of the
next generation Nintendo video game system is expected to result in declining
sales of Nintendo 64 video game players and related cartridges, although sales
of video game cartridges would be likely to continue for some time. In the near
term, factors negatively affecting sales of Nintendo 64 video game cartridges
could have a material adverse effect on the Company's results of operations and
financial condition.
Although the Company expects that an increasingly significant portion of
its future revenue will be related to sales of digital consumer products such as
handheld personal computers and set-top boxes as well as other video game
products, there can be no assurance that the Company's technology will be
selected for design into any such products. Accordingly, the Company may remain
significantly dependent on revenue related to sales of video game products. The
identity of significant products may vary from period to period depending on the
addition of new contracts and the number of designs using the Company's
technology.
A significant portion of the Company's total revenue has been and is
expected to continue to be derived from a limited number of semiconductor
manufacturers. For the fiscal years ended June 30, 1998, 1997 and 1996, NEC
accounted for approximately 13%, 23% and 31%, respectively, of the Company's
total revenue. The Company believes that NEC will continue to represent in
excess of 10% of its total revenue for at least the next several years, although
NEC is not obligated to continue using the Company's technology in its current
or future products. Because there is a relatively limited number of
semiconductor manufacturers to which the Company could license its technology on
a basis consistent with its business model, it is likely that the Company's
revenue will continue to be concentrated at the semiconductor manufacturing
partner level. This revenue concentration for any given period will vary
depending on the addition or expiration of contracts, the nature and timing of
payments due under such contracts and the volumes and prices at which the
Company's partners sell products incorporating its technology. Accordingly, the
identity of particular manufacturing partners that will account for any such
revenue concentration will vary from period to period and may be difficult to
predict.
Seasonality. Because revenue related to sales of Nintendo 64 video game
cartridges is expected to represent a substantial portion of the Company's total
revenue over the next several years, the Company expects to experience seasonal
fluctuations in its revenue and operating results. The Company records royalty
revenue from Nintendo in the quarter following the sale of the related Nintendo
64 video game cartridge. Because a disproportionate amount of Nintendo 64 video
game cartridges are typically sold in the Company's second fiscal quarter (which
includes the holiday selling season), a disproportionate amount of the Company's
revenue and operating income is expected to be realized in its third fiscal
quarter. In addition, as the Company increases its focus on microprocessor
intellectual property for high-volume digital consumer products, the Company can
be expected to continue to experience similar seasonal fluctuations in its
revenue and operating results.
Intellectual Property Matters. The Company regards its patents, copyrights,
mask work rights, trademarks, trade secrets and similar intellectual property as
critical to its success, and relies on a combination of patent, trademark,
copyright, mask work and trade secret laws to protect its proprietary rights.
Any failure of the Company to obtain or maintain adequate protection of its
intellectual property rights for any reason could have a material adverse effect
on its business, results of operations and financial condition. Subject to the
grant of a license to Silicon Graphics, the Company owns approximately 51 U.S.
patents on various aspects of its technology, with expiration dates ranging
16
<PAGE>
from 2006 to 2015, approximately 24 pending U.S. patent applications as well as
all foreign counterparts relating thereto. There can be no assurance that
patents will issue from any patent applications submitted by the Company, that
any patents held by the Company will not be challenged, invalidated or
circumvented or that any claims allowed from its patents will be of sufficient
scope or strength to provide meaningful protection or any commercial advantage
to the Company. In addition, there can be no assurance that third parties will
not assert claims of infringement against the Company or against the Company's
semiconductor manufacturing partners in connection with their use of the
Company's technology. Such claims, even those without merit, could be time
consuming, result in costly litigation and/or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, or at all.
Moreover, the laws of certain foreign countries may not protect the Company's
intellectual property to the same extent as do the laws of the United States
and, because of the importance of the Company's intellectual property rights to
its business, this could have a material adverse effect on its business, results
of operations and financial condition.
The Company also uses licensing agreements and employee and third party
nondisclosure and assignment agreements to limit access to and distribution of
its proprietary information and to obtain ownership of technology prepared on a
work-for-hire basis. There can be no assurance that the steps taken by the
Company to protect its intellectual property rights will be adequate to deter
misappropriation of such rights or that the Company will be able to detect
unauthorized uses and take immediate or effective steps to enforce its rights.
There can also be no assurance that the steps taken by the Company to obtain
ownership of contributed intellectual property will be sufficient to assure its
ownership of all proprietary rights. The Company also relies on unpatented trade
secrets to protect its proprietary technology. No assurance can be given that
others will not independently develop or otherwise acquire the same or
substantially equivalent technologies or otherwise gain access to the Company's
proprietary technology or disclose such technology or that the Company can
ultimately protect its rights to such unpatented proprietary technology. In
addition, no assurance can be given that third parties will not obtain patent
rights to such unpatented trade secrets, which patent rights could be used to
assert infringement claims against the Company. From time to time the Company
has entered, and in the future may enter, into cross licensing arrangements with
others, pursuant to which the Company licenses certain of its patents in
exchange for patent licenses from such licensees. Although these types of cross
licensing arrangements are common in the semiconductor and microprocessor
industries, and do not generally provide for transfers of know-how or other
proprietary information, such arrangements may facilitate the ability of such
licensees, either alone or in conjunction with others, to develop competitive
products and designs.
The Company and Silicon Graphics have entered into arrangements pursuant to
which certain intellectual property was assigned to the Company, subject to the
grant of a license to Silicon Graphics; certain intellectual property was
retained by Silicon Graphics, subject to the grant of a license to the Company;
and certain intellectual property was retained by Silicon Graphics without any
ongoing interest to the Company. The Company's inability to use Silicon
Graphics' intellectual property in the future could have a material adverse
affect on its business and results of operations. In the past, the MIPS Group
has benefited from its status as a division of Silicon Graphics in its access to
the intellectual property of third parties through licensing arrangements or
otherwise, and in the negotiation of the financial and other terms of any such
arrangements. As a result of the Separation, there can be no assurance that the
Company will be able to negotiate commercially attractive intellectual property
licensing arrangements with third parties in the future, particularly if the
Company ceases to be a majority-owned subsidiary of Silicon Graphics. In
addition, in connection with any future intellectual property infringement
claims, the Company will not have the benefit of asserting counterclaims based
on Silicon Graphics' intellectual property portfolio, nor will the Company be
able to provide licenses to Silicon Graphics' intellectual property in order to
resolve such claims.
Lack of Independent Operating History. The Company has never operated as a
stand-alone company. The Company continues to be a majority owned subsidiary of
Silicon Graphics, however, Silicon Graphics will have no obligation to provide
assistance to the Company. The Company will be required to develop and implement
the operational, administrative and other systems and infrastructure necessary
to support its current and future business. There can be no assurance that the
Company will be able to develop the necessary systems and infrastructure and any
failure to do so could have an adverse effect on the Company's business, results
of operations and financial condition.
17
<PAGE>
New Product Development and Technological Change. The Company's success is
highly dependent on its ability to develop enhancements and new generations of
its microprocessor intellectual property, introduce them to the marketplace in a
timely manner, and have them incorporated into semiconductor products that are
ultimately selected for design into the products of leading digital consumer
product manufacturers. There can be no assurance that the Company's development
efforts will be successful or that the characteristics of its microprocessor
intellectual property will satisfy those that may be critical to specific
applications in the embedded market. To the extent that the Company's
development efforts are unsuccessful or the characteristics of its
microprocessor intellectual property are not compatible with the requirements of
specific digital consumer product applications, its ability to achieve design
wins may be limited. Failure to achieve sufficient design wins could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Technical innovations of the type critical to the Company's success are
inherently complex. Any failure by the Company to anticipate or respond
adequately to changes in the requirements of digital consumer product
manufacturers or in the semiconductor manufacturing process, or any significant
delays in the development or introduction of new microprocessor intellectual
property, could have a material adverse effect on the Company's business,
results of operations and financial condition. Moreover, significant technical
innovations generally require a substantial investment before their commercial
viability is determined. There can be no assurance that the Company will have
the financial resources necessary to fund the future development of
microprocessor and related designs. In addition, there can be no assurance that
any enhancements or new generations of the Company's technology, even if
successfully developed, will generate revenue in excess of the costs of
development or not be quickly rendered obsolete by changing consumer
preferences, the introduction of products embodying new technologies or features
or other technological developments in the semiconductor and digital consumer
products industries.
Dependence on Digital Consumer Products Industry. The digital consumer
products industry will be the primary market for the Company's microprocessor
and related designs. The Company's success will be dependent upon the level of
consumer acceptance of the products that incorporate its technology, which may
be affected by changing consumer preferences and the introduction of products
embodying new technologies or features. In addition, certain digital consumer
products such as video game products may present limited opportunities for
design wins due to a limited number of product manufacturers and the length of
product life cycles. Many applications in the digital consumer products
industry, such as handheld personal computers and set-top boxes, have only
recently been introduced to the market and the level of consumer interest and
acceptance is difficult to predict. Factors negatively affecting the digital
consumer products industry and the demand for digital consumer products, such as
the failure to develop industry standards for hardware and software or to
achieve adequate product cost reductions, could have a material adverse effect
on the Company's business, results of operations and financial condition.
Moreover, to the extent that the performance, functionality, price and power
characteristics of the Company's microprocessor designs do not satisfy those
that may be critical to specific digital consumer product applications, the
Company's dependence on the digital consumer products industry may be further
confined to a limited segment of that industry.
Reliance on Manufacturing Partners. The Company does not manufacture or
sell microprocessors containing its technology. Rather, the Company licenses its
technology to semiconductor manufacturers that incorporate the Company's
technology into the products they sell. In some cases, these manufacturing
partners also add custom integration services and derivative design technologies
to the Company's microprocessor designs. Accordingly, the Company's success is
substantially dependent on the adoption and continued use of its technology by
semiconductor manufacturers. The Company faces numerous risks in obtaining
agreements with semiconductor manufacturers on terms consistent with its
business model, including, among others, the lengthy and expensive process of
building a relationship with a potential partner before there is any assurance
of an agreement; persuading large semiconductor companies to work with, to rely
for critical technology on, and to disclose proprietary manufacturing technology
to, the Company; and persuading potential partners to bear certain development
costs associated with the Company's technology and to make the necessary
investment to successfully produce embedded microprocessors using the Company's
technology. Moreover, none of the Company's manufacturing partners is obligated
to license new or future generations of the Company's microprocessor designs.
The Company is also subject to many risks beyond its control that influence
the success of its semiconductor manufacturing partners, including, among
others, the highly competitive environment in which its current and any future
partners operate, the market for their products and the engineering capabilities
and financial and other resources of its partners. The Company also believes
that its principal competition may come from semiconductor
18
<PAGE>
manufacturers, including its current manufacturing partners that internally
develop products using similar or alternative technologies. Any such competition
may adversely affect the Company's existing relationships and its ability to
establish new relationships. Moreover, the Company's relationships with certain
of its existing partners may be negatively affected by its separation from
Silicon Graphics, insofar as Silicon Graphics' status as a customer of such
partners has been a factor in establishing and maintaining such relationships or
in negotiating the financial and other terms of the contractual arrangements
with such partners.
The Company currently has seven semiconductor manufacturing partners. There
can be no assurance that the Company will be successful in maintaining
relationships with its current manufacturing partners or in entering into new
relationships with additional partners. Any failure by the Company to establish
or maintain such relationships could have a material adverse effect on the
Company's business, results of operations and financial condition.
Dependence on Digital Consumer Product Manufacturers. The timing and amount
of royalties received by the Company is directly affected by sales of consumer
products incorporating the Company's technology. Accordingly, the Company's
success is substantially dependent upon the adoption of its technology by
digital consumer product manufacturers. The Company is subject to many risks
beyond its control that influence the success or failure of a particular digital
consumer product manufacturer, including, among others, competition faced by the
manufacturer in its particular industry; market acceptance of the manufacturer's
products; the engineering, marketing and management capabilities of the
manufacturer; technical challenges unrelated to the Company's technology faced
by the manufacturer in developing its products; and the financial and other
resources of the manufacturer. The process of persuading digital consumer
product manufacturers to adopt the Company's technology can be lengthy and, even
if adopted, there can be no assurance that the Company's technology will be used
in a product that is ultimately brought to market, achieves commercial
acceptance or results in meaningful royalties to the Company. The failure of
manufacturers in the digital consumer products industry to adopt the Company's
technology for incorporation into their products could have a material adverse
effect on the Company's business, results of operations and financial condition.
Furthermore, because the Company does not control the business practices of its
licensees, it has no ability to establish the prices at which the products
incorporating its technology are made available to digital consumer product
manufacturers or the degree to which its licensees promote the Company's
technology to such manufacturers.
Competition. Competition in the market for embedded microprocessors is
intense. The Company believes that the principal competitive factors in the
industry are performance, functionality, price, customizability and power
consumption. The Company competes primarily against ARM Holdings plc. and
Hitachi Semiconductor (America) Inc. The Company also competes against certain
semiconductor manufacturers whose product lines include microprocessors for
embedded and non-embedded applications, including Intel Corporation, National
Semiconductor Corporation, Advanced Micro Devices, Inc. and Motorola, Inc. In
addition, the Company must continue to differentiate its microprocessor and
related designs from those available or under development by the internal design
groups of semiconductor manufacturers, including its current and prospective
manufacturing partners. Many of these internal design groups have substantial
programming and design resources and are part of larger organizations, which
have substantial financial and marketing resources. There can be no assurance
that internal design groups will not develop products that compete directly with
those of the Company or will not actively seek to license their own technology
to third-party semiconductor manufacturers. Certain of the Company's competitors
have greater name recognition and customer bases as well as greater financial
and marketing resources than the Company, and such competition could adversely
affect the Company's business, results of operations and financial condition.
Dependence on Key Personnel. The Company's success depends in part on the
continued contributions of its key management, technical, sales and marketing
personnel, many of whom are highly skilled and difficult to replace. In
addition, the Company's business plan requires, and its future operating results
depend in significant part upon, the identification and hiring of additional
highly skilled personnel, particularly technical personnel for its anticipated
research and development activities. Competition for qualified personnel,
particularly those with significant experience in the semiconductor and
microprocessor design industries, is intense. The loss of the services of any of
the key personnel, the inability to attract and retain qualified personnel in
the future or delays in hiring personnel, particularly technical personnel,
could have a material adverse effect on the Company's business, operating
results and financial condition.
19
<PAGE>
Risks Associated with International Operations. A substantial portion of
the Company's revenue is derived from outside the United States. For the fiscal
years ended June 30, 1998, 1997 and 1996, revenue from customers outside the
United States, primarily in Japan, represented approximately 90%, 87% and 83%,
respectively, of the Company's total revenue. The Company anticipates that
revenue from international customers primarily in Asia, will continue to
represent a substantial portion of its total revenue. To date, substantially all
of the Company's revenue from international customers has been denominated in
U.S. dollars. However, to the extent that sales to digital consumer product
manufacturers by the Company's manufacturing partners are denominated in foreign
currencies, royalties received by the Company on such sales could be subject to
fluctuations in currency exchange rates. In addition, if the effective price of
the technology sold by the Company to its partners were to increase as a result
of fluctuations in foreign currency exchange rates, demand for the Company's
technology could fall which would, in turn, reduce the Company's royalties. The
Company is unable to predict the amount of non-U.S. dollar denominated revenue
earned by its licensees. Therefore, the Company has not historically attempted
to mitigate the effect that currency fluctuations may have on its revenue, and
does not presently intend to do so in the future. The relative significance of
the Company's international operations exposes it to a number of additional
risks including political and economic instability, longer accounts receivable
collection periods and greater difficulty in collection of accounts receivable,
reduced or limited protection for intellectual property, export license
requirements, tariffs and other trade barriers and potentially adverse tax
consequences. Several countries in Asia are experiencing a severe economic
crisis, characterized by reduced economic activity, lack of liquidity, highly
volatile foreign currency exchange and interest rates and unstable stock
markets. Several of the Company's semiconductor partners sell products into Asia
that incorporate the Company's microprocessor and related designs. Any negative
impact of the circumstances in Asia on its sales of such products by the
Company's semiconductor partners could have a negative impact on its royalty
revenue. There can be no assurance that the Company will be able to sustain
revenue derived from international customers or that the foregoing factors will
not have a material adverse effect on the Company's business, operating results
and financial condition.
Management of Growth. The Company has limited managerial, financial,
engineering and other resources and may not be equipped to manage successfully
any future periods of rapid growth or expansion. In addition, the Company's
business plan requires that it identify and hire additional highly skilled
technical personnel during fiscal 1999 to staff its anticipated research and
development activities. Recruitment and integration of these additional
employees, as well as any future periods of rapid growth or expansion, can be
expected to place significant strains on the Company's resources, which may be
exacerbated by the Company's recent shift in strategic direction. Digital
consumer product manufacturers as well as the Company's semiconductor
manufacturing partners typically require significant engineering support in the
design, testing and manufacture of products incorporating the Company's
technology. As a result, any increase in the adoption of the Company's
technology will increase the strain on the Company's personnel, particularly its
engineers. The Company's future growth will also depend on its ability to
implement operational, financial and management information and control systems
and procedures necessary to operate as a stand-alone company and without the
financial, operational, managerial and administrative support previously
provided by Silicon Graphics.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not Applicable.
Item 8. Financial Statements and Supplementary Data.
20
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
of MIPS Technologies, Inc.
We have audited the accompanying balance sheets of MIPS Technologies, Inc.
(the "Company") as of June 30, 1998 and 1997, and the related statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MIPS Technologies, Inc. at
June 30, 1998 and 1997, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1998 in conformity with
generally accepted accounting principles.
/S/ Ernst & Young LLP
San Jose, California
July 20, 1998
21
<PAGE>
MIPS TECHNOLOGIES, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash ........................................................ $ 45 $ --
Accounts receivable ......................................... 250 381
Prepaid expenses and other current assets ................... 618 2,775
--------- ---------
Total current assets .................................... 913 3,156
Equipment and furniture, net .................................. 2,787 15,190
Employee notes receivable ..................................... 996 1,328
--------- ---------
$ 4,696 $ 19,674
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ............................................ $ 3,087 $ 5,834
Accrued liabilities ......................................... 2,356 5,437
Current portion of capital lease obligations ................ -- 331
--------- ---------
Total current liabilities ............................... 5,443 11,602
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $0.001 par value: 150,000,000 shares
authorized; 36,000,000 shares issued and outstanding ...... 36 36
Additional paid-in capital .................................. 120,041 129,236
Accumulated deficit ......................................... (120,824) (121,200)
--------- ---------
Total stockholders' equity (deficit) .................... (747) 8,072
--------- ---------
$ 4,696 $ 19,674
========= =========
</TABLE>
See accompanying notes.
22
<PAGE>
MIPS TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Royalties ............................... $ 55,980 $ 37,192 $ 19,716
Contract revenue ........................ 830 3,115 17,327
-------- -------- --------
Total revenue ....................... 56,810 40,307 37,043
Costs and expenses (see Note 11
regarding related party transactions with
Silicon Graphics):
Cost of contract revenue ................ 375 1,345 5,580
Research and development ................ 43,446 68,827 48,402
Sales and marketing ..................... 5,307 6,170 6,026
General and administrative .............. 4,685 4,750 4,601
Restructuring charge .................... 2,614 -- --
-------- -------- --------
Total costs and expenses ............ 56,427 81,092 64,609
-------- -------- --------
Operating income (loss) ..................... 383 (40,785) (27,566)
Interest expense ............................ (7) (50) (99)
-------- -------- --------
Net income (loss) ........................... $ 376 $(40,835) $(27,665)
======== ======== ========
Net income (loss) per basic and diluted share $ 0.01 $ (1.13) $ (0.77)
======== ======== ========
Common shares outstanding-basic ............. 36,000 36,000 36,000
======== ======== ========
Common shares outstanding-diluted ........... 36,033 36,000 36,000
======== ======== ========
</TABLE>
See accompanying notes.
23
<PAGE>
MIPS TECHNOLOGIES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
Total
Additional Stockholders'
Common Paid-in- Accumulated Equity
Stock Capital Deficit (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)
========= ========= ========= =========
</TABLE>
See accompanying notes.
24
<PAGE>
MIPS TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years ended June 30,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income (loss) ............................................. $ 376 $(40,835) $(27,665)
Adjustments to reconcile net income to cash
provided by (used in) operations:
Depreciation ................................................ 5,044 7,343 8,201
Restructuring charge ........................................ 2,114 -- --
Other non-cash charges ...................................... 362 99 28
Changes in operating assets and liabilities:
Accounts receivable ....................................... 131 146 (218)
Prepaid expenses and other current assets ................. 2,157 (728) (300)
Employee notes receivable ................................. 92 (1,332) --
Accounts payable and accrued liabilities .................. (5,828) 574 (7,214)
-------- -------- --------
Net cash flow provided by (used in) operating activities,
excluding Silicon Graphics financing .................. 4,448 (34,733) (27,168)
Investing activities-- capital expenditures ..................... (2,107) (9,913) (7,257)
Financing activities:
Payments on capital lease obligations ......................... (331) (408) (829)
Net financing provided from (returned to) Silicon Graphics .... (1,965) 45,054 35,254
-------- -------- --------
Net cash provided by (used in) financing activities ..... (2,296) 44,646 34,425
Net increase in cash ............................................ 45 -- --
Cash, beginning of year ......................................... -- -- --
-------- -------- --------
Cash, end of year ............................................... $ 45 $ -- $ --
======== ======== ========
Supplemental disclosures of cash flow information:
Net equipment transferred to Silicon Graphics ............... $ 7,230 $ -- $ --
======== ======== ========
Interest paid ............................................... $ 13 $ 50 $ 99
======== ======== ========
</TABLE>
See accompanying notes.
25
<PAGE>
MIPS Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
Note 1. Formation and Description of Business
Formation of MIPS Technologies, Inc. (the "Company"). In June 1992, Silicon
Graphics formed the Company following the merger of MIPS Computer Systems, Inc.
into Silicon Graphics, which was accounted for as pooling of interests. MIPS
Computer Systems, Inc. was founded in 1984 and was engaged in the design and
development of RISC microprocessors for the computer systems and embedded
markets. Silicon Graphics adopted the MIPS architecture for its computer systems
in 1988 and acquired MIPS Computer Systems, Inc. in 1992. Following the
acquisition, Silicon Graphics continued the MIPS microprocessor business through
its MIPS Group (a division of Silicon Graphics), which focused primarily on the
development of high-performance microprocessors for Silicon Graphics'
workstations and servers. Until the last few years, cost considerations limited
the broader use of these microprocessors. However, as the cost to design and
manufacture microprocessors based on the MIPS technology decreased, the MIPS
Group sought to penetrate the consumer market, both through supporting and
coordinating the efforts of the MIPS semiconductor partners and most notably, by
partnering with Nintendo in its design of the Nintendo 64 video game player and
related cartridges. Revenues related to sales of Nintendo 64 game players and
related cartridges currently account for the substantial majority of the
Company's revenue. In order to increase the focus of the MIPS Group on the
design and development of microprocessor applications dedicated to the embedded
market, in December 1997, Silicon Graphics initiated a plan to separate the
business of the MIPS Group from its other operations.
In April 1998, the Board of Directors of the Company approved a
transaction, pursuant to which, Silicon Graphics transferred to the Company the
assets and liabilities related to the design and development of microprocessor
intellectual property for embedded market applications (the "Separation"). In
connection with the Separation, the Company and Silicon Graphics entered into a
Corporate Agreement that provides for certain pre-emptive rights of Silicon
Graphics to purchase shares of the Company's capital stock, registration rights
related to shares of the Company's capital stock owned by Silicon Graphics and
covenants against certain actions by the Company for as long as Silicon Graphics
owns a majority of the Company's outstanding Common Stock. Furthermore, the
Company and Silicon Graphics entered into a Management Services Agreement
pursuant to which Silicon Graphics will provide certain services to the Company
following the Separation on an interim or transitional basis.
As of June 30, 1998, the Company is a wholly owned subsidiary of Silicon
Graphics.
Basis of Presentation. The accompanying financial statements reflect the
operations of the Company's predecessor, the MIPS Group, through June 30, 1998.
The accompanying balance sheets have been prepared using the historical basis of
accounting and include all of the assets and liabilities specifically
identifiable to the Company and, for certain liabilities that are not
specifically identifiable, estimates have been used to allocate a portion of
Silicon Graphics' liabilities to the Company. Cash management for the Company
has been done by Silicon Graphics on a centralized basis and all cash provided
by Silicon Graphics has been recorded as interest-free financing from Silicon
Graphics in these financial statements.
The statements of operations include all revenue and costs attributable to
the Company, including a corporate allocation of the costs of facilities and
employee benefits. Additionally, incremental corporate administration, finance
and management costs are allocated to the Company based on certain methodologies
that management believes are reasonable under the circumstances (see Note 11).
Note 2. Summary of Significant Accounting Policies
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results inevitably will differ from those
estimates, and such differences may be material to the financial statements.
Revenue Recognition. The Company derives revenue from fees for the transfer
of proven and reusable intellectual property components or the performance of
engineering services to customer specifications. The Company enters into
licensing agreements that provide licensees the right to incorporate the
Company's intellectual property
26
<PAGE>
MIPS Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
components in their products with terms and conditions that have historically
varied by licensee. Generally these agreements include one or more of the
following elements: (i) royalty payments, which are payable upon the sale of a
licensee's products, (ii) nonrefundable technology license fees, which are
payable upon the transfer of intellectual property and (iii) engineering service
fees, which generally are payable upon the Company's achievement of defined
milestones. No upgrades or modifications to a licensed product are provided.
The Company classifies all revenue that involves the future sale of a
licensee's products as royalty revenue. Royalty revenue generally is recognized
in the quarter in which a report is received from a licensee detailing the
shipments of products incorporating the Company's intellectual property
components (i.e., in the quarter following the sale of licensed product by the
licensee). The Company classifies all revenue that does not involve the future
sale of a licensee's products, primarily license fees and engineering service
fees, as contract revenue. License fees are recognized upon the execution of the
license agreement and transfer of intellectual property, provided no further
significant performance obligations exist. Engineering services, which are
performed on a best efforts basis, are recognized as revenue when the defined
milestones are completed and the milestone payment is probable of collection.
Milestones have historically been formulated to correlate with the estimated
level of effort and related costs have been expensed as incurred.
Certain license agreements provide for limited product support that
consists of an identified customer contact at the Company and telephonic or
e-mail product support. Such support arrangements have been insignificant to
date.
Equipment and Furniture. Equipment and furniture are stated at cost and
depreciation is computed using the straight-line method. Useful lives of three
to seven years are used for equipment and furniture and fixtures.
Prepaid Expenses and Other Current Assets. Prepaid expenses and other
current assets consist principally of amounts paid by the Company in advance for
maintenance contracts on its computer-aided software design tools. These
contracts typically cover a one-year period, over which the cost is amortized.
Stock-Based Compensation. The Company has adopted the disclosure
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-based Compensation" ("SFAS 123"). As allowed by SFAS 123, the Company
accounts for stock-based employee compensation arrangements under the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB25"). As a result, no expense
had been recognized for options to purchase common stock of Silicon Graphics
(prior to the Separation) or of the Company granted with an exercise price equal
to fair market value at the date of grant or in connection with the Silicon
Graphics stock purchase plan prior to the Separation (see Note 10). For Silicon
Graphics stock options that were granted and restricted Silicon Graphics common
stock issued at discounted prices, the Company recognizes compensation expense
over the vesting period for the difference between the exercise or purchase
price and the fair market value on the measurement date.
Earnings per Share. The Company follows the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS
128 requires the presentation of basic and fully diluted earnings per share.
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares that were
outstanding during the period. Diluted earnings per share is computed giving
effect to all dilutive potential common shares that were outstanding for any
periods presented in these financial statements. The Company effected a
360,000-for-one split of its common stock in May 1998 (see Note 10), and
accordingly, the Company has presented share and net income (loss) per share
data in the financial statements giving effect to that split.
27
<PAGE>
MIPS Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Years ended June 30,
---------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Net income (loss) available to common stockholders . $ 376 $(40,835) $(27,665)
======== ======== ========
Denominator:
Shares used in computing basic net income (loss)
per share-weighted-average shares ................ 36,000 36,000 36,000
Effect of dilutive securities-employee stock options 33 -- --
-------- -------- --------
Shares used in computing diluted net income (loss)
per share-adjusted weighted-average shares and
common share equivalents ......................... 36,033 36,000 36,000
======== ======== ========
Basic net income (loss) per share .................. $ 0.01 $ (1.13) $ (0.77)
Diluted net income (loss) per share ................ $ 0.01 $ (1.13) $ (0.77)
</TABLE>
Recent Accounting Pronouncements. In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"), and No. 131, "Disclosures
Segments of an Enterprise and Related Information" ("SFAS 131"), collectively
the "Statements." The Company is required to adopt these Statements in fiscal
1999. SFAS 130 establishes new standards for reporting and displaying
comprehensive income and its components. SFAS 131 requires disclosure of certain
information regarding operating segments, products and services, geographic
areas of operation and major customers. Adoption of these Statements is expected
to have no impact on the Company's results of operations or financial condition.
In March 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS 132"). SFAS 132 does not change the recognition or measurement
of pension or postretirement benefit plans, but revises and standardizes
disclosure requirements for pensions and other postretirement benefits. The
adoption of SFAS 132 in fiscal 1999 will have no impact on the Company's results
of operations or financial condition.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Financial Instruments and for Hedging
Activities" ("SFAS 133"), which provides comprehensive and consistent standard
for the recognition and measurement of derivatives and hedging activities. The
Company is required to adopt SFAS 133 in fiscal 2000 and it is not anticipated
to have an impact on the Company's results of operations or financial condition
when adopted.
Note 3. Business Risk and Customer Concentration
The Company operates in the intensely competitive semiconductor industry,
which has been characterized by price erosion, rapid technological change, short
product life cycles, cyclical market patterns and heightened foreign and
domestic competition. Significant technological changes in the industry could
affect operating results adversely. Due to the Company's focus on microprocessor
designs dedicated to the embedded market, including digital consumer products,
the Company expects to experience seasonal fluctuations in its revenue and
operating results.
The Company markets and licenses its technology to a limited number of
customers and generally does not require collateral. At June 30, 1998 and 1997,
one customer accounted for 100% of accounts receivable. During the years ended
June 30, 1998 and 1997, revenue from two customers represented an aggregate of
88% and 85% of total revenue, respectively, and during the year ended June 30,
1996, revenue from three customers represented an aggregate of 72% of total
revenue. The Company expects that a significant portion of its future revenue
will continue to be generated by a limited number of customers. The nonrenewal
or expiration of contracts between the Company and its current customers could
adversely affect near-term future operating results.
28
<PAGE>
MIPS Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
A substantial portion of the Company's revenue is derived from customers
outside the United States (see Note 13). The Company anticipates that revenue
from international customers will continue to represent a substantial portion of
its total revenue. To date, substantially all of the revenue from international
customers has been denominated in U.S. dollars. However, to the extent that
sales to digital consumer product manufacturers by the Company's manufacturing
partners are denominated in foreign currencies, royalties received by the
Company on such sales could be subject to fluctuations in currency exchange
rates. In addition, if the effective price of the technology sold by the Company
to its partners were to increase as a result of fluctuations in foreign currency
exchange rates, demand for the Company's technology could fall which would, in
turn, reduce the Company's revenues. The relative significance of the Company's
international operations exposes it to a number of additional risks including
political and economic instability, longer accounts receivable collection
periods and greater difficulty in collection of accounts receivable, reduced or
limited protection for intellectual property, export license requirements,
tariffs and other trade barriers and potentially adverse tax consequences. There
can be no assurance that the Company will be able to sustain revenue derived
from international customers or that the foregoing factors will not have a
material adverse effect on the Company's business, operating results and
financial condition.
Note 4. Restructuring Charge
The restructuring charge recorded in fiscal 1998 includes approximately
$500,000 in severance and related costs (17 employees, a majority of which
supported research and development activities) and $2.1 million in fixed asset
write-downs related to the Company's shift in strategic direction. Substantially
all the severance and related costs were paid and 16 employees were terminated
as of June 30, 1998.
Note 5. Employee Notes Receivable
The Company has loans outstanding to employees and an officer. Such loans
are payable upon maturity and have terms ranging from three to five years.
Approximately $432,000 and $776,000 of these loans at June 30, 1998 and 1997,
respectively, relate to loans that are forgiven by the Company on a periodic
basis as the employees or officer remains employed by the Company. Loan
forgiveness charged to expense was approximately $240,000, $99,000 and $28,000
in fiscal 1998, 1997 and 1996, respectively. Upon termination of employment, the
unamortized balance of the loans becomes due. Such forgivable loans bear no
interest. The remaining employee loans bear interest at rates ranging from 7.19%
to 7.25% and are due on dates ranging from September 1999 to March 2002.
Note 6. Equipment and Furniture
The components of equipment and furniture are as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
------------------------
1998 1997
-------- --------
<S> <C> <C>
Equipment ............................ $ 7,990 $ 45,918
Equipment under capital lease ........ -- 1,198
Furniture and fixtures ............... 421 516
-------- --------
8,411 47,632
Accumulated depreciation ............. (5,624) (32,442)
-------- --------
Equipment and furniture, net ......... $ 2,787 $ 15,190
======== ========
Note 7. Accrued Liabilities
The components of accrued liabilities are as follows (in thousands):
June 30,
------------------------
1998 1997
-------- --------
Accrued compensation and
employee-related expenses ......... $ 194 $ 4,163
Development and marketing funds ...... 1,555 1,053
Other accrued liabilities ............ 607 221
-------- --------
$ 2,356 $ 5,437
======== ========
</TABLE>
29
<PAGE>
MIPS Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
Accrued compensation and employee-related expenses at June 30, 1997 include
approximately $1.6 million in accrued vacation and $1.2 million in accrued
employee relocation expenses. In connection with the Separation, all accrued
vacation amounts as of May 31, 1998 were paid to the Company's employees. The
amount accrued at June 30, 1998 represents accrued vacation costs from June 1,
1998 to June 30, 1998. The development and marketing funds represent amounts
received from certain of the Company's customers to be used in joint development
and marketing programs.
Note 8. Capital Lease Obligations
The Company's capital lease obligations pertaining to leased equipment
matured in fiscal 1998.
Note 9. Income Taxes
The net income and losses incurred in fiscal years 1998, 1997 and 1996 are
primarily attributable to the operations of the Company as a division of Silicon
Graphics and were included in the income tax returns filed by Silicon Graphics.
In light of both historical losses incurred, as well as the fact that, by
operation of the tax sharing agreement, the Company will not receive any benefit
for losses incurred or have any tax liability for any income earned up to the
closing of the initial public offering, no income tax provision or benefit has
been reflected for the periods presented.
Subsequent to the closing of the initial public offering, the Company,
while still a part of Silicon Graphics' consolidated group for federal income
tax purposes, is responsible for its income taxes through a tax sharing
agreement with Silicon Graphics. Therefore, to the extent the Company produces
taxable income, losses or credits, it will make or receive payments as though it
filed separate federal, state and local income tax returns.
The Company and Silicon Graphics have entered into a tax sharing agreement
pursuant to which they will make payments between them such that, with respect
to any period, the amount of taxes to be paid by the Company, subject to certain
adjustments, will be determined as though the Company were to file separate
federal, state and local income tax returns.
In general, the Company will be included in Silicon Graphics' consolidated
group for federal income tax purposes for so long as Silicon Graphics
beneficially owns at least 80% of the total voting power and value of the
outstanding common stock.
At June 30, 1998 and 1997, the Company's deferred tax assets and the
related valuation allowance were immaterial.
Note 10. Stockholders' Equity
In May 1998, the Board of Directors of the Company authorized and the
Company's Stockholder later approved a 360,000-for-one stock split of the
Company's common stock and an amendment to the Company's Certificate of
Incorporation for an increase in the number of authorized shares of common stock
to 150,000,000 shares. All prior year financial statements have been restated to
effect the stock split.
1998 Long-Term Incentive Plan. The 1998 Long-Term Incentive Plan (the
"Plan") was adopted by the Board of Directors of the Company and approved by the
Company's Stockholder in May 1998. The Plan authorized the issuance of various
forms of stock-based awards including incentive and non-qualified stock options,
stock appreciation rights, stock awards and performance unit awards to officers
and other key employees and consultants. Stock options are granted at an
exercise price of not less than the fair value on the date of grant; the prices
of other stock awards are determined by the Board of Directors. Stock options
generally vest over a fifty-month period from the date of grant. An aggregate of
6,600,000 shares of common stock may be issued under the Plan and are reserved
for future issuance.
30
<PAGE>
MIPS Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
The stock option activity under the Plan is summarized as follows:
<TABLE>
<CAPTION>
Outstanding Options
------------------------------
Shares available Number of Weighted Average
for Grant Shares Exercise Price
----------- -------- ---------------
<S> <C> <C> <C>
Balance at July 1, 1997 .............. -- -- --
Shares authorized for issuance ....... 6,600,000 -- --
Options granted ...................... (2,996,900) 2,996,900 $ 12.00
Balance at June 30, 1998 ............. 3,603,100 2,996,900 $ 12.00
========== =========
</TABLE>
At June 30, 1998, the weighted average contractual life of the options
outstanding was 10 years. There are no options exercisable at June 30, 1998.
Employee Stock Purchase Plan. The Employee Stock Purchase Plan (the
"Purchase Plan") was adopted by the Board of Directors of the Company and
approved by the Company's Stockholder in May 1998. The purpose of the Purchase
Plan is to provide employees of the Company who participate in the Purchase Plan
with an opportunity to purchase common stock of the Company through payroll
deductions. Under this Purchase Plan eligible employees may purchase stock at
85% of the lower of the fair market value of the Common Stock (a) on the date of
commencement of the offering period or (b) the applicable exercise date within
such offering period. A 24-month offering period commences every six months,
generally at May 1 and November 1 of each year. The offering period is divided
into four six month exercise periods. The exercise date is the last day of the
particular six month exercise period within the offering period. If the fair
market value of the Company's Common Stock on the first day of any exercise
period is less than on the first day of that offering period, all employees
participating in the Purchase Plan on the first day of such exercise period will
be deemed to have withdrawn from the offering period on the first day of such
exercise period and to have enrolled in the new offering period commencing on
that date. Purchases are limited to 10% of each employee's eligible
compensation. At June 30, 1998 no shares have been issued to employees of the
Company under the Purchase Plan. Presently 600,000 shares of Common Stock are
reserved for future issuances under the Purchase Plan, and in addition there
will be an amount added annually on July 1 of each year equal to the lesser of
one-half of one percent of the outstanding shares of Common Stock on a fully
diluted basis or 600,000 shares or a lesser amount as determined by the Board.
Directors' Stock Option Plan. The Board of Directors of the Company adopted
and the Company's Stockholder approved the Directors' Stock Option Plan (the
"Director Plan") in July 1998. The plan authorizes 600,000 shares of Common
Stock for issuance plus an annual increase each July 1st equal to the lesser of
(i) 100,000 shares, (ii) the number of shares subject to option granted in the
prior one year period, or (iii) a lesser amount determined by the Board. Upon a
non-employee director's election or appointment to the Board, he or she will
automatically receive a non-statutory stock option to purchase 40,000 shares of
Common Stock. Each director who has been a non-employee director for at least
six months will automatically receive a non-statutory stock option to purchase
10,000 shares of Common Stock each year on the date of the annual stockholder
meeting. All stock options are granted an exercise price equal to the fair
market value of the Company's Common Stock on the date of grant. Stock options
generally vest over a 50-month period from the date of the grant. As of June 30,
1998, no shares had been issued to directors of the Company under the Director
Plan.
Non-U.S. Stock Purchase Plan. The Non-U.S. Stock Purchase Plan (the
"Non-U.S. Purchase Plan") was adopted by the Board in July 1998. The purpose of
the Non-U.S. Purchase Plan is to provide employees and consultants of the
Company who do not provide services in the United States and who participate in
the Non-U.S. Purchase Plan with an opportunity to purchase Common Stock of the
Company at the same discount and subject to the same general rules as the
Company's Employees Stock Purchase Plan. The Non-U.S. Purchase Plan, like the
Purchase Plan, has 24-month offering periods commencing every six months and
each offering period is divided into four six-month exercise periods. Purchases
are limited to ten percent of each employee's and consultant's eligible
compensation. As of June 30, 1998, no shares had been issued to employees or
consultants of the Company under the Non-U.S. Purchase Plan and 60,000 shares of
Common Stock are reserved for issuance.
31
<PAGE>
MIPS Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
Silicon Graphics Stock Award Plans. While employees of Silicon Graphics,
certain employees of the Company were granted options to purchase Silicon
Graphics common stock and were awarded restricted shares of Silicon Graphics
common stock. In addition, certain employees of the Company purchased Silicon
Graphics common stock through the Silicon Graphics stock purchase plan. In
connection with their acceptance of employment with the Company, employees of
the Company previously employed by Silicon Graphics have mutually agreed with
Silicon Graphics that all unvested options to purchase Silicon Graphics common
stock and unvested restricted shares of Silicon Graphics common stock will be
forfeited. In addition, such individuals have 30 or 90 days from May 29, 1998
(depending on the terms of the option grant) to exercise any vested options to
purchase Silicon Graphics common stock, and any vested options that are not
exercised will be forfeited.
Silicon Graphics has various stock award plans, which provide for the grant
of incentive and nonstatutory stock options and the issuance of restricted stock
to employees. Incentive stock options are granted at not less than the fair
market value on the date of grant; the prices of nonstatutory stock option
grants and restricted stock were determined by the board of directors of Silicon
Graphics. Under the plans, options and restricted stock generally vest over a
fifty-month period from the date of grant.
Silicon Graphics stock option activity related to employees of the Company
is summarized as follows:
<TABLE>
<CAPTION>
Outstanding Options
------------------------------
Number of Weighted Average
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
Range of Number of Contractual Life Weighted-Average
Exercise Price Shares (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>
Shares of restricted Silicon Graphics common stock awarded to employees of
the Company in fiscal 1998, 1997 and 1996 were 27,000 shares, 83,500 shares and
40,000 shares, respectively.
At June 30, 1998, 1997 and 1996 there were 130,559, 480,629 and 856,711
exercisable options to purchase Silicon Graphics common stock held by employees
of the Company, respectively. At June 30, 1998, there were no shares of
restricted Silicon Graphics stock held by employees of the Company. At June 30,
1997 and 1996, 50,125
32
<PAGE>
MIPS Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
and 35,000 shares of restricted Silicon Graphics stock held by employees of the
Company were subject to repurchase, respectively.
Silicon Graphics Stock Purchase Plan. Silicon Graphics has an employee
stock purchase plan under which eligible employees may purchase stock at 85% of
the lower of the closing prices for the stock at the beginning of a twenty
four-month offering period or the end of each six-month purchase period. The
Purchase periods generally begin in May and November. Purchases are limited to
10% of each employee's compensation. Shares issued to employees of the Company
under this Plan in fiscal 1998, 1997 and 1996 were 101,292 shares, 135,808
shares and 76,084 shares, respectively. Former employees of Silicon Graphics are
not eligible to participate in this Plan after their acceptance of employment
with the Company.
Grant Date Fair Values. The weighted average estimated fair value of
Silicon Graphics employee stock options granted at grant date market prices
during fiscal 1998, 1997 and 1996 was $6.02, $8.08 and $11.32 per share,
respectively. The weighted average exercise price of Silicon Graphics employee
stock options granted at grant date market prices during fiscal 1998, 1997 and
1996 was $14.89, $20.70 and $29.66 per share, respectively. The weighted average
estimated fair value of Silicon Graphics employee stock options granted at below
grant date market prices during fiscal 1997 and 1996 was $13.09 and $17.07 per
share, respectively. The weighted average exercise price of Silicon Graphics
employee stock options granted at below grant date market prices during 1997 and
1996 was $15.65 and $21.35 per share, respectively. There were no Silicon
Graphics options granted at below grant date market price during fiscal 1998.
The weighted average estimated fair value of Silicon Graphics restricted stock
granted during fiscal 1998, 1997 and 1996 was $24.37, $23.37 and $27.30 per
share, respectively. The weighted average estimated fair value of shares granted
under the Silicon Graphics stock purchase plan during fiscal 1998, 1997 and 1996
was $6.88, $7.85 and $15.09 per share, respectively.
The weighted average estimated fair value of the Company's employee stock
options granted at grant date market prices during fiscal 1998 was $8.71 per
share.
The weighted average fair value of Silicon Graphics options granted has
been estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions:
<TABLE>
<CAPTION>
Employee Stock Options Stock Purchase Plan Shares
---------------------------- ----------------------------
Years Ended June 30, Years Ended June 30,
---------------------------- ----------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life (in years) ............... 2.7 2.7 3.8 0.5 0.5 0.5
Risk-free interest rate ................ 5.74% 6.38% 5.18% 5.72% 5.45% 5.49%
Volatility ............................. 0.61 0.50 0.45 0.79 0.57 0.45
Dividend yield ......................... 0% 0% 0% 0% 0% 0%
</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>
Employee Stock Options
Year Ended June 30, 1998
------------------------
<S> <C>
Expected life (in years) ...................... 5.0
Risk-free interest rate ....................... 5.66%
Volatility .................................... 0.70
Dividend yield ................................ 0%
</TABLE>
Pro Forma Information. The Company has elected to follow APB 25 in
accounting for its employee stock options to purchase both Silicon Graphics and
the Company's common stock. Under APB 25, no compensation expense is recognized
in the Company's financial statements except in connection with the granting of
restricted
33
<PAGE>
MIPS Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
stock for nominal consideration and unless the exercise price of the employee
stock options is less than the market price of the underlying stock on the date
of grant. Total compensation expense recognized in the Company's financial
statements for stock-based awards under APB 25 for fiscal 1998, 1997 and 1996
was $1.0 million, $1.7 million and $0.5 million, respectively.
Pro forma information regarding net loss and loss per share has been
determined as if the Company had accounted for Silicon Graphics and its employee
stock options and employee stock purchase plans under the fair value method
prescribed by SFAS 123. For purposes of pro forma disclosures, the estimated
fair value of the stock awards is amortized to expense over the vesting periods
of such awards.
The Company's pro forma information is as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
Pro forma net loss ............................ $ (738) $ (46,228) $ (30,041)
Pro forma basic and diluted net loss per share $ (0.02) $ (1.28) $ (0.83)
</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 from Silicon Graphics
and the establishment of the Company's Plans during 1998.
Note 11. Related Party Transactions
Funding. The Company has utilized Silicon Graphics' centralized cash
management services and processes related to receivables, payables, payroll and
other activities. The Company's net cash requirements have been funded by
Silicon Graphics. Net financing provided to the Company by Silicon Graphics in
fiscal 1997 and 1996 was approximately $45.1 million and $35.3 million,
respectively. There was a net return of capital to Silicon Graphics by the
Company of approximately $9.2 million in fiscal 1998. The average balance due to
Silicon Graphics during fiscal 1998, 1997 and 1996 was approximately $125
million, $107 million and $67 million, respectively.
Corporate Services. Silicon Graphics allocates a portion of its domestic
corporate expenses to its divisions, including the Company. In addition, in
accordance with Staff Accounting Bulletin No. 55, certain additional allocations
have been reflected in these financial statements. These expenses have included
corporate communications, management, compensation and benefits administration,
payroll, accounts payable, income tax compliance, treasury and other
administration and finance overhead. Allocations and charges were based on
either a direct cost pass-through or a percentage allocation for such services
provided based on factors such as net sales, headcount and relative expenditure
levels. Such allocations and corporate charges totaled $8.5 million, $11.0
million and $9.0 million for the years ended June 30, 1998, 1997 and 1996,
respectively.
In June 1998, the Company and Silicon Graphics has entered into the
Management Services Agreement, pursuant to which Silicon Graphics will provide
certain administrative and corporate support services to the Company on an
interim or transitional basis, including accounting, treasury, tax, facilities
and information services. Specified charges for such services are generally
intended to allow Silicon Graphics to recover the fully allocated direct costs
of providing the services, plus all out-of-pocket costs and expenses, but
without any profit. The Management Services Agreement will have a three-year
term and will be subject to automatic termination at such time as Silicon
Graphics' beneficial ownership interest in the Company's outstanding common
stock ceases to exceed 50%. In addition, either Silicon Graphics or the Company
may terminate the Management Services Agreement with respect to one or more of
the services provided thereunder upon giving at least 30 days prior written
notice to the other party.
Management believes that the basis used for allocating corporate services
is reasonable. While the terms of these transactions may differ from those that
would result from transactions among unrelated parties, management does not
believe such differences would be material.
34
<PAGE>
MIPS Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
Facilities. The Company's executive, administrative and technical offices
currently occupy space in a building subleased from Silicon Graphics in Mountain
View, California. Payments by the Company to Silicon Graphics under this
sublease are expected to be $611,000, $743,000, $776,000 and $741,000 in fiscal
years 1999, 2000, 2001 and 2002, respectively. The sublease will terminate on
May 31, 2002, subject to earlier termination in certain circumstances.
Note 12. Contingencies
In February 1998, the Company received a notice asserting that the R10000
microprocessor and potentially other microprocessors designed by the Company
allegedly infringe a patent originally assigned to Control Data Corporation. The
Company is evaluating these claims.
From time to time, the Company receives communications from third parties
asserting patent or other rights covering the Company's products and
technologies. Based upon the Company's evaluation, it may take no action or it
may seek to obtain a license. There can be no assurance in any given case that a
license will be available on terms the Company considers reasonable, or that
litigation will not ensue.
Management is not aware of any pending disputes that would be likely to
have a material adverse effect on the Company's business, results of operations
or financial condition.
Note 13. Industry and Geographic Segment Information
The Company operates in one industry segment. The Company's revenue by
geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
United States ........... $ 5,621 $ 5,066 $ 6,123
Japan ................... 50,939 35,241 22,620
Europe .................. 250 -- 6,300
Rest of World ........... -- -- 2,000
------- ------- -------
Total revenue ........... $56,810 $40,307 $37,043
======= ======= =======
</TABLE>
Note 14. Subsequent Events
On July 6, 1998, the Company completed its initial public offering of
5,500,000 shares of its common stock pursuant to a Registration Statement on
Form S-1 (File No. 333-50643) declared effective by the Securities and Exchange
Commission on June 29, 1998. The offering consisted of the sale of 4,250,000
shares of common stock by Silicon Graphics for net proceeds of approximately
$55.3 million and 1,250,000 shares of common stock by the Company for net
proceeds of $16.0 million. Upon completion of the Offering there were 37,250,000
shares of common stock outstanding.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
35
<PAGE>
EXHIBIT 99.2
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACTS OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM
TO .
COMMISSION FILE NUMBER 000-24487
MIPS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0322161
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
1225 CHARLESTON ROAD, MOUNTAIN VIEW, CA 94043-1353
(Address of principal executive offices)
Registrants' telephone number, including area code: (650) 567-5000
__________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
The number of outstanding shares of the Registrant's Common
Stock, $.001 par value, was 37,265,000 as of October 31, 1998.
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MIPS TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998(1)
------------- --------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............... $21,043 $ 45
Accounts receivable ..................... 1,309 250
Prepaid expenses and other current assets 585 618
---------- --------
Total current assets ............... 22,937 913
Equipment and furniture, net ................. 2,549 2,787
Other assets ................................. 1,081 996
---------- --------
$26,567 $ 4,696
---------- --------
---------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ....................... $ 3,083 $ 3,087
Accrued liabilities .................... 4,711 2,356
---------- --------
Total current liabilities ......... 7,794 5,443
Deferred revenue, less current portion ...... 375 --
Total stockholders' equity (deficit) ........ 18,398 (747)
---------- --------
$26,567 $ 4,696
---------- --------
---------- --------
</TABLE>
The balance sheet at June 30, 1998 has been derived from audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
3
<PAGE>
MIPS TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1997
------- -------
<S> <C> <C>
Revenue:
Royalties .................................... $11,611 $14,287
Contract revenue ............................. 650 750
------- -------
Total revenue ........................... 12,261 15,037
Costs and expenses:
Cost of contract revenue ..................... -- 375
Research and development ..................... 4,552 17,338
Sales and marketing .......................... 1,289 1,448
General and administrative ................... 1,135 1,257
------- -------
Total costs and expenses ................ 6,976 20,418
------- -------
Operating income (loss) ........................... 5,285 (5,381)
Interest income (expense), net .................... 170 (7)
------- -------
Income (loss) before income taxes ................. 5,455 (5,388)
Provision for income taxes ........................ 2,182 --
------- -------
Net income (loss) ................................. $ 3,273 $(5,388)
------- -------
------- -------
Net income (loss) per share -- basic and diluted ... $ 0.09 $ (0.15)
------- -------
------- -------
Common shares outstanding -- basic ................. 37,250 36,000
------- -------
------- -------
Common shares outstanding -- diluted ............... 38,009 36,000
------- -------
------- -------
</TABLE>
See accompanying notes.
4
<PAGE>
MIPS TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Operating activities:
Net income (loss) ...................................................... $ 3,273 $ (5,388)
Adjustments to reconcile net income (loss) to cash provided by (used
in) operations:
Depreciation ..................................................... 523 1,531
Other non-cash charges ........................................... 42 58
Changes in operating assets and liabilities:
Accounts receivable ........................................... (1,059) 381
Prepaid expenses and other current assets ..................... 33 (767)
Other assets .................................................. (127) (10)
Accounts payable .............................................. (4) (27)
Accrued liabilities ........................................... 2,322 (885)
Deferred revenue .............................................. 408 --
--------- ---------
Net cash flow provided by (used in) operating activities,
excluding Silicon Graphics financing ....................... 5,411 (5,107)
Investing activities -- capital expenditures ................................. (285) (180)
Financing activities:
Net proceeds from issuance of common stock ............................. 15,872 --
Payments on capital lease obligations .................................. -- (109)
Financing provided from Silicon Graphics ............................... -- 5,396
--------- ---------
Net cash provided by financing activities ......................... 15,872 5,287
Net increase in cash ........................................................ 20,998 --
Cash and cash equivalents, beginning of period .............................. 45 --
--------- ---------
Cash and cash equivalents, end of period ..................................... $ 21,043 $ --
--------- ---------
--------- ---------
Supplemental disclosures of cash flow information:
Interest paid .......................................................... $ -- $ 7
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
5
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. FORMATION AND DESCRIPTION OF BUSINESS
FORMATION OF MIPS TECHNOLOGIES, INC. (THE "COMPANY"). In June 1992,
Silicon Graphics formed the Company following the merger of MIPS Computer
Systems, Inc. into Silicon Graphics, which was accounted for as pooling of
interests. MIPS Computer Systems, Inc. was founded in 1984 and was engaged
in the design and development of RISC microprocessors for the computer
systems and embedded markets. Silicon Graphics adopted the MIPS architecture
for its computer systems in 1988 and acquired MIPS Computer Systems, Inc. in
1992. Following the acquisition, Silicon Graphics continued the MIPS
microprocessor business through its MIPS Group (a division of Silicon
Graphics), which focused primarily on the development of high-performance
microprocessors for Silicon Graphics' workstations and servers. Until the
last few years, cost considerations limited the broader use of these
microprocessors. However, as the cost to design and manufacture
microprocessors based on the MIPS technology decreased, the MIPS Group sought
to penetrate the consumer market, both through supporting and coordinating
the efforts of the MIPS semiconductor partners and most notably, by
partnering with Nintendo in its design of the Nintendo 64 video game player
and related cartridges. Revenues related to sales of Nintendo 64 game players
and related cartridges currently account for the substantial majority of the
Company's revenue. In order to increase the focus of the MIPS Group on the
design and development of microprocessor applications dedicated to the
embedded market, in December 1997, Silicon Graphics initiated a plan to
separate the business of the MIPS Group from its other operations.
In April 1998, the Board of Directors of the Company approved a
transaction, pursuant to which, Silicon Graphics transferred to the Company
the assets and liabilities related to the design and development of
microprocessor intellectual property for embedded market applications (the
"Separation"). In connection with the Separation, the Company and Silicon
Graphics entered into a Corporate Agreement that provides for certain
pre-emptive rights of Silicon Graphics to purchase shares of the Company's
capital stock, registration rights related to shares of the Company's capital
stock owned by Silicon Graphics and covenants against certain actions by the
Company for as long as Silicon Graphics owns a majority of the Company's
outstanding Common Stock. Furthermore, the Company and Silicon Graphics
entered into a Management Services Agreement pursuant to which Silicon
Graphics provides certain services to the Company followed the Separation on
an interim or transitional basis.
As of the closing of the Company's initial public offering (the
"Offering"), on July 6, 1998, the Company was a majority owned subsidiary of
Silicon Graphics.
BASIS OF PRESENTATION. The accompanying financial statements, through
June 30, 1998, reflect the operations of the Company's predecessor, the MIPS
Group. Subsequent to June 30, 1998, the Company operated as a stand-alone
company, MIPS Technologies, Inc.
The accompanying balance sheets have been prepared using the historical
basis of accounting and include all of the assets and liabilities
specifically identifiable to the Company and, for certain liabilities that
are not specifically identifiable, estimates have been used to allocate a
portion of Silicon Graphics' liabilities to the Company. Through June 30,
1998, cash management for the Company had been done by Silicon Graphics on a
centralized basis and all cash provided by Silicon Graphics has been recorded
as interest-free financing from Silicon Graphics. The statement of operations
for the three months ended September 30, 1998 and 1997 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.
6
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
The unaudited results of operations for the interim periods shown herein
are not necessarily indicative of operating results for the entire fiscal
year. In the opinion of management, the condensed financial statements
include all adjustments (consisting only of normal recurring accruals)
necessary to present fairly the financial position, results of operations and
cash flow for each interim period shown.
The condensed financial statements have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission
(SEC) applicable to interim financial information. Certain information and
footnote disclosures included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted in these
interim statements pursuant to such SEC rules and regulations. The unaudited
condensed financial statements included in this Form 10-Q should be read in
conjunction with the audited financial statements and notes thereto, for the
fiscal year ended June 30, 1998, included in the Company's 1998 Annual Report
on Form 10-K.
NOTE 2. COMPUTATION OF EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months ended
September 30,
---------- ----------
1998 1997
---------- ----------
<S> <C> <C>
Net income (loss)............................................... $3,273 $(5,388)
---------- ----------
---------- ----------
Weighted-average shares outstanding -- basic.................... 37,250 36,000
Effect of dilutive securities -- employee stock options......... 759 --
---------- ----------
Weighted-average shares outstanding -- diluted.................. 38,009 36,000
---------- ----------
---------- ----------
Net income (loss) per share -- basic............................ $ 0.09 $ (0.15)
---------- ----------
---------- ----------
Net income (loss) per share -- diluted.......................... $ 0.09 $ (0.15)
---------- ----------
---------- ----------
</TABLE>
7
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. NEW ACCOUNTING PRONOUNCEMENTS
During fiscal 1999, the Company adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130").
There was no impact to the Company as a result of the adoption of SFAS 130,
as there is no difference between the Company's reported net income (loss)
and the comprehensive net income (loss) under SFAS 130 for the periods
presented.
In June 1997, the Financial Accounting and Standards Board issued
Statement of Financial Accounting Standards No. 131 "Disclosures about
segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 is
effective for the fiscal year ending June 30, 1999 and establishes standards
for disclosure about products, geography and major customers. The adoption
of SFAS 131 will have no impact on the Company's results of operation and
financial condition. The Company expects that implementation of this standard
will not have material effect on its annual financial statement disclosures.
NOTE 4. CONTINGENCIES
On April 6, 1998, the Company and Silicon Graphics filed an action against
ArtX, Inc. and certain employees of ArtX, Inc. in the Superior Court of the
State of California alleging, among other things, misappropriation of trade
secrets and breach of contractual and fiduciary duties in connection with the
defendants' actions in developing graphics technology for Nintendo's next
generation video game system. On April 23, 1998, Nintendo notified Silicon
Graphics and the Company of its belief that the disclosure in the Company's
registration statement filed with the Securities and Exchange Commission on
April 21, 1998 of certain information regarding the contract for the
development of the Nintendo 64 video game system constituted a breach of that
contract. Silicon Graphics and the Company strongly disagree that any such
breach has occurred. On May 27, 1998, Silicon Graphics, the Company,
Nintendo and ArtX, Inc. entered into a memorandum of understanding pursuant
to which the companies have engaged in discussions relating to a possible
mutually beneficial business relationship. On the basis of this
understanding, Silicon Graphics and the Company have dismissed without
prejudice the pending lawsuit against ArtX, Inc., and Nintendo has agreed
that, in the absence of a lawsuit against Nintendo or ArtX, Inc., it will not
assert any claim that the Nintendo 64 contract has been breached in
connection with the filing of the Company's registration statement.
On April 10, 1998, the Company filed an action against Lexra, Inc.,
a Massachusetts company ("Lexra"), in the United States District Court for
the Northern District of California, asserting claims for false
advertisement, trademark infringement, trademark dilution and unfair
competition. This lawsuit arose out of Lexra's claim that its newly
introduced product offering is "MIPS compatible." Lexra does not have a
license from the Company to use its intellectual property in connection with
any Lexra products. In the suit, the Company sought injunctive relief as
well as monetary damages. In May 1998, Lexra filed an answer and
counterclaim seeking to cancel certain of the Company's trademarks. In
September 1998, the Company has entered into a memorandum of understanding
(MOU) with Lexra, Inc. In the MOU, among other things, Lexra will no longer
state that its products are "MIPS compatible". Lexra's counterclaims has
also been dismissed. The Company is continuing to evaluate possible patent
infringement claims against Lexra and will assert such claims if appropriate.
In February 1998, the Company received a notice asserting that the
R10000 microprocessor and potentially other microprocessors designed by the
Company allegedly infringe a patent originally assigned to Control Data
Corporation. The Company is evaluating these claims.
From time to time, the Company receives communications from third
parties asserting patent or other rights covering the Company's products and
technologies. Based upon the Company's evaluation, it may take no action or
it may seek to obtain a license. There can be no assurance in any given case
that a license will be available on terms the
8
<PAGE>
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 5. RELATED PARTY TRANSACTIONS
At September 30, 1998, accounts payable includes approximately $1.4
million payable to Silicon Graphics relating to payments made by Silicon
Graphics to vendors on behalf of the Company.
At September 30, 1998 accrued liabilities includes approximately $1.1
million taxes payable to Silicon Graphics in accordance with the tax sharing
agreement pursuant to which the Company and Silicon Graphics will make
payments to each other such that, with respect to any period, the amount of
taxes to be paid by the Company, subject to certain adjustments, will be
determined as though the Company were to file separate federal, state and
local income tax return.
During the quarter ended September 30, 1997, the Company was operating
as a division of Silicon Graphics and was utilizing its centralized cash
management services and processes relating to accounts payable and accrued
liabilities. The Company's net cash requirements then were funded by Silicon
Graphics.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT.
Except for the historical information contained in this quarterly report on
Form 10-Q, the matters discussed herein may contain forward-looking
statements that are subject to certain risks and uncertainties that could
cause the Company's actual results to differ materially from those expressed
or implied by such forward-looking statements. Factors that could cause such
differences include, but are not limited to, Year 2000 compliance and other
risks identified herein under "Factors That May Affect Our Business," and
other risks included from time to time in the Company's other Securities and
Exchange Commission ("SEC") reports and press releases, copies of which are
available from the Company upon request. The forward-looking statements
within this Quarterly Report on Form 10-Q are identified by words such as
"believes", "anticipates", "expects", "intends", "may" and other similar
expressions. However, these words are not the exclusive means of identifying
such statements. The Company assumes no obligation to update any
forward-looking statements contained herein.
RESULTS OF OPERATIONS
REVENUE. The Company's revenue consists of royalties and contract revenue
earned under contracts with its licensees. The Company generates royalties
from the sale by semiconductor manufacturers of products incorporating the
Company's technology. The Company also receives royalties from Nintendo
relating to sales of Nintendo 64 video game players and related cartridges.
Royalties may be calculated as a percentage of the revenue received by the
seller on sales of such products or on a per unit basis. Contract revenue
includes technology license fees and engineering service fees earned
primarily under contracts with the Company's semiconductor manufacturing
partners.
Total revenue decreased by $2.8 million to $12.3 million for the three
months ended September 30, 1998 from $15.0 million for the comparable period
in 1997. The decrease in revenue was attributable to the absence of
royalties from the graphics chip included in the Nintendo 64 game player,
which reached its cap in the first half of fiscal 1998. The decrease was
offset in part by an increase in royalties generated from game cartridge
sales by Nintendo. Contract revenue consisted principally of license fees
for the three months ended September 30, 1998 and 1997 and remained
relatively flat quarter over quarter.
COST OF CONTRACT REVENUE. Cost of contract revenue decreased to zero for
the three months ended September 30, 1998 from $375,000 for the comparable
period in 1997. Cost of contract revenue in the first quarter of fiscal 1998
was attributable to sublicense fees, such fees were not payable in the first
quarter of fiscal 1999.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased by
$12.8 million to $4.6 million for the three months ended September 30, 1998
from $17.3 million for the comparable period in 1997. The decrease in
research and development expenses was primarily due to the reduction in the
Company's research and development staff to 43 persons at September 30, 1998
from 258 persons at September 30, 1997. This reduction reflects the transfer
from the Company to Silicon Graphics of employees engaged in the development
of next generation microprocessors for Silicon Graphics' systems as well as
other staff reductions associated with the Company's change in strategic
direction. See "Risks Associated with Recent Shift in Strategic Direction".
The Company expects research and development expenses to increase in fiscal
year 1999 as it develops new designs for the digital consumer products market.
SALES AND MARKETING, GENERAL AND ADMINISTRATIVE. Sales and marketing and
general and administrative expenses decreased by $281,000 to $2.4 million for
the three months ended September 30, 1998 from $2.7 million for the
comparable period in 1997. The decrease was primarily due to a decrease in
advertising and promotional spending. The Company expects sales and marketing
and general and administrative expenses to increase in fiscal year 1999 as
the Company places additional resources into marketing its technology and
operating as a public company.
10
<PAGE>
INTEREST INCOME (EXPENSE). Interest income (expense) increased by
$177,000 to an interest income of $170,000 for the three months ended
September 30, 1998 from an interest expense of $7,000 for the comparable
period in 1997. The increase was primarily due to interest income earned
from investment of the proceeds of approximately $15.9 million from the
Company's initial public offering, which closed on July 6, 1998.
INCOME TAXES. Subsequent to the closing of the initial public offering,
the Company, while still a part of Silicon Graphics' consolidated group for
federal income tax purposes, is responsible for its income taxes through a
tax sharing agreement with Silicon Graphics. Therefore, to the extent the
Company produces taxable income, losses or credits, it will make or receive
payments as though it filed separate federal, state and local income tax
returns. The Company will be included in Silicon Graphics' consolidated
group for federal income tax purposes for so long as Silicon Graphics
beneficially owns at least 80% of the total voting power and value of the
outstanding common stock.
The Company recorded a provision for income taxes of $2.2 million for the
three months ended September 30, 1998 compared to zero for the comparable
period in 1997. The provision for the three months ended September 30, 1998
was based on an estimated federal and state combined rate of 40% on income
before taxes. The net losses incurred for the three months ended September
30, 1997 are primarily attributable to the operations of the Company as a
division of Silicon Graphics and were included in the income tax returns
filed by Silicon Graphics. In light of both historical losses incurred, as
well as the fact that, by operation of a tax sharing agreement, the Company
will not receive any benefit for losses incurred or have any tax liability
for any income earned up to the closing of the initial public offering, no
income tax provision or benefit has been reflected for the three months ended
September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998 the Company had cash and cash equivalents of $21.0
million and total working capital of $15.1 million, including a short-term
component of deferred revenue of $33,000.
The Company's operating activities provided net cash of $5.4 million for
the three months ended September 30, 1998 compared to net cash used in
operating activities of $5.1 million for the comparable period in 1997. In
the three months ended September 30, 1998, net cash provided by operating
activities consisted mainly of net income, depreciation and an increase in
accrued liabilities and deferred revenue partially offset by an increase in
accounts receivable. The increases in accounts receivable and deferred
revenue were due to a new license agreement completed during the quarter. The
increase in accrued liabilities was the result of accrued compensation and
income tax provision recorded for the three months ended September 30, 1998.
Net cash used in investing activities was $285,000 and $180,000 for the
three months ended September 30, 1998 and 1997, respectively. Net cash used
in investing activities in both periods presented consisted of equipment
purchases. Capital expenditures have been, and future expenditures are
anticipated to be, primarily for facilities and equipment to support
expansion of the Company's operations. The Company expects that its capital
expenditures will increase slightly as its employee base grows.
Net cash provided by financing activities was $15.9 million for the three
months ended September 30, 1998 compared to $5.3 million for the comparable
period in 1997. Net cash provided by financing activities for the three
months ended September 30, 1998, consisted primarily of cash received in
connection with the issuance of common stock through the Company's initial
public offering, which was completed in July 1998. Financing activities for
the three months ended September 30, 1997, consisted primarily of funds
provided from Silicon Graphics.
The Company's future liquidity and capital requirements are expected to
vary greatly from quarter to quarter, depending on numerous factors,
including, among others, the cost, timing and success of product development
efforts, the cost and timing of sales and marketing activities, the extent to
which the Company's existing and new technologies gain market acceptance, the
level and timing of contract revenues and royalties, competing technological
and market
11
<PAGE>
developments and the costs of maintaining and enforcing patent claims and
other intellectual property rights. The Company believes that cash generated
by its operations, together with the net proceeds to the Company from its
initial public offering, will be sufficient to meet its projected operating
and capital requirements. The Company may elect to raise additional funds
through public or private financing, strategic relationships or other
arrangements. Additional equity financing may be dilutive to holders of the
Common Stock, and debt financing, if available, may involve restrictive
covenants. Moreover, strategic relationships, if necessary to raise
additional funds, may require that the Company relinquish its rights to
certain of its technologies. As long as Silicon Graphics desires to maintain
its percentage ownership interest in the Company, the Company may be
constrained in its ability to issue Common Stock in connection with
acquisitions or to raise equity capital.
FACTORS THAT MAY AFFECT OUR BUSINESS
RISKS ASSOCIATED WITH RECENT SHIFT IN STRATEGIC DIRECTION. The Company's
research and development efforts historically focused primarily on the
development of high-performance microprocessor and related designs for
Silicon Graphics' workstations and servers. However, as the cost to design
and manufacture microprocessors based on the Company's technology decreased,
the Company has sought to penetrate the market for high-volume,
high-performance embedded applications by supporting and coordinating the
efforts of its semiconductor partners in that area. In connection with the
Separation and the Offering, the Company has formulated a new strategic
direction in which its primary focus is the development of microprocessors
and related designs for applications in the embedded market, including
digital consumer products such as video game products, handheld personal
computers and digital set-top boxes. The design and development of
high-performance microprocessors for the next generation Silicon Graphics'
product line is carried out by persons who have been transferred to Silicon
Graphics in connection with the Separation. The Company's shift in strategic
direction involves several risks, including (i) increased reliance on the
evolving and highly competitive digital consumer products industry; (ii) the
need for the Company to refocus its research and development efforts from
microprocessors primarily for high-performance computer systems to
microprocessors and related designs for use in a wide range of digital
consumer products; and (iii) increased importance of the Company's sales and
marketing activities and its limited experience in this area. Any failure by
the Company to adequately address any of these risks could have a material
adverse effect on the Company's business, results of operations and financial
condition.
UNPREDICTABLE AND FLUCTUATING OPERATING RESULTS. The Company experiences
significant fluctuations in its quarterly operating results due to a variety
of factors, many of which are outside of its control. Moreover, because many
of the Company's revenue components fluctuate and are difficult to predict
and the Company's expenses are largely independent of its revenue in any
particular period, it is difficult for the Company to accurately forecast
operating results. The Company's revenue in any particular quarter is
dependent on a number of factors, including the demand for and average
selling prices of semiconductor products that incorporate the Company's
technology, the financial terms of the Company's contractual arrangements
with its semiconductor partners (which may require significant up-front
payments or payments based on the achievement of certain milestones), the
relative mix of contract revenue and royalties, and competitive pressures
resulting in lower contract revenue or royalty rates. In addition, contract
revenue may fluctuate significantly from period to period and any increase or
decrease in such revenue will not be indicative of future period-to-period
increases or decreases. Because the Company's expense levels are based, in
part, on management's expectations regarding future revenue, if revenue is
below expectations in any quarter, the adverse effect may be magnified by the
Company's inability to adjust spending in a timely manner to compensate for
any such revenue shortfall.
Factors that may adversely affect the Company's quarterly operating
results include the Company's ability to develop, introduce and market new
microprocessor intellectual property, the demand for and average selling
prices of semiconductor products that incorporate the Company's technology,
the establishment or loss of strategic relationships with semiconductor
manufacturing partners or manufacturers of digital consumer products, the
timing of new products and product enhancements by the Company and its
competitors, changes in the Company's and digital consumer product
manufacturers' development schedules and levels of expenditures on research
and development and product support and general economic conditions. As a
result, the Company's total revenue and operating results in any future
period cannot
12
<PAGE>
be predicted with certainty, and its operating results in any quarter may not
be indicative of its future performance. Moreover, the Company expects to
experience seasonal fluctuations in its revenue and operating results.
REVENUE CONCENTRATION. The Company is subject to revenue concentration
risks at both the product and semiconductor manufacturing partner levels. To
date, a substantial portion of the Company's total revenue has been derived
from contract revenue and royalties earned on sales of video game products
that use the Company's RISC-based microprocessor technology. In particular,
royalties and contract revenue from Nintendo and NEC relating to sales of
Nintendo 64 video game players and related cartridges accounted for 79% and
78% of the Company's total revenue for the three months ended September 30,
1998 and 1997, respectively.
The Company anticipates that royalties related to sales of Nintendo 64
video game cartridges will represent a substantial portion of its total
revenue for the next several years. However, competition in the market for
home entertainment products is intense and the introduction of new products
or technologies, as well as shifting consumer preferences, could negatively
impact Nintendo 64 video game cartridge sales. There can be no assurance as
to the amount and timing of sales of Nintendo 64 video game players and
related cartridges and, consequently, there can be no assurance as to the
royalty stream to the Company from such sales. In particular, the eventual
introduction of the next generation Nintendo video game system is expected to
result in declining sales of Nintendo 64 video game players and related
cartridges, although sales of video game cartridges would be likely to
continue for some time. In the near term, factors negatively affecting sales
of Nintendo 64 video game cartridges could have a material adverse effect on
the Company's results of operations and financial condition.
Although the Company expects that an increasingly significant portion of
its future revenue will be related to sales of digital consumer products such
as handheld personal computers and set-top boxes as well as other video game
products, there can be no assurance that the Company's technology will be
selected for design into any such products. Accordingly, the Company may
remain significantly dependent on revenue related to sales of video game
products. The identity of significant products may vary from period to
period depending on the addition of new contracts and the number of designs
using the Company's technology.
A significant portion of the Company's total revenue has been and is
expected to continue to be derived from a limited number of semiconductor
manufacturers. For the three months ended September 30, 1998 and 1997 NEC
accounted for approximately 10% and 16%, respectively, of the Company's total
revenue. The Company believes that NEC will continue to represent at least
10% of its total revenue for at least the next several years, although NEC is
not obligated to continue using the Company's technology in its current or
future products. Because there is a relatively limited number of
semiconductor manufacturers to which the Company could license its technology
on a basis consistent with its business model, it is likely that the
Company's revenue will continue to be concentrated at the semiconductor
manufacturing partner level. This revenue concentration for any given period
will vary depending on the addition or expiration of contracts, the nature
and timing of payments due under such contracts and the volumes and prices at
which the Company's partners sell products incorporating its technology.
Accordingly, the identity of particular manufacturing partners that will
account for any such revenue concentration will vary from period to period
and may be difficult to predict.
SEASONALITY. Because revenue related to sales of Nintendo 64 video game
cartridges is expected to represent a substantial portion of the Company's
total revenue over the next several years, the Company expects to experience
seasonal fluctuations in its revenue and operating results. The Company
records royalty revenue from Nintendo in the quarter following the sale of
the related Nintendo 64 video game cartridge. Because a disproportionate
amount of Nintendo 64 video game cartridges are typically sold in the
Company's second fiscal quarter (which includes the holiday selling season),
a disproportionate amount of the Company's revenue and operating income is
expected to be realized in its third fiscal quarter. In addition, as the
Company increases its focus on microprocessor intellectual property for
high-volume digital consumer products, the Company can be expected to
continue to experience similar seasonal fluctuations in its revenue and
operating results.
INTELLECTUAL PROPERTY MATTERS. The Company regards its patents,
copyrights, mask work rights, trademarks, trade secrets and similar
intellectual property as critical to its success, and relies on a combination
of patent, trademark, copyright, mask work and trade secret laws to protect
its proprietary rights. Any failure of the Company to obtain or
13
<PAGE>
maintain adequate protection of its intellectual property rights for any
reason could have a material adverse effect on its business, results of
operations and financial condition. Subject to the grant of a license to
Silicon Graphics, the Company owns approximately 51 U.S. patents on various
aspects of its technology, with expiration dates ranging from 2006 to 2015,
approximately 24 pending U.S. patent applications as well as all foreign
counterparts relating thereto. There can be no assurance that patents will
issue from any patent applications submitted by the Company, that any patents
held by the Company will not be challenged, invalidated or circumvented or
that any claims allowed from its patents will be of sufficient scope or
strength to provide meaningful protection or any commercial advantage to the
Company. In addition, there can be no assurance that third parties will not
assert claims of infringement against the Company or against the Company's
semiconductor manufacturing partners in connection with their use of the
Company's technology. Such claims, even those without merit, could be time
consuming, result in costly litigation and/or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements,
if required, may not be available on terms acceptable to the Company, or at
all. Moreover, the laws of certain foreign countries may not protect the
Company's intellectual property to the same extent as do the laws of the
United States and, because of the importance of the Company's intellectual
property rights to its business, this could have a material adverse effect on
its business, results of operations and financial condition.
The Company also uses licensing agreements and employee and third party
nondisclosure and assignment agreements to limit access to and distribution
of its proprietary information and to obtain ownership of technology prepared
on a work-for-hire basis. There can be no assurance that the steps taken by
the Company to protect its intellectual property rights will be adequate to
deter misappropriation of such rights or that the Company will be able to
detect unauthorized uses and take immediate or effective steps to enforce its
rights. There can also be no assurance that the steps taken by the Company
to obtain ownership of contributed intellectual property will be sufficient
to assure its ownership of all proprietary rights. The Company also relies
on unpatented trade secrets to protect its proprietary technology. No
assurance can be given that others will not independently develop or
otherwise acquire the same or substantially equivalent technologies or
otherwise gain access to the Company's proprietary technology or disclose
such technology or that the Company can ultimately protect its rights to such
unpatented proprietary technology. In addition, no assurance can be given
that third parties will not obtain patent rights to such unpatented trade
secrets, which patent rights could be used to assert infringement claims
against the Company. From time to time the Company has entered, and in the
future may enter, into cross licensing arrangements with others, pursuant to
which the Company licenses certain of its patents in exchange for patent
licenses from such licensees. Although these types of cross licensing
arrangements are common in the semiconductor and microprocessor industries,
and do not generally provide for transfers of know-how or other proprietary
information, such arrangements may facilitate the ability of such licensees,
either alone or in conjunction with others, to develop competitive products
and designs.
The Company and Silicon Graphics have entered into arrangements pursuant
to which certain intellectual property was assigned to the Company, subject
to the grant of a license to Silicon Graphics; certain intellectual property
was retained by Silicon Graphics, subject to the grant of a license to the
Company; and certain intellectual property was retained by Silicon Graphics
without any ongoing interest to the Company. The Company's inability to use
Silicon Graphics' intellectual property in the future could have a material
adverse affect on its business and results of operations. In the past, the
MIPS Group has benefited from its status as a division of Silicon Graphics in
its access to the intellectual property of third parties through licensing
arrangements or otherwise, and in the negotiation of the financial and other
terms of any such arrangements. As a result of the Separation, there can be
no assurance that the Company will be able to negotiate commercially
attractive intellectual property licensing arrangements with third parties in
the future, particularly if the Company ceases to be a majority-owned
subsidiary of Silicon Graphics. In addition, in connection with any future
intellectual property infringement claims, the Company will not have the
benefit of asserting counterclaims based on Silicon Graphics' intellectual
property portfolio, nor will the Company be able to provide licenses to
Silicon Graphics' intellectual property in order to resolve such claims.
YEAR 2000 COMPLIANCE. The Company is currently examining the Year 2000
issue. The Company believes its products are Year 2000 compliant; however,
the Company is initiating a program to prepare its information technology
("IT") and related non-IT and processes for the Year 2000 and plans to have
changes to critical systems completed by the third quarter of calendar year
1999 to allow time for testing.
14
<PAGE>
Management is assessing the Year 2000 project costs and expects the
assessment to be complete by the end of the second quarter of fiscal 1999,
but based on preliminary estimates, the costs of any necessary actions are
not expected to be material to the Company's results of operations or
financial condition.
The Company intends to cooperate with its manufacturing partners and
others with which it does business to coordinate Year 2000 compliance with
operational processes and marketed products, although the Company is unable
to evaluate the Year 2000 compliance of products and technology developed by
third parties that incorporates the Company's technology. To the extent that
any such third-party product or technology fails to be Year 2000 compliant,
the Company may be adversely affected due to its association with such
product or technology. The Company will also be contacting critical
suppliers of products and services to determine that the suppliers'
operations and the products and services they provide are Year 2000 capable
or to monitor their progress toward Year 2000 capability. The Company may
develop contingency plans should the need arise. There can be no assurance
that another company's failure to ensure Year 2000 capability would not have
an adverse effect on the Company.
LACK OF INDEPENDENT OPERATING HISTORY. The Company has never operated as a
stand-alone company. The Company continues to be a majority owned subsidiary
of Silicon Graphics, however, Silicon Graphics will have no obligation to
provide assistance to the Company. The Company will be required to develop
and implement the operational, administrative and other systems and
infrastructure necessary to support its current and future business. There
can be no assurance that the Company will be able to develop the necessary
systems and infrastructure and any failure to do so could have an adverse
effect on the Company's business, results of operations and financial
condition.
NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE. The Company's success
is highly dependent on its ability to develop enhancements and new
generations of its microprocessor intellectual property, introduce them to
the marketplace in a timely manner, and have them incorporated into
semiconductor products that are ultimately selected for design into the
products of leading digital consumer product manufacturers. There can be no
assurance that the Company's development efforts will be successful or that
the characteristics of its microprocessor intellectual property will satisfy
those that may be critical to specific applications in the embedded market.
To the extent that the Company's development efforts are unsuccessful or the
characteristics of its microprocessor intellectual property are not
compatible with the requirements of specific digital consumer product
applications, its ability to achieve design wins may be limited. Failure to
achieve sufficient design wins could have a material adverse effect on the
Company's business, results of operations and financial condition.
Technical innovations of the type critical to the Company's success are
inherently complex. Any failure by the Company to anticipate or respond
adequately to changes in the requirements of digital consumer product
manufacturers or in the semiconductor manufacturing process, or any
significant delays in the development or introduction of new microprocessor
intellectual property, could have a material adverse effect on the Company's
business, results of operations and financial condition. Moreover,
significant technical innovations generally require a substantial investment
before their commercial viability is determined. There can be no assurance
that the Company will have the financial resources necessary to fund the
future development of microprocessor and related designs. In addition, there
can be no assurance that any enhancements or new generations of the Company's
technology, even if successfully developed, will generate revenue in excess
of the costs of development or not be quickly rendered obsolete by changing
consumer preferences, the introduction of products embodying new technologies
or features or other technological developments in the semiconductor and
digital consumer products industries.
DEPENDENCE ON DIGITAL CONSUMER PRODUCTS INDUSTRY. The digital consumer
products industry will be the primary market for the Company's microprocessor
and related designs. The Company's success will be dependent upon the level
of consumer acceptance of the products that incorporate its technology, which
may be affected by changing consumer preferences and the introduction of
products embodying new technologies or features. In addition, certain
digital consumer products such as video game products may present limited
opportunities for design wins due to a limited number of product
manufacturers and the length of product life cycles. Many applications in the
digital consumer products industry, such as handheld personal computers and
set-top boxes, have only recently been introduced to the market and the level
of consumer interest and acceptance is difficult to predict. Factors
negatively affecting the digital consumer products industry and the demand
for digital consumer products, such as the failure to develop industry
15
<PAGE>
standards for hardware and software or to achieve adequate product cost
reductions, could have a material adverse effect on the Company's business,
results of operations and financial condition. Moreover, to the extent that
the performance, functionality, price and power characteristics of the
Company's microprocessor designs do not satisfy those that may be critical to
specific digital consumer product applications, the Company's dependence on
the digital consumer products industry may be further confined to a limited
segment of that industry.
RELIANCE ON MANUFACTURING PARTNERS. The Company does not manufacture or
sell microprocessors containing its technology. Rather, the Company licenses
its technology to semiconductor manufacturers that incorporate the Company's
technology into the products they sell. In some cases, these manufacturing
partners also add custom integration services and derivative design
technologies to the Company's microprocessor designs. Accordingly, the
Company's success is substantially dependent on the adoption and continued
use of its technology by semiconductor manufacturers. The Company faces
numerous risks in obtaining agreements with semiconductor manufacturers on
terms consistent with its business model, including, among others, the
lengthy and expensive process of building a relationship with a potential
partner before there is any assurance of an agreement; persuading large
semiconductor companies to work with, to rely for critical technology on, and
to disclose proprietary manufacturing technology to, the Company; and
persuading potential partners to bear certain development costs associated
with the Company's technology and to make the necessary investment to
successfully produce embedded microprocessors using the Company's technology.
Moreover, none of the Company's manufacturing partners is obligated to
license new or future generations of the Company's microprocessor designs.
The Company is also subject to many risks beyond its control that
influence the success of its semiconductor manufacturing partners, including,
among others, the highly competitive environment in which its current and any
future partners operate, the market for their products and the engineering
capabilities and financial and other resources of its partners. The Company
also believes that its principal competition may come from semiconductor
manufacturers, including its current manufacturing partners that internally
develop products using similar or alternative technologies. Any such
competition may adversely affect the Company's existing relationships and its
ability to establish new relationships. Moreover, the Company's
relationships with certain of its existing partners may be negatively
affected by its separation from Silicon Graphics, insofar as Silicon
Graphics' status as a customer of such partners has been a factor in
establishing and maintaining such relationships or in negotiating the
financial and other terms of the contractual arrangements with such partners.
The Company currently has seven semiconductor manufacturing partners.
There can be no assurance that the Company will be successful in maintaining
relationships with its current manufacturing partners or in entering into new
relationships with additional partners. Any failure by the Company to
establish or maintain such relationships could have a material adverse effect
on the Company's business, results of operations and financial condition.
DEPENDENCE ON DIGITAL CONSUMER PRODUCT MANUFACTURERS. The timing and
amount of royalties received by the Company is directly affected by sales of
consumer products incorporating the Company's technology. Accordingly, the
Company's success is substantially dependent upon the adoption of its
technology by digital consumer product manufacturers. The Company is subject
to many risks beyond its control that influence the success or failure of a
particular digital consumer product manufacturer, including, among others,
competition faced by the manufacturer in its particular industry; market
acceptance of the manufacturer's products; the engineering, marketing and
management capabilities of the manufacturer; technical challenges unrelated
to the Company's technology faced by the manufacturer in developing its
products; and the financial and other resources of the manufacturer. The
process of persuading digital consumer product manufacturers to adopt the
Company's technology can be lengthy and, even if adopted, there can be no
assurance that the Company's technology will be used in a product that is
ultimately brought to market, achieves commercial acceptance or results in
meaningful royalties to the Company. The failure of manufacturers in the
digital consumer products industry to adopt the Company's technology for
incorporation into their products could have a material adverse effect on the
Company's business, results of operations and financial condition.
Furthermore, because the Company does not control the business practices of
its licensees, it has no ability to establish the prices at which the
products incorporating its technology are made available to digital consumer
product manufacturers or the degree to which its licensees promote the
Company's technology to such manufacturers.
16
<PAGE>
COMPETITION. Competition in the market for embedded microprocessors is
intense. The Company believes that the principal competitive factors in the
industry are performance, functionality, price, customizability and power
consumption. The Company competes primarily against ARM Holdings plc. and
Hitachi Semiconductor (America) Inc. The Company also competes against
certain semiconductor manufacturers whose product lines include
microprocessors for embedded and non-embedded applications, including Intel
Corporation, National Semiconductor Corporation, Advanced Micro Devices, Inc.
and Motorola, Inc. In addition, the Company must continue to differentiate
its microprocessor and related designs from those available or under
development by the internal design groups of semiconductor manufacturers,
including its current and prospective manufacturing partners. Many of these
internal design groups have substantial programming and design resources and
are part of larger organizations, which have substantial financial and
marketing resources. There can be no assurance that internal design groups
will not develop products that compete directly with those of the Company or
will not actively seek to license their own technology to third-party
semiconductor manufacturers. Certain of the Company's competitors have
greater name recognition and customer bases as well as greater financial and
marketing resources than the Company, and such competition could adversely
affect the Company's business, results of operations and financial condition.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends in part on the
continued contributions of its key management, technical, sales and marketing
personnel, many of whom are highly skilled and difficult to replace. In
addition, the Company's business plan requires, and its future operating
results depend in significant part upon, the identification and hiring of
additional highly skilled personnel, particularly technical personnel for its
anticipated research and development activities. Competition for qualified
personnel, particularly those with significant experience in the
semiconductor and microprocessor design industries, is intense. The loss of
the services of any of the key personnel, the inability to attract and retain
qualified personnel in the future or delays in hiring personnel, particularly
technical personnel, could have a material adverse effect on the Company's
business, operating results and financial condition.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. A substantial portion of
the Company's revenue is derived from outside the United States. For the
three months ended September 30, 1998 and 1997, revenue from customers
outside the United States, primarily in Japan, represented approximately 87%
and 91% respectively, of the Company's total revenue. The Company anticipates
that revenue from international customers primarily in Asia, will continue to
represent a substantial portion of its total revenue. To date, substantially
all of the Company's revenue from international customers has been
denominated in U.S. dollars. However, to the extent that sales to digital
consumer product manufacturers by the Company's manufacturing partners are
denominated in foreign currencies, royalties received by the Company on such
sales could be subject to fluctuations in currency exchange rates. In
addition, if the effective price of the technology sold by the Company to its
partners were to increase as a result of fluctuations in foreign currency
exchange rates, demand for the Company's technology could fall which would,
in turn, reduce the Company's royalties. The Company is unable to predict
the amount of non-U.S. dollar denominated revenue earned by its licensees.
Therefore, the Company has not historically attempted to mitigate the effect
that currency fluctuations may have on its revenue, and does not presently
intend to do so in the future. The relative significance of the Company's
international operations exposes it to a number of additional risks including
political and economic instability, longer accounts receivable collection
periods and greater difficulty in collection of accounts receivable, reduced
or limited protection for intellectual property, export license requirements,
tariffs and other trade barriers and potentially adverse tax consequences.
Several countries in Asia are experiencing a severe economic crisis,
characterized by reduced economic activity, lack of liquidity, highly
volatile foreign currency exchange and interest rates and unstable stock
markets. Several of the Company's semiconductor partners sell products into
Asia that incorporate the Company's microprocessor and related designs. Any
negative impact of the circumstances in Asia on its sales of such products by
the Company's semiconductor partners could have a negative impact on its
royalty revenue. There can be no assurance that the Company will be able to
sustain revenue derived from international customers or that the foregoing
factors will not have a material adverse effect on the Company's business,
operating results and financial condition.
MANAGEMENT OF GROWTH. The Company has limited managerial, financial,
engineering and other resources and may not be equipped to manage
successfully any future periods of rapid growth or expansion. In addition,
the Company's business plan requires that it identify and hire additional
highly skilled technical personnel during fiscal 1999 to staff its
anticipated research and development activities. Recruitment and integration
of these additional employees, as well as
17
<PAGE>
any future periods of rapid growth or expansion, can be expected to place
significant strains on the Company's resources, which may be exacerbated by
the Company's recent shift in strategic direction. Digital consumer product
manufacturers as well as the Company's semiconductor manufacturing partners
typically require significant engineering support in the design, testing and
manufacture of products incorporating the Company's technology. As a result,
any increase in the adoption of the Company's technology will increase the
strain on the Company's personnel, particularly its engineers. The Company's
future growth will also depend on its ability to implement operational,
financial and management information and control systems and procedures
necessary to operate as a stand-alone company and without the financial,
operational, managerial and administrative support previously provided by
Silicon Graphics.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
NOT APPLICABLE.
18
<PAGE>
EXHIBIT 99.3
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACTS OF 1934.
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 000-24487
MIPS Technologies, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0322161
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
1225 CHARLESTON ROAD, MOUNTAIN VIEW, CA 94043-1353
(Address of principal executive offices)
Registrants' telephone number, including area code: (650) 567-5000
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[ ]
The number of outstanding shares of the Registrant's Common Stock, $.001
par value, was 37,292,286 as of
January 31, 1999.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MIPS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1998 (1)
----------- -----------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 26,052 $ 45
Accounts receivable . . . . . . . . . . . . . . . . . . . . 2,602 250
Prepaid expenses and other current assets . . . . . . . . . 453 618
----------- -----------
Total current assets. . . . . . . . . . . . . . . . . . . 29,107 913
Equipment and furniture, net . . . . . . . . . . . . . . . . . . 3,155 2,787
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 1,027 996
----------- -----------
$ 33,289 $ 4,696
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . $ 3,661 $ 3,087
Accrued liabilities . . . . . . . . . . . . . . . . . . . . 6,381 2,356
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . . 10,042 5,443
Deferred revenue, less current portion . . . . . . . . . . . . . 375 --
Stockholders' equity (deficit):
Common stock, $0.001 par value: 150,000,000 shares
authorized; issued and outstanding: 37,292,286 shares at
December 31, 1998 and 36,000,000 shares at June 30,
1998. . . . . . . . . . . . . . . . . . . . . . . . . . . 37 36
Additional paid-in capital. . . . . . . . . . . . . . . . . 136,235 120,041
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (113,400) (120,824)
----------- -----------
Total stockholders' equity (deficit). . . . . . . . . . . 22,872 (747)
----------- -----------
$ 33,289 $ 4,696
----------- -----------
----------- -----------
</TABLE>
(1) The balance sheet at June 30, 1998 has been derived from audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
3
<PAGE>
MIPS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Royalties $ 13,243 $ 12,472 $ 24,854 $ 26,759
Contract revenue 1,750 77 2,400 827
------------ ------------ ------------ ------------
Total revenue 14,993 12,549 27,254 27,586
Costs and expenses:
Cost of contract revenue 125 ---- 125 375
Research and development 4,667 17,789 9,223 35,127
Sales and marketing 1,730 1,462 3,019 2,910
General and administrative 1,821 1,038 2,956 2,295
Restructuring charge ---- 2,614 ---- 2,614
------------ ------------ ------------ ------------
Total costs and expenses 8,343 22,903 15,323 43,321
------------ ------------ ------------ ------------
Operating income (loss) 6,650 (10,354) 11,931 (15,735)
Interest income (expense), net 264 (4) 438 (11)
------------ ------------ ------------ ------------
Income (loss) before income taxes 6,914 (10,358) 12,369 (15,746)
Provision for income taxes 2,766 ---- 4,948 ----
------------ ------------ ------------ ------------
Net income (loss) $ 4,148 $ (10,358) $ 7,421 $ (15,746)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income (loss) per share - basic $ 0.11 $ (0.29) $ 0.20 $ (0.44)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income (loss) per share - diluted $ 0.11 $ (0.29) $ 0.19 $ (0.44)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Common shares outstanding - basic 37,267 36,000 37,225 36,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Common shares outstanding - diluted 38,536 36,000 38,239 36,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes.
4
<PAGE>
MIPS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
------------
1998 1997
---- ----
<S> <C> <C>
Operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,421 $(15,746)
Adjustments to reconcile net income (loss) to cash provided by (used in)
operations:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 997 3,063
Other non-cash charges . . . . . . . . . . . . . . . . . . . . . . 133 116
Restructuring charges. . . . . . . . . . . . . . . . . . . . . . . ---- 2,614
Changes in operating assets and liabilities: . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . (2,352) ----
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . 574 (381)
Other assets and liabilities. . . . . . . . . . . . . . . . . 4,446 (91)
-------- --------
Net cash flow provided by (used in) operating activities,
excluding Silicon Graphics financing. . . . . . . . . . . 11,219 (10,425)
Investing activities - capital expenditures . . . . . . . . . . . . . . . . (1,365) (452)
Financing activities:
Net proceeds from issuance of common stock. . . . . . . . . . . . . . . 16,150 ----
Payments on capital lease obligations . . . . . . . . . . . . . . . . . ---- (218)
Financing provided from Silicon Graphics. . . . . . . . . . . . . . . . ---- 11,095
-------- --------
Net cash provided by financing activities . . . . . . . . . . 16,150 10,877
Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . . . . 3 ----
-------- --------
Net increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,007 ----
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . 45 ----
--------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . $ 26,052 $ ----
-------- --------
-------- --------
Supplemental disclosures of cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ ---- $ 10
-------- --------
-------- --------
</TABLE>
See accompanying notes.
5
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. FORMATION AND DESCRIPTION OF BUSINESS
FORMATION OF MIPS TECHNOLOGIES, INC. (THE "COMPANY"). MIPS Technologies'
predecessor, MIPS Computer Systems, Inc., was founded in 1984 and was engaged in
the design and development of RISC processors for the computer systems and
embedded markets. Silicon Graphics, Inc. ("Silicon Graphics") adopted the MIPS
architecture for its computer systems in 1988 and acquired MIPS Computer
Systems, Inc. in 1992. Following the acquisition, Silicon Graphics continued
the MIPS processor business through its MIPS Group (a division of Silicon
Graphics), which focused primarily on the development of high-performance
processors for Silicon Graphics' workstations and servers. Until the last few
years, cost considerations limited the broader use of these processors.
However, as the cost to design and manufacture processors based on the MIPS
technology decreased, the MIPS Group sought to penetrate the consumer market,
both through supporting and coordinating the efforts of the MIPS semiconductor
partners and most notably, by partnering with Nintendo in its design of the
Nintendo 64 video game player and related cartridges. Revenues related to sales
of Nintendo 64 game players and related cartridges currently account for the
substantial majority of the Company's revenue. In order to increase the focus
of the MIPS Group on the design and development of processor applications
dedicated to the embedded market, in December 1997, Silicon Graphics initiated a
plan to separate the business of the MIPS Group from its other operations.
In April 1998, the Board of Directors of the Company approved a
transaction, pursuant to which, Silicon Graphics transferred to the Company the
assets and liabilities related to the design and development of processor
intellectual property for embedded market applications (the "Separation"). In
connection with the Separation, the Company and Silicon Graphics entered into a
Corporate Agreement that provides for certain pre-emptive rights of Silicon
Graphics to purchase shares of the Company's capital stock, registration rights
related to shares of the Company's capital stock owned by Silicon Graphics and
covenants against certain actions by the Company for as long as Silicon Graphics
owns a majority of the Company's outstanding common stock. Furthermore, the
Company and Silicon Graphics entered into a Management Services Agreement
pursuant to which Silicon Graphics provides certain services to the Company
following the Separation on an interim or transitional basis.
Since the closing of the Company's initial public offering (the "Offering")
on July 6, 1998, the Company has been a majority owned subsidiary of Silicon
Graphics.
MIPS Technologies International A.G., a wholly owned Swiss subsidiary, was
incorporated on November 20, 1998. MIPS Denmark Development Center, located in
Copenhagen, Denmark, and a branch of the Swiss subsidiary, was opened on
December 1, 1998. The development center will work on product development as
well as provide support and design expertise for the Company's European-based
customers.
BASIS OF PRESENTATION. The accompanying financial statements, through June
30, 1998, reflect the operations of the Company's predecessor, the MIPS Group.
The balance sheet as of June 30, 1998 has been prepared using the historical
basis of accounting and includes all of the assets and liabilities specifically
identifiable to the Company and, for certain liabilities that are not
specifically identifiable, estimates have been used to allocate a portion of
Silicon Graphics' liabilities to the Company. Through June 30, 1998, cash
management for the Company had been done by Silicon Graphics on a centralized
basis and all cash provided by Silicon Graphics has been recorded as
interest-free
6
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
financing from Silicon Graphics. The statement of operations for the six months
ended December 31, 1997 includes all revenue and costs attributable to the
Company, including a corporate allocation from Silicon Graphics of the costs of
facilities and employee benefits. Additionally, incremental corporate
administration, finance and management costs have been allocated to the Company
based on certain methodologies that management believes are reasonable under the
circumstances. Subsequent to June 30, 1998, the Company operated as a
stand-alone company, MIPS Technologies, Inc. The consolidated financial
statements includes the accounts of the Company and its wholly owned Swiss
subsidiary, MIPS Technologies International A.G., after elimination of
intercompany transactions and balances.
The unaudited results of operations for the interim periods shown herein
are not necessarily indicative of operating results for the entire fiscal year.
In the opinion of management, the condensed consolidated financial statements
include all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the financial position, results of operations and cash flow
for each interim period shown.
The condensed consolidated financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission (SEC) applicable to interim financial information. Certain
information and footnote disclosures included in financial statements prepared
in accordance with generally accepted accounting principles have been omitted in
these interim statements pursuant to such SEC rules and regulations. The
unaudited condensed consolidated financial statements included in this Form 10-Q
should be read in conjunction with the audited financial statements and notes
thereto, for the fiscal year ended June 30, 1998, included in the Company's 1998
Annual Report on Form 10-K.
NOTE 2. COMPUTATION OF EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------ ------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,148 $(10,358) $ 7,421 $(15,746)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted - average shares outstanding - basic. . . . . . . . . . . . . 37,267 36,000 37,225 36,000
Effect of dilutive securities-employee stock options . . . . . . . . . 1,269 ---- 1,014 ----
-------- -------- -------- --------
Weighted - average shares outstanding - diluted. . . . . . . . . . . . 38,536 36,000 38,239 36,000
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share - basic. . . . . . . . . . . . . . . . . . $ 0.11 $ (0.29) $ 0.20 $(0.44)
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share - diluted. . . . . . . . . . . . . . . . . $ 0.11 $ (0.29) $ 0.19 $(0.44)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
7
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. NEW ACCOUNTING PRONOUNCEMENTS
During fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"). There was no
impact to the Company as a result of the adoption of SFAS 130, as there is no
material difference between the Company's reported net income (loss) and the
comprehensive net income (loss) under SFAS 130 for the periods presented.
In June 1997, the Financial Accounting and Standards Board issued Statement
of Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 is effective for the
fiscal year ending June 30, 1999 and establishes standards for disclosure about
products, geography and major customers. The adoption of SFAS 131 will have no
impact on the Company's results of operation and financial condition. The
Company expects that implementation of this standard will not have material
effect on its annual financial statement disclosures.
NOTE 4. CONTINGENCIES
On April 6, 1998, the Company and Silicon Graphics filed an action against
ArtX, Inc. and certain employees of ArtX, Inc. in the Superior Court of the
State of California alleging, among other things, misappropriation of trade
secrets and breach of contractual and fiduciary duties in connection with the
defendants' actions in developing graphics technology for Nintendo's next
generation video game system. On April 23, 1998, Nintendo notified Silicon
Graphics and the Company of its belief that the disclosure in the Company's Form
S-1 registration statement filed with the Securities and Exchange Commission on
April 21, 1998 of certain information regarding the contract for the development
of the Nintendo 64 video game system constituted a breach of that contract.
Silicon Graphics and the Company strongly disagree that any such breach has
occurred. On May 27, 1998, Silicon Graphics, the Company, Nintendo and ArtX,
Inc. entered into a memorandum of understanding pursuant to which Silicon
Graphics and the Company dismissed without prejudice the pending lawsuit
against ArtX, Inc., and Nintendo has agreed that, in the absence of a lawsuit
against Nintendo or ArtX, Inc., it will not assert any claim that the Nintendo
64 contract has been breached in connection with the filing of the Company's
registration statement.
On April 10, 1998, the Company filed an action against Lexra, Inc., a
Massachusetts company ("Lexra"), in the United States District Court for the
Northern District of California, asserting claims for false advertisement,
trademark infringement, trademark dilution and unfair competition. This lawsuit
arose out of Lexra's claim that its newly introduced product offering is "MIPS
compatible." Lexra does not have a license from the Company to use its
intellectual property in connection with any Lexra products. In the suit, the
Company sought injunctive relief as well as monetary damages. In May 1998,
Lexra filed an answer and counterclaim seeking to cancel certain of the
Company's trademarks. In September 1998, the Company entered into a memorandum
of understanding (MOU) with Lexra, Inc. In the MOU, among other things, Lexra
will no longer state that its products are "MIPS compatible". In December
1998, the Company and Lexra entered into a Settlement Agreement, and on January
8, 1999, the lawsuit was dismissed.
In February 1998, the Company received a notice asserting that the R10000
processor and potentially other processors designed by the Company allegedly
infringe a patent originally assigned to Control Data Corporation. Effective
December 15, 1998, Silicon Graphics, the Company, and the holder of the patent
entered into a Settlement and Non-Exclusive License Agreement resolving the
matter.
8
<PAGE>
MIPS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
From time to time, the Company receives communications from third parties
asserting patent or other rights covering the Company's products and
technologies. Based upon the Company's evaluation, it may take no action or it
may seek to obtain a license. There can be no assurance in any given case that a
license will be available on terms the Company considers reasonable, or that
litigation will not ensue. In addition, the Company is continuing to evaluate
possible patent infringement claims against third parties and may assert such
claims, if appropriate.
Management is not aware of any pending disputes that would be likely to
have a material adverse effect on the Company's business, results of operations
or financial condition.
NOTE 5. RELATED PARTY TRANSACTIONS
At December 31, 1998, accounts payable includes approximately $207,000
payable to Silicon Graphics related to certain administrative and corporate
support services provided by Silicon Graphics on behalf of the Company and
approximately $2.7 million taxes payable to Silicon Graphics in accordance with
the tax sharing agreement pursuant to which the Company and Silicon Graphics
will make payments to each other such that, with respect to any period, the
amount of taxes to be paid by the Company, subject to certain adjustments, will
be determined as though the Company were to file separate federal, state and
local income tax returns.
During the six months ended December 31, 1997, the Company was operating as
a division of Silicon Graphics and was utilizing its centralized cash management
services and processes relating to accounts payable and accrued liabilities. The
Company's net cash requirements then were funded by Silicon Graphics.
NOTE 6. SUBSEQUENT EVENTS
On January 29, 1999, the Company filed a preliminary proxy statement
with the U.S. Securities and Exchange Commission relating to a special
meeting of its stockholders called for the purpose of approving a proposal to
recapitalize the authorized capital stock of the Company, including (i) the
approval and adoption of an amended and restated certificate of incorporation
and by-laws of the Company pursuant to which each issued and outstanding
share of the Company's common stock, par value $0.001 per share, will be
redesignated as one share of newly created and issued Class A common stock,
par value $0.001 per share, of the Company and (ii) the exchange by Silicon
Graphics, Inc. of each share of Class A Common Stock it will own for one
share of newly created and issued Class B common stock, par value $0.001 per
share, of the Company. The recapitalization was designed to permit an
orderly, multi-step increase in the number of shares of MIPS Technologies
common stock that are publicly traded while preserving Silicon Graphics'
ability to divest of its interest in MIPS Technologies in a transaction
intended to qualify generally as a tax-free distribution under the Internal
Revenue Code.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. Except
for the historical information contained in this quarterly report on Form 10-Q,
the matters discussed herein may contain forward-looking statements that are
subject to certain risks and uncertainties that could cause the Company's actual
results to differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause such differences include,
but are not limited to, those identified herein under "Factors That May Affect
Our Business," and other risks included from time to time in the Company's other
Securities and Exchange Commission ("SEC") reports and press releases, copies of
which are available from the Company upon request. The forward-looking
statements within this Quarterly Report on Form 10-Q are identified by words
such as "believes", "anticipates", "expects", "intends", "may" and other similar
expressions. However, these words are not the exclusive means of identifying
such statements. The Company assumes no obligation to update any forward-looking
statements contained herein.
RESULTS OF OPERATIONS
REVENUE. The Company's revenue consists of royalties and contract
revenue earned under contracts with its licensees. The Company generates
royalties from the sale by semiconductor manufacturers of products
incorporating the Company's technology. The Company also receives royalties
from Nintendo relating to sales of Nintendo 64 video game players and related
cartridges. Royalties may be calculated as a percentage of the revenue
received by the seller on sales of such products or on a per unit basis.
Contract revenue includes technology license fees and engineering service
fees earned primarily under contracts with the Company's semiconductor
manufacturing partners. The Company receives license fees for the use of
technology that it has developed internally and, in some cases, that it has
licensed from third parties. Fees related to engineering services, which are
performed on a best efforts basis, are recognized as revenue when the defined
milestones are achieved and collectibility of the milestone payment is
probable. The technology developed is licensed to multiple customers.
Total revenue for the second quarter and first six months of fiscal 1999
increased by $2.4 million to $15.0 million and decreased by $332,000 to $27.3
million, respectively, compared with $12.5 million and $27.6 million for the
comparable periods in fiscal 1998. Royalties for the second quarter and
first six months of fiscal 1999 increased by $771,000 to $13.2 million and
decreased by $1.9 million to $24.9 million, respectively, compared with the
same periods in fiscal 1998. The increase in royalties for the second
quarter was due primarily to higher royalties generated by Nintendo game
cartridge sales. The decrease in royalties for the six months was due to the
absence of royalties from the graphics chips included in the Nintendo 64 game
player, which reached its cap during the first six months of fiscal 1998.
Contract revenue for the second quarter and first six months of fiscal 1999
increased by $1.7 million to $1.8 million and increased by $1.6 million to
$2.4 million, respectively, compared with the same periods in fiscal 1998.
The increase in contract revenue in both the quarter and year-to-date periods
was the result of fees generated primarily from new agreements, and included
engineering service fees of $1.5 million earned upon the Company's
achievement of defined milestones in the second fiscal quarter of 1999.
COST OF CONTRACT REVENUE. The Company's cost of contract revenue consists
mainly of sublicense fees. The Company incurs an obligation to pay these fees
when it sublicenses technology to its customers that it has licensed from third
parties. Sublicense fees are recognized as cost of contract revenue when the
obligation is incurred, which is typically the same period in which the related
revenue is recognized.
Cost of contract revenue was $125,000 for the second quarter of fiscal
1999 compared to zero for the comparable period in fiscal 1998. Cost of
contract revenue in the fiscal 1999 period reflects sublicense fees paid by
the Company. There was no such activity in the second quarter of fiscal 1998.
Cost of contract revenue decreased $250,000 to $125,000 for the first six
10
<PAGE>
months of fiscal 1999 compared with the same period in fiscal 1998. The
decrease was attributable to a decrease in the Company's sublicensing activities
which resulted in a decrease in its obligation to pay sublicense fees to its
licensors. The Company expects that the future cost of contract revenue will be
minimal.
RESEARCH AND DEVELOPMENT. Costs incurred by the Company with respect to
internally developed technology and engineering services are included in
research and development expense as they are incurred and are not directly
related to any particular licensee, license agreement or license fee.
Research and development expenses for the second quarter and first six
months of fiscal 1999 decreased by $13.1 million and $25.9 million,
respectively, to $4.7 million and $9.2 million, compared with research and
development expenses of $17.8 million and $35.1 million for the comparable
periods in fiscal 1998. The decreases in research and development expenses
reflect the separation of the Company's business from that of Silicon Graphics
as well as the Company's change in strategic direction in the second half of
fiscal 1998. Research and development expenses for the second quarter and first
six months of fiscal 1998 reflect the operations of the MIPS Group, a division
of Silicon Graphics engaged in the development of high-performance processors
for Silicon Graphics' workstations and servers. Due to the complex nature of
Silicon Graphics' research and development requirements, the MIPS Group had a
staff of 221 persons at December 31, 1997. Because the markets targeted by the
Company allow it to use smaller design teams and to rely largely on industry
standard third-party design tools, the Company reduced its research and
development staff by approximately 185 persons in connection with the separation
and the change in strategic direction. During the first six months of fiscal
1999, the Company increased its research and development staff to 75 persons
reflecting in part the addition of 24 employees to staff its development center
in Copenhagen, Denmark which opened on December 1, 1998. The development center
will work on product development as well as provide support and design expertise
for the Company's European-based customers. The Company expects research and
development expenses to increase during the balance of fiscal 1999 as it
develops new designs for the digital consumer products market.
SALES AND MARKETING, GENERAL AND ADMINISTRATIVE. Sales and marketing and
general and administrative expenses for the second quarter and first six months
of fiscal 1999 increased by $1.1 million and $770,000, respectively, to $3.6
million and $6.0 million, compared to sales and marketing and general and
administrative expenses of $2.5 million and $5.2 million for the comparable
periods in fiscal 1998. The increase in both the quarter and year-to-date
periods was due to an increase in staffing levels, legal and consulting
services. The Company expects sales and marketing and general and
administrative expenses to continue to increase in the remainder of fiscal year
1999 as the Company places additional resources into marketing its technology
and operating as a new public company.
RESTRUCTURING CHARGE. The restructuring charge taken in the second quarter
of fiscal 1998 included $500,000 in severance related costs and $2.1 million in
asset writedowns related to the Company's shift in the strategic direction.
INTEREST INCOME (EXPENSE). Interest income (expense), net, for the
second quarter and first six months of fiscal 1999 increased by $268,000 and
$449,000, respectively, to an interest income of $264,000 and $438,000,
respectively, compared to interest expense of $4,000 and $11,000 for the
comparable periods in fiscal 1998. The increase in both the quarter and
year-to-date periods was primarily due to interest income earned from
investment of the net proceeds of approximately $15.9 million from the
Company's July 1998 initial public offering and subsequent cash generated
from operating activities.
INCOME TAXES. Subsequent to the closing of the initial public offering,
the Company, while still a part of Silicon Graphics' consolidated group for
federal income tax purposes, is responsible for its income taxes through a tax
sharing agreement with Silicon Graphics. Therefore, to the extent the Company
produces taxable income, losses or credits, it makes or receives payments as
though it filed separate federal, state and local income tax returns. The
Company will be included in Silicon Graphics' consolidated group for federal
income tax purposes for so long as Silicon Graphics beneficially owns at least
80% of the total voting power and value of the outstanding common stock.
11
<PAGE>
The Company recorded a provision for income taxes of $2.8 million and $4.9
million for the second quarter and first six months of fiscal 1999 compared to
zero for the comparable periods in fiscal 1998. The provision for the second
quarter and the first six months of fiscal 1999 was based on an estimated
federal and state combined rate of 40% on income before taxes. The net losses
incurred for the second quarter and for the first six months of fiscal 1998 are
primarily attributable to the operations of the Company as a division of Silicon
Graphics and were included in the income tax returns filed by Silicon Graphics.
In light of both historical losses incurred, as well as the fact that, by
operation of a tax sharing agreement, the Company will not receive any benefit
for losses incurred or have any tax liability for any income earned up to the
closing of the initial public offering, no income tax provision or benefit has
been reflected for the second quarter and the first six months of fiscal 1998.
FINANCIAL CONDITION
At December 31, 1998 the Company had cash and cash equivalents of $26.1
million and total working capital of $19.1 million, including a short-term
component of deferred revenue of $77,000.
The Company's operating activities provided net cash of $11.2 million for
the six months ended December 31, 1998 compared to net cash used in operating
activities of $10.4 million for the comparable period in 1997. In the six
months ended December 31, 1998, net cash provided by operating activities
consisted mainly of net income and an increase in accrued liabilities, partially
offset by an increase in accounts receivable. The increase in accounts
receivable was due to amounts owed to the Company under new license agreements
entered into during the period. The increase in accrued liabilities for the six
months ended December 31, 1998 was the result of accrued compensation related to
increased staffing levels, along with accumulated performance bonuses and
accrued administrative costs associated with being a new public company. In the
six months ended December 31, 1997, net cash used in operating activities
consisted mainly of net loss of $15.7 million partially offset by approximately
$5.7 million of non-cash charges of depreciation and restructuring charges.
Net cash used in investing activities was $1.4 million and $452,000 for the
six months ended December 31, 1998 and 1997, respectively. Net cash used in
investing activities in both periods presented consisted of equipment purchases
and licensing of computer aided design tools used in development. Capital
expenditures have been, and future expenditures are anticipated to be, primarily
for facilities and equipment to support expansion of the Company's operations
and licensing of computer aided design tools used in development. The Company
expects that its capital expenditures will increase as its employee base grows.
Net cash provided by financing activities was $16.2 million for the six
months ended December 31, 1998 compared to $10.9 million for the comparable
period in 1997. Net cash provided by financing activities for the six months
ended December 31, 1998 consisted primarily of cash received in connection with
the issuance of common stock through the Company's initial public offering,
which was completed in July 1998. Financing activities for the six months ended
December 31, 1997 consisted primarily of net funds provided by Silicon Graphics.
The Company's future liquidity and capital requirements are expected to
vary greatly from quarter to quarter, depending on numerous factors, including,
among others, the cost, timing and success of product development efforts, the
cost and timing of sales and marketing activities, the extent to which the
Company's existing and new technologies gain market acceptance, the level and
timing of contract revenues and royalties, competing technological and market
developments and the costs of maintaining and enforcing patent claims and other
intellectual property rights. The Company believes that cash generated by its
operations, together with its current cash balance, will be sufficient to meet
its projected operating and capital requirements. The Company may elect to raise
additional funds through public or private financing, strategic relationships or
other arrangements. Additional equity financing may be dilutive to holders of
the common stock, and debt financing, if available, may involve restrictive
covenants. Moreover, strategic relationships, if necessary to raise additional
funds, may require that the Company relinquish its rights to certain of its
technologies. As long as Silicon Graphics desires to maintain its percentage
ownership interest in the Company, the
12
<PAGE>
Company may be constrained in its ability to issue common stock in connection
with acquisitions or to raise equity capital.
FACTORS THAT MAY AFFECT OUR BUSINESS
REVENUE CONCENTRATION. Our revenue sources are presently concentrated in a
small number of products and in a small base of semiconductor manufacturing
partners. To date, we have derived a substantial portion of our total revenue
from contract revenue and royalties earned on sales of video game products. In
particular, revenue from Nintendo and NEC relating to Nintendo 64 video game
players and related cartridges for the second quarter and first six months of
fiscal 1999 was 71% and 75%, respectively, of our total revenue compared to 74%
and 76% for the comparable periods in fiscal 1998. We anticipate that royalties
related to sales of Nintendo 64 video game cartridges will continue to
represent a substantial portion of our total revenue for the next several years.
Accordingly, in the near term, factors negatively affecting sales of Nintendo 64
video game cartridges could have a material adverse effect on our results of
operations and financial condition.
Under the terms of the separation of our business from that of Silicon
Graphics, we will receive all royalties payable by Nintendo under its contract
with Silicon Graphics and us with respect to sales of Nintendo 64 video game
products.
The market for home entertainment products is competitive and the
introduction of new products or technologies, as well as shifting consumer
preferences, could negatively impact the amount and timing of sales of Nintendo
64 video game players and cartridges. In addition, the eventual introduction of
the next generation Nintendo video game system is likely to result in declining
sales of Nintendo 64 video game players and related cartridges, although sales
of video game cartridges would be likely to continue for some time. We do not
expect to offset any decline in the royalties we receive on sales of Nintendo 64
video game products with revenue from any next generation Nintendo video game
product.
Although we expect that an increasingly significant portion of our future
revenue will be related to sales of digital consumer products such as handheld
personal computers and set-top boxes as well as other video game products, our
technology may not be selected for design into any such products. Accordingly,
we may remain significantly dependent on revenue related to sales of video game
products. The identity of significant products may vary from period to period
depending on the addition of new contracts and the number of designs using our
technology.
A significant portion of our total revenue has been derived from a limited
number of semiconductor manufacturers and we expect this to continue. For the
second quarter and first six months of fiscal 1999, NEC accounted for
approximately 22% and 16%, respectively, of our total revenue compared to 18%
and 15% for the comparable period in fiscal 1998. We believe that NEC will
continue to represent at least 10% of our total revenue for at least the next
several years, although NEC is not obligated to continue using our technology in
its current or future products. Because there is a relatively limited number of
semiconductor manufacturers to which we could license our technology on a basis
consistent with our business model, it is likely that our revenue sources will
continue to be concentrated among a small number of semiconductor manufacturers.
The identity of particular manufacturing partners that will account for this
revenue concentration may vary from period to period depending on the addition
or expiration of contracts, the nature and timing of payments due under such
contracts and the volumes and prices at which our partners sell products
incorporating our technology.
UNPREDICTABLE AND FLUCTUATING OPERATING RESULTS. Our revenue and
operating results may vary significantly from quarter to quarter due to a number
of factors, many of which are outside of our control. These factors include:
- the demand for and average selling prices of semiconductor products
that incorporate our technology;
- the financial terms of our contractual arrangements with our
semiconductor partners, which may require significant up-front
payments or payments based on the achievement of certain milestones;
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<PAGE>
- the relative mix of contract revenue and royalties;
- competitive pressures resulting in lower contract revenue or royalty
rates;
- our ability to develop, introduce and market new processor
intellectual property;
- the establishment or loss of strategic relationships with
semiconductor manufacturing partners or manufacturers of digital
consumer products;
- the timing of new products and product enhancements by us and our
competitors;
- changes in development schedules, research and development expenditure
levels and product support by us and digital consumer product
manufacturers;
- seasonal fluctuations; and
- general economic and market conditions.
Our revenue components are difficult to predict and may fluctuate
significantly from period to period and, because our expenses are largely
independent of our revenue in any particular period, it is difficult to
accurately forecast our operating results. Our operating expenses are based, in
part, on anticipated future revenue and a high percentage of our expenses are
fixed in the short term. As a result, if our revenue is below expectations in
any quarter, the adverse effect may be magnified by our inability to adjust
spending in a timely manner to compensate for the revenue shortfall. We also
experience seasonal fluctuations in our revenue and operating results.
In light of the foregoing and the other risks discussed in this section, we
believe that quarter-to-quarter comparisons of our revenue and operating results
may not be a good indication of our future performance. It is possible that in
some future periods our results of operations may be below the expectations of
public market analysts and investors. In this event, the price of our common
stock may fall.
RISKS ASSOCIATED WITH SHIFT IN STRATEGIC DIRECTION. Our research and
development efforts historically focused primarily on the development of
high-performance processor and related designs for Silicon Graphics'
workstations and servers. However, as the cost to design and manufacture our
processors has decreased, we have sought to penetrate the market for
high-volume, high-performance embedded applications by supporting and
coordinating the efforts of our semiconductor partners in that area. In
addition, from fiscal 1994 through fiscal 1996, the Company, together with
Silicon Graphics, was engaged in the design and development of the processor and
related graphics chip, together with related software, for the Nintendo 64 video
game system. In connection with the separation of our business from that of
Silicon Graphics in the third quarter of fiscal 1998, we formulated a new
strategic direction in which our primary focus will be the development of
processors and related designs for applications in the embedded market,
including digital consumer products such as video game products, handheld
personal computers and digital set-top boxes. This shift in strategic direction
involves several risks, including:
- An increased reliance on the evolving and highly competitive digital
consumer products industry;
- The need for our management team to refocus its research and
development efforts from processors primarily for high-performance
computer systems to processors and related designs for use in a wide
range of digital consumer products; and
- The increased importance of our sales and marketing activities and our
limited experience in this area.
SEASONALITY. Because revenue related to sales of digital consumer
products, such as Nintendo 64 video game cartridges, is expected to constitute a
substantial portion of our total revenue over the next several years, we expect
to experience seasonal fluctuations in our revenue and operating results. In
addition, we record royalty revenue from
14
<PAGE>
Nintendo in the quarter following the sale of the related Nintendo 64 video game
cartridge. Because a disproportionate amount of Nintendo 64 video game
cartridges are typically sold in our second fiscal quarter (which includes the
holiday selling season), a disproportionate amount of our revenue and operating
income is expected to be realized in our third fiscal quarter.
NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE. Our future success will
depend on the extent to which our processor and related designs are incorporated
into the products of leading digital consumer product manufacturers ("design
wins"). This requires that we develop enhancements and new generations of our
processor designs that satisfy the requirements of specific digital consumer
product applications and introduce these new technologies to the marketplace in
a timely manner. We cannot assure you that our development efforts will be
successful or that we will not encounter significant delays. If our development
efforts are not successful or are significantly delayed, or if the
characteristics of our processor designs are not compatible with the
requirements of specific digital consumer product applications, our ability to
achieve design wins may be limited. Our failure to achieve a sufficient number
of design wins could have a material adverse effect on our business, results of
operations and financial condition.
Technical innovations of the type critical to our success are inherently
complex and involve several risks, including:
- our ability to anticipate and timely respond to changes in the
requirements of digital consumer product manufacturers;
- our ability to anticipate and timely respond to changes in
semiconductor manufacturing processes;
- changing consumer preferences in the digital consumer products market;
- the emergence of new standards in the semiconductor or digital
consumer products industries;
- the significant investment that is often required before commercial
viability is determined; and
- the introduction by our competitors of products embodying new
technologies or features.
Any failure by us to adequately address these risks could render our
existing processor and related designs obsolete and could have a material
adverse effect on our business, results of operations and financial condition.
In addition, we cannot assure you that we will have the financial and other
resources necessary to develop processor and related designs in the future, or
that any enhancements or new generations of our technology, even if successfully
developed, will generate revenue in excess of the costs of development.
DEPENDENCE ON DIGITAL CONSUMER PRODUCTS INDUSTRY. The digital consumer
products industry is presently the primary market for our processor and related
designs and our success will depend on consumer acceptance of the products that
incorporate our technology. Our dependence on the digital consumer products
industry involves several risks and uncertainties, including:
- changes in consumer requirements and preferences or the introduction
of products by our competitors embodying new technologies or features;
- the potentially limited opportunities for design wins with respect to
certain digital consumer products such as video game products due to a
limited number of product manufacturers and the length of product life
cycles;
15
<PAGE>
- the difficulty in predicting the level of consumer interest in and
acceptance of many digital consumer product applications, such as
handheld personal computers and set-top boxes, which have only
recently been introduced to the market; and
- the current lack of open industry standards for hardware and software
in the digital consumer products industry;
Factors negatively affecting the digital consumer products industry could have a
material adverse effect on our business, results of operations and financial
condition. Moreover, to the extent that the performance, functionality, price
and power characteristics of our processor designs do not satisfy those that may
be critical to specific digital consumer product applications, the use of our
processor and related designs may be further confined to a limited segment of
that industry.
The timing and amount of royalties we receive depends on sales by digital
consumer product manufacturers of products incorporating our technology. The
process of persuading digital consumer product manufacturers to adopt our
technology can be lengthy and, even if adopted, we cannot be certain that our
technology will be used in a product that is ultimately brought to market,
achieves commercial acceptance or generates meaningful royalties for us. We are
subject to risks beyond our control that influence the success or failure of a
particular digital consumer product manufacturer, including:
- the competition it faces and the market acceptance of its products;
- the engineering, marketing and management capabilities of the
manufacturer and the technical challenges unrelated to our technology
that it faces in developing its products; and
- the financial and other resources of the manufacturer.
If our technology is not adopted by digital consumer product manufacturers
and incorporated into the products they sell, our business could be materially
and adversely affected. Furthermore, because we do not control the business
practices of our licensees, we do not influence the degree to which our
licensees promote our technology or set the prices at which the products
incorporating our technology are sold to digital consumer product manufacturers.
INTELLECTUAL PROPERTY MATTERS. Our success and ability to compete are
substantially dependent on our internally developed technologies and trade marks
which we attempt to protect under a combination of patent, trademark, copyright
and trade secret laws. We also use licensing agreements and employee and third
party nondisclosure and assignment agreements to limit access to and
distribution of proprietary information and to obtain ownership of technology
prepared on a work-for-hire basis. Despite our efforts to protect our
intellectual property rights, unauthorized parties may attempt to copy or
otherwise obtain and use our technologies. Policing the unauthorized use of our
intellectual property is difficult, and we cannot be certain that the steps we
have taken will prevent the misappropriation of our technologies, particularly
in foreign countries where the laws may not protect our proprietary rights as
fully as in the United States. In addition, we cannot be certain that others
will not independently develop or otherwise acquire the same or substantially
equivalent technologies as ours or obtain patent rights, which patent rights
could be used to assert infringement claims against us. Furthermore, we cannot
be certain that the steps we have taken to obtain ownership of contributed
intellectual property will be sufficient to assure our ownership of all
proprietary rights.
We own approximately 52 U.S. patents on various aspects of our technology,
with expiration dates ranging from 2006 to 2015, and have an additional 14 U.S.
patent applications pending. We also own or have filed corresponding patents
and applications in various foreign jurisdictions. We cannot assure you that
any of our patent applications will be approved or that any of the patents that
we own will not be challenged, invalidated or circumvented by others or be of
sufficient scope or strength to provide us with any meaningful protection or
commercial advantage. Moreover, significant litigation regarding intellectual
property rights exists in the industry in
16
<PAGE>
which we operate. We cannot be certain that third parties will not make a claim
of infringement against us or our semiconductor manufacturing partners in
connection with their use of our technology. Any claims, even those without
merit, could be time consuming to defend, result in costly litigation and/or
require us to enter into royalty or licensing agreements. These royalty or
licensing agreements, if required, may not be available to us on acceptable
terms or at all. A successful claim of infringement against us or one of our
semiconductor manufacturing partners in connection with its use of our
technology could adversely affect our business.
We have entered, and in the future may enter, into cross licensing
arrangements with others, including Silicon Graphics. Under these arrangements,
we license certain of our patents in exchange for patent licenses from such
licensees but do not generally transfer know-how or other proprietary
information. Although these types of cross licensing arrangements are common in
the semiconductor and processor industries, these arrangements may facilitate
the ability of such licensees, either alone or in conjunction with others, to
develop competitive products and designs.
As a result of the separation, however, we no longer have full access to
Silicon Graphics' patents and other intellectual property. We have entered into
certain licensing arrangements with Silicon Graphics with respect to certain of
its intellectual property that we use in our business. In the past, the MIPS
Group has benefited from its status as a division of Silicon Graphics in its
access to the intellectual property of third parties through licensing
arrangements or otherwise, and in the negotiation of the financial and other
terms of such arrangements. We cannot assure you that the separation of our
business from that of Silicon Graphics will not adversely affect our ability to
negotiate commercially attractive intellectual property licensing arrangements
with third parties in the future, particularly if we are no longer a
majority-owned subsidiary of Silicon Graphics. Moreover, in connection with
future intellectual property infringement claims, we will not have the benefit
of asserting counterclaims based on Silicon Graphics' intellectual property
portfolio, nor will we be able to provide licenses to Silicon Graphics'
intellectual property in order to resolve such claims.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. A substantial portion of
our revenue has been and is continuing to be derived from outside the United
States, primarily from Japan. For the second quarter and first six months of
fiscal 1999, revenue from customers outside the United States represented
approximately 92% and 90%, respectively, of our total revenue compared to 88%
and 90% for the comparable period in fiscal 1998. To date, substantially all
of our revenue from international customers has been denominated in U.S.
dollars. However, to the extent that sales by our manufacturing partners are
denominated in foreign currencies, the royalties we receive on such sales could
be subject to fluctuations in currency exchange rates. If the effective price
of the technology we sell to our partners were to increase due to fluctuations
in foreign currency exchange rates, demand for our technology could fall which
would, in turn, reduce our royalties. Because we cannot predict the amount of
non-U.S. dollar denominated revenue earned by our licensees, we have not
historically attempted to mitigate the effect that currency fluctuations may
have on our revenue, and we do not presently intend to do so in the future.
The substantial size of our international operations exposes us to a number
of additional risks, including:
- political and economic instability;
- reduced or limited protection for intellectual property;
- export license requirements, tariffs and other trade barriers;
- potentially adverse tax consequences; and
- longer accounts receivable collection periods and greater difficulty
in collection of accounts receivable.
Any negative impact on the worldwide sales of products by our manufacturing
partners could have a negative impact on our royalty revenue. There can be no
assurance that we will be able to sustain revenue derived from international
customers or that the foregoing factors will not have a material adverse effect
on our business, operating results and financial condition.
17
<PAGE>
RELIANCE ON MANUFACTURING PARTNERS. We do not manufacture or sell
processors containing our technology. Rather, we license our technology to
semiconductor manufacturers and digital consumer product manufacturers who then
incorporate our technology into the products they sell. In some cases, our
manufacturing partners also add custom integration services and derivative
design technologies to enhance our processor designs. Accordingly, the adoption
and continued use of our technology by manufacturers is critical to our success.
None of our current semiconductor manufacturing partners is obligated to license
new or future generations of our processor designs. We cannot assure you that
we will be able to maintain our current relationships or establish new
relationships with additional manufacturing partners, and any failure by us to
do so could have a material adverse effect on our business. We face numerous
risks in obtaining agreements with manufacturers on terms consistent with our
business model, including:
- the lengthy and expensive process of building a relationship with a
potential partner before there is any assurance of an agreement;
- the fact that we may compete with the internal design teams of
manufacturers in the development of products using technologies that
are similar to or an alternative to ours;
- the potential difficulties in persuading large semiconductor and other
companies to work with us, to rely on us for critical technology, and
to disclose to us proprietary manufacturing technology; and
- the potential difficulties in persuading potential partners to bear
certain development costs associated with our technology and to make
other necessary investments to produce embedded processors using our
technology.
We are also subject to many risks beyond our control that influence the
success of our manufacturing partners, including, for example, the highly
competitive environment in which they operate, the market for their products and
their engineering capabilities and financial and other resources. In addition,
our separation from Silicon Graphics may negatively effect certain of our
existing partner relationships, insofar as Silicon Graphics was a factor in
establishing and maintaining the relationship or in negotiating the financial
and other terms of our contracts with such partners (due to, for example,
Silicon Graphics' status as a customer of such partners).
OUR MARKETS ARE HIGHLY COMPETITIVE. Competition in the market for embedded
processors is intense. We believe that the principal competitive factors in our
industry are performance, functionality, price, customizability and power
consumption. Our primary competitors are ARM Holdings plc. and Hitachi
Semiconductor (America) Inc., although we also compete with semiconductor
manufacturers whose product lines include processors for embedded and
non-embedded applications, including Intel Corporation, National Semiconductor
Corporation, Advanced Micro Devices, Inc. and Motorola, Inc. To remain
competitive, we must also continue to differentiate our processor and related
designs from those available or under development by the internal design groups
of semiconductor manufacturers, including some of our current and prospective
manufacturing partners. Many of these internal design groups have substantial
programming and design resources and are part of larger organizations with
substantial financial and marketing resources. These internal design groups may
develop products that compete directly with ours or may actively seek to license
their own technology to third-party semiconductor manufacturers.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases as well as greater financial and marketing resources than we do.
This may allow them to respond more quickly than we can to new or emerging
technologies and changes in customer requirements. It may also allow them to
devote greater resources than we can to the development and promotion of their
technologies and products. We cannot assure you that we will be able to compete
successfully or that competitive pressures will not materially and adversely
effect our business, results of operations and financial condition.
LACK OF INDEPENDENT OPERATING HISTORY. Prior to the separation of our
business from that of Silicon Graphics in June 1998, we operated as a division
of Silicon Graphics and not as a separate stand-alone company. Although we
continue to be a majority owned subsidiary of Silicon Graphics, Silicon Graphics
has no obligation to assist us, except
18
<PAGE>
as provided in the management services agreement between the companies. Since
the separation, we have begun to develop and implement the operational,
administrative and other systems and infrastructure necessary to support our
current and future business as a stand-alone company, although we cannot assure
you that we will ultimately be able to develop all necessary systems and
infrastructure. Any failure to do so could have an adverse effect on our
business, results of operations and financial condition.
NEED TO MANAGE GROWTH. Our ability to continue to grow successfully
requires an effective planning and management process. Since the separation of
our business from that of Silicon Graphics, we have begun to develop the
financial, operational, managerial and administrative capabilities previously
provided by Silicon Graphics, although we will need to continue to improve these
capabilities. In addition, since June 30, 1998, we have increased our headcount
substantially from 63 employees at that date to 110 employees at December 31,
1998. This increase primarily reflects the addition of 24 employees to our
research and development staff in Denmark in December 1998 as well as additional
sales and marketing staff.
Our business plan requires that we hire additional highly skilled technical
personnel during fiscal 1999 to staff our anticipated research and development
activities. Our growth has placed, and the recruitment and integration of
additional employees will continue to place, a significant strain on our
resources. Digital consumer product manufacturers and our semiconductor
manufacturing partners typically require significant engineering support in the
design, testing and manufacture of products incorporating our technology.
Accordingly, increases in the adoption of our technology can be expected to
increase the strain on our personnel, particularly our engineers.
DEPENDENCE ON KEY PERSONNEL. Our future success depends to a significant
extent on the continued contributions of our key management, technical, sales
and marketing personnel, many of whom are highly skilled and difficult to
replace. We do not have employment agreements with any of our officers or key
employees. In addition, our business plan requires that we identify and hire
additional highly skilled personnel, particularly technical personnel for our
anticipated research and development activities. Competition for qualified
personnel, particularly those with significant experience in the semiconductor
and processor design industries, is intense. The loss of the services of any of
the key personnel or our inability to attract and retain qualified personnel in
the future could have a material adverse effect on our business, operating
results and financial condition.
YEAR 2000 COMPLIANCE. Many computer programs and embedded date-reliant
systems use two digits rather than four to define the applicable year. Programs
and systems that record only the last two digits of the calendar year may not be
able to distinguish whether "00" means 1900 or 2000. If not corrected,
date-related information and data could cause such programs or systems to fail
or to generate erroneous information.
Although our processor and related designs have no inherent time or date
function, we initiated a comprehensive assessment of our Year 2000 readiness in
September, 1998. We have recently completed this assessment and have begun to
implement programs to make our information technology ("IT") and related non-IT
and processes Year 2000 compliant. In addition, we recently replaced our
internal computer systems and operating and applications software with equipment
and software that is Year 2000 compliant. We expect to complete changes to
critical systems by the third quarter of calendar 1999. We believe that we have
allocated sufficient resources for our Year 2000 compliance efforts, and we
estimate the total costs connected with our efforts to be less than $200,000.
We intend to cooperate with our manufacturing partners and others with whom
we do business to coordinate Year 2000 compliance with operational processes and
marketed products. However, we are unable to directly assess the Year 2000
compliance of products and technologies developed by others and incorporating
our technology. To the extent that any such third-party product or technology
is not Year 2000 compliant, we may be adversely affected due to our association
with such product or technology. In addition, our revenue and operating results
could become subject to unexpected fluctuations and could be adversely effected
if our partners or manufacturers of digital consumer products encounter Year
2000 compliance problems that affect their ability to distribute products that
incorporate our technology.
We will also be contacting critical suppliers to determine whether the
products and services they provide to us are Year 2000 compliant. We may
develop contingency plans should the need arise. A delay or failure by our
critical
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<PAGE>
suppliers to be Year 2000 compliant could, in a worst case, interrupt our
business and have an adverse effect on our business, financial condition and
results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
NOT APPLICABLE.
20
<PAGE>
EXHIBIT 99.4
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 8-K
CURRENT REPORT
-----------------------
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): FEBRUARY 26, 1999
MIPS Technologies, Inc.
(Exact Name of Registrant as specified in its Charter)
-----------------------
Delaware 77-0322161
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Identification No.)
Organization)
000-24487
(Commission File No.)
1225 Charleston Road
Mountain View, CA 94043
(Address of Principal Executive Offices, Including Zip Code)
(650) 567-5000
(Registrant's Telephone Number, Including Area Code)
None
(Former Name or Former Address, if Changed Since Last Report)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
ITEM 5. OTHER EVENTS
In connection with the filing of a Registration Statement on Form S-1,
the Registrant filed this Current Report on Form 8-K in order to update
certain disclosures contained in its Quarterly Report on Form 10-Q for the
quarter ended December 31, 1998 under the caption "Factors that May Affect
our Business." Refer to Exhibit 99.1.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Not applicable
(b) Not applicable
(c) Exhibits
Exhibit Decription
- ------- ----------
99.1 Factors that May Affect
Our Business
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MIPS TECHNOLOGIES, INC.
Date: February 26, 1999 By: /s/ Kevin C. Eichler
------------------------------
Name: Kevin C. Eichler
Title: Vice President, Chief
Financial Officer and
Treasurer
<PAGE>
FACTORS THAT MAY AFFECT OUR BUSINESS
Revenue Concentration
We have derived a significant portion of our total revenue from a limited
number of semiconductor companies, and we expect this to continue. For the
second quarter and for the first six months of fiscal 1999, NEC accounted for
approximately 22% and 16%, respectively, of our revenue compared to 18% and
15% for the comparable period in fiscal 1998. We believe that NEC will
continue to represent more than 10% of our total revenue for at least the
next several years, although NEC is not obligated to continue using our
technology in current or future products. While we continue to broaden our
base of licensees, it is likely that our revenue will continue to be
concentrated among a small number of semiconductor companies. The identity of
particular licensees that will account for this revenue concentration will
vary from period to period depending on the addition or expiration of
contracts, the nature and timing of payments due under our contracts and the
volumes and prices at which our licensees sell products incorporating our
technology.
Our revenue is also presently concentrated in a small number of products. To
date, we have derived a substantial portion of our total revenue from contract
revenue and royalties earned on sales of video game products. In particular,
revenue from Nintendo and NEC relating to Nintendo 64 video game players and
related cartridges for the second quarter and first six months of fiscal 1999
was 71% and 75%, respectively, of our total revenue compared to 74% and 76%
for the comparable periods in fiscal 1998.
We anticipate that royalties related to sales of Nintendo 64 video game
cartridges will continue to represent a substantial portion of our total revenue
for the next several years. Accordingly, factors negatively affecting sales of
Nintendo 64 video game cartridges could have a material adverse effect on our
results of operations and financial condition.
The market for home entertainment products is competitive and the
introduction of new products or technologies, as well as shifting consumer
preferences, could negatively impact the amount and timing of sales of
Nintendo 64 video game players and related cartridges. In addition, the
eventual introduction of the next generation Nintendo video game system is
likely to result in declining sales of Nintendo 64 video game players and
related cartridges, although sales of video game cartridges, which account
for a significant portion of our royalties, will continue, albeit at a
declining rate, for a period of time after the introduction. We developed key
elements of the Nintendo 64 system in conjunction with Silicon Graphics.
These elements included certain software and graphics technologies which, as
a result of our separation from Silicon Graphics and our shift in strategic
direction in early 1998, we no longer offer. Accordingly, we will need to
generate revenue growth from our stated markets to offset the eventual
decline of Nintendo 64 royalties. We understand that the next generation
Nintendo video game system will not incorporate any of our technology. We
value our relationship with Nintendo; however, there can be no assurance that
this relationship will result in any revenues for us other than those
generated by the sale of Nintendo 64 video game players and related
cartridges. In May 1998, we entered into a memorandum of understanding with
Silicon Graphics, Nintendo Co. Ltd. and ArtX, Inc. resolving certain disputes
among the parties. See "Business -- Litigation".
Although we expect that an increasingly significant portion of our future
revenue will be related to sales of digital consumer and business equipment
products, our technology
<PAGE>may not be selected for design into any such products. Accordingly, we
may remain significantly dependent on revenue related to sales of video game
products, which may decline. Our ability to diversify our sources of revenue
is still uncertain and will depend on whether our processors and related
designs are accepted in a broader range of digital consumer products and
business equipment. Our experience in these markets is limited because, prior
to 1998, we were focused primarily on the development of high performance
processors for Silicon Graphics' workstations and related designs. Our new
focus requires us to shift our research and development efforts and places an
increased importance on our sales and marketing efforts. As we shift our
direction, the identity of significant products may vary from period to
period depending on the addition of new contracts and the number of designs
using our technology.
Unpredictable and Fluctuating Operating Results
Our revenue and operating results may vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control.
These factors include:
- the demand for and average selling prices of semiconductor products that
incorporate our technology;
- the financial terms of our contractual arrangements with our semiconductor
licensees, which may provide for significant up-front payments or payments
based on the achievement of certain milestones;
- the relative mix of contract revenue and royalties;
- competitive pressures resulting in lower contract revenue or royalty
rates;
- our ability to develop, introduce and market new processor intellectual
property;
- the establishment or loss of licensing relationships with semiconductor
manufacturing companies, fabless semiconductor companies or system
original equipment manufacturers;
- the timing of new products and product enhancements by us and our
competitors;
- changes in development schedules, research and development expenditure
levels and product support by us and digital consumer product
manufacturers;
- seasonal fluctuations; and
- general economic and market conditions.
Our revenue components are difficult to predict and may fluctuate
significantly from period to period. Because our expenses are largely
independent of our revenue in any particular period, it is difficult to
accurately forecast our operating results. Our operating expenses are based, in
part, on anticipated future revenue and a high percentage of our expenses are
fixed in the short term. As a result, if our revenue is below expectations in
any quarter, the adverse effect may be magnified by our inability to adjust
spending in a timely manner to compensate for the revenue shortfall.
We also expect to experience seasonal fluctuations in our revenue and
operating results because revenue related to sales of digital consumer
products is expected to constitute a substantial portion of our total revenue
over the next several years. We typically record royalty revenue from our
licensees, including Nintendo, in the quarter following the sale of the
related digital consumer product. Because a disproportionate amount of
Nintendo 64 video game cartridges are typically sold in our second fiscal
quarter (which includes the holiday selling season), we have realized a
disproportionate amount of our revenue and operating income in our third
fiscal quarter. We expect that these seasonal fluctuations will continue as
we increase our focus on processors, cores and related designs for
high-volume digital consumer products.
<PAGE>
In light of the foregoing and the other risks discussed in this section,
we believe that quarter-to-quarter comparisons of our revenue and operating
results may not be a good indication of our future performance. It is
possible that in some future periods our results of operations may be below
the expectations of public market analysts and investors. In this event, the
price of our common stock may fall.
Dependence on Digital Consumer Products Industry
The digital consumer products industry is presently the primary market for
our processor, core and related designs. As a result, our success will depend
largely on consumer acceptance of the products that incorporate our technology.
Our dependence on the digital consumer products industry involves several risks
and uncertainties, including:
- changes in consumer requirements and preferences;
<PAGE>
- the introduction of products by our competitors embodying new technologies
or features;
- the potentially limited opportunities for design wins with respect to
certain digital consumer products, such as video game products, due to a
limited number of product manufacturers and the length of product life
cycles;
- the difficulty in predicting the level of consumer interest in and
acceptance of many digital consumer product applications, such as handheld
personal computers and set-top boxes, which have only recently been
introduced to the market; and
- the current lack of open industry standards for hardware and software in
the digital consumer products industry.
Factors negatively affecting the digital consumer products industry could
have a material adverse effect on our business, results of operations and
financial condition. Moreover, to the extent that the performance,
functionality, price and power characteristics of our processor designs do not
satisfy those that may be critical to specific digital consumer product
applications, the use of our processors, cores and related designs may be
further confined to a limited segment of that industry.
The timing and amount of royalties we receive depends on sales by digital
consumer product manufacturers of products incorporating our technology. The
process of persuading digital consumer product manufacturers to adopt our
technology can be lengthy. Even if our technology is adopted, we cannot be
certain that it will be used in a product that is ultimately brought to market,
achieves commercial acceptance or generates meaningful royalties for us. We are
subject to risks beyond our control that influence the success or failure of a
particular digital consumer product manufacturer, including:
- the competition the manufacturer faces and the market acceptance of its
products;
- the engineering, marketing and management capabilities of the manufacturer
and the technical challenges unrelated to our technology that it faces in
developing its products; and
- the financial and other resources of the manufacturer.
If our technology is not adopted by digital consumer product manufacturers
and incorporated into the products they sell, our business could be materially
and adversely affected. Furthermore, because we do not control the business
practices of our licensees, we do not influence the degree to which our
licensees promote our technology or set the prices at which the products
incorporating our technology are sold to digital consumer product manufacturers.
New Product Development and Technological Change
Our future success will depend on the extent to which our processor, core
and related designs are incorporated into the products of leading digital
consumer product and business equipment manufacturers ("design wins"). This
requires that we develop enhancements and new generations of our processors,
cores and other intellectual property that satisfy the requirements of specific
product applications and introduce these new technologies to the marketplace in
a timely manner. We cannot assure you that our development efforts will be
successful or that we will not encounter significant delays. If our development
efforts are not successful or are significantly delayed, or if the
characteristics of our processors, cores and other intellectual property are not
compatible with the requirements of specific product applications, our ability
to achieve design wins may be limited. Our failure to achieve a sufficient
number of design wins could have a material adverse effect on our business,
results of operations and financial condition.
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Technical innovations of the type critical to our success are inherently
complex and involve several risks, including:
- our ability to anticipate and timely respond to changes in the
requirements of digital consumer product and business equipment
manufacturers;
- our ability to anticipate and timely respond to changes in semiconductor
manufacturing processes;
- changing consumer preferences in the digital consumer products market;
- the emergence of new standards in the semiconductor, digital consumer
product or business equipment industries;
- the significant investment that is often required before commercial
viability is determined; and
- the introduction by our competitors of products embodying new technologies
or features.
Any failure by us to adequately address these risks could render our
existing processor, core and related designs obsolete and could have a material
adverse effect on our business, results of operations and financial condition.
In addition, we cannot assure you that we will have the financial and other
resources necessary to develop processor, core and related designs in the
future, or that any enhancements or new generations of the technology that we
develop will generate revenue in excess of the costs of development.
Intellectual Property Matters
Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks which we attempt to protect
through a combination of patent, trademark, copyright and trade secret laws. We
also use licensing agreements and employee and third party nondisclosure and
assignment agreements to limit access to and distribution of our proprietary
information and to obtain ownership of technology prepared on a work-for-hire
basis.
Despite our efforts to protect our intellectual property rights,
unauthorized parties may attempt to copy or otherwise obtain and use our
technologies, including in the marketing and sale of unauthorized MIPS-based
clones. We intend to vigorously protect our intellectual property rights through
litigation and other means. However, there can be no assurance that we will be
able to enforce our rights or prevent other parties from designing and marketing
unauthorized MIPS-based products.
Policing the unauthorized use of our intellectual property is difficult, and
we cannot be certain that the steps we have taken will prevent the
misappropriation of our technologies, particularly in foreign countries where
the laws may not protect our proprietary rights as fully as in the United
States. In addition, we cannot be certain that others will not independently
develop or otherwise acquire the same or substantially equivalent technologies
as ours or that the steps we have taken to obtain ownership of contributed
intellectual property and to prevent misappropriation of our intellectual
property will be sufficient.
We own 54 U.S. patents on various aspects of our technology, with expiration
dates ranging from 2006 to 2017, and have an additional 15 U.S. patent
applications pending. We also own or have filed corresponding patents and
applications in various foreign jurisdictions. We cannot assure you that any of
our patent applications will be approved or that any of the patents that we own
will not be challenged, invalidated or circumvented by others or be of
sufficient scope or strength to provide us with any meaningful protection or
commercial advantage. Moreover, significant litigation regarding intellectual
property rights exists in our industry. We cannot be certain that third parties
will not make a claim of infringement against us or against our semiconductor
manufacturing licensees in connection with their use of our technology. Any
claims, even those without merit, could be time consuming to defend, result in
costly litigation and/or require us to enter into royalty or licensing
agreements. These royalty or licensing agreements, if required, may not be
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available to us on acceptable terms or at all. A successful claim of
infringement against us or one of our semiconductor manufacturing licensees in
connection with its use of our technology could adversely affect our business.
We have entered into, and in the future may enter into, cross licensing
arrangements with others, including Silicon Graphics. Under these arrangements,
we license certain of our patents in exchange for patent licenses from such
licensees but do not generally transfer know-how or other proprietary
information. Although these types of cross licensing arrangements are common in
the semiconductor and processor industries, these arrangements may facilitate
the ability of such licensees, either alone or in conjunction with others, to
develop competitive products and designs.
We have entered into licensing arrangements with Silicon Graphics with
respect to certain of its intellectual property that we use in our business.
As a result of the separation, however, we no longer have full access to
Silicon Graphics' patents and other intellectual property. In the past, the
MIPS Group benefitted from its status as a division of Silicon Graphics in
its access to the intellectual property of third parties through licensing
arrangements or otherwise, and in the negotiation of the financial and other
terms of such arrangements. The separation of our business from that of
Silicon Graphics could adversely affect our ability to negotiate commercially
attractive intellectual property licensing arrangements with third parties in
the future, particularly if we are no longer a majority-owned subsidiary of
Silicon Graphics. Moreover, in connection with future intellectual property
infringement claims, we will not have the benefit of asserting counterclaims
based on Silicon Graphics' intellectual property portfolio, nor will we be
able to provide licenses to Silicon Graphics' intellectual property in order
to resolve such claims.
Lack of Independent Operating History
Prior to the separation of our business from that of Silicon Graphics in
June 1998, we
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operated as a division of Silicon Graphics and not as a separate stand-alone
company. Although we continue to be a majority owned subsidiary of Silicon
Graphics, Silicon Graphics has no obligation to assist us except as provided
in the management services agreement between the companies. If we fail to
implement the operational, administrative and other systems and
infrastructure necessary to support our business as a stand-alone company,
our business, results of operations and financial condition could be
adversely affected.
Our Markets Are Highly Competitive
Competition in the market for embedded processors is intense. We believe
that the principal competitive factors in our industry are performance,
functionality, price, customizability and power consumption. Our processors
and cores compete with those of ARM Holdings plc, Hitachi Semiconductor
(America) Inc. and PowerPC (an alliance between Motorola, Inc. and IBM
Corporation), although we also compete with semiconductor manufacturers whose
product lines include processors for embedded and non-embedded applications,
including Intel Corporation, National Semiconductor Corporation, Advanced
Micro Devices, Inc. and Motorola, Inc. In addition, we may face competition
from the producers of unauthorized MIPS-based clones and non-RISC based
technology designs.
To remain competitive, we must also differentiate our processors, cores and
related designs from those available or under development by the internal design
groups of semiconductor manufacturers, including some of our current and
prospective manufacturing licensees. Many of these internal design groups have
substantial programming and design resources and are part of larger
organizations with substantial financial and marketing resources. These internal
design groups may develop products that compete directly with ours or may
actively seek to license their own technology to third-party semiconductor
manufacturers.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater brand recognition, larger
customer bases as well as greater financial and marketing resources than we do.
This may allow them to respond more quickly than we can to new or emerging
technologies and changes in customer requirements. It may also allow them to
devote greater resources than we can to the development and promotion of their
technologies and products. In addition, we may face competition from non-RISC
based designs of technology. We cannot assure you that we will be able to
compete successfully or that competitive pressures will not materially and
adversely effect our business, results of operations and financial condition.
Dependence on Key Personnel
Our future success depends to a significant extent on the continued
contributions of our key management, technical, sales and marketing
personnel, many of whom are highly skilled and difficult to replace. We do
not have employment agreements with any of our officers or key employees. We
intend to hire additional highly skilled personnel, particularly technical
personnel, for our anticipated research and development activities.
Competition for qualified personnel, particularly those with significant
experience in the semiconductor and processor design industries, is intense.
The loss of the services of any of our key personnel or our inability to
attract and retain qualified personnel in the future could have a material
adverse effect on our business, results of operations and financial
condition. In particular, our ability to hire and retain qualified
engineering personnel is essential to meet our business goals.
Risks Associated With International Operations
A substantial portion of our revenue has been, and is expected to
continue to be, derived from customers outside the United States, primarily
in Japan. For the second quarter and for first six months of fiscal 1999,
revenue from customers outside the United States represented approximately
92% and 90%, respectively, of our total revenue compared to 88% and 90% for
the comparative period in fiscal 1998.
To date, substantially all of our revenue from international customers has
been denominated in U.S. dollars. However, to the extent that the sales by our
manufacturing licensees to their customers are denominated in foreign
currencies, the royalties we receive on such sales could be subject to
fluctuations in currency exchange rates. If the effective price of the
technology we sell to our licensees were to increase due to fluctuations in
foreign currency exchange rates, demand for our technology could fall which
would, in turn, reduce our royalties. Because we cannot predict the amount of
non-U.S. dollar denominated revenue earned by our licensees, we have not
historically attempted to mitigate the effect that currency fluctuations may
have on our revenue, and we do not presently intend to do so in the future.
The relative significance of our international operations exposes us to a
number of additional risks, including:
- political and economic instability;
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- reduced or limited protection for intellectual property;
- export license requirements, tariffs and other trade barriers;
- potentially adverse tax consequences; and
- longer accounts receivable collection periods and greater difficulty in
collection of accounts receivable.
Need to Manage Growth
Our ability to continue to grow successfully requires an effective planning
and management process. Although we have developed much of the financial,
operational and administrative capabilities previously provided to us by Silicon
Graphics, we will need to continue to improve these capabilities. Since June 30,
1998, we have increased our headcount substantially, from 63 employees at that
date to 110 employees at December 31, 1998. This increase includes the addition
of 24 employees in December 1998 to staff research and development activities at
our new development center in Denmark, as well as additional employees in our
sales and marketing staff.
Our growth has placed, and the recruitment and integration of additional
employees will continue to place, a strain on our resources. Digital consumer
product manufacturers and our semiconductor manufacturing licensees typically
require significant engineering support in the design, testing and manufacture
of products incorporating our technology. Accordingly, increases in the adoption
of our technology can be expected to increase the strain on our personnel,
particularly our engineers.
Reliance on Semiconductor Company Licensees
We do not manufacture or sell processors containing our technology. Rather,
we license our technology to semiconductor companies and digital consumer
product manufacturers who then incorporate our technology into the products they
sell. In some cases, our licensees also add custom integration services and
derivative design technologies to enhance our processor designs. Accordingly,
the adoption and continued use of our technology by semiconductor companies
is important to our continued success. None of our current semiconductor
company licensees is obligated to license new or future generations of our
processor designs. We cannot assure you that we will be able to maintain our
current relationships or establish new relationships with additional licensees,
and any failure by us to do so could have a material adverse effect on our
business. We face numerous risks in obtaining agreements with semiconductor
companies on terms consistent with our business model, including:
- the lengthy and expensive process of building a relationship with a
potential licensee before there is any assurance of an agreement;
- the fact that we may compete with the internal design teams of
semiconductor companies in the development of products using
technologies that are similar to or an alternative to ours;
- the potential difficulties in persuading large semiconductor companies to
work with us, to rely on us for critical technology, and to disclose to us
proprietary manufacturing technology; and
- the potential difficulties in persuading potential licensees to bear
certain development costs associated with our technology and to make other
necessary investments to produce embedded processors using our technology.
We are also subject to many risks beyond our control that influence the
success of our licensees, including, for example, the highly competitive
environment in which they operate, the market for their products, their
engineering capabilities and their financial and other resources. In
addition, our separation from Silicon Graphics may negatively affect certain
of our existing licensee relationships, insofar as Silicon Graphics was a
factor in establishing and maintaining the relationship or in negotiating the
financial and other terms of our contracts with such licensees (due to, for
example, Silicon Graphics' status as a customer of such licensees).
Year 2000 Issue
Many computer programs and embedded date-reliant systems use two digits
rather than four to define the applicable year. Programs and systems that record
only the last two digits of the calendar year may not be able to distinguish
whether "00" means 1900 or 2000. If not corrected, date-related information and
data could cause such programs or systems to fail or to generate erroneous
information.
Although our processor and related designs have no inherent time or date
function, we initiated a comprehensive assessment of our Year 2000 readiness in
September 1998.
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We have recently completed this assessment and have begun to implement
programs to make our information technology (IT) and related non-IT and
processes Year 2000 compliant. In addition, we recently replaced our internal
computer systems and operating and applications software. Each of the
suppliers of these systems and software has indicated to us that it believes
its products are Year 2000 compliant. We expect to complete changes to
critical systems by the third quarter of calendar year 1999. We believe that
we have allocated sufficient resources for our Year 2000 compliance efforts,
and we expect that our total costs associated with these efforts will be less
than $200,000, exclusive of ordinary costs to upgrade and maintain our
equipment.
We intend to cooperate with our licensees and others with whom we do
business to coordinate Year 2000 compliance with operational processes and
marketed products. However, we are unable to directly assess the Year 2000
compliance of products and technologies developed by others and incorporating
our technology. To the extent that any such third-party product or technology is
not Year 2000 compliant, we may be adversely affected due to our association
with such product or technology. In addition, our revenue and operating results
could become subject to unexpected fluctuations and could be adversely effected
if our licensees or system original equipment manufacturers encounter Year 2000
compliance problems that affect their ability to distribute products that
incorporate our technology.
We will also be contacting critical suppliers to determine whether the
products and services they provide to us are Year 2000 compliant. We will
develop contingency plans should the need arise. A delay or failure by our
critical suppliers to be Year 2000 compliant could, in a worst case, interrupt
our business and have an adverse effect on our business, financial condition and
results of operations.
