-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BnHG/9TSlZN5gtDQpuwZQcT4o0iH0XT1aX2gdX7NZckBicpq+TJYZr+4iT3pmm+a ZIdSBubT57rZ00dOK43+vQ== 0000891554-98-001209.txt : 19980925 0000891554-98-001209.hdr.sgml : 19980925 ACCESSION NUMBER: 0000891554-98-001209 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980924 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIPS TECHNOLOGIES INC CENTRAL INDEX KEY: 0001059786 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 770322161 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24487 FILM NUMBER: 98714193 BUSINESS ADDRESS: STREET 1: 2011 N SHORELINE BLVD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 6509601980 MAIL ADDRESS: STREET 1: 2011 N SHORELINE BLVD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 10-K 1 ANNUAL REPORT ================================================================================ 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 ACTS 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. ================================================================================ PART 1 Item 1. Business General On July 6, 1998 the Company completed its initial public offering (the "Offering"). Prior to the Offering, the Company was a wholly owned subsidiary of Silicon Graphics. 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"). Prior to the Separation, the Company's business was conducted by Silicon Graphics primarily through its MIPS Group, a division of Silicon Graphics. The Company's predecessor, MIPS Computer Systems, Inc., was founded in 1984 and was engaged in the design and development of RISC microprocessors for the computer systems and embedded markets. Silicon Graphics adopted the MIPS architecture for its computer systems in 1988 and acquired MIPS Computer Systems, Inc. in 1992. Following the acquisition, Silicon Graphics continued the MIPS microprocessor business through its MIPS Group, which focused primarily on the development of high-performance microprocessors for Silicon Graphics' workstations and servers. Until the last few years, cost considerations limited the broader use of these microprocessors. However, as the cost to design and manufacture microprocessors based on the MIPS technology decreased, the MIPS Group sought to penetrate the consumer market, both through supporting and coordinating the efforts of the MIPS semiconductor partners and by partnering with Nintendo Co., Ltd. ("Nintendo") in its design of the Nintendo 64 video game player and related cartridges. The Company is a leading designer and developer of RISC-based high-performance microprocessor intellectual property for embedded systems applications. The Company has established a distribution channel for its intellectual property by licensing its technology to key semiconductor partners. Each of these partners possesses leading design and/or process technology and can leverage a strong market position in strategic embedded markets. To date, the MIPS RISC architecture has been used to create over 60 separate microprocessor products. These microprocessor products have a cumulative installed base of over 70 million units and have been embedded into a variety of products such as video games, color printers and handheld personal computers. The Company's semiconductor partners reported that approximately 47 million units based on the Company's RISC architecture were shipped in fiscal year 1998. The Company's technology focuses on providing cost-effective and high-performance microprocessor and related designs for high-volume embedded applications. The MIPS RISC architecture is flexible and allows semiconductor manufacturers to integrate their intellectual property with the Company's microprocessor and related designs to develop differentiated and innovative products for a variety of embedded applications within demanding time-to-market requirements. The advantages of the MIPS architecture relate primarily to scalability of die size and performance. Products incorporating the MIPS architecture range from disk drives using microprocessor cores with a die size of less than two square millimeters to high-performance workstations using microprocessors with a die size of 300 square millimeters. In addition, while designed for high performance, the Company's RISC-based architectures have been incorporated in low-power applications such as the Philips Velo and the NEC MobilePro handheld personal computers. The MIPS architecture is designed around upward compatible instruction sets that enable manufacturers developing products across a broad range of price/performance points to use common support tools and software. The Company was incorporated in Delaware in June 1992. The Company 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. Industry Background Rapid advances in semiconductor technology have enabled the development of higher performance microprocessors at lower cost. As a result, it is now cost-effective for system OEMs to embed these microprocessors into a wider range of electronic products and systems, including a new generation of digital consumer products. At the same time, improvements in semiconductor manufacturing processes have enabled the integration of entire 1 systems onto a single integrated circuit to create complex system-on-a-chip solutions. However, design tool capabilities and the internal design resources of semiconductor manufacturers and system OEMs have not kept pace with the increase in the number of transistors that can be placed on a single chip. Consequently, a significant and growing "design gap" for semiconductor designers and manufacturers has developed. To address this "design gap," semiconductor designers and manufacturers are increasingly licensing proven and reusable intellectual property components such as microprocessor cores, memories and logic blocks from third-party suppliers to create differentiated products and reduce development costs and time-to-market. The availability of low-cost, high-performance microprocessors and the development of system-on-a-chip technology have contributed to the emergence and rapid growth of the market for embedded systems, particularly advanced digital consumer products. Embedded systems are broadly defined as microcontrollers and microprocessors plus related software incorporated into devices other than personal computers, workstations, servers, mainframes and minicomputers. Until recently, this market was dominated by low-cost 4-, 8- and 16-bit microcontrollers embedded primarily into low-cost, high-volume consumer products such as home appliances, facsimile machines, printers, telephone answering machines and various automobile systems. The use of higher performance 32- and 64-bit microprocessors was common in higher cost but lower volume applications such as telecommunications switching equipment and data networking routers. Although microcontrollers are adequate for basic system control functions, they lack the performance and bandwidth capabilities to implement today's advanced functions. Recently, however, the price of 32- and 64-bit microprocessors has reached the point where it is now cost-effective to embed these solutions into low-cost, high-volume digital consumer products. Digital consumer products that incorporate high-performance microprocessors and software can offer advanced functionality such as realistic 3-D graphics rendering, digital audio and video, and communications and high-speed signal processing. To meet the demands of the digital consumer products market, system OEMs rely on semiconductor manufacturers to design and deliver critical components within rigorous price and performance parameters. In order to supply products for these markets, semiconductor suppliers are increasingly combining their own intellectual property with that of third-party suppliers such as the Company in the form of microprocessor cores and other functional blocks. The MIPS Network Through its network of semiconductor partners, independent software vendors and system OEMs, the Company has developed the infrastructure to support its architecture as a standard platform for the embedded market. Semiconductor Partners. The Company currently has seven semiconductor partners that develop, market and sell silicon solutions based on the MIPS RISC microprocessor architecture. Because products incorporating the Company's intellectual property are sold to system OEMs by its semiconductor partners (and not directly by the Company), these partners operate as a value-added distribution channel. Several of the Company's partners have had contracts with the Company and its predecessors since prior to Silicon Graphics' acquisition of MIPS Computer Systems, Inc. in 1992. The Company's current semiconductor partners are Integrated Device Technology ("IDT"), LSI Logic Corporation ("LSI Logic"), NEC Corporation ("NEC"), NKK Corporation ("NKK"), Philips Electronics N.V. ("Philips"), Quantum Effect Design, Inc. ("QED") and Toshiba Corporation ("Toshiba"). Several of the Company's manufacturing partners have made significant investments in MIPS technology and market development which has resulted in multiple design teams around the world engaged in the development of MIPS-based microprocessors and related designs. The Company's partners and their associated design teams have developed a broad portfolio of microprocessors and standard products based on the MIPS RISC architecture as well as application specific extensions which can be licensed back to the Company and offered to its other partners Independent Software Vendors. The Company's RISC architecture is further enabled by a variety of third-party independent software vendors that provide operating systems and engineering development tools such as compilers, debuggers and in-circuit emulation testers. Currently, these companies provide over 150 products in support of the Company's RISC architecture. This software support allows system OEMs to design the MIPS microprocessor technology into their products. Software operating systems developed by Microsoft, Wind River Systems, Inc. and Integrated Systems Inc. are compatible with the Company's RISC architecture. System OEMs. Microprocessor products based on the Company's RISC architecture are used by a variety of system OEMs in the embedded market. A number of high-profile digital consumer products incorporate the Company's RISC-based microprocessor intellectual property, including the Nintendo 64 and Sony PlayStation 2 video game systems, the Philips Velo and NEC MobilePro handheld personal computers and the digital set-top boxes from Echostar and WebTV. The Company participates in various sales and technical efforts directed to system OEMs and has launched a promotional campaign aimed at increasing brand awareness of the MIPS RISC architecture among system OEMs and software vendors. Markets and Applications Digital Consumer Products. Together with its existing semiconductor manufacturing partners and their associated design teams, the Company seeks to leverage the MIPS RISC architecture into solutions for a wide variety of sophisticated, high-volume digital consumer products such as video game products, handheld personal computers and set-top boxes. To date, the Company's RISC-based microprocessors have been designed into many digital consumer products, including the Nintendo 64 and Sony PlayStation video game systems. Revenue related to the video game market presently accounts for a substantial majority of the Company's total revenue, and such revenue is expected to continue to account for a significant portion of the Company's total revenue for at least the next several years. Video Games. The market for video games, which represented the first high-volume consumer application for 32- and 64-bit microprocessors, accounted for approximately 30 million units in 1997, of which an estimated 90% used the Company's technology. The Company's key design wins in this market include the Nintendo 64 video game system, which was introduced in 1996 and uses a MIPS R4300i microprocessor manufactured by NEC, and the Sony PlayStation, which was introduced in 1994 and uses a MIPS R3000 class embedded microprocessor developed by LSI Logic. Set-Top Boxes. As digital transmission of video signals becomes more widely utilized, the Company believes that the market for compatible set-top boxes could represent an area of growth in the use of 32- and 64-bit microprocessors and related designs. The Company's key design wins in this market include the set-top box used in WebTV's Internet appliance, introduced in 1996, which uses a MIPS R4000 class microprocessor manufactured by IDT. Echostar's Dish Network set-top box, introduced in 1996, uses a MIPS R3000 class microprocessor that is also manufactured by IDT. General Instrument Corporation's DCT-5000+ advanced interactive digital set-top terminal will also use a MIPS based product. Handheld Personal Computers. While the market for handheld personal computers has only recently begun to develop, the Company expects that this market will continue to grow as these devices become more interactive with desktop PCs. To date, the Company's RISC-based microprocessor designs have been incorporated into products such as the Philips Velo and Sharp's Mobilon, both of which use a MIPS R3000 class microprocessor developed by Philips. In addition, NEC has incorporated a MIPS R4000 class microprocessor design into its MobilePro handheld personal computer. Other Embedded Applications. Significant design wins in more traditional embedded market applications include networking communications equipment from Cisco as well as laser printers from Hewlett-Packard Company, Electronics for Imaging Inc. and Brother Industries, Ltd. Products The Company designs, develops and licenses intellectual property for high-performance microprocessors. The Company's intellectual property is used in the design of microprocessor cores, instruction set architectures ("ISAs") and application specific extensions ("ASEs") that enable its semiconductor partners to manufacture flexible, high-performance microprocessors for embedded systems within demanding time-to-market requirements. Through licensing and royalty-based arrangements with its semiconductor partners, the Company seeks to strengthen the position of the MIPS architecture in the microprocessor industry and proliferate its designs in embedded systems applications. The Company has not historically and does not intend to manufacture microprocessors and related devices. Basic Cores. The Company currently provides flexible, modular microprocessor cores covering a range of performance/price points to enable its manufacturing partners to provide customized semiconductor products more quickly to system OEMs. R3000. The R3000 is a 32-bit microprocessor introduced in 1988 that has served as the basis for many derivatives by the Company's semiconductor partners and is available from the Company in core form. The 3 small die size (less than two square millimeters in one implementation) and performance characteristics of the R3000 make it well-suited for applications such as video game consoles, including the Sony PlayStation, and handheld personal computers, copiers, networking equipment and laser printers. R4000. The R4000 is a 64-bit microprocessor introduced in 1992 that has served as the basis for a variety of derivatives, including the R4300i which, together with Silicon Graphics' Reality Co-Processor (RCP), is used in Nintendo 64 video game players. The R4000 was designed for applications in which high performance is the principle objective, such as video games, computer systems, network servers and interactive consumer applications such as set-top boxes. R5000. The R5000 is a 64-bit microprocessor developed by QED in January 1996 that is presently licensed to the Company. The R5000, which can be sublicensed by the Company to its other semiconductor partners, is a dual instruction issue processor that has served as the microprocessor in several of Silicon Graphics' workstations. Its performance characteristics make it an attractive microprocessor for more powerful and sophisticated embedded applications. Instruction Set Architectures. Instruction set architectures are combinations of binary instructions and the hardware to execute them which together determine the native capability of a microprocessor. ISA standards are important because, among other things, they become the common points around which tools are built, software libraries and compilers are written and software operating systems are developed. Elements of an ISA may be copyrighted or patented thus preventing unrestricted use without a license. The Company licenses its ISAs to promote the development and marketing of MIPS compatible parts by its semiconductor manufacturing partners. MIPS I/II. The MIPS I/II instruction set architecture is the basic series of instructions for 32-bit operations. This instruction set, which is presently used in a wide range of applications, allows the performance of integer and floating point computation, logical operations, data movement and a variety of other functions. The MIPS II ISA is implemented in the R3000 series of products. Full MIPS I/II compatibility is protected by patents, copyrights and trademarks owned by the Company. MIPS III. In addition to providing full support for the MIPS II ISA, the MIPS III instruction set architecture extends the MIPS II ISA to 64-bit operations, increases the number of floating point registers and adds certain other functions. The MIPS III ISA is implemented in the R4000 series of products. MIPS III is a patented instruction set that is necessary to operate 64-bit MIPS microprocessors in 64-bit mode. MIPS IV. MIPS IV enhances floating point operations and adds additional instructions that improve performance in a number of engineering and scientific applications. The MIPS IV ISA is implemented in the R5000 series of products. MIPS V. MIPS V provides instructions that enhance performance in 3-D graphics applications. The hardware for the MIPS V ISA has not been implemented. Application Specific Extensions. Application specific extensions are intended to provide design flexibility for application-specific MIPS products and are offered to the Company's semiconductor manufacturing partners as optional, additional features to its microprocessor cores. MIPS16. MIPS16 is an ASE to the Company's RISC architecture introduced in October 1996 that permits substantially reduced systems costs by reducing memory requirements through the use of 16-bit instruction representation. MIPS Digital Media Extensions (MDMX). MDMX is an ASE designed to provide enhanced digital media processing including video compression and decompression and audio and signal processing. Research and Development The Company believes that its future competitive position will depend in large part on its ability to develop new and enhanced microprocessor cores and related designs in a timely and cost-effective manner. The Company believes that these capabilities are necessary to meet the evolving and rapidly changing needs of semiconductor manufacturers and system OEMs in the digital consumer products industry. To this end, the Company has assembled a team of highly skilled engineers that possess significant experience in the design and development of complex microprocessors. The Company intends to build on this base of experience and the technologies that it has developed to enhance the MIPS RISC architecture and develop a broader line of microprocessor cores that are optimized for 4 applications in the digital consumer products industry. The Company's strategy is to use a modular approach that emphasizes re-usable, licensable microprocessors, cores and software technology. The Company believes that this increased flexibility and modularity will allow its semiconductor partners to provide high-performance, customized products more quickly to their customers. In addition, the Company develops and licenses standardized ISAs and ASEs to work within and around its RISC architecture to enhance and tailor the capabilities of its microprocessor designs for specific applications. Historically, the Company has collaborated with its semiconductor manufacturing partners to develop these specific product applications and ASEs from its core microprocessor designs. The Company develops and licenses its microprocessor designs in two forms. Initial or "process targeted designs" are designs intended to address the specific silicon manufacturing process technology of the semiconductor manufacturer to which it is licensed. For example, details such as transistor and interconnect dimensions vary from manufacturer to manufacturer and affect performance. The Company believes that its ability to adjust its microprocessor designs to work at optimum performance levels for targeted silicon process technologies is a significant competitive advantage. Because they are designed with the manufacturing partner's specific silicon process technology in mind, it is expected that these initial microprocessor cores will have superior performance levels and high value for the target partner. The Company also expects to generate both high-level description language representations of these designs called "soft" cores and intermediate representations with some process targeting called "firm" cores. Key internal circuits of "firm" cores can be enhanced to maintain substantially the level of performance of the "process targeted designs" on which they are based. "Soft" cores and "firm" cores are flexible and can be licensed to multiple customers and used in multiple applications. In anticipation of the Separation and the more limited focus of its research and development efforts, the Company has significantly reduced its research and development staff, from 221 persons at December 31, 1997 to 40 persons at June 30, 1998. This decrease principally 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 shift in strategic direction. Because the Company expects to use industry-standard third-party design tools, it will not be required to develop and maintain the proprietary design tools that were necessary in connection with the design of high-performance microprocessors for Silicon Graphics. As a result, the Company expects that its staffing requirements will be significantly lower than those required prior to the Separation. For the fiscal years ended June 30, 1998, 1997 and 1996 the Company's research and development costs were $43.4 million, $68.8 million and $48.4 million, respectively. Sales and Marketing The Company's sales and marketing activities are focused principally on establishing and maintaining licensing arrangements with semiconductor manufacturers and participating in marketing, sales and technical efforts directed to system OEMs. The Company licenses its RISC-based microprocessor and related design technology on a non-exclusive and worldwide basis to semiconductor manufacturers who, in turn, sell products incorporating these technologies to system OEMs. The partnerships established by the Company form a distribution channel and are an important element of its strategy to proliferate the MIPS RISC architecture as the standard in the embedded microprocessor industry. In establishing these partnerships, the Company seeks to license its technology to those companies it believes can offer value-added design capabilities in the Company's existing target markets as well as expand the market for the Company's microprocessor and related designs. By licensing its technology to multiple semiconductor manufacturers, the Company seeks to ensure that system access to multiple sources of its RISC-based microprocessors and related designs. The Company presently has two customers that individually account for more than 10% of its total revenue: Nintendo and NEC. Substantially all of the revenue derived from these two customers reflects contract revenue and royalties related to development and sales of Nintendo 64 video game players and related cartridges. Revenue related to sales of Nintendo 64 video game cartridges is expected to continue to account for a significant portion of the Company's total revenue for the next several years and, therefore, the Company expects that a significant portion of its total revenue will continue to be derived from Nintendo and, to a lesser extent, NEC. Because revenue related to sales of Nintendo 64 video game cartridges is expected to represent a substantial portion of the Company's total revenue, the Company expects to experience seasonal fluctuations in its revenue and operating results. See "Factors That May Affect Our Business--Seasonality" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Revenue." For financial information regarding revenue derived from the Company's international licensees, see Note 13 of Notes to Financial Statements. 5 Although the precise terms of the Company's contracts vary from licensee to licensee, they typically provide for technology license and engineering service fees which may be payable up-front and/or upon the achievement of certain milestones such as provision of deliverables by the Company or production of semiconductor products by the licensee. The Company's contracts also provide for the payment of royalties to the Company based on a percentage of the net revenue earned by the licensee from the sale of products incorporating the Company's technology and, in some cases, based on unit sales of such products. The Company's contracts with its semiconductors partners are typically subject to periodic renewal or extension. The Company also offers licensees the option to license its technology on a single-use or unlimited-use basis, and may provide licensees with various technical support, training and consulting services and sales and marketing support. Certain of the Company's marketing activities are also aimed at system OEMs. Through targeted advertising and co-marketing programs with its partners, the Company seeks to increase awareness of the MIPS RISC architecture in popular digital consumer products. Because the Company's past microprocessor design efforts have primarily focused on serving the needs of Silicon Graphics, and although the Company has always maintained a sales and marketing staff to support its strategic relationships, its sales and marketing activities have not historically been central to its operations. The Company's sales and marketing staff and related expenses are expected to increase as the Company seeks to diversify its revenue base. The Company's sales and marketing effort is a significant factor to the Company's future operating success. Intellectual Property The Company regards its patents, copyrights, mask work rights, trademarks, trade secrets and similar intellectual property as critical to its success, and relies on a combination of patent, trademark, copyright, mask work and trade secret laws to protect its proprietary rights. Any failure of the Company to obtain or maintain adequate protection of its intellectual property rights for any reason could have a material adverse effect on its business, results of operations and financial condition. 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 6 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. Competition The market for embedded microprocessors is highly competitive and characterized by rapidly changing technological needs and capabilities. The Company believes that the principal competitive factors in the embedded microprocessor market are performance, functionality, price, customizability and power consumption. The Company competes primarily against 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 Advanced Micro Devices, Inc., Intel Corporation, Motorola, Inc. and National Semiconductor Corporation. In addition, the Company must continue to differentiate its microprocessor and related designs from those available or under development by the internal design groups of semiconductor manufacturers, including its current and prospective manufacturing partners. Many of these internal design groups have substantial programming and design resources and are part of larger organizations, which have substantial financial and marketing resources. There can be no assurance that internal design groups will not develop products that compete directly with the Company's microprocessor and related designs or will not actively seek to participate as merchant vendors in the intellectual property component market by selling to third-party semiconductor manufacturers or, if they do, that the Company will be able to compete with them successfully. To the extent that these alternative technologies provide comparable performance at a lower or similar cost than the Company's technology, semiconductor manufacturers may adopt and promote these alternative technologies. Certain of the Company's competitors have greater name recognition and customer bases as well as greater financial and marketing resources than the Company, and such competition could adversely affect the Company's business, results of operations and financial condition. Employees As of June 30, 1998, the Company had 63 full time employees. Of this total, 40 were in research and development, 16 were in sales and marketing and 7 were in finance and administration. The Company's future success will depend in part on its ability to attract, retain and motivate highly qualified technical and management personnel who are in great demand in the semiconductor industry. The Company's business plan requires that it identify and hire additional highly skilled technical personnel during fiscal 1999 to staff its anticipated research and development activities. None of the Company's employees is represented by a labor union or subject to a collective bargaining agreement. The Company believes that its relations with its employees are good. Item 2. Properties The Company's executive, administrative and technical offices currently occupy approximately 27,500 square feet (with an option to increase to 55,000 square feet) in a building subleased from Silicon Graphics in Mountain View, California. Payments by the Company to Silicon Graphics under this sublease are equal to amounts payable by Silicon Graphics under its sublease for the property with a third party. This sublease will expire on May 31, 2002, subject to earlier termination in certain circumstances. The Company believes that these facilities are adequate to meets its current needs but that it may need to seek additional space in the future. 7 Item 3. Legal Proceedings On April 6, 1998, the Company and Silicon Graphics filed an action against ArtX, Inc. and certain employees of ArtX, Inc. in the Superior Court of the State of California alleging, among other things, misappropriation of trade secrets and breach of contractual and fiduciary duties in connection with the defendants' actions in developing graphics technology for Nintendo's next generation video game system. On April 23, 1998, Nintendo notified Silicon Graphics and the Company of its belief that the disclosure in the Company's registration statement filed with the Securities and Exchange Commission on April 21, 1998 of certain information regarding the contract for the development of the Nintendo 64 video game system constituted a breach of that contract. Silicon Graphics and the Company strongly disagree that any such breach has occurred. On May 27, 1998, Silicon Graphics, the Company, Nintendo and ArtX, Inc. entered into a memorandum of understanding pursuant to which the companies are engaged in further discussions relating to a possible mutually beneficial business relationship, including the possible selection of a MIPS-based microprocessor for the next generation Nintendo video game system. 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. The parties recently reached an agreement in principle to settle this matter. Among other things, Lexra will no longer state that its products are "MIPS compatible". Lexra's counterclaims will also be 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 and potentially other microprocessors designed by the Company allegedly infringe a patent originally assigned to Control Data Corporation. The Company is evaluating these claims. The Company believes that the foregoing proceedings are not likely to have a material adverse effect on its business, results of operations or financial condition. 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. Item 4. Submission of Matters to a Vote of Security Holders. (a) During the fourth quarter of fiscal 1998, Silicon Graphics, Inc., the Company's sole stockholder, took action by written consent on, May 22, 1998, June 2, 1998 and June 26, 1998. (b) On June 26, 1998, the sole stockholder consented to the election of Anthony B. Holbrook and Fred M. Gibbons as directors of the Company, to be effective on July 6, 1998, the closing of the Company's initial public offering. The Directors whose terms of office continued after the stockholder action are Forest Baskett, John E. Bourgoin, Kenneth L. Coleman, William M. Kelly and Teruyasu Sekimoto. (c) Other matters approved by the sole stockholder were the 1998 Long Term Incentive Plan and the Employee Stock Purchase Plan on May 22, 1998, an increase in the authorized capital stock of the Company on June 2, 1998 and the restatement of the Company's Certificate of Incorporation in connection with the Company's initial public offering on June 26, 1998. 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. (a) The Company's initial public offering of its Common Stock was declared effective on June 29, 1998 at a price of $14.00 per share. The Company's Common Stock is listed on the Nasdaq National Market under the symbol "MIPS." The ending stock price for the period ended June 30, 1998 as reported by Nasdaq was $13.437. 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 was underwritten by Deutsche Bank Securities, BancAmerica Robertson Stephens and Hambrecht & Quist. Of the 5,500,000 Common Shares offered, 1,250,000 were offered by the Company and 4,250,000 were offered by Silicon Graphics, Inc. The Company received approximately $16,035,000 from the initial public offering, net of underwriting discounts, commissions and other offering costs and expenses. (b) Prior to June 30, 1998, Silicon Graphics was the only holder of record of the Company's Common Stock. Subsequent to the closing of the Offering, Silicon Graphics owns approximately 85.2% of the outstanding common stock of the Company. As of September 10, 1998, there were 20 holders of record of the Company's Common Stock. (c) The Company has never paid or declared any cash dividends on its Common Stock or other securities and does not anticipate paying cash dividends in the foreseeable future. (d) There were no sales by the Company of its equity securities during the quarter ended June 30, 1998, which were not registered under the Securities Act of 1933. No payments constituted direct or indirect payments to directors, officers, general partners of the issuer or their associates, or to persons owning ten percent or more of any class of equity securities of the issuer or to affiliates of the issuer. The Company has used the net proceeds from the Offering to fund working capital and general corporate purposes. The funds that are not being used to fund short-term needs have been placed in temporary investments pending future use. 9 Item 6. Selected Financial Data. The following table presents selected financial data of the Company. The information below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations". The historical financial information, particularly for periods prior to March 31, 1998 may not be indicative of the Company's future performance and does not necessarily reflect what the financial position and results of operations of the Company would have been had the Company operated as a separate, stand-alone entity during the periods covered. The historical financial information does not reflect many significant changes that have occurred 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.
Years Ended June 30, ------------------------------------------------------------ 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (In thousands, except per share data) Statements of Operations Data: Revenue: Royalties .................... $ 55,980 $ 37,192 $ 19,716 $ 13,576 $ 8,402 Contract revenue ............. 830 3,115 17,327 13,903 8,962 -------- -------- -------- -------- -------- Total revenue .......... 56,810 40,307 37,043 27,479 17,364 Costs and expenses: Cost of contract revenue ..... 375 1,345 5,580 7,364 2,768 Research and development ..... 43,446 68,827 48,402 39,033 24,396 Sales and marketing .......... 5,307 6,170 6,026 6,761 5,668 General and administrative ... 4,685 4,750 4,601 4,272 3,692 Restructuring charge ......... 2,614 -- -- -- -- -------- -------- -------- -------- -------- Total costs and expenses 56,427 81,092 64,609 57,430 36,524 -------- -------- -------- -------- -------- Operating income (loss) ........ 383 (40,785) (27,566) (29,951) (19,160) Interest expense ............... (7) (50) (99) (69) (70) -------- -------- -------- -------- -------- Net income (loss) .............. $ 376 $(40,835) $(27,665) $(30,020) $(19,230) ======== ======== ======== ======== ======== Net income (loss) per basic and diluted share ................ $ 0.01 $ (1.13) $ (0.77) $ (0.83) $ (0.53) ======== ======== ======== ======== ======== June 30, ------------------------------------------------------------ 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (in thousands) Balance Sheet Data: Working capital deficiency ..... $ (4,530) $ (8,446) $ (8,531) $(16,683) $(11,230) Total assets ................... 4,696 19,674 15,289 15,744 12,338 Long-term obligations, net of current maturities ........... -- -- 331 739 457 Total stockholders' equity (deficit) (747) 8,072 3,853 (3,736) (755)
10 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 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 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 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 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 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 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 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 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 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 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 MIPS TECHNOLOGIES, INC. BALANCE SHEETS (In thousands, except share data)
June 30, ----------------------- 1998 1997 --------- --------- 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 ========= =========
See accompanying notes. 22 MIPS TECHNOLOGIES, INC. STATEMENTS OF OPERATIONS (In thousands, except per share data)
Years Ended June 30, ---------------------------------- 1998 1997 1996 -------- -------- -------- 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 ======== ======== ========
See accompanying notes. 23 MIPS TECHNOLOGIES, INC. STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (In thousands)
Total Additional Stockholders' Common Paid-in- Accumulated Equity Stock Capital Deficit (Deficit) --------- --------- --------- --------- 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) ========= ========= ========= =========
See accompanying notes. 24 MIPS TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS (In thousands)
Years ended June 30, ---------------------------------- 1998 1997 1996 -------- -------- -------- 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 ======== ======== ========
See accompanying notes. 25 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 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 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):
Years ended June 30, --------------------------------- 1998 1997 1996 -------- -------- -------- 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)
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 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): June 30, ------------------------ 1998 1997 -------- -------- 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 ======== ======== 29 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 MIPS Technologies, Inc. NOTES TO FINANCIAL STATEMENTS (Continued) The stock option activity under the Plan is summarized as follows:
Outstanding Options ------------------------------ Shares available Number of Weighted Average for Grant Shares Exercise Price ----------- -------- --------------- 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 ========== =========
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 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:
Outstanding Options ------------------------------ Number of Weighted Average Shares Exercise Price ---------- ---------------- 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 ==========
Additional information about outstanding options to purchase Silicon Graphics common stock held by employees of the Company at June 30, 1998 is as follows:
Options Outstanding and Exercisable ------------------------------------------------- Weighted-Average Range of Number of Contractual Life Weighted-Average Exercise Price Shares (in years) Exercise Price -------------- ------------ ----------- ---------------- $ 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 =======
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 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:
Employee Stock Options Stock Purchase Plan Shares ---------------------------- ---------------------------- Years Ended June 30, Years Ended June 30, ---------------------------- ---------------------------- 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- 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%
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: Employee Stock Options Year Ended June 30, 1998 ------------------------ Expected life (in years) ...................... 5.0 Risk-free interest rate ....................... 5.66% Volatility .................................... 0.70 Dividend yield ................................ 0% 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 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):
Years Ended June 30, -------------------------------------- 1998 1997 1996 --------- --------- ---------- Pro forma net loss ............................ $ (738) $ (46,228) $ (30,041) Pro forma basic and diluted net loss per share $ (0.02) $ (1.28) $ (0.83)
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 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): Years Ended June 30, ------------------------------------- 1998 1997 1996 ------- ------- ------- 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 ======= ======= ======= 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 PART III Item 10. Directors and Executive Officers of the Registrant. Executive Officers and Directors The executive officers and directors of the Company, and their ages as of June 30, 1998, are as follows: Name Age Position ---- --- -------- John E. Bourgoin ................ 52 Chief Executive Officer, President and Director Lavi Lev ........................ 41 Senior Vice President, Engineering Kevin C. Eichler ................ 38 Vice President and Chief Financial Officer Derek Meyer ..................... 38 Vice President, Sales and Marketing Sandy Creighton ................. 45 Vice President, General Counsel and Secretary Dr. Forest Baskett .............. 55 Director Kenneth L. Coleman .............. 55 Director William M. Kelly ................ 44 Director Teruyasu Sekimoto ............... 58 Director John E. Bourgoin has served as Chief Executive Officer of the Company since February 1998 and President of the Company since September 1996, and has been a director of the Company since May 1997. Mr. Bourgoin has also served as a Senior Vice President of Silicon Graphics from September 1996 through May 1998. Prior to joining Silicon Graphics, Mr. Bourgoin was Group Vice President, Computation Products Group at Advanced Micro Devices, Inc. Lavi Lev has served as Senior Vice President--Engineering of the Company since March 1998, and was Vice President--Engineering of Silicon Graphics from 1996 to March 1998. From 1995 to 1996, he served as Vice President, Engineering at MicroUnity Systems Engineering and between 1992 and 1995 he was a manager at Sun Microsystems, Inc. Prior to joining Sun Microsystems, Inc., Mr. Lev was employed by Intel Corporation and was involved in the development of the Pentium microprocessor. Kevin C. Eichler has served as Vice President and Chief Financial Officer of the Company since May 1998. Prior to joining the Company and since 1996, Mr. Eichler served as Vice President, Finance, Chief Financial Officer, Treasurer and Secretary of Visigenic Software Inc., an independent provider of software tools for distributed object technologies for the Internet, Intranet and enterprise computing environments. From 1995 to 1996, he served as Executive Vice President, Finance and Chief Financial Officer of National Insurance Group, a provider of technology solutions for financial services and related companies. From 1991 to 1995, Mr. Eichler served as Executive Vice President, Finance and Chief Financial Officer of Mortgage Quality Management, Inc., a national provider of quality control services and technologies to residential mortgage lenders. Prior to 1991, Mr. Eichler held management positions with NeXT Software and Microsoft. Derek Meyer joined the Company in May 1996 as Director of Worldwide Marketing and Sales and became Vice President--Sales and Marketing in March 1998. Prior to joining the Company and since 1994, Mr. Meyer served as marketing director for the TriMedia division of Philips Semiconductors and prior to that time he was director of SPARC marketing for Sun Microsystems, Inc. Sandy Creighton joined the Company in June 1998 as Vice President, General Counsel and Secretary. Prior to joining the Company and since 1991, Ms. Creighton was Deputy General Counsel at Sun Microsystems, Inc. Dr. Forest Baskett has served as a director of the Company since January 1998. Since 1990, Dr. Baskett has served as Senior Vice President, Research and Development of Silicon Graphics, and since 1994, has also served as its Chief Technology Officer. Kenneth L. Coleman has served as a director of the Company since January 1998. Since April 1997, Mr. Coleman has been Senior Vice President, Customer and Professional Services of Silicon Graphics. Prior to that time, he was Senior Vice President, Administration of Silicon Graphics. 36 William M. Kelly has served as a director of the Company since January 1998. He joined Silicon Graphics in 1994 as Vice President, Business Development, General Counsel and Secretary and, since 1997, has been Senior Vice President, Corporate Operations of Silicon Graphics. During 1996, Mr. Kelly also served as Senior Vice President, Silicon Interactive Group of Silicon Graphics and he served as acting Chief Financial Officer of Silicon Graphics from May 1997 to February 1998. Prior to joining Silicon Graphics, Mr. Kelly was an attorney in private practice. Teruyasu Sekimoto has served as a director of the Company since January 1998. Mr. Sekimoto joined Silicon Graphics in 1987 as representative director of Silicon Graphics Japan. In 1991, he became Vice President, North Pacific Area and since 1995 has served as Senior Vice President, East Asia. Upon completion of the Offering on July 6, 1998, the size of the Board of Directors has increased by two, and the Company's stockholder has elected the following two additional directors who are not associated with the Company or Silicon Graphics: Anthony B. Holbrook, age 59. Mr. Holbrook retired as Chief Technical Officer of Advanced Micro Devices, Inc. in August 1994. Mr. Holbrook joined Advanced Micro Devices, Inc. in 1973 and served in a number of executive capacities. He was elected a corporate officer in 1978 and in 1982 was named Executive Vice President and Chief Operating Officer. In 1986, Mr. Holbrook was named President of Advanced Micro Devices, Inc. and was elected to the board of directors. In 1989, he moved from Chief Operating Officer to Chief Technical Officer and in 1990 from President to Vice Chairman, a position he held until April 1996. Prior to joining Advanced Micro Devices, Inc., Mr. Holbrook held engineering management positions with Fairchild Semiconductor and Computer Micro Technology Corporation. Mr. Holbrook is also a director of SDL, Inc., a solid state laser manufacturer. Fred M. Gibbons, age 48. Mr. Gibbons has been a partner with Concept Stage Venture Management, an investment firm based in California, since 1994. From 1995 through 1998, Mr. Gibbons was also a lecturer at the Stanford University Graduate School of Engineering. In 1981, Mr. Gibbons founded Software Publishing Corporation based in San Jose, California, a company engaged in the development of software systems for personal computer applications, and was its Chief Executive Officer through 1994. Prior to 1981, Mr. Gibbons was employed as a product and marketing manager for Hewlett-Packard Company. There is no family relationship between any directors or executive officers of the Company. Section 16(a) Beneficial Ownership Reporting Compliance Under Section 16(a) of the Securities and Exchange Act of 1934, as amended, the Company's directors, executive officers, and any persons holding more than ten percent of the Company's common stock are required to report to the Securities and Exchange Commission and the Nasdaq National Market their initial ownership of the Company's stock and any subsequent changes in that ownership. The Company believes that during fiscal year 1998, its officers, directors and holders of more than 10 percent of the Company's common stock did not file all Section 16 (a) reports on a timely basis. Form 3 was not filed timely by any such persons. Item 11. Executive Compensation Director Compensation Directors who do not receive compensation as officers or employees of the Company or any of its affiliates will be paid an annual board membership fee. Directors are reimbursed for reasonable expenses incurred in attending Board or committee meetings. The Board of Directors and the Company's Stockholder approved the Director's 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. Pursuant to the terms of the Director Plan, Messrs. Holbrook and Gibbons were each granted 40,000 stock options upon commencement of their term as members of the Company's Board of Directors. 37 Executive Compensation The following table sets forth information about the compensation of the Chief Executive Officer and each of the other two most highly compensated executive officers of the Company who, based on employment with the Company and Silicon Graphics were the most highly compensated officers of the Company (collectively, the "Named Executive Officers"). All of the information set forth in this table reflects compensation earned by such individuals for services rendered to the Company and Silicon Graphics and its subsidiaries. Summary Compensation Table
Long-Term Compensation Annual Compensation(1) Awards ----------------------------------- ---------------------------------- Securities Other Annual Restricted Underlying All Other Name and Principal Compensation Stock Options/SARs LTIP Compensation Position Year Salary Bonus (2) Award(s) (3) Payouts (4) ------------------ ---- -------- -------- ------------ ---------- ------------ ------- ------------ John E. Bourgoin 1998 $372,053 $ -- $ 21,343 $-- -- $-- $ 2,226 Chief Executive Officer 1997 $280,000 $ 89,086 $ 9,382 $-- 125,000 $-- $ 1,200 and President Lavi Lev 1998 $245,542 $ -- $309,228 $-- -- $-- $ 1,880 Senior Vice 1997 $215,192 $106,550 $ 83,024 $-- 64,000 $-- $ 2,400 President, Engineering Derek Meyer 1998 $201,456 $ -- $ 32,210 $-- 4,500 $-- $ 1,793 Vice President, 1997 $182,215 $ 25,987 $ 36,543 $-- 12,000 $-- $ 2,079 Sales and Marketing
- ---------- (1) Silicon Graphics has no pension, retirement, annuity or similar benefit plan. (2) In fiscal 1998, "Other Annual Compensation" for the following executives is: Mr. Bourgoin includes (i) $11,348 club membership fees, (ii) $5,538 car allowance and (iii) various executive perquisites none of which exceed 25% of the amount reported as other annual compensation; Mr. Lev includes (i) $150,000 of gross-up award related to a forgivable loan, (ii) $100,000 of income reflecting monthly amortization of a forgivable loan from Silicon Graphics, (iii) $50,538 in relocation expenses and housing allowances and (iv) various executive perquisites none of which exceed 25% of the amount reported as other annual compensation and Mr. Meyer includes (i) $32,210 on the sale of 2,500 shares of restricted stock. In fiscal 1997, "Other Annual Compensation" for the following executives is: Mr. Bourgoin includes various executive perquisites none of which exceed 25% of the amount reported as other annual compensation; Mr. Lev includes (i) $42,000 of income reflecting monthly amortization of a forgivable loan from Silicon Graphics, (ii) $34,320 in relocation expenses and housing allowances and (iii) various executive perquisites none of which exceed 25% of the amount reported as other annual compensation and Mr. Meyer includes (i) $36,248 on the sale of 2,500 shares of restricted stock and (ii) various executive perquisites none of which exceed 25% of the amount reported as other annual compensation. (3) In fiscal 1997, Silicon Graphics effected an option exchange program to allow employees to exchange their out-of-the-money stock options for a smaller number of new options at a more favorable exercise price. The numbers in this column include 44,000 options issued to Mr. Lev in the exchange program for 55,000 options that were granted in fiscal 1997 and 12,000 options issued to Mr. Meyer in the exchange program for 15,000 options that were granted prior to fiscal 1997. (4) All other compensation includes Silicon Graphics' contribution to savings plans. Grants Under the 1998 Long-Term Incentive Plan In connection with the Offering, the Company has made initial grants of stock options to the executive officers and certain other employees and consultants of the Company under the 1998 Long-Term Incentive Plan. An aggregate of 2,996,900 shares of common stock are issuable upon the exercise of the options granted at an exercise price of $12.00 per share. In addition, the Company granted stock awards totalling 15,000 shares of Common Stock. The following table sets forth the number of shares of common stock underlying options and the number of shares subject to stock awards that were granted under the 1998 Long-Term Incentive Plan to (i) each of the executive 38 officers of the Company, (ii) the executive officers of the Company as a group and (iii) all employees and consultants of the Company as a group other than the executive officers of the Company. Grants Under 1998 Long-Term Incentive Plan
Number of Shares Stock Name and Position Underlying Options Awards ----------------- ----------------- ------ John E. Bourgoin ....................................................... 559,500 15,000 Chief Executive Officer and President Lavi Lev ............................................................... 298,400 -- Senior Vice President, Engineering Kevin C. Eichler ....................................................... 223,800 -- Vice President and Chief Financial Officer Derek Meyer ............................................................ 205,200 -- Vice President, Sales and Marketing Sandy Creighton ........................................................ 223,800 -- Vice President, General Counsel and Secretary Executive Officers as a Group .......................................... 1,510,700 15,000 Non-Executive Officer Employee and Consultants Group ................... 1,486,200 --
The following table sets forth information regarding the Company's stock options granted to the Named Executive Officers during fiscal year 1998. Option Grants in Fiscal 1998
Individual Grants ---------------------------------------------------- Number of % of Total Securities Options Potential Realizable Value Underlying Granted to Exercise at Assumed Annual Rates of Options Employees Price Expiration Stock Price Appreciation Name Granted in Fiscal Year per Share Date for Option Term(1) ---- ---------- -------------- --------- ---------- ----------------------- 5% 10% ---------- ----------- John E. Bourgoin ........ 559,500 18.67% $12.00 05/22/08 $4,222,399 $10,700,387 Lavi Lev................. 298,400 9.96% $12.00 05/22/08 $2,251,946 $ 5,706,873 Kevin C. Eichler......... 223,800 7.47% $12.00 05/22/08 $1,688,959 $ 4,280,155 Derek Meyer ............. 205,200 6.85% $12.00 05/22/08 $1,548,590 $ 3,924,431 Sandy Creighton.......... 223,800 7.47% $12.00 06/04/08 $1,688,959 $ 4,280,155
- ---------- (1) Potential realizable value assumes that the price of the Company's common stock increases from the date of grant until the end of the option term (10 years) at the annual rate specified (5% and 10%). The 5% and 10% assumed annual rates of appreciation are mandated by rules of the Securities and Exchange Commission and do not represent an estimate or projection of the future price of the Company's common stock. The Company does not believe that this method accurately illustrates the potential value of a stock option. 39 The following table sets forth information regarding stock options granted to the Named Executive Officers during fiscal year 1998 in respect of shares of Silicon Graphics common stock under the Silicon Graphics' stock plan. Option Grants in Fiscal 1998
Individual Grants --------------------------------------------------- Number of % of Total Securities Options Potential Realizable Value Underlying Granted to Exercise at Assumed Annual Rates of Options Employees Price Expiration Stock Price Appreciation Name Granted in Fiscal Year per Share Date for Option Term(1) ---- --------- -------------- --------- ---------- ------------------------ 5% 10% --------- ---------- Derek Meyer.............. 4,500 * $12.875 11/13/07 $ 36,437 $ 92,337
- ---------- * Less than 1%. (1) Potential realizable value assumes that the price of Silicon Graphics' common stock increases from the date of grant until the end of the option term (10 years) at the annual rate specified (5% and 10%). The 5% and 10% assumed annual rates of appreciation are mandated by rules of the Securities and Exchange Commission and do not represent an estimate or projection of the future price of Silicon Graphics' common stock. The Company does not believe that this method accurately illustrates the potential value of a stock option. The following table sets forth information regarding options to purchase the Company's common stock by the Named Executive Officers during fiscal 1998, and the number and value of unexercised, in-the-money options at June 30, 1998. Stock Option Exercises and June 30, 1998 Fiscal Year-End Values
Shares Acquired Value of Unexercised on Value Number of Unexercised In-the-Money Options at Name Exercise Realized Options at June 30, 1998 June 30, 1998 (1) ------ ------- ------ ------------------------- ---------------------------- Exercisable Unexercisable Exercisable Unexercisable ----------- ------------- ----------- ------------- John E. Bourgoin ............. -- -- -- 559,500 -- $804,002 Lavi Lev ..................... -- -- -- 298,400 -- $428,801 Kevin C. Eichler ............. -- -- -- 223,800 -- $321,601 Derek Meyer .................. -- -- -- 205,200 -- $294,872 Sandy Creighton .............. -- -- -- 223,800 -- $321,601
- ---------- (1) The amounts in this column reflect the difference between the closing market price of the Company's common stock on June 30, 1998, which was $13.437, and the option exercise price. The actual value of unexercised options fluctuates with the market price of the Company's common stock. The following table sets forth information regarding options to purchase Silicon Graphics common stock by the Named Executive Officers during fiscal 1998, and the number and value of unexercised, in-the-money options at June 30, 1998. Stock Option Exercises and June 30, 1998 Fiscal Year-End Values
Shares Acquired Value of Unexercised on Value Number of Unexercised In-the-Money Options at Name Exercise Realized Options at June 30, 1998 June 30, 1998 (1) ------ ------- ------ -------------------------- ---------------------------- Exercisable Unexercisable Exercisable Unexercisable ----------- ------------- ----------- ------------- John E. Bourgoin ............. -- -- 50,000 -- -- -- Lavi Lev ..................... -- -- 21,734 -- $ 3,828 -- Derek Meyer .................. -- -- 4,548 -- -- --
- ---------- (1) The amounts in this column reflect the difference between the closing market price of the Silicon Graphics' common stock on June 30, 1998, which was $12.125, and the option exercise price. The actual value of unexercised options fluctuates with the market price of Silicon Graphics' common stock. Change in Control Arrangements Unvested stock options held be the Named Executive Officers at the time of a change in control of the Company will become immediately vested and exercisable. 40 Item 12. Security Ownership of Certain Beneficial Owners and Management Stock Ownership of Directors and Executive Officers The Company is not aware of any person who, on September 1, 1998, was the beneficial owner of 5% or more of the Company's outstanding common stock, except for Silicon Graphics, Inc. The following table sets forth such ownership as of September 1, 1998. The table also shows the number of shares of the Company common stock beneficially owned on September 1, 1998 by each of the Company's directors, the Named Executive Officers and all directors and executive officers of the Company as a group.
Number of Shares Beneficially Percent of Name Owned Class ----- ------------ ---------- Silicon Graphics, Inc. 2011 North Shoreline Boulevard Mountain View, CA 94043.............................. 31,750,000 85.2% John E. Bourgoin .................................... 16,000** * Lavi Lev ............................................ 1,000 * Kevin C. Eichler..................................... 1,000 * Derek Meyer ......................................... 1,300 * Sandy Creighton...................................... 1,000 * Dr. Forest Baskett .................................. -- * Kenneth L. Coleman .................................. 1,285 * Fred M. Gibbons...................................... -- * Anthony B. Holbrook.................................. -- * William M. Kelly .................................... -- * Teruyasu Sekimoto ................................... -- * Directors and Executive Officers as a Group (11 persons) 21,585 *
- ---------- * No individual Named Executive Officer or director beneficially owns 1% or more of the Company's common stock, nor do the Named Executive Officers and directors as a group. ** Under the 1998 Long-Term Incentive Plan, the Company granted stock awards totalling 15,000 shares of Common Stock effective upon the completion of the initial public offering. (1) The persons named have sole voting and investment power over the shares shown as being beneficially owned by them, subject to community property laws, where applicable, except for 1,000 shares held indirectly by Mr. Lev. Mr. Lev disclaims beneficial ownership of these shares and they are held in trust for his children. There were no options or other convertible securities that were exercisable on September 1, 1998 or within 60 days thereafter. Silicon Graphics owns approximately 85.2% of the outstanding Common Stock of the Company. For so long as Silicon Graphics continues to beneficially own in excess of 50% of the shares of Common Stock outstanding, Silicon Graphics will be able to direct the election of all directors of the Company and exercise a controlling influence over the business and affairs of the Company, including any determinations with respect to mergers or other business combinations involving the Company, the acquisition or disposition of assets by the Company, future issuances of Common Stock or other equity securities of the Company, the incurrence of indebtedness by the Company and the payment of dividends with respect to the Common Stock. Similarly, Silicon Graphics will have the power to determine matters submitted to a vote of the Company's stockholders without the consent of the Company's other stockholders, will have the power to prevent or cause a change in control of the Company and could take other actions that might be favorable to Silicon Graphics. Conflicts of interest may arise between the Company and Silicon Graphics in a number of areas relating to their past and ongoing relationships, including potential competitive business activities, indemnity arrangements, tax and intellectual property matters, registration rights, potential acquisitions or financing transactions, sales or other dispositions by Silicon Graphics of shares of Common Stock and the exercise by Silicon Graphics of its ability to control the management and affairs of the Company. Although Silicon Graphics does not currently intend to engage in the design and development of microprocessor intellectual property for embedded systems applications, the Company's Restated Certificate of Incorporation provides that Silicon Graphics shall have no duty to refrain from engaging in the same or similar activities or lines of business as the Company. 41 Ownership interests of directors or officers of the Company in the common stock of Silicon Graphics or service as both a director of the Company and an officer or employee of Silicon Graphics could create or appear to create potential conflicts of interest when directors and officers are faced with decisions that could have different implications for the Company and Silicon Graphics. Four of the Company's seven current directors are officers or employees of Silicon Graphics. The Restated Certificate of Incorporation includes certain provisions relating to the allocation of business opportunities that may be suitable for both the Company and Silicon Graphics based on the relationship to the Company and Silicon Graphics of the individual to whom the opportunity is presented and the method by which its was presented. Item 13. Certain Relationships and Related Transactions. In connection with the Separation and the Offering, the Company and Silicon Graphics entered into various agreements intended to define the relationship between them following the Offering. Because these agreements were entered into at a time when the Company was still a wholly owned subsidiary of Silicon Graphics, they are not the result of arm's-length negotiations between the parties. Among these agreements is a Management Services Agreement, under which Silicon Graphics will provide various, primarily administrative, services to the Company, including accounting, treasury, tax, facilities and information services. The Management Services Agreement will have a three-year term and will be subject to automatic termination at such time as Silicon Graphics ceases to own more than 50% of the outstanding Common Stock. 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. The Company subleases from Silicon Graphics approximately 27,500 square feet (with an option to increase to 55,000 square feet) in one building in Mountain View, California. Payments by the Company to Silicon Graphics under this sublease are approximately $51,000 per month, increasing to approximately $67,000 per month by August 2001. The amounts payable by the Company under this sublease are equal to the amounts payable by Silicon Graphics under its sublease for the property with a third party. This sublease will expire on May 31, 2002, subject to earlier termination in certain circumstances. By virtue of its beneficial ownership of over 80% of the total voting power and value of the outstanding Common Stock, Silicon Graphics will include the Company in its consolidated group for federal income tax purposes. The Company and Silicon Graphics entered into a Tax Sharing Agreement pursuant to which the Company and Silicon Graphics will make payments between them such that, with respect to any period, the amount of taxes to be paid or received by the Company, subject to certain adjustments, will be determined as though the Company were to file separate federal, state and local income tax returns. However, each member of a consolidated group for federal income tax purposes is jointly and severally liable for the federal income tax liability of each other member of the consolidated group. Each member of the Silicon Graphics controlled group, which includes Silicon Graphics, the Company and Silicon Graphics' other subsidiaries, is also jointly and severally liable for pension and benefit funding and termination liabilities of other group members, as well as certain benefit plan taxes. Accordingly, the Company could be liable under such provisions if any such liability is incurred, and not discharged, by any other member of the Silicon Graphics consolidated or controlled group. In addition, by virtue of its beneficial ownership of over 80% of the total voting power and value of the outstanding Common Stock and the terms of the Tax Sharing Agreement entered into between the Company and Silicon Graphics, Silicon Graphics will effectively control all of the Company's tax decisions. Under the Tax Sharing Agreement, Silicon Graphics will have the sole authority to respond to and conduct all tax proceedings (including tax audits) relating to the Company, to file all returns on behalf of the Company and to determine the amount of the Company's liability to (or entitlement to payment from) Silicon Graphics under the Tax Sharing Agreement. Subject to applicable federal securities laws and the restrictions set forth below, Silicon Graphics may sell any and all of the shares of Common Stock beneficially owned by it or distribute any or all of such shares of Common Stock to its stockholders. Sales or distribution by Silicon Graphics of substantial amounts of Common Stock in the public market or to its stockholders, or the perception that such sales or distribution could occur, could adversely affect the prevailing market prices for the Common Stock. Silicon Graphics has advised the Company that its current intent is to continue to hold all of the Common Stock beneficially owned. However, Silicon Graphics is not subject to any obligation to retain its controlling interest in the Company, except that Silicon Graphics has agreed not to sell or otherwise dispose of any shares of Common Stock until June 29, 1999 without the prior written 42 consent of Deutsche Bank Securities Inc. As a result, there can be no assurance concerning the period of time during which Silicon Graphics will maintain its beneficial ownership of Common Stock owned by it following the Offering. Moreover, there can be no assurance that, in any transfer by Silicon Graphics of a controlling interest in the Company, any holders of Common Stock will be able to participate in such transaction or will realize any premium with respect to their shares of Common Stock. Silicon Graphics will have registration rights with respect to the shares of the Common Stock owned by it following the Offering, which would facilitate any future disposition. The Company has three outstanding loans to Mr. Lev. The first loan is a forgivable, non-interest bearing note with a principal amount outstanding at June 30, 1998 of approximately $258,000. The principal of this loan is forgiven (reduced) ratably on a periodic basis through December 2000, subject to Mr. Lev's continued employment. The second loan is a forgivable, non-interest bearing (except in certain limited circumstances) note with a principal amount outstanding at June 30, 1998 of $250,000. The principal of this loan is forgivable on March 1, 2002, subject to Mr. Lev's continued employment at all times prior to such date. The third loan bears interest at an annual rate of 7.19% and had a principal amount outstanding at June 30, 1998 of $275,000. The largest aggregate amount of these loans outstanding during the period since July 1, 1996 was approximately $900,000. 43 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 10-K (a) The Following documents are filed as a part of this Report: 1. Financial Statements. The following financial statements and supplementary information of the Company and Report of Independent Auditors are included in Part II of this Report:
Page ---- Report of Ernst & Young LLP, Independent Auditors........................................ 21 Balance Sheets-- Years Ended June 30, 1998 and 1997...................................... 22 Statements of Operations -Years Ended June 30, 1998, 1997 and 1996....................... 23 Statement of Stockholders' Equity (Deficit) -- Years Ended June 30, 1998, 1997 and 1996 .............................................. 24 Statements of Cash Flows-- Years Ended June 30, 1998, 1997 and 1996....................... 25 Notes to Financial Statements............................................................. 26
2. Schedules not listed above have been omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements or notes thereto. 3. Exhibits. The following Exhibits are filed as part of, or incorporated by reference into, this Report: Exhibit No. List of Exhibits ----------- ---------------- 3.1 Certificate of Incorporation is incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1, Registration No, 333-50643 filed with the Securities and Exchange Commission (the "Commission") which registration statement became effective on June 29, 1998. 3.2 The Company's By-Laws, as amended. 10.1 The Separation Agreement between the Company and Silicon Graphics, Inc. is incorporated herein by reference to Exhibit 10.1 of Amendment No. 2 to the Company's Registration Statement on Form S-1, Registration No. 333-50643 filed with the Commission, which registration statement became effective on June 29, 1998. 10.2 The Corporate Agreement between the Company and Silicon Graphics, Inc. is incorporated herein by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1, Registration No. 333-50643 filed with the Commission, which registration statement became effective on June 29, 1998. 10.3 The Management Services Agreement between the Company and Silicon Graphics, Inc. is incorporated herein by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1, Registration No. 333-50643 filed with the Commission, which registration statement became effective on June 29, 1998. 10.4 The Tax Sharing Agreement between the Company and Silicon Graphics, Inc. is incorporated herein by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1, Registration No. 333-50643 filed with the Commission, which registration statement became effective on June 29, 1998. 10.5 The Technology Agreement between the Company and Silicon Graphics, Inc. is incorporated herein by reference to Exhibit 10.5 of Amendment No. 5 to the Company's Registration Statement on Form S-1, Registration No. 333-50643 filed with the Commission, which registration statement became effective on June 29, 1998. 10.6 The Trademark Agreement between the Company and Silicon Graphics, Inc. is incorporated herein by reference to Exhibit 10.6 of Amendment No. 5 to the Company's Registration Statement on Form S-l, Registration No. 333-50643 filed with the Commission, which registration statement became effective on June 29, 1998. 10.7.1 The Joint Development and License Agreement between Nintendo Co., Ltd. and Nintendo of America Inc. on the one hand and Silicon Graphics, Inc. and MIPS Technologies, Inc. on the other hand is incorporated herein by reference to Exhibit 10.7.1 of Amendment No. 4 to the Company's Registration Statement on Form S-1, Registration No. 333-50643 filed with the Commission, which registration statement became effective on June 29, 1998.* 44 Exhibit No. List of Exhibits ----------- ---------------- 10.7.2 The First Addendum to the Joint Development and License Agreement is incorporated herein by reference to Exhibit 10.7.2 of Amendment No. 4 to the Company's Registration Statement on Form S-1, Registration No. 333-50643 filed with the Commission, which registration statement became effective on June 29, 1998.* 10.7.3 The Second Addendum to the Joint Development and License Agreement is incorporated herein by reference to Exhibit 10.7.3 of Amendment No. 5 to the Company's Registration Statement on Form S-1, Registration No. 333-50643 filed with the Commission, which registration statement became effective on June 29, 1998.* 10.7.4 The Fourth Addendum to the Joint Development and License Agreement is incorporated herein by reference to Exhibit 10.7.4 of Amendment No. 5 to the Company's Registration Statement on Form S-1, Registration No. 333-50643 filed with the Commission, which registration statement became effective on June 29, 1998. 10.8 The 1998 Long-Term Incentive Plan, as amended. 10.9 The Employee Stock Purchase Plan, as amended. 10.10 Director's Stock Option Plan. 10.11 Non-U.S. Stock Purchase Plan. 27.1 Financial Data Schedule. - ---------- * The Company has received confidential treatment of portions of this Exhibit. Accordingly, portions thereof have been omitted from the public filing. 45 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. MIPS Technologies, Inc. By: /s/ JOHN E. BOURGOIN ------------------------------------- John E. Bourgoin Chief Executive Officer Date: September 22, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ JOHN E. BOURGOIN Chief Executive Officer September 22, 1998 - -------------------------- and Director (Principal John E. Bourgoin Executive Officer) /s/ KEVIN C. EICHLER (Principal Financial and September 23, 1998 - -------------------------- Accounting Officer) Kevin C. Eichler /s/ WILLIAM M. KELLY Director September 23, 1998 - -------------------------- William M. Kelly /s/ KENNETH L. COLEMAN Director September 22, 1998 - -------------------------- Kenneth L. Coleman /s/ TERUYASU SEKIMOTO Director September 22, 1998 - -------------------------- Teruyasu Sekimoto /s/ FOREST BASKETT Director September 22, 1998 - -------------------------- Forest Baskett /s/ ANTHONY B. HOLBROOK Director September 22, 1998 - -------------------------- Anthony B. Holbrook /s/ FRED M. GIBBONS Director September 21, 1998 - -------------------------- Fred M. Gibbons 46 EX-3.2 2 BY-LAWS BY-LAWS OF MIPS TECHNOLOGIES, INC. ARTICLE I Offices The registered office of the Corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The Corporation may also have one or more offices at such other places, either inside or outside of the State of Delaware, as the Board of Directors may from time to time determine or as the business of the Corporation may require. The books and records of the Corporation may be kept (subject to the provisions of the laws of the State of Delaware) at any place, either inside or outside of the State of Delaware, as from time to time may be determined by the Board of Directors. ARTICLE II Stockholders Section 1. Place of Meetings. Meetings of stockholders (whether annual or special) shall be held at such place, either inside or outside of the State of Delaware, as the Board of Directors shall from time to time determine. Section 2. Annual Meeting. The annual meeting of the stockholders of the Corporation shall be held on such date and at such time as may be fixed by resolution of the Board of Directors. Section 3. Special Meetings. Unless otherwise prescribed by law or by the Corporation's Restated Certificate of Incorporation, as amended from time to time (the "Charter"), and subject to any preferential rights of any outstanding series of Preferred Stock (as defined in the Charter), special meetings of stockholders of the Corporation for any purpose or purposes may be called only by the Chairman of the Board of Directors, the President, or, at the request in writing of a majority of the Board of Directors, any officer. Such request shall state the purpose or purposes of the proposed meeting. In addition, prior to the Trigger Date (as defined in the Charter), the Corporation shall call a special meeting of stockholders of the Corporation promptly upon request by Silicon Graphics, Inc., a Delaware corporation, or any of its affiliates, in each case if such entity is a stockholder of the Corporation. 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 2 if all stockholders entitled to vote are present, or if notice is waived by those not present in accordance with Section 2 of Article X of these By-laws. Any previously scheduled meeting of the stockholders may be postponed, and any special meeting of the stockholders may be canceled, by resolution of the Board of Directors upon public notice given prior to the date previously scheduled for such meeting of stockholders. Section 5. Notice of Stockholder Business and Nominations. (a) Annual Meetings of Stockholders. (i) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (A) pursuant to the Corporation's notice of meeting delivered pursuant to Section 4 of this Article II, (B) by or at the direction of the Board of Directors, (C) by any stockholder of the Corporation who was a stockholder of record at the time of the giving of the notice provided for in this Section 5, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 5, or (D) prior to the Trigger Date, by Silicon Graphics, Inc., a Delaware corporation, or any of its affiliates that is a stockholder of the Corporation. (ii) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (C) of paragraph (a)(i) of this Section 5, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must be a proper subject for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than thirty (30) days or delayed by more than sixty (60) days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the ninetieth day prior to such annual meeting and not later than the close of business on the later of the sixtieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the Corporation. For purposes of determining whether a stockholder's notice shall have been delivered in a timely manner for the annual meeting of stockholders in 1999, the first anniversary of the previous year's meeting shall be deemed to be 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 3 statement as a nominee and to serving as a director if elected); (B) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (C) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (1) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (2) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (iii) Notwithstanding anything in the second sentence of paragraph (a)(ii) of this Section 5 to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least seventy (70) days prior to the first anniversary of the preceding year's annual meeting, a stockholders's notice required by this Section 5 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation. (b) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting pursuant to Section 4 of this Article II. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (i) by or at the direction of the Board of Directors, (ii) by any stockholder of the Corporation who was a stockholder of record at the time of the giving of the notice provided for in this Section 5, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 5, or (iii) prior to the Trigger Date, by Silicon Graphics, Inc., a Delaware corporation, or any of its affiliates that is a stockholder of the Corporation. In the event that the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any stockholder may nominate such person or persons (as the case may be), for election to the Board of Directors, if the stockholder's notice required by paragraph (a)(ii) of this Section 5 shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not earlier than the ninetieth day prior to such special meeting and not later than the close of business on the later of the sixtieth day prior to such special meeting or the tenth day following the day on which public announcement by the Corporation is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. (c) General. 4 (i) Only persons who are nominated in accordance with the procedures set forth in this Section 5 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 5. Except as otherwise provided by law, the Charter or these By-laws, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with this Section 5 and, if any proposed nomination or business is not in compliance with this Section 5, to declare that such defective proposal or nomination shall be disregarded. (ii) For purposes of this Section 5, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (iii) Notwithstanding the foregoing provisions of this Section 5, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 5. Nothing in this Section 5 shall be deemed to affect any rights (A) of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (B) of the holders of any series or Preferred Stock to elect directors. Section 6. Quorum. Except as otherwise provided by law or in the Charter, the holders of a majority of the voting power of all outstanding shares of the Corporation entitled to vote generally in the election of directors (the "Voting Stock"), represented in person or by proxy, shall constitute a quorum at a meeting of stockholders, except that when specified business is to be voted on by a class or series of stock voting as a class, the holders of a majority of the shares of such class or series shall constitute a quorum of such class or series for the transaction of such business. At any meeting of stockholders at which a quorum is not present, the person serving as chairman of the meeting or the holders of a majority in interest of the stockholders present in person or by proxy and who are entitled to vote on every matter that is to be voted on without regard to class at such meeting may adjourn the meeting from time to time. No notice of the time and place of adjourned meetings need by given except as required by law. Section 7. Organization and Conduct of Business. The Chairman of the Board of Directors shall act as chairman of meetings of the stockholders. The Board of Directors may designate any other officer or director of the Corporation to act as chairman of any meeting in the absence of the Chairman of the Board of Directors, and the Board of Directors may further provide for determining who shall act as chairman of any stockholder's meeting in the absence of the Chairman of the Board of Directors and such designee. The person serving as chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order. 5 The Secretary of the Corporation shall act as secretary of all meetings of the stockholders, but in the absence of the Secretary the presiding officer may appoint any other person to act as secretary of any meeting. Section 8. Proxies and Voting. At any meeting of stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument executed in writing (or in such manner prescribed by the General Corporation Law of the State of Delaware) by the stockholder, or by such person's duly authorized attorney in fact. Election of directors at all meeting of the stockholders at which directors are to be elected shall be by ballot, and, subject to the rights of the holders of any series of Preferred Stock to elect directors, a plurality of the votes cast thereat shall elect directors. Except as otherwise provided by law, the Charter and these By-laws and subject to the rights of the holders of any series of Preferred Stock, in all matters other than the election of directors, the affirmative vote of a majority of the voting power of the shares present in person or represented by proxy at the meeting and entitled to vote on the matter shall be the act of the stockholders. Section 9. Inspectors of Election. The Board of Directors may, and to the extent required by law, shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting, decide upon the qualification of voters, count the votes, decide the results and make a written report thereof in accordance with the General Corporation Law of the State of Delaware. The Board of Directors may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector(s) shall have the duties prescribed by law. Section 10. No Stockholder Action by Written Consent. Effective as of the Trigger Date, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders. ARTICLE III Board of Directors Section 1. Number and Term of Office. Subject to the rights, if any, of holders of preferred stock of the Corporation, the number of directors of the Corporation shall be fixed from time to time exclusively by resolution of the Board of Directors adopted by the affirmative vote of directors constituting not less than a majority of the Whole Board, but shall consist of not more than ten (10) nor less than three (3) directors. The directors, other than those who may be elected by the holders of any class or series of preferred stock of the Corporation, shall be classified, with respect to the time they severally hold office, into three classes, as nearly equal in 6 number as possible, one class to be initially elected for a term expiring at the annual meeting of stockholders to be held in 1999, another class to be initially elected for a term expiring at the annual meeting of stockholders to be held in 2001, and another class to be initially elected for a term expiring at the annual meeting of stockholders to be held in 2001, with each director to serve until his or her successor shall have been elected and shall have qualified. At each succeeding annual meeting of stockholders, directors elected to succeed those directors whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to serve until his or her successor shall have been elected and shall have qualified. For purposes of these By-laws, the term "Whole Board" shall mean the total number of directors that the Corporation would have if there were no vacancies on the Corporation's Board of Directors. Section 2. Meetings. Regular meetings of the Board of Directors may be held at such place, either inside or outside of the State of Delaware, and at such time, as may from time to time be designated by the Chairman of the Board of Directors or resolution of the Board of Directors or as may be specified in the call of any meeting. An annual meeting of the Board of Directors shall be held on the same day as, and as soon as practicable following, the annual meeting of stockholders or at such other time or place as shall be determined by the Board of Directors at its regular meeting next preceding said annual meeting of stockholders. Special meetings of the Board of Directors may be held at any time on the call of the Chairman of the Board of Directors, the President or a majority of the Board of Directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix the time and place of the meetings. Meetings may be held at any time or place without notice if all the directors are present or if those not present waive notice of the meeting in writing. Section 3. Notice of Meetings. Notice of the time and place of meetings of the Board of Directors (excepting the annual meeting of directors) shall be given to each director by the Secretary or an Assistant Secretary of the Corporation by (i) mailing or sending via courier such notice not later than during the second day preceding the day on which such meeting is to be held, or (ii) by (a) sending a facsimile transmission or other form of electronic communication containing such notice or (b) delivering such notice personally or by telephone, in each case, not later than during the first day preceding the day on which such meeting is to be held. Unless otherwise stated in the notice thereof, any and all business may be transacted at any meeting. Section 4. Quorum and Organization of Meetings. Subject to Section 5 of this Article III, a whole number of directors equal to at least a majority of the Whole Board shall constitute a quorum for the transaction of business, but if at any meeting of the Board of Directors there shall be less than a quorum present, a majority of the directors present may adjourn the meeting from time to time without further notice. The act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. The directors present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the 7 withdrawal of enough directors to leave less than a quorum. Meetings shall be presided over by the Chairman of the Board of Directors or, in his or her absence, by such other person as the Board of Directors may designate or the members present may select. Section 5. Vacancies. Subject to the rights, if any, of holders of preferred stock of the Corporation, and unless the Board of Directors otherwise determines, any vacancy occurring in the Board of Directors caused by death, resignation, increase in number of directors or otherwise may be filled by the affirmative vote of a majority of the remaining members of the Board of Directors, though less than a quorum, or by a sole remaining director, and except as otherwise provided by law, any such vacancy may not be filled by the stockholders of the Company. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been duly elected and qualified. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Section 6. Powers. In addition to the powers and authorities by these By-laws expressly conferred upon them, the Board of Directors shall have and may exercise all such powers of the Company and do all such lawful acts and things that are not by statute, the Charter or these By-laws directed or required to be exercised or done by the stockholders. Section 7. Reliance upon Books, Reports and Records. Each director, each member of any committee designated by the Board of Directors and each officer, in the performance of his or her duties, shall be fully protected in relying in good faith upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or by committees of the Board of Directors, or by any other person, as to matters such director, member or officer, as the case may be, reasonably believes are within such person's professional or expert competence and who has been selected with reasonable care by the Board of Directors or by any such committee, or in relying in good faith upon other records of the Corporation. Section 8. Compensation of Directors. Directors, as such, may receive, pursuant to resolution of the Board of Directors, fixed fees and other compensation for their services as directors, including, without limitation, services as members of committees of the Board of Directors; provided, however, that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Section 9. Meetings by Means of Conference Telephone. Unless otherwise provided by the Charter or these By-laws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 8 shall constitute presence in person at such meeting. 8 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 Company. The Audit Committee shall have the power to confer with and direct the officers of the Corporation to the extent necessary to review the internal controls, accounting practices, financial structure and financial reporting of the Corporation. From time to 9 time the Audit Committee shall report to and advise the Board of Directors concerning the results of its consultation and review and such other matters relating to the internal controls, accounting practices, financial structure and financial reporting of the Corporation as the Audit Committee believes merit review by the Board of Directors. The Audit Committee also shall perform such other functions and exercise such other powers as may be delegated to it from time to time by the Board of Directors. Section 3. Compensation Committee. The Compensation Committee shall fix from time to time the salaries of members of the Board of Directors who are officers or employees of the Corporation and of all Senior Executive Vice Presidents, Executive Vice Presidents and Senior Vice Presidents of the Corporation. It also shall perform such functions as may be delegated to it under the provisions of any bonus, supplemental compensation, special compensation or stock option plan of the Corporation. Section 4. Rules and Procedures. Each committee may fix its own rules and procedures and shall meet at such times and places as may be provided by such rules, by resolution of the committee or by call of the chairman or vice chairman of such committee. Notice of meeting of each committee, other than of regular meetings provided for by its rules or resolutions, shall be given to committee members. The presence of a majority of its members, but not less than two, shall constitute a quorum of any committee, and all questions shall be decided by a majority vote of the members present at the meeting. All action taken at each committee meeting shall be recorded in minutes of the meeting. Section 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 Company shall include a Chairman of the Board of Directors, who shall be chosen from among the directors, a President, a Chief Financial Officer, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a Treasurer, a General Counsel and a Secretary, each of whom shall be elected by the Board of Directors to hold office until his or her successor shall have been chosen and shall have qualified. The Board of Directors, the Chairman of the Board of Directors and the Chief Executive Officer may elect or appoint one or more Controllers, one or more Assistant Vice Presidents, one or more Assistant Treasurers, one or more Assistant General Counsels and one or more Assistant Secretaries, and the Board of Directors may elect or appoint such other officers as it may deem necessary, or desirable, each of whom shall have such authority, shall perform such duties and shall hold office for such term as may be prescribed by the Board of Directors from time to time. Any person may hold at one time more than one office, excepting 10 that the duties of the President and Secretary shall not be performed by one person. Section 2. Chairman of the Board of Directors. The Chairman of the Board of Directors shall be the Chief Executive Officer of the Corporation. Subject to the provisions of these By-laws and to the direction of the Board of Directors, he or she shall have ultimate authority for decisions relating to the general management and control of the affairs and business of the Corporation and shall perform all other duties and exercise all other powers commonly incident to the position of Chief Executive Officer or which are or from time to time may be delegated to him or her by the Board of Directors, or which are or may at any time be authorized or required by law. He or she shall preside at all meetings of the Board of Directors. He or she shall make reports to the Board of Directors and stockholders, and shall see that all orders and resolutions of the Board of Directors and any committee thereof are carried into effect. The Chairman of the Board may also serve as President, if so elected by the Board of Directors. The Board of Directors may also elect a Vice-Chairman to act in the place of the Chairman upon his or her absence or inability to act. Section 3. President. Subject to the provisions of these By-laws and to the direction of the Board of Directors and of the Chief Executive Officer, the President shall have such powers and shall perform such duties as from time to time may be delegated to him or her by the Board of Directors or by the Chief Executive Officer, or which are or may at any time be authorized or required by law. Section 4. Executive Vice Presidents, Senior Vice Presidents and Vice Presidents. Each of the Executive Vice Presidents, each of the Senior Vice Presidents and each of the other Vice Presidents shall have such powers and shall perform such duties as may be delegated to him or her by the Board of Directors, the Chairman of the Board of Directors, the President or such other officer or officers to whom he or she is directly responsible. Section 5. Treasurer and Assistant Treasurer. The Treasurer, subject to the direction of the Board of Directors, shall have the care and custody of all funds and securities of the Corporation. When necessary or proper he or she shall endorse on behalf of the Corporation, for collection, checks, notes and other obligations, and shall deposit all funds of the Corporation in such banks or other depositaries as may be designated by the Board of Directors or by such officers or employees as may be authorized by the Board of Directors so to designate. He or she shall perform all acts incident to the office of Treasurer, subject to the control of the Board of Directors and such other officer or officers to whom he or she is directly responsible. He or she may be required to give a bond for the faithful discharge of his or her duties, in such sum and upon such conditions as the Board of Directors may require. At the request and direction of the Treasurer or, in the case of his or her absence or inability to act, any Assistant Treasurer may act in his or her place. In the case of the death of the Treasurer, or in the case of his or her absence or inability to act without having designated an Assistant Treasurer to act temporarily in his or her place, the Assistant Treasurer so to perform the duties of the Treasurer shall be designated by the Chairman of the Board of Directors, the 11 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 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. 12 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. 13 ARTICLE VI Resignations Any director or officer of the Corporation, whether elected or appointed, may resign at any time by giving written notice of such resignation to the Chairman of the Board of Directors, the President, or the Secretary, and such resignation shall be deemed effective as of the close of business on the date said notice is received by the Chairman of the Board of Directors, the President, or the Secretary, or at such later time as is specified therein. No formal action shall be required of the Board of Directors or the stockholders to make any such resignation effective. ARTICLE VII Capital Stock; Dividends; Seal Section 1. Stock Certificates and Transfers. The interest of each stockholder of the Corporation shall be evidenced by certificates for shares of stock in such form as the appropriate officers of the Corporation may from time to time prescribe. The shares of the stock of the Corporation shall be transferred on the books of the Corporation by the holder thereof in person or by such person's attorney, upon surrender for cancellation of certificates for at least the same number of shares, with an assignment and power of transfer endorsed thereon or attached thereto, duly executed, with such proof of the authenticity of the signature as the Corporation or its agents may reasonably require. The certificates of stock shall be numbered and signed by the Chairman of the Board of Directors, the President, an Executive Vice President, a Senior Vice President or a Vice President, and also by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary. Any and all signatures may be facsimiles. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. Section 2. Lost, Destroyed or Stolen Certificate. Any person claiming a stock certificate in lieu of one lost, destroyed or stolen, shall give the Corporation an affidavit as to his, her or its ownership of the certificate and of the facts which go to prove that it has been lost, destroyed or stolen. If required by the Board of Directors or any financial officer of the Corporation, he, she or it also shall give the Corporation a bond, in such form as may be approved by the Board of Directors or such financial officer, sufficient to indemnify the Corporation against any claim that may be made against it on account of the alleged loss of the certificate or the issuance of a new certificate. A new certificate shall be issued upon receipt of such an affidavit and, if required, upon the giving of such a bond. Section 3. Record of holder of Shares. The Corporation shall be entitled to treat the holder of record of any share or shares as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claims to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the General Corporation Law of the State of Delaware. The Corporation shall be 14 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 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. 15 ARTICLE IX Fiscal Year The fiscal year of the Company shall begin the first day of July in each year. ARTICLE X Miscellaneous Section 1. Notices and Waivers Thereof. Whenever any notice whatever is required by these By-laws, the Charter or any of the laws of the State of Delaware to be given to any stockholder, director or officer, such notice, except as otherwise provided by the laws of the State of Delaware, may be given personally or by telephone or be given by facsimile transmission or other form of electronic communication, addressed to such stockholder at such person's address as it appears on the stock transfer books of the Corporation, or to such director or officer at his or her Corporation location, if any, or at such address as appears on the books of the Corporation, or the notice may be given in writing by depositing the same in a post office, or in a regularly maintained letter box, or by sending it via courier in a postpaid, sealed wrapper addressed to such stockholder at such person's address as it appears on the stock transfer books of the Corporation, or to such director or officer at his or her Corporation location, if any, or such address as appears on the books of the Corporation. Any notice given by facsimile transmission or other form of electronic communication shall be deemed to have been given when it shall have been transmitted. Any notice given by mail or courier shall be deemed to have been given when it shall have been mailed or delivered to the courier. A waiver of any such notice in writing, including by facsimile transmission, signed or dispatched by the person entitled to such notice or by his or her duly authorized attorney, whether before or after the time stated therein, shall be deemed equivalent to the notice required to be given, and the presence at any meeting of any person entitled to notice thereof shall be deemed a waiver of such notice as to such person. Section 2. Audits. The accounts, books and records of the Corporation shall be audited upon the conclusion of each fiscal year by an independent certified public accountant selected by the Board of Directors, and it shall be the duty of the Board of Directors to cause such audit to be done annually. ARTICLE XI Amendments These By-laws may be altered, amended or repealed, and new By-laws may be adopted (a) at any annual or special meeting of stockholders by the affirmative vote of the holders of a majority of the voting power of the stock issued and outstanding and entitled to vote thereat, provided, however, that any proposed alteration, amendment or repeal of, or the adoption of any 16 By-law inconsistent with, Sections 3, 5 or 10 of Article II or Sections 1 or 5 of Article III of the By-laws by the stockholders shall require the affirmative vote of the holders of at least 80% of the voting power of all Voting Stock then outstanding, voting together as a single class, and provided, further, however, that, in the case of any such stockholder action at a special meeting of stockholders, notice of the proposed alteration, amendment, repeal or adoption of the new By-law or By-laws must be contained in the notice of such special meeting, or (b) by the affirmative vote of a majority of the Whole Board. EX-10.8 3 1998 LONG-TERM INCENTIVE PLAN MIPS TECHNOLOGIES, INC. 1998 LONG-TERM INCENTIVE PLAN (as amended August 27, 1998) MIPS TECHNOLOGIES, INC. 1998 LONG-TERM INCENTIVE PLAN 1. Purposes The purposes of the Plan are to (a) promote the long-term success of the Company and to increase stockholder value by providing Eligible Individuals and Consultants with incentives to contribute to the long-term growth and profitability of the Company and (b) assist the Company in attracting, retaining and motivating highly qualified individuals. The Plan permits the Committee to make Awards which constitute "qualified performance-based compensation" for purposes of Section 162(m) of the Code. 2. Definitions For purposes of the Plan, the following terms shall be defined as follows: "Administrator" means the individual or individuals to whom the Committee delegates authority under the Plan in accordance with Section 3(d). "Award" means an award made pursuant to the terms of the Plan to an Eligible Individual in the form of Stock Options, Stock Appreciation Rights, Stock Awards, Restricted Stock, Performance Units or Other Awards. "Award Document" means a written document approved in accordance with Section 3 which sets forth the terms and conditions of the Award to the Participant. An Award Document may be in the form of (i) an agreement between the Company which is executed by an officer on behalf of the Company and is signed by the Participant or (ii) a certificate issued by the Company which is executed by an officer on behalf of the Company but does not require the signature of the Participant. "Board" means the Board of Directors of the Company. "Cause" means the termination of Purchaser's employment as a result of: (i) an act or acts of dishonesty undertaken by such Purchaser and intended to result in gain or personal enrichment of the Purchaser, (ii) persistent failure to perform the duties and obligations of such Purchaser which is not remedied in a reasonable period of time after receipt of written notice from Employer, (iii) violation of confidentiality or proprietary information obligations to or agreements entered into with the Employer, (iv) use, sale or distribution of illegal drugs on the Employer's premises, (v) threatening, intimidating or coercing or harassing fellow employees, or (vi) the conviction of such Purchaser of a felony. "Change in Control" means: (i) the acquisition of any Person (as such term is used in Sections 13(d) and 14(d) of the Securities and Exchange Act of 1934, as amended (the "1934 Act") as Beneficial Owner (as such term is used in Rule 13d-3 promulgated under the 1934 Act), directly or indirectly, of fifty percent (50%) or more of the combined voting power of the outstanding shares of capital stock of the Company's then outstanding securities with respect to the election of the directors of the Board. (ii) During any period of three (3) consecutive years, individuals who, at the beginning of such period, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a Director of the Board subsequent to the date of this Agreement whose election, or a nomination for election by the Company's shareholders, was approved by the vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of any individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Board, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the 1934 Act) shall be, for these purposes, considered as though such person were a member of the Incumbent Board. "Code" means the Internal Revenue Code of 1986, as amended, and the applicable rulings and regulations (including any proposed regulations) thereunder. "Committee" means the Compensation Committee of the Board, any successor committee thereto or any other committee appointed from time to time by the Board to administer the Plan. The Committee shall consist of at least two individuals and shall serve at the pleasure of the Board. "Common Stock" means the common stock, par value $.001 per share, of the Company. "Company" means MIPS Technologies, Inc., a Delaware corporation. "Consultant" means any person, including an advisor, engaged by the Company to render services and who is compensated for such services. The term Consultant shall include directors on the Board. "Eligible Individuals" means the individuals described in Section 6 who are eligible for Awards under the Plan. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the applicable rulings and regulations thereunder. "Fair Market Value" means, with respect to a share of Common Stock, the fair market value thereof as of the relevant date of determination, as determined in accordance with a valuation methodology approved by the Committee. In the absence of any alternative valuation methodology approved by the Committee, the Fair Market Value of a share of Common Stock shall equal the closing selling price of a share of Common Stock as reported on the composite 2 tape for securities listed on the Nasdaq National Market, or such other national securities exchange as may be designated by the Committee, or, in the event that the Common Stock is not listed for trading on a national securities exchange but is quoted on an automated system, on such automated system, in any such case on the valuation date (or, if there were no sales on the valuation date, the average of the highest and the lowest quoted selling prices as reported on said composite tape or automated system for the most recent day during which a sale occurred). "Good Reason" for voluntary resignation means (i) the Employer reduces by ten percent (10%) or more the Purchaser's compensation at the rate in effect immediately prior to the Change of Control or (ii) without the Purchaser's express written consent, the Employer requires the Purchaser to change the location of his or her job or office, so that he or she will be based at a location more than fifty (50) miles from the location of his or her job or office immediately prior to the Change of Control. For these purposes, "Compensation" means base salary, exclusive of bonus, incentive compensation and shift differential, paid by the Employer as consideration for the Purchaser's service. "Incentive Stock Option" means a Stock Option which is an "incentive stock option" within the meaning of Section 422 of the Code and designated by the Committee as an Incentive Stock Option in an Award Document. "Nonqualified Stock Option" means a Stock Option which is not an Incentive Stock Option. "Other Award" means any other form of award authorized under Section 13 of the Plan. "Participant" means an Eligible Individual to whom an Award has been granted under the Plan. "Performance Unit" means a performance unit granted to an Eligible Individual pursuant to Section 12 hereof which is subject to performance criteria. "Plan" means this MIPS Technologies, Inc.1998 Long-Term Incentive Plan as described herein. "Restricted Stock" means Common Stock granted to an Eligible Individual pursuant to Section 11 hereof which is subject to restrictions. "Restoration Option" means a Stock Option that is awarded upon the exercise of a Stock Option earlier awarded under the Plan (an "Underlying Option") for which the exercise price is paid in whole or in part by tendering shares of Common Stock previously owned by the Participant, where such Restoration Option (i) covers a number of shares of Common Stock no greater than the number of previously owned shares tendered in payment of the exercise price of the Underlying Option plus the number of shares withheld to pay taxes arising upon such exercise, (ii) the expiration date of the Restoration Option is no later than the expiration date of the Underlying Option and (iii) the exercise price per share of the Restoration Option is no less than the Fair Market Value per share of Common Stock on the date of exercise of the Underlying Option. 3 "Stock Appreciation Right" means a right to receive all or some portion of the appreciation on shares of Common Stock granted to an Eligible Individual pursuant to Section 9 hereof. "Stock Award" means a share of Common Stock granted to an Eligible Individual for no consideration other than the provision of services or offer for sale to an Eligible Employee at a purchase price determined by the Committee, in either case pursuant to Section 10 hereof. "Stock Option" means an Award to purchase shares of Common Stock granted to an Eligible Individual pursuant to Section 8 hereof, which Award may be either an Incentive Stock Option or a Nonqualified Stock Option. "Substitute Award" means an Award granted upon assumption of, or in substitution for, outstanding awards previously granted by a company or other entity in connection with a corporate transaction, such as a merger, combination, consolidation or acquisition of property or stock. 3. Administration of the Plan (a) Power and Authority of the Committee. The Plan shall be administered by the Committee, which shall have full power and authority, subject to the express provisions hereof: (i) to select Participants from the Eligible Individuals; (ii) to make Awards in accordance with the Plan; (iii) to determine the number of shares of Common Stock subject to each Award or the cash amount payable in connection with an Award; (iv) to determine the terms and conditions of each Award, including, without limitation, those related to vesting, forfeiture, payment and exercisability, and the effect, if any, of a Participant's termination of employment with the Company, and including the authority to amend the terms and conditions of an Award after the granting thereof to a Participant in a manner that is not, without the consent of the Participant, prejudicial to the rights of such Participant in such Award; (v) to specify and approve the provisions of the Award Documents delivered to Participants in connection with their Awards; (vi) to construe and interpret any Award Document delivered under the Plan; (vii) to prescribe, amend and rescind rules and procedures relating to the Plan; (viii) to vary the terms of Awards to take account of tax, securities law and other regulatory requirements of foreign jurisdictions; 4 (ix) subject to the provisions of the Plan and subject to such additional limitations and restrictions as the Committee may impose, to delegate to one or more officers of the Company some or all of its authority under the Plan; (x) to employ such legal counsel, independent auditors and consultants as it deems desirable for the administration of the Plan and to rely upon any opinion or computation received therefrom; and (xi) to make all other determinations and to formulate such procedures as may be necessary or advisable for the administration of the Plan. (b) Plan Construction and Interpretation. The Committee shall have full power and authority, subject to the express provisions hereof, to construe and interpret the Plan. (c) Determinations of Committee Final and Binding. All determinations by the Committee in carrying out and administering the Plan and in construing and interpreting the Plan shall be final, binding and conclusive for all purposes and upon all persons interested herein. (d) Delegation of Authority. The Committee may, but need not, from time to time delegate some or all of its authority under the Plan to an Administrator consisting of one or more members of the Committee or of one or more officers of the Company; provided, however, that the Committee may not delegate its authority (i) to make Awards to Eligible Individuals who are officers of the Company who are delegated authority by the Committee hereunder, or (ii) under Sections 3(b) and 16 of the Plan. Any delegation hereunder shall be subject to the restrictions and limits that the Committee specifies at the time of such delegation or thereafter. Nothing in the Plan shall be construed as obligating the Committee to delegate authority to an Administrator, and the Committee may at any time rescind the authority delegated to an Administrator appointed hereunder or appoint a new Administrator. At all times, the Administrator appointed under this Section 3(d) shall serve in such capacity at the pleasure of the Committee. Any action undertaken by the Administrator in accordance with the Committee's delegation of authority shall have the same force and effect as if undertaken directly by the Committee, and any reference in the Plan to the Committee shall, to the extent consistent with the terms and limitations of such delegation, be deemed to include a reference to the Administrator. (e) Liability of Committee. No member of the Committee shall be liable for any action nor determination made in good faith, and the members of the Committee shall be entitled to indemnification and reimbursement in the manner provided in the Company's certificate of incorporation as it may be amended from time to time. In the performance of its responsibilities with respect to the Plan, the Committee shall be entitled to rely upon information and advice furnished by the Company's officers, the Company's accountants, the Company's counsel and any other party the Committee deems necessary, and no member of the Committee shall be liable for any action taken or not taken in reliance upon any such advice. (f) Action by the Board. Anything in the Plan to the contrary notwithstanding, any authority or responsibility which, under the terms of the Plan, may be exercised by the Committee may alternatively be exercised by the Board. 5 4. Effective Date and Term The Plan shall become effective upon its adoption by the Board subject to its approval by the stockholders of the Company. Prior to such stockholder approval, the Committee may grant Awards conditioned on stockholder approval. If such stockholder approval is not obtained at or before the first annual meeting of stockholders to occur after the adoption of the Plan by the Board (including any adjournment or adjournments thereof), the Plan and any Awards made thereunder shall terminate ab initio and be of no further force and effect. In no event shall any Awards be made under the Plan after the [fifth] anniversary of the date of stockholder approval. 5. Shares of Common Stock Subject to the Plan (a) General. Subject to adjustment as provided in Section 15(b) hereof, the number of shares of Common Stock that may be issued pursuant to Awards under the Plan (the "Section 5 Limit") shall not exceed, in the aggregate, 6,600,000. Shares issued under this Plan may be either authorized but unissued shares, treasury shares or any combination thereof. (b) Rules Applicable to Determining Shares Available for Issuance. For purposes of determining the number of shares of Common Stock that remain available for issuance, the following shares shall be added back to the Section 5 Limit and again be available for Awards: (i) The number of shares tendered to pay the exercise price of a Stock Option or other Award; and (ii) The number of shares withheld from any Award to satisfy a Participant's tax withholding obligations or, if applicable, to pay the exercise price of a Stock Option or other Award. In addition, any shares issued underlying Substitute Awards shall not be counted against the Section 5 Limit and shall not be subject to Section 5(c) below. (c) Special Limits. Anything to the contrary in Section 5(a) above notwithstanding, but subject to Section 15(b) below, the following special limits shall apply to shares of Common Stock available for Awards under the Plan: (i) The maximum number of shares that may be issued in the form of Stock Awards, or issued upon settlement of Restricted Stock or Other Awards, shall equal 800,000 shares, of which no more than a number of shares equal to 10% of the Section 5 Limit shall be in the form of Other Awards, provided, however, that any such Stock Awards, Restricted Stock or Other Awards that are issued in lieu of cash compensation that otherwise would be paid to a Participant, or in satisfaction of any other obligation owed by the Company to a Participant, shall not be counted against such limitation; and (ii) The maximum number of shares of Common Stock that may be subject to Stock Options or Stock Appreciation Rights granted to any Eligible Individual in any fiscal year 6 of the Company shall equal 3,000,000 shares plus any shares which were available under this Section 5(c)(ii) for Awards of Stock Options or Stock Appreciation Rights to such Eligible Individual in any prior fiscal year but which were not covered by such Awards. (iii) The maximum number of Performance Units that may be granted to any Eligible Individual in any fiscal year of the Company shall equal 3,000,000 units plus any Performance Units which were available under this Section 5(c)(iii) for Awards of Performance Units to such Eligible Individual in any prior fiscal year but which were not covered by such Awards 6. Eligible Individuals Awards may be granted by the Committee to Eligible Individuals who are officers or other key employees of the Company or Consultants; provided, however, that Consultants shall not be eligible to receive Incentive Stock Options. An individual's status as an Administrator will not, by itself, affect his or her eligibility to participate in the Plan. 7. Awards in General (a) Types of Award and Award Document. Awards under the Plan may consist of Stock Options, Stock Appreciation Rights, Stock Awards, Restricted Stock, Performance Stock or Other Awards. Any Award described in Sections 8 through 13 of the Plan may be granted singly or in combination or in tandem with any other Award, as the Committee may determine. Awards may be made in combination with, in replacement of, or as alternatives to grants of rights under any other employee compensation plan of the Company, including the plan of any acquired entity, or may be granted in satisfaction of the Company's obligations under any such plan. (b) Terms Set Forth in Award Document. The terms and provisions of an Award shall be set forth in a written Award Document approved by the Committee and delivered or made available to the Participant as soon as administratively practicable following the date of such Award. The vesting, exercisability, payment and other restrictions applicable to an Award (which may include, without limitation, restrictions on transferability or provision for mandatory resale to the Company) shall be determined by the Committee and set forth in the applicable Award Document. Notwithstanding the foregoing, the Committee may accelerate (i) the vesting or payment of any Award, (ii) the lapse of restrictions on any Award or (iii) the date on which any Stock Option, Stock Appreciation Right or Other Award first becomes exercisable. (c) Termination of Employment and Change in Control. The Committee shall also have full authority to determine and specify in the applicable Award Document the effect, if any, that a Participant's termination of employment for any reason will have on the vesting, exercisability, payment or lapse of restrictions applicable to an Award. The date of a Participant's termination of employment for any reason shall be determined in the sole discretion of the Committee. Similarly, subject to Section 15(c), the Committee shall have full authority to determine the effect, if any, of a Change in Control of the Company on the vesting, exercisability, payment or lapse of restrictions 7 applicable to an Award, which effect may be specified in the applicable Award Document or determined at a subsequent time. (d) Dividends and Dividend Equivalents. The Committee may provide Participants with the right to receive dividends or payments equivalent to dividends or interest with respect to an outstanding Awards, which payments can either be paid currently or deemed to have been reinvested in shares of Common Stock, and can be made in Common Stock, cash or a combination thereof, as the Committee shall determine. 8. Stock Options (a) Terms of Stock Options Generally. A Stock Option shall entitle the Participant to whom the Stock Option was granted to purchase a specified number of shares of Common Stock during a specified period at a price that is determined in accordance with Section 8(b) below. Stock Options may be either Nonqualified Stock Options or Incentive Stock Options. The Committee will fix the vesting and exercisability conditions applicable to a Stock Option, provided that no Stock Option shall vest sooner than twelve months from the date of grant (subject to early vesting, if so provided by the Committee, upon termination of employment or change in control of the Company), but provided further that such minimum vesting period shall not apply to any Restoration Option. (b) Exercise Price. The exercise price per share of Common Stock purchasable under a Stock Option shall be fixed by the Committee at the time of grant or, alternatively, shall be determined by a method specified by the Committee at the time of grant; provided, however, that, except as provided in Section 15(b) below, the exercise price per share of Common Stock applicable to a Stock Option may not be adjusted or amended, including by means of amendment, cancellation or the replacement of such Stock Option with a subsequently awarded Stock Option. Notwithstanding the foregoing, the exercise price per share of a Stock Option that is a Substitute Award may be less than the Fair Market Value per share on the date of award, provided that the excess of: (i) the aggregate Fair Market Value (as of the date such Substitute Award is granted) of the shares of Common Stock subject to the Substitute Award, over (ii) the aggregate exercise price thereof, does not exceed the excess of: (iii) the aggregate fair market value (as of the time immediately preceding the transaction giving rise to the Substitute Award, such fair market value to be determined by the Committee) of the shares of the predecessor entity that were subject to the award assumed or substituted for by the Company, over (iv) the aggregate exercise price of such shares. (c) Option Term. The term of each Stock Option shall be fixed by the Committee and shall not exceed ten years from the date of grant. 8 (d) Incentive Stock Options. Each Stock Option granted pursuant to the Plan shall be designated at the time of grant as either an Incentive Stock Option or as a Nonqualified Stock Option. No Incentive Stock Option may be issued pursuant to the Plan to any individual who, at the time the Stock Option is granted, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries, unless (A) the exercise price determined as of the date of grant is at least 110% of the Fair Market Value on the date of grant of the shares of Common Stock subject to such Stock Option, and (B) the Incentive Stock Option is not exercisable more than five years from the date of grant thereof. No Incentive Stock Option may be granted under the Plan after the tenth anniversary of the Effective Date. (e) Method of Exercise. Subject to the provisions of the applicable Award Document, the exercise price of a Stock Option may be paid in cash or previously owned shares or a combination thereof and, if the applicable Award Document so provides, in whole or in part through the withholding of shares subject to the Stock Option with a value equal to the exercise price. In accordance with the rules and procedures established by the Committee for this purpose, the Stock Option may also be exercised through a "cashless exercise" procedure approved by the Committee involving a broker or dealer approved by the Committee, that affords Participants the opportunity to sell immediately some or all of the shares underlying the exercised portion of the Stock Option in order to generate sufficient cash to pay the Stock Option exercise price and/or to satisfy withholding tax obligations related to the Stock Option. (f) Accelerated Vesting Upon Death or Disability. In the event a Participant terminates his or her service with the Company due to Participant's death or disability (as defined in Section 22(e)(3) of the Code), all Stock Options granted to Participant shall become fully vested and exercisable upon such termination and remain exercisable for the period of time stated in the Participant's stock option agreement. 9. Stock Appreciation Rights (a) General. A Stock Appreciation Right shall entitle a Participant to receive, upon satisfaction of the conditions to the payment specified in the applicable Award Document, an amount equal to the excess, if any, of the Fair Market Value on the exercise date of the number of shares of Common Stock for which the Stock Appreciation Right is exercised, over the exercise price for such Stock Appreciation Right specified in the applicable Award Document. The exercise price per share of Common Stock covered by a Stock Appreciation Right shall be fixed by the Committee at the time of grant or, alternatively, shall be determined by a method specified by the Committee at the time of grant; provided, however, that, except as provided in Section 9(b) below, the exercise price per share shall be no less than 100% of the Fair Market Value per share on the date of grant (or if the exercise price is not fixed on the date of grant, then on such date as the exercise price is fixed); and provided further, that, except as provided in Section 15(b) below, the exercise price per share of Common Stock subject to a Stock Appreciation Right may not be adjusted or amended, including by means of amendment, cancellation or the replacement of such Stock Appreciation Right with a subsequently awarded Stock Appreciation Right. Notwithstanding the foregoing, the exercise price per share of a Stock Appreciation Right that is a Substitute Award may be less than the Fair Market Value per share on the date of award, provided, that such exercise price is not less than the minimum exercise price that would be permitted for an equivalent Stock Option as determined in accordance with Section 8(b) above. At 9 the sole discretion of the Committee, payments to a Participant upon exercise of a Stock Appreciation Right may be made in cash, in shares of Common Stock having an aggregate Fair Market Value as of the date of exercise equal to such amount, or in a combination of cash and shares of Common Stock having an aggregate value as of the date of exercise equal to such amount. A Stock Appreciation Right may be granted alone or in addition to other Awards, or in tandem with a Stock Option. (b) Stock Appreciation Rights in Tandem with Stock Options. A Stock Appreciation Right granted in tandem with a Stock Option may be granted either at the same time as such Stock Option or subsequent thereto. If granted in tandem with a Stock Option, a Stock Appreciation Right shall cover the same number of shares of Common Stock as covered by the Stock Option (or such lesser number of shares as the Committee may determine) and shall be exercisable only at such time or times and to the extent the related Stock Option shall be exercisable, and shall have the same term and exercise price as the related Stock Option (which, in the case of a Stock Appreciation Right granted after the grant of the related Stock Option, may be less than the Fair Market Value per share on the date of grant of the tandem Stock Appreciation Right). Upon exercise of a Stock Appreciation Right granted in tandem with a Stock Option, the related Stock Option shall be canceled automatically to the extent of the number of shares covered by such exercise; conversely, if the related Stock Option is exercised as to some or all of the shares covered by the tandem grant, the tandem Stock Appreciation Right shall be canceled automatically to the extent of the number of shares covered by the Stock Option exercise. 10. Stock Awards (a) General. A Stock Award shall consist of one or more shares of Common Stock granted to a Participant for no consideration other than the provision of services (or, if required by applicable law in the reasonable judgment of the Company, for payment of the par value of such shares). Stock Awards shall be subject to such restrictions (if any) on transfer or other incidents of ownership for such periods of time, and shall be subject to such conditions of vesting, as the Committee may determine and as shall be set forth in the applicable Award Document. (b) Distributions. Any shares of Common Stock or other securities of the Company received by a Participant to whom a Stock Award has been granted as a result of a stock distribution to holders of Common Stock or as a stock dividend on Common Stock shall be subject to the same terms, conditions and restrictions as such Stock Award. 11. Restricted Stock (a) General An Award of Restricted Stock shall consist of a grant of one or more shares of Common Stock to a Participant for no consideration other than the provision of services or may be offered for sale to a Participant at a purchase price determined by the Committee, subject to the terms and conditions established by the Committee in connection with the Award and as set forth in the applicable Award Document. Such shares of Common Stock shall be subject to such restrictions on transfer or other incidents of ownership for such periods of time, and shall be subject to such conditions of vesting, as the Committee may determine and as shall be set forth in the Award Document relating to such stock. If shares of Common Stock are offered for sale under the Plan, the purchase price shall be payable in cash, or, in the sole discretion of the Committee and to the extent provided in any applicable 10 Award Document, in shares of Common Stock already owned by the Participant, for other consideration acceptable to the Committee or in any combination of cash, shares of Common Stock or such other consideration. Subject to Sections 8(f) and 15(c), Restricted Stock that is granted in respect of individual or corporate performance shall vest no sooner than one year from the date of grant, and Restricted Stock that is granted in connection with hiring or retention arrangements between the Company and a Participant shall vest no sooner than three years from the date of grant. (b) Share Certificates; Rights and Privileges. At the time Restricted Stock is granted or sold to a Participant, share certificates representing the appropriate number of shares or Restricted Stock shall be registered in the name of the Participant but shall be held by the Company in custody for the account of such person. The certificates shall bear a legend restricting their transferability as provided herein. Except for such restrictions on transfer or other incidents of ownership as may be determined by the Committee and set forth in the Award Document relating to an award or sale of Restricted Stock, a Participant shall have the rights of a stockholder as to such Restricted Stock, including the right to receive dividends and the right to vote in accordance with the Company's certificate of incorporation. (c) Distributions. Any shares of Common Stock or other securities of the Company received by a Participant to whom Restricted Stock has been granted or sold as a result of a stock distribution to holders of Common Stock or as a stock dividend on Common Stock shall be subject to the same terms, conditions and restrictions as such Restricted Stock. 12. Performance Units Performance Units may be granted as fixed or variable share- or dollar-denominated units subject to such conditions of vesting and time of payment as the Committee may determine and as shall be set forth in the applicable Award Document relating to such Performance Units. Performance Units may be paid in Common Stock upon the satisfaction of the applicable performance criteria as described in the Award Document, cash or a combination of Common Stock and cash, as the Committee may determine. 13. Other Awards The Committee shall have the authority to specify the terms and provisions of other forms of equity-based or equity-related Awards not described above which the Committee determines to be consistent with the purpose of the Plan and the interests of the Company, which Awards may provide for cash payments based in whole or in part on the value or future value of Common Stock, for the acquisition or future acquisition of Common Stock, or any combination thereof. Other Awards shall also include cash payments (including the cash payment of dividend equivalents) under the Plan which may be based on one or more criteria determined by the Committee which are unrelated to the value of Common Stock and which may be granted in tandem with, or independent of, other Awards under the Plan. 11 14. Certain Restrictions (a) Transfers. Unless the Committee determines otherwise, no Award shall be transferable other than by will or by the laws of descent and distribution or pursuant to a domestic relations order; provided, however, that the Committee may, in its discretion and subject to such terms and conditions as it shall specify, permit the transfer of an Award for no consideration to a Participant's family members or to one or more trusts or partnerships established in whole or in part for the benefit of one or more of such family members (collectively, "Permitted Transferees"). Any Award transferred to a Permitted Transferee shall be further transferable only by will or the laws of descent and distribution or, for no consideration, to another Permitted Transferee of the Participant. The Committee may in its discretion permit transfers of Awards other than those contemplated by this Section 14. (b) Exercise. During the lifetime of the Participant, a Stock Option, Stock Appreciation Right or similar-type Other Award shall be exercisable only by the Participant or by a Permitted Transferee to whom such Stock Option, Stock Appreciation Right or Other Award has been transferred in accordance with Section 14(a). 15. Recapitalization or Reorganization (a) Authority of the Company and Stockholders. The existence of the Plan, the Award Documents and the Awards granted hereunder shall not affect or restrict in any way the right or power of the Company or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (b) Change in Capitalization. Notwithstanding any provision of the Plan or any Award Document, the number and kind of shares authorized for issuance under Section 5(a) above, including the maximum number of shares available under the special limits provided for in Section 5(c) above, may be equitably adjusted in the sole discretion of the Committee in the event of a stock split, stock dividend, recapitalization, reorganization, merger, consolidation, extraordinary dividend, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Stock at a price substantially below Fair Market Value or other similar corporate event affecting the Common Stock in order to preserve, but not increase, the benefits or potential benefits intended to be made available under the Plan. In addition, upon the occurrence of any of the foregoing events, the number of outstanding Awards and the number and kind of shares subject to any outstanding Award and the purchase price per share, if any, under any outstanding Award may be equitably adjusted (including by payment of cash to a Participant) in the sole discretion of the Committee in order to preserve the benefits or potential benefits intended to be made available to Participants granted Awards. Such 12 adjustments shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final. Unless otherwise determined by the Committee, such adjusted Awards shall be subject to the same vesting schedule and restrictions to which the underlying Award is subject. (c) Change in Control. In the event of the involuntary termination of a Participant's employment with the Company not for Cause or a Participant's termination of employment with the Company for Good Reason within twenty-four months after a Change in Control of the Company, the following shall occur: (i) all of such participant's outstanding stock options and stock appreciation rights shall become vested and exercisable, (ii) all restrictions and conditions of all Stock Awards and Restricted Stock held by such Participant shall lapse and (iii) all Performance Units and any Other Awards held by such Participant shall be deemed to be fully earned. 16. Amendments; Termination The Board or Committee may at any time and from time to time alter, amend, suspend or terminate the Plan in whole or in part; provided, however, that any amendment which under the requirements of any applicable law or stock exchange rule must be approved by the stockholders of the Company shall not be effective unless and until such stockholder approval has been obtained in compliance with such law or rule; and provided further that, except as contemplated by Section 15(b) above, the Board or Committee may not, without the approval of the Company's stockholders, increase the maximum number of shares issuable under the Plan or reduce the exercise price of a Stock Option or Stock Appreciation Right. No termination or amendment of the Plan may, without the consent of the Participant to whom an Award has been granted, adversely affect the rights of such Participant under such Award. Notwithstanding any provision herein to the contrary, the Board or Committee shall have broad authority to amend the Plan or any Award under the Plan to take into account changes in applicable tax laws, securities laws, accounting rules and other applicable state and federal laws. 17. Miscellaneous (a) Tax Withholding. The Company may require any individual entitled to receive a payment in respect of an Award to remit to the Company, prior to such payment, an amount sufficient to satisfy any Federal, state or local tax withholding requirements. The Company shall also have the right to deduct from all cash payments made pursuant to or in connection with any Award any Federal, state or local taxes required to be withheld with respect to such payments. In addition, the Company may permit any individual to whom an Award has been made to satisfy, in whole or in part, such obligation to remit taxes, by directing the Company to withhold shares of Common Stock that would otherwise be received by such individual upon settlement or exercise of such Award or by delivering to the Company shares of Common Stock owned by the individual prior to exercising the option, subject to such rules as the Committee may establish from time to time. The value of any share of Common Stock to be withheld by the Company pursuant to this Section 17(a) shall be the Fair Market Value on the date to be used to determine the amount of tax to be withheld. (b) No Right to Grants or Employment. No Eligible Individual or Participant shall have any claim or right to receive grants of Awards under the Plan. Nothing in the Plan or in any 13 Award or Award Document shall confer upon any employee of the Company any right to continued employment with the Company or interfere in any way with the right of the Company to terminate the employment of any of its employees at any time, with or without cause. (c) Other Compensation. Nothing in this Plan shall preclude or limit the ability of the Company to pay any compensation to a Participant under the Company's other compensation and benefit plans and programs. (d) Other Employee Benefit Plans. Payments received by a Participant under any Award made pursuant to the Plan shall not be included in, nor have any effect on, the determination of benefits under any other employee benefit plan or similar arrangement provided by the Company, unless otherwise specifically provided for under the terms of such plan or arrangement or by the Committee. (e) Unfunded Plan. The Plan is intended to constitute an unfunded plan for incentive compensation. Prior to the payment or settlement of any Award, nothing contained herein shall give any Participant any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Common Stock or payments in lieu thereof with respect to awards hereunder. (f) Securities Law Restrictions. The Committee may require each Eligible Individual purchasing or acquiring shares of Common Stock pursuant to a Stock Option or other Award under the Plan to represent to and agree with the Company in writing that such Eligible Individual is acquiring the shares for investment and not with a view to the distribution thereof. All certificates for shares of Common Stock delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any exchange upon which the Common Stock is then listed, and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. No shares of Common Stock shall be issued hereunder unless the Company shall have determined that such issuance is in compliance with, or pursuant to an exemption from, all applicable federal and state securities laws. (g) Compliance with Rule 16b-3. Notwithstanding anything contained in the Plan or in any Award Document to the contrary, if the consummation of any transaction under the Plan would result in the possible imposition of liability on a Participant pursuant to Section 16(b) of the Exchange Act, the Committee shall have the right, in its sole discretion, but shall not be obligated, to defer such transaction or the effectiveness of such action to the extent necessary to avoid such liability, but in no event for a period longer than six months. (h) Award Document. In the event of any conflict or inconsistency between the Plan and any Award Document, the Plan shall govern, and the Award Document shall be interpreted to minimize or eliminate any such conflict or inconsistency. (i) Expenses. The costs and expenses of administering the Plan shall be borne by the Company. 14 (j) Application of Funds. The proceeds received from the Company from the sale of Common Stock or other securities pursuant to Awards will be used for general corporate purposes. (k) Applicable Law. Except as to matters of federal law, the Plan and all actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware without giving effect to conflicts of law principles. 15 EX-10.9 4 EMPLOYEE STOCK PURCHASE PLAN MIPS TECHNOLOGIES, INC. EMPLOYEE STOCK PURCHASE PLAN (Effective as of June 1, 1998) (Amended as of August 27, 1998) The following constitutes the provisions of the MIPS Technologies, Inc. Employee Stock Purchase Plan. 1. PURPOSE. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through payroll deductions. It is believed that employee participation in ownership of the Company on this basis will be to the mutual benefit of the employees and the Company. It is the intention of the Company that the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. DEFINITIONS. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended. "Common Stock" means the Common Stock, $0.001 par value, of the Company. "Company" means MIPS Technologies, Inc. "Committee" means the committee appointed by and serving at the pleasure of the Board to administer the Plan pursuant to Section 14. "Compensation" means base pay, plus any amounts attributable to overtime, shift premium, incentive compensation, bonuses and commissions (exclusive of "spot bonuses" and any other such item specifically directed for all Employees by the Board or a committee), designated by the Board, but shall exclude severance pay, pay in lieu of vacations, back pay awards, disability benefits, deferred compensation, or any other compensation excluded in the discretion of the Board. Compensation shall be determined before giving effect to any salary reduction agreement pursuant to a qualified cash or deferred arrangement within the meaning of Section 401(k) of the Code or to any similar reduction agreement pursuant to any cafeteria plan (within the meaning of Section 125 of the Code). "Continuous Status as an Employee" shall mean the absence of any interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of a leave of absence agreed to in writing by the Company, provided that such leave is for a period of not more than 90 days or re-employment upon the expiration of such leave is guaranteed by contract or statute. "Designated Subsidiaries" means the Subsidiaries which have been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. "Employee" means any person, including an officer, who is customarily employed for at least twenty (20) hours per week and more than five (5) months in a calendar year by the Company or one of its Designated Subsidiaries. "Exercise Date" means the last business day of each Exercise Period in an Offering Period. "Exercise Period" means a six-month period commencing on an Offering Date or on the first business day after any Exercise Date in an Offering Period. "Offering Date" means the first day of each Offering Period of the Plan. "Offering Period" means a period of twenty-four (24) months consisting of four six-month Exercise Periods during which options granted pursuant to the Plan may be exercised. "Plan" means the MIPS Technologies, Inc. Employee Stock Purchase Plan. "Subsidiary" means any corporation, domestic or foreign, in which the Company owns, directly or indirectly, 50% or more of the voting shares. 3. ELIGIBILITY. (a) Any person who is an Employee, as defined in paragraph 2, on the Offering Date of a given Offering Period shall be eligible to participate in such Offering Period under the Plan, subject to the requirements of paragraph 5(a) and the limitations imposed by Section 423(b) of the Code. (b) Notwithstanding any provisions of the Plan to the contrary, no Employee shall be granted an option under the Plan if (i) immediately after the grant, such Employee (or any other person whose stock ownership would be attributed to such Employee pursuant to Section 424(d) of the Code) would own shares and/or hold outstanding options to purchase shares possessing five percent (5%) or more of the total combined voting power or value of all classes of shares of the Company or of any subsidiary of the Company, or (ii) the rate of withholding under such option would permit the employee's rights to purchase shares under all employee stock purchase plans (described in Section 423 of the Code) of the Company and its subsidiaries to accrue (i.e., become exercisable) at a rate which exceeds Twenty-Five Thousand -2- Dollars ($25,000) of fair market value of such shares (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. (c) Upon reemployment of a former Employee, such former Employee will again be eligible to participate in the Plan, subject to the requirements of Paragraph 5(a) and the limitations imposed by Section 423(b) of the Code. 4. OFFERING PERIODS. The Plan shall be implemented by consecutive Offering Periods with a new Offering Period commencing on or about each May 1 or November 1, provided, however, that the Offering Date of the initial Offering Period shall be June 10, 1998. If the Company cannot make an offer under the Plan on or about any May 1 or November 1 because of restrictions imposed by law, the Company may make an offer as soon as practical after the expiration of such restrictions. The Board or the Committee shall have the power to change the duration of Offering Periods with respect to future offerings without stockholder approval, if such change is announced at least fifteen (15) days prior to the scheduled beginning of the first Offering Period to be affected. 5. PARTICIPATION. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions on the form provided by the Company and filing it with the Company's payroll office prior to the Offering Date of the first Offering Period with respect to which it is to be effective, unless a later time for filing the subscription agreement is set by the Board or Committee for all eligible Employees with respect to such Offering Period. Once enrolled, the Employee remains enrolled in each subsequent Offering Period of the Plan at the designated payroll deduction unless the Employee withdraws by providing the Company with a written Notice of Withdrawal or files a new subscription agreement prior to the applicable Offering Date changing the Employee's designated payroll deduction. An eligible Employee may participate in only one Offering Period at a time. (b) Payroll deductions for a participant shall commence with the first payroll period following the Offering Date, or the first payroll following the date of valid filing of the subscription agreement, whichever is later, and shall end when terminated by the participant as provided in paragraph 10. 6. PAYROLL DEDUCTIONS. (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each payday during all subsequent Offering Periods at a rate not exceeding ten percent (10%), or such other rate as may be determined from time to time by the Board, of the Compensation which he or she would otherwise receive on such payday without regard to deferral elections, provided that the aggregate of such payroll deductions during any Offering Period shall not exceed ten percent (10%), or such other percentage as may be determined from time to time by the Board, of the aggregate Compensation which he or she would otherwise have received during said Offering Period. Notwithstanding -3- the foregoing, for the initial Offering Period commencing on June 10, 1998, payroll deductions will not commence until the first payday following the date that the registration statement for the initial public offering of the Common Stock becomes or is declared effective by the Securities and Exchange Commission under the Securities Act of 1933 (the "IPO Effective Date"). The amount of initial payroll deductions in the period from June 10, 1998 to the IPO Effective Date will, upon authorization by the participant, be deducted in two substantially equal payments during the first two payroll periods immediately following the IPO Effective Date and, thereafter, payroll deductions will be made at the rate authorized by the participant in his or her initial subscription agreement. (b) All payroll deductions authorized by a participant shall be credited to his or her account under the Plan. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in paragraph 10, or may change the rate of his or her payroll deductions during an Offering Period by completing and filing with the Company a new authorization for payroll deduction, provided that the Board may, in its discretion, impose reasonable and uniform restrictions on participants' ability to change the rate of payroll deductions. The change in rate shall be effective no later than fifteen (15) days following the Company's receipt of the new authorization. A participant may decrease or increase the amount of his or her payroll deductions as of the beginning of an Offering Period by completing and filing with the Company, prior to the beginning of such Offering Period, a new payroll deduction authorization. (d) Notwithstanding the foregoing, to the extent necessary, but only to such extent, to comply with Section 423(b)(8) of the Code and paragraph 3(b) herein, a participant's payroll deductions may be automatically decreased to 0% at such time during any Exercise Period which is scheduled to end in the current calendar year that the aggregate of all payroll deductions accumulated with respect to the applicable Offering Period and any other Offering Period ending within the same calendar year equals $25,000. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the next succeeding Exercise Period, unless terminated by the participant as provided in paragraph 10. 7. GRANT OF OPTION. (a) On each Offering Date, each participant shall be granted an option to purchase on each Exercise Date (at the per share option price) a number of full shares of Common Stock arrived at by dividing such participant's total payroll deductions to be accumulated prior to such Exercise Date and retained in the participant's account as of the Exercise Date by the lower of (i) eighty-five percent (85%) of the fair market value of a share of Common Stock at the Offering Date, or (ii) eighty-five percent (85%) of the fair market value of a share of Common Stock at the Exercise Date; provided, however, that the maximum number of shares a participant may purchase during each Offering Period shall be determined by (i) dividing $50,000 by the fair market value of a share of Common Stock on the Offering Date or -4- (ii) if less, by the "Maximum Cap" set for such Offering Period; and provided further that such purchase shall be subject to the limitations set forth in paragraphs 3(b) and 12 hereof. The "Maximum Cap" for each Offering Period shall be the number of shares purchasable under the Plan during that Offering Period with the maximum payroll deductions permitted by paragraph 6(a) hereof, based upon the fair market value of a share of Common Stock at the beginning of the Offering Period. The fair market value of a share of Common Stock shall be determined as provided in paragraph 7(b) herein. (b) The option price per share of such shares shall be the lower of: (i) eighty-five percent (85%) of the fair market value of a share of Common Stock at the Offering Date; or (ii) eighty-five percent (85%) of the fair market value of a share of Common Stock at the Exercise Date. The fair market value of a share of Common Stock on said dates shall be determined by the Board, based upon such factors as the Board determines relevant; provided, however, that if there is a public market for the Common Stock, the fair market value of a share of Common Stock on a given date shall be the reported bid price for the Common Stock as of such date; or, in the event that the Common Stock is listed on a national securities exchange, the fair market value of a share of Common Stock shall be an amount equal to the average of the high and low sales price of a share of Common Stock on the exchange as of such date. 8. EXERCISE OF OPTION. (a) Unless a participant withdraws from the Offering Period as provided in paragraph 10, his or her option for the purchase of shares will be exercised automatically at each Exercise Date, and the maximum number of full shares subject to option will be purchased at the applicable option price with the accumulated payroll deductions in his or her account. The shares purchased upon exercise of an option hereunder shall be deemed to be transferred to the participant on the Exercise Date. (b) During his or her lifetime, a participant's option to purchase shares hereunder is exercisable only by the participant. (c) The Board may require, as a condition precedent to any purchase under the Plan, appropriate arrangements with the participant for the withholding of any applicable Federal, state, local or foreign withholding or other taxes. 9. DELIVERY. As promptly as practicable after the Exercise Date of each Offering Period, the Company shall arrange for the shares purchased upon exercise of his or her option to be electronically credited to the participant's designated brokerage account at one of the securities brokerage firms participating in the Company's direct deposit program from time to time. Any cash remaining to the credit of a participant's account under the Plan after a purchase by him or her of shares at the Exercise Date of each Offering Period which merely represents a fractional share shall be credited to the participant's account for the next subsequent Offering Period; any additional cash shall be returned to said participant. -5- 10. WITHDRAWAL; TERMINATION OF EMPLOYMENT. (a) A participant may withdraw all, but not less than all, the payroll deductions credited to his or her account under the Plan at any time prior to an Exercise Date by giving written notice to the Company on a form provided for such purpose. If the participant withdraws from the Offering Period, all of the participant's payroll deductions credited to his or her account will be paid to the participant as soon as practicable after receipt of the notice of withdrawal and his or her option for the current Offering Period will be automatically canceled, and no further payroll deductions for the purchase of shares will be made during such Offering Period or subsequent Offering Periods, except pursuant to a new subscription agreement filed in accordance with paragraph 6 hereof. (b) Upon termination of the participant's Continuous Status as an Employee prior to an Exercise Date of an Offering Period for any reason, including retirement or death, the payroll deductions accumulated in his or her account will be returned to him or her as soon as practicable after such termination or, in the case of death, to the person or persons entitled thereto under paragraph 14, and his or her option will be automatically canceled. (c) In the event an Employee fails to remain in Continuous Status as an Employee of the Company for at least twenty (20) hours per week during an Offering Period in which the employee is a participant, he or she will be deemed to have elected to withdraw from the Plan, and the payroll deductions credited to his or her account will be returned to the participant and the option canceled. (d) A participant's withdrawal from an Offering Period will not have any effect upon his or her eligibility to participate in a succeeding Offering Period by executing and delivering to the Company a new payroll deduction form or in any similar plan which may hereafter be adopted by the Company. 11. AUTOMATIC TRANSFER TO LOW PRICE OFFERING PERIOD. In the event that the fair market value of the Common Stock is lower on the first day of an Exercise Period (the "Subsequent Exercise Period") than it was on the first Offering Date for that Offering Period (the "Initial Offering Period"), all participants in the Plan on the first day of the Subsequent Exercise Period shall be deemed to have withdrawn from the Initial Offering Period on the first day of the Subsequent Exercise Period and to have enrolled as participants in a new Offering Period which begins on or about that day. A participant may elect to remain in the Initial Offering Period by filing a written statement declaring such election with the Company prior to the time of the automatic change to the new Offering Period. 12. INTEREST. No interest shall accrue on the payroll deductions of a participant in the Plan. -6- 13. STOCK. (a) Subject to adjustment upon changes in capitalization of the Company as provided in paragraph 19, the maximum number of shares of Common Stock which shall be reserved for sale under the Plan shall be: (i) 600,000 shares, plus an annual increase to be added on July 1 of each year beginning July 1, 1999 equal to the lesser of (A) 0.5% of the total number of shares of Common Stock outstanding on a fully diluted basis as of the immediately preceding June 30, or (B) 600,000 shares provided, however, that at no time may the cumulative number of shares of Common Stock subject to options granted pursuant to paragraph 7(a) hereof since the inception of the Plan exceed 2% of the number of shares of Common Stock outstanding on a fully diluted basis as of the last day of the most recently completed calendar fiscal quarter of the Company. If the total number of shares which would otherwise be subject to options granted pursuant to paragraph 7(a) hereof on the Offering Date of an Offering Period exceeds the number of shares then available under the Plan (after deduction of all shares for which options have been exercised or are then outstanding), the Company shall make a pro rata allocation of the shares remaining available for option grant in as uniform and equitable a manner as is practicable. In such event, the Company shall give written notice of such reduction of the number of shares subject to the option to each participant affected thereby and shall return any excess funds accumulated in each participant's account as soon as practicable after the affected Exercise Date of such Offering Period. Common Stock to be sold to participants in the Plan may be, at the election of the Company, either treasury shares or shares authorized but unissued. (b) A participant will have no interest or voting rights in shares covered by his or her option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan will be credited electronically to a brokerage account in the name of the participant at one of the brokerage firms participating from time to time in the Company's direct deposit program. 14. ADMINISTRATION. The Plan shall be administered by the Board or the Committee. The Board or the Committee shall have the authority to (i) make all factual determinations in the administration or interpretation of the Plan, (ii) establish administrative regulations to further the purpose of the Plan, and (iii) take any other action desirable or necessary to interpret, construe or implement properly the provisions of the Plan. The administration, interpretation or application of the Plan by the Board or the Committee shall be final, conclusive and binding upon all participants. Members of the Board or the Committee who are eligible Employees are permitted to participate in the Plan, provided that: -7- (a) Members of the Board who participate in the Plan may not vote on any matter affecting the administration of the Plan or the grant of any option pursuant to the Plan. (b) If a Committee is established to administer the Plan, no member of the Board who participates in the Plan may be a member of the Committee. 15. DESIGNATION OF BENEFICIARY. (a) A participant may file a written designation of a beneficiary who is to receive shares and/or cash, if any, from the participant's account under the Plan in the event of such participant's death at a time when cash or shares are held for his or her account. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant in the absence of a valid designation of a beneficiary who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant; or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may reasonably designate. 16. RIGHTS NOT TRANSFERABLE. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution, or as provided in paragraph 15 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with paragraph 10. 17. USE OF FUNDS. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 18. REPORTS. Individual accounts will be maintained for each participant in the Plan. Statements of account will be given to participating Employees as soon as practicable following each Exercise Date. Such statements will set forth the amounts of payroll deductions, the per share purchase price, the number of shares purchased and the remaining cash balance, if any. 19. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but have not yet been placed under option (collectively, the "Reserves"), as well as the price per share of Common -8- Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, stock dividend, combination or reclassification of the Common Stock or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to option. In the event of the proposed dissolution or liquidation of the Company, the Offering Period will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each option under the Plan shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Board determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the participant shall have the right to exercise the option as to all of the optioned stock, including shares as to which the option would not otherwise be exercisable. If the Board makes an option fully exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify the participant that the option shall be fully exercisable, and the option will terminate upon the expiration of such period. The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, and in the event of the Company being consolidated with or merged into any other corporation. 20. AMENDMENT OR TERMINATION. The Board may at any time and for any reason terminate or amend the Plan. Except as provided in paragraph 19 and this paragraph 20, no such termination will affect options previously granted. Except as provided in paragraph 19 and this paragraph 20, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. In addition, to the extent necessary, but only to such extent, to comply with Section 423 of the Code (or any successor rule or provision or any other applicable law or regulation), the Company shall obtain stockholder approval of an amendment in such a manner and to such a degree as so required. In the event the Board determines that the ongoing operation of the Plan may result in unfavorable financial accounting consequences, the Board may, in its discretion and, to the extent necessary or desirable, modify or amend the Plan to reduce or eliminate such accounting consequence including, but not limited to: -9- (1) altering the purchase price for any Offering Period including an Offering Period underway at the time of the change in purchase price; (2) shortening any Offering Period so that Offering Period ends on a new Exercise Date, including an Offering Period underway at the time of the Board action; and (3) allocating shares. Such modifications or amendments shall not require stockholder approval or the consent of any Plan participants. 21. NOTICES. All notices or other communications by a participant to the Company in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. Notices given electronically by the Company will be deemed to be written notices under the Plan. 22. STOCKHOLDER APPROVAL. The Plan was adopted by the Board on May 22, 1998 and approved by the shareholders of the Company on May 22, 1998 in accordance with the requirements of Section 423(b)(2) of the Code. 23. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, if required by applicable securities laws, the Company may require the participant for whose account the option is being exercised to represent and warrant at the time of such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 24. NO RIGHT TO EMPLOYMENT. Nothing shall confer upon any employee of the Company any right to continued employment with the Company any right to continued employment with the Company or interfere in any way with the right of the Company to terminate the employment of any of its employees at any time, with or without cause. 25. TERM OF PLAN. The Plan shall remain in effect until May 22, 2008, unless terminated earlier in accordance with Paragraph 20. -10- 26. GOVERNING LAW. All rights and obligations under the Plan shall be construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of laws. -11- MIPS Technologies Inc. EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT - ------------------------------------------------------------------------------------------------------------------------- EMPLOYEE LAST NAME FIRST NAME MI SOCIAL SECURITY # EMPLOYEE # - ------------------------------------------------------------------------------------------------------------------------- DAYTIME TELEPHONE NUMBER OFFICE LOCATION - ------------------------------------------------------------------------------------------------------------------------- |_| ORIGINAL APPLICATION |_| CHANGE
1. I hereby elect to participate in each Offering Period of the MIPS Technologies Inc. Employee Stock Purchase Plan (the "Plan") beginning subsequent to the date set forth below and subscribe to purchase shares of Common Stock of MIPS Technologies Inc. (the "Company") in accordance with this Agreement and the Plan. 2. I hereby authorize payroll deductions from each paycheck during each Offering Period in the amount of (1% to 10%, whole percentages only) ____________% of my compensation (including base pay and, to the extent applicable, any amounts attributable to overtime, shift premium, incentive compensation, bonuses and commissions) in accordance with the Plan. 3. I understand that payroll deductions will not begin until after the closing date of the initial public offering of the Company's Common Stock (the "Closing Date"). The Company will notify me when payroll deductions will begin and I will be given the opportunity to withdraw from the Plan. If I elect to continue participation in the Plan, payroll deductions for the period from June 10, 1998 until the Closing Date will be made up in equal installments over the first two payroll periods. 4. I understand that said payroll deductions shall be accumulated for the purchase of shares in accordance with the Plan, and that shares will be purchased for me automatically at the end of each six-month Exercise Period unless I withdraw from the Plan by giving written notice to the Company. I authorize the Company to carry over to the next Exercise Period or Offering Period any Cash insufficient to purchase a share of Common Stock. 5. I have received a copy of the Company's most recent prospectus which describes the Plan and a copy of the complete "MIPS Technologies Inc. Employee Stock Purchase Plan." I understand that my participation in the Plan is in all respects subject to the terms of the Plan. 6. I hereby agree to be bound by the terms of the Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Plan. 7. In the event of my death, I hereby designate my beneficiary to receive all payments and shares due me under the Plan. 8. I agree that the shares I purchase through the MIPS Technologies Inc. Employee Stock Purchase Plan (ESPP) will be electronically transferred to a brokerage firm for credit to an account set up under my name. Broker selection will be forthcoming and be announced in an additional communication. - --------------------------------------- ------------------------- Employee Signature Date - --------------------------------------- ------------------------- Human Resources Signature Date PLEASE RETURN FORM TO Trish Leeper / HR -12- EX-10.10 5 DIRECTORS' STOCK OPTION PLAN MIPS TECHNOLOGIES, INC. DIRECTORS' STOCK OPTION PLAN (effective as of July 6, 1998) 1. Purposes of the Plan. The purposes of this Directors' Stock Option Plan are to attract and retain the best available personnel for service as Directors of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board. All options granted hereunder shall be non-statutory stock options. 2. Definitions. As used herein, the following definitions shall apply: (a) "Annual Meeting" means the Company's regularly scheduled annual meeting of stockholders, as provided for in the Company's bylaws. (b) "Board" means the Board of Directors of the Company. (c) "Code" means the Internal Revenue Code of 1986, as amended. (d) "Common Stock" means the Common Stock of the Company. (e) "Company" means MIPS Technologies, Inc., a Delaware corporation. (f) "Continuous Status as a Director" means the absence of any interruption or termination of service as a Director. (g) "Director" means a member of the Board. (h) "Employee" means any person, including officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a Director's fee by the Company shall not be sufficient in and of itself to constitute "employment" by the Company. (i) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (j) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("Nasdaq") System, the Fair Market Value of a Share of Common Stock shall be the closing sales price for such stock or the closing bid, if no sales were reported, as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable; (ii) If the Common Stock is quoted on the Nasdaq System (but not on the National Market System thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high and low asked prices for the Common Stock on the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or; (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board. (k) "Option" means a stock option granted pursuant to the Plan. (l) "Optioned Stock" means the Common Stock subject to an Option. (m) "Optionee" means an Outside Director who receives an Option. (n) "Outside Director" means a Director who is not an Employee. (o) "Parent" means a "parent corporation", whether now or hereafter existing, as defined in Section 424(e) of the Code. (p) "Plan" means this Directors' Stock Option Plan. (q) "Service Provider" means an Employee, Director or consultant of the Company. (r) "Share" means a share of the Common Stock, as adjusted in accordance with Section 10 of the Plan. (s) "Subsidiary" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 10 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 600,000 Shares plus an annual increase to be added each year on July 1 beginning on July 1, 1999 in an amount equal to the lesser of (i) 100,000 shares, (ii) the number of shares subject to option grants in the prior year ending June 30 or (iii) a lesser number determined by the Board (the "Pool") of Common Stock. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. -2- 4. Administration of and Grants of Options under the Plan. (a) Administrator. Except as otherwise required herein, the Plan shall be administered by the Board, or by a compensation committee (the "Committee") appointed by the Board. (b) Procedure for Grants. All grants of Options hereunder shall be automatic and non-discretionary and shall be made strictly in accordance with the following provisions: (i) No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options granted to Outside Directors. (ii) Each Outside Director shall be automatically granted an Option to purchase 40,000 Shares (which number shall be subject to adjustment in the manner set forth in Section 10 hereof upon the occurrence of any event described therein) upon the date on which such person first becomes a Director (an "Initial Grant"), whether through election by the stockholders of the Company or by appointment by the Board to fill a vacancy. (iii) On the date of each Annual Meeting during the term of this Plan, each Outside Director who has served as a Director for at least the previous six (6) months shall automatically receive an Option to purchase 10,000 Shares, which number shall be subject to adjustment in the manner set forth in Section 10 hereof upon the occurrence of any event described therein (a "Renewal Grant"). (iv) The terms of each Option granted hereunder shall be as follows: (A) the term of the Option shall be ten (10) years. (B) the Option shall be exercisable only while the Outside Director remains a Service Provider, except as set forth in Section 8 hereof. (C) the exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the Option. (D) the Initial Grant will vest and become exercisable as follows: 24% of the Shares subject to the Option shall vest twelve months after the Option's grant date, and 2% of the Shares subject to the Option shall vest each month thereafter, subject to the Outside Director continuing to be a Service Provider on such dates. (E) The Renewal Grants will vest and become exercisable as to 2% of the Shares subject to such Option each month beginning with the first month after the grant date, subject to the Outside Director continuing to be a Service Provider on such dates. -3- (v) In the event that any Option granted under the Plan would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased upon exercise of Options to exceed the Pool, then each such automatic grant shall be for that number of Shares determined by dividing the total number of Shares remaining available for grant by the number of Outside Directors on the automatic grant date. No further grants shall be made until such time, if any, as additional Shares become available for grant under the Plan through action of the stockholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder. (c) Powers of the Board. Subject to the provisions and restrictions of the Plan, the Board or the Committee shall have the authority, in its discretion: (i) to determine, upon review of relevant information and in accordance with Section 2(j) of the Plan, the Fair Market Value of the Common Stock; (ii) to interpret the Plan; (iii) to prescribe, amend and rescind rules and regulations relating to the Plan; (iv) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted hereunder; and (v) to make all other determinations deemed necessary or advisable for the administration of the Plan. (d) Effect of Board's Decision. All decisions, determinations and interpretations of the Board or the Committee shall be final. 5. Eligibility. Options may be granted only to Outside Directors. All Options shall be automatically granted in accordance with the terms set forth in Section 4(b) hereof. An Outside Director who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options in accordance with such provisions. The Plan shall not confer on any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate his or her directorship at any time. 6. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the stockholders of the Company as described in Section 16 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 12 of the Plan. 7. Exercise Price and Consideration. (a) Exercise Price. The per Share exercise price for Optioned Stock shall be 100% of the Fair Market Value per Share on the date of grant of the Option. (b) Form of Consideration. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Board and may consist entirely of: (i) cash, (ii) check, (iii) promissory note, (iv) other shares which (x) in the case of Shares acquired upon exercise of an Option either have been owned by the Optionee for more than six (6) months on the date of surrender, or were not acquired directly or indirectly from the Company, and (y) have a Fair Market Value on the date of surrender equal to the -4- aggregate exercise price of the Shares as to which said Option shall be exercised, (v) authorization from the Company to retain from the total number of Shares as to which the Option is exercised that number of Shares having a Fair Market Value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised, (vi) delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price, (vii) by delivering an irrevocable subscription agreement for the Shares which irrevocably obligates the Optionee to take and pay for the Shares not more than twelve (12) months after the date of delivery of the subscription agreement, (viii) any combination of the foregoing methods of payment, or (ix) such other consideration and method of payment for the issuance of Shares to the extent permitted by applicable law. 8. Exercise of Option. (a) Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder shall be exercisable at such times as are set forth in Section 4(b) hereof; provided, however, that no Options shall be exercisable until stockholder approval of the Plan in accordance with Section 16 hereof has been obtained. An Option may not be exercised for a fraction of a share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 7(b) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 10 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Rule 16b-3. Options granted to Outside Directors must comply with the applicable provisions of Rule 16b-3 promulgated under the Exchange Act or any successor thereto and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. (c) Termination of Status as a Service Provider. If an Outside Director ceases to be a Service Provider, he or she may, but only within three (3) months after the date he or she ceases -5- to be a Service Provider, exercise an Option to the extent that he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its five (5) year term has expired. To the extent that the Optionee was not entitled to exercise an Option at the date of such termination, or if the Optionee does not exercise such Option (which he or she was entitled to exercise) within the time specified herein, the Option shall terminate. (d) Disability of Optionee. Notwithstanding the provisions of Section 8(c) above, in the event an Optionee is unable to continue as a Service Provider as a result of the Optionee's total and permanent disability (as defined in Section 22(e)(3) of the Code), he or she may, but only within six (6) months from the date of termination, exercise an Option to the extent that he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its five (5) year term has expired. To the extent that the Optionee was not entitled to exercise the Option at the date of termination, or if the Optionee does not exercise such Option (which he or she was entitled to exercise) within the time specified herein, the Option shall terminate. (e) Death of Optionee. In the event of the death of an Optionee, the Option may be exercised, at any time within six (6) months following the date of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of death. Notwithstanding the foregoing, in no event may the Option be exercised after its five (5) year term has expired. 9. Non-Transferability of Options . The Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 10. Adjustments Upon Changes in Capitalization, Liquidation or Merger. (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of Shares covered by each outstanding Option, and the number of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per Share covered by each such outstanding Option or Right, shall be proportionately adjusted for any increase or decrease in the number of issued Shares of resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of Shares of stock of any class, or securities convertible into Shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option. -6- (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, all outstanding Options will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Board and give each Optionee the right to exercise his or her Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation or the sale of substantially all of the assets of the Company, outstanding Options may be assumed or equivalent options may be substituted by the successor corporation or a Parent or Subsidiary thereof (the "Successor Corporation"). If an Option is assumed or substituted for, the Option or equivalent option shall continue to be exercisable as provided in Section 4 hereof for so long as the Optionee is a Service Provider of the Company or of the Successor Corporation. Following such assumption or substitution, if the Optionee's status as a Service Provider of the Company or of the Successor Corporation, as applicable, is terminated other than upon a voluntary resignation by the Optionee, the Option or option shall become fully exercisable, including as to Shares for which it would not otherwise be exercisable. Thereafter, the Option or option shall remain exercisable in accordance with Sections 8(c) through (e) above. If the Successor Corporation does not assume an outstanding Option or substitute for it an equivalent option, the Option shall become fully vested and exercisable, including as to Shares for which it would not otherwise be exercisable. In such event the Board shall notify the Optionee that the Option shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and upon the expiration of such period the Option shall terminate. For the purposes of this Section 10(c), an Option shall be considered assumed if, following the merger or sale of assets, the Option confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares). If such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 11. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or discontinue the Plan, but no amendment, alteration, suspension, or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without -7- his or her consent. In addition, to the extent necessary and desirable to comply with any applicable law or regulation, the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required. (b) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated. 12. Time of Granting Options. The date of grant of an Option or Right shall, for all purposes, be the date determined in accordance with Section 4(b) hereof. Notice of the determination shall be given to each Outside Director to whom an Option is so granted within a reasonable time after the date of such grant. 13. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 14. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 15. Option Agreement. Options shall be evidenced by written option agreements in such form as the Board shall approve. 16. Stockholder Approval. Continuance of the Plan shall be subject to approval by the stockholders of the Company at or prior to the first annual meeting of stockholders subsequent to the granting of an Option hereunder. Such stockholder approval shall be obtained in the manner and to the degree required under applicable state and federal law. -8- EX-10.11 6 NON-U.S. STOCK PURCHASE PLAN MIPS TECHNOLOGIES, INC. NON-U.S. STOCK PURCHASE PLAN The following constitutes the provisions of the MIPS Technologies, Inc. Non-U.S. Stock Purchase Plan. 1. PURPOSE. The purpose of the Plan is to provide non-U.S. employees and consultants of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through cash contributions. It is believed that employee participation in ownership of the Company on this basis will be to the mutual benefit of the employees, consultants and the Company. 2. DEFINITIONS. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended. "Common Stock" means the Common Stock, $0.001 par value, of the Company. "Company" means MIPS Technologies, Inc. "Committee" means the committee appointed by and serving at the pleasure of the Board to administer the Plan pursuant to Section 14. "Compensation" means base pay and consulting fees, plus any amounts attributable to overtime, shift premium, incentive compensation, bonuses and commissions (exclusive of "spot bonuses" and any other such item specifically directed for all Employees by the Board or a committee), designated by the Board, but shall exclude severance pay, pay in lieu of vacations, back pay awards, disability benefits, deferred compensation, or any other compensation excluded in the discretion of the Board. Compensation shall be determined before giving effect to any salary reduction agreement pursuant to a qualified cash or deferred arrangement within the meaning of Section 401(k) of the Code or to any similar reduction agreement pursuant to any cafeteria plan (within the meaning of Section 125 of the Code). "Consultant" means any person, including an advisor, engaged by the Company or a parent or Designated Subsidiary to render services to such entity. "Continuous Status as an Employee or Consultant" shall mean the absence of any interruption or termination of service as an Employee or Consultant. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of a leave of absence agreed to in writing by the Company, provided that such leave is for a period of not more than 90 days or re-employment upon the expiration of such leave is guaranteed by contract or statute. "Contributions" means an Employee's payroll deduction, a Consultant's invoice deductions or any participant's cash contributions made to the Plan during an Offering Period in order to purchase shares. "Designated Subsidiaries" means the Subsidiaries which have been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. "Employee" means any person, including an officer, who is employed by the Company or one of its Designated Subsidiaries. "Exercise Date" means the last business day of each Exercise Period in an Offering Period. "Exercise Period" means a six-month period commencing on an Offering Date or on the first business day after any Exercise Date in an Offering Period. "Offering Date" means the first day of each Offering Period of the Plan. "Offering Period" means a period of twenty-four (24) months consisting of four six-month Exercise Periods during which options granted pursuant to the Plan may be exercised. "Plan" means the MIPS Technologies, Inc. Employee Stock Purchase Plan. "Subsidiary" means any corporation, domestic or foreign, in which the Company owns, directly or indirectly, 50% or more of the voting shares. 3. ELIGIBILITY. (a) Any person who is an Employee or Consultant, as defined in paragraph 2, on the Offering Date of a given Offering Period (or as otherwise determined by the Board or the Committee ) shall be eligible to participate in such Offering Period under the Plan, subject to the requirements of paragraph 5(a) and the limitations imposed by Section 423(b) of the Code. (b) Notwithstanding any provisions of the Plan to the contrary, no Employee or Consultant shall be granted an option under the Plan if (i) immediately after the grant, such Employee or Consultant (or any other person whose stock ownership would be attributed to such Employee or Consultant pursuant to Section 424(d) of the Code) would own shares and/or hold outstanding options to purchase shares possessing five percent (5%) or more of the total combined voting power or value of all classes of shares of the Company or of any subsidiary of the Company, or (ii) the rate of Contributions under such option would permit the employee's or consultant's rights to purchase shares under all stock purchase plans (including those described in Section 423 of the -2- Code) of the Company and its subsidiaries to accrue (i.e., become exercisable) at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) of fair market value of such shares (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. (c) Upon reemployment of a former Employee, such former Employee will again be eligible to participate in the Plan, subject to the requirements of Paragraph 5(a) and the limitations imposed by Section 423(b) of the Code. 4. OFFERING PERIODS. The Plan shall be implemented by consecutive Offering Periods with a new Offering Period commencing on or about each May 1 or November 1, provided, however, that the Offering Date of the initial Offering Period shall be June 10, 1998. If the Company cannot make an offer under the Plan on or about any May 1 or November 1 because of restrictions imposed by law, the Company may make an offer as soon as practical after the expiration of such restrictions. The Board or the Committee shall have the power to change the duration of Offering Periods with respect to future offerings without stockholder approval, if such change is announced at least fifteen (15) days prior to the scheduled beginning of the first Offering Period to be affected. 5. PARTICIPATION. (a) An eligible Employee or Consultant may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions or Consultant's invoice deductions on the form provided by the Company and filing it with the Company's payroll office or other appropriate department of the Company prior to the Offering Date of the first Offering Period with respect to which it is to be effective, unless a later time for filing the subscription agreement is set by the Board or Committee with respect to such Offering Period. In addition, the Board or Committee may allow a participant to pay by check in addition to or in substitution for payroll or invoice deductions; provided, however, that the aggregate Contributions for the Offering Period and each Exercise Period is not in excess of 10 percent (10%) of the participant's Compensation for the relevant period. Once enrolled, the Employee or Consultant remains enrolled in each subsequent Offering Period of the Plan at the designated deduction amount unless the Employee or Consultant withdraws by providing the Company with a written Notice of Withdrawal or files a new subscription agreement prior to the applicable Offering Date changing the Employee's or Consultant's designated payroll or invoice deduction. An eligible Employee or Consultant may participate in only one Offering Period at a time. (b) Payroll or invoice deductions for a participant shall commence with the first payroll period following the Offering Date, or the first payroll following the date of valid filing of the subscription agreement, or the first invoice submitted after the valid filing of the subscription agreement, whichever is later, and shall end when terminated by the participant as provided in paragraph 10. 6. PAYROLL DEDUCTIONS. -3- (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll or invoice deductions made on each payday during all subsequent Offering Periods at a rate not exceeding ten percent (10%), or such other rate as may be determined from time to time by the Board, of the Compensation which he or she would otherwise receive during such Offering Period without regard to deferral elections, provided that the aggregate Contributions during any Offering Period and any Exercise Period shall not exceed ten percent (10%), or such other percentage as may be determined from time to time by the Board, of the aggregate Compensation which he or she would otherwise have received during said Offering Period. Notwithstanding the foregoing, for the initial Offering Period commencing on June 10, 1998, payroll deductions will not commence until the first payday following the date that the registration statement for the initial public offering of the Common Stock becomes or is declared effective by the Securities and Exchange Commission under the Securities Act of 1933 (the "IPO Effective Date"). The amount of initial payroll or invoice deductions in the period from June 10, 1998 to the IPO Effective Date will, upon authorization by the participant, be deducted in two substantially equal payments during the first two payroll periods immediately following the IPO Effective Date and, thereafter, payroll or invoice deductions will be made at the rate authorized by the participant in his or her initial subscription agreement. (b) All Contributions authorized by a participant shall be credited to his or her account under the Plan. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in paragraph 10, or may change the rate of his or her Contributions during an Offering Period by completing and filing with the Company a new authorization for a new level of Contributions, provided that the Board may, in its discretion, impose reasonable and uniform restrictions on participants' ability to change the rate of Contributions. The change in rate shall be effective no later than fifteen (15) days following the Company's receipt of the new authorization. A participant may decrease or increase the amount of his or her Contributions as of the beginning of an Offering Period by completing and filing with the Company, prior to the beginning of such Offering Period, a new subscription agreement. (d) Notwithstanding the foregoing, to the extent necessary, but only to such extent, to comply with Section 423(b)(8) of the Code and paragraph 3(b) herein, a participant's rate of Contributions may be automatically decreased to 0% at such time during any Exercise Period which is scheduled to end in the current calendar year that the aggregate of all a participant's Contributions accumulated with respect to the applicable Offering Period and any other Offering Period ending within the same calendar year equals $25,000. Contributions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the next succeeding Exercise Period, unless terminated by the participant as provided in paragraph 10. 7. GRANT OF OPTION. (a) On each Offering Date (or on such later date specifically authorized by the Board or the Committee), each participant shall be granted an option to purchase on each Exercise -4- Date (at the per share option price) a number of full shares of Common Stock arrived at by dividing such participant's total Contributions to be accumulated prior to such Exercise Date and retained in the participant's account as of the Exercise Date by the lower of (i) eighty-five percent (85%) of the fair market value of a share of Common Stock at the Offering Date, or (ii) eighty-five percent (85%) of the fair market value of a share of Common Stock at the Exercise Date; provided, however, that the maximum number of shares a participant may purchase during each Offering Period shall be determined by (i) dividing $50,000 by the fair market value of a share of Common Stock on the Offering Date or (ii) if less, by the "Maximum Cap" set for such Offering Period; and provided further that such purchase shall be subject to the limitations set forth in paragraphs 3(b) and 12 hereof. The "Maximum Cap" for each Offering Period shall be the number of shares purchasable under the Plan during that Offering Period with the maximum Contributions permitted by paragraph 6(a) hereof, based upon the fair market value of a share of Common Stock at the beginning of the Offering Period. The fair market value of a share of Common Stock shall be determined as provided in paragraph 7(b) herein. (b) The option price per share of such shares shall be the lower of: (i) eighty-five percent (85%) of the fair market value of a share of Common Stock at the Offering Date; or (ii) eighty-five percent (85%) of the fair market value of a share of Common Stock at the Exercise Date. The fair market value of a share of Common Stock on said dates shall be determined by the Board, based upon such factors as the Board determines relevant; provided, however, that if there is a public market for the Common Stock, the fair market value of a share of Common Stock on a given date shall be the reported bid price for the Common Stock as of such date; or, in the event that the Common Stock is listed on a national securities exchange, the fair market value of a share of Common Stock shall be the closing sales price of a share of Common Stock on the exchange as of such date. 8. EXERCISE OF OPTION. (a) Unless a participant withdraws from the Offering Period as provided in paragraph 10, his or her option for the purchase of shares will be exercised automatically at each Exercise Date, and the maximum number of full shares subject to option will be purchased at the applicable option price with the accumulated payroll or invoice deductions in his or her account. The shares purchased upon exercise of an option hereunder shall be deemed to be transferred to the participant on the Exercise Date. (b) During his or her lifetime, a participant's option to purchase shares hereunder is exercisable only by the participant. (c) The Board may require, as a condition precedent to any purchase under the Plan, appropriate arrangements with the participant for the withholding of any applicable Federal, state, local or foreign withholding or other taxes. 9. DELIVERY. As promptly as practicable after the Exercise Date of each Offering Period, the Company shall arrange for the shares purchased upon exercise of his or her option to be -5- electronically credited to the participant's designated brokerage account at one of the securities brokerage firms participating in the Company's direct deposit program from time to time. Any cash remaining to the credit of a participant's account under the Plan after a purchase by him or her of shares at the Exercise Date of each Offering Period which merely represents a fractional share shall be credited to the participant's account for the next subsequent Offering Period; any additional cash shall be returned to said participant. 10. WITHDRAWAL; TERMINATION OF EMPLOYMENT. (a) A participant may withdraw all, but not less than all, the Contributions credited to his or her account under the Plan at any time prior to an Exercise Date by giving written notice to the Company on a form provided for such purpose. If the participant withdraws from the Offering Period, all of the participant's Contributions credited to his or her account will be paid to the participant as soon as practicable after receipt of the notice of withdrawal and his or her option for the current Offering Period will be automatically canceled, and no further Contributions for the purchase of shares will be allowed during such Offering Period or subsequent Offering Periods, except pursuant to a new subscription agreement filed in accordance with paragraph 6 hereof. (b) Upon termination of the participant's Continuous Status as an Employee or Consultant prior to an Exercise Date of an Offering Period for any reason, including retirement or death, the Contributions accumulated in his or her account will be returned to him or her as soon as practicable after such termination or, in the case of death, to the person or persons entitled thereto under paragraph 14, and his or her option will be automatically canceled. (c) In the event an Employee or Consultant fails to remain in Continuous Status as an Employee or Consultant of the Company for at least twenty (20) hours per week during an Offering Period in which the employee or consultant is a participant, he or she will be deemed to have elected to withdraw from the Plan, and the Contributions credited to his or her account will be returned to the participant and the option canceled. (d) A participant's withdrawal from an Offering Period will not have any effect upon his or her eligibility to participate in a succeeding Offering Period by executing and delivering to the Company a new subscription agreement or in any similar plan which may hereafter be adopted by the Company. 11. AUTOMATIC TRANSFER TO LOW PRICE OFFERING PERIOD. In the event that the fair market value of the Common Stock is lower on the first day of an Exercise Period (the "Subsequent Exercise Period") than it was on the first Offering Date for that Offering Period (the "Initial Offering Period"), all participants in the Plan on the first day of the Subsequent Exercise Period shall be deemed to have withdrawn from the Initial Offering Period on the first day of the Subsequent Exercise Period and to have enrolled as participants in a new Offering Period which begins on or about that day. A participant may elect to remain in the Initial Offering Period by filing a written statement declaring such election with the Company prior to the time of the automatic change to the new Offering Period. -6- 12. INTEREST. No interest shall accrue on the payroll or invoice deductions of a participant in the Plan. 13. STOCK. (a) Subject to adjustment upon changes in capitalization of the Company as provided in paragraph 19, the maximum number of shares of Common Stock which shall be reserved for sale under the Plan shall be 60,000 shares. If the total number of shares which would otherwise be subject to options granted pursuant to paragraph 7(a) hereof on the Offering Date of an Offering Period exceeds the number of shares then available under the Plan (after deduction of all shares for which options have been exercised or are then outstanding), the Company shall make a pro rata allocation of the shares remaining available for option grant in as uniform and equitable a manner as is practicable. In such event, the Company shall give written notice of such reduction of the number of shares subject to the option to each participant affected thereby and shall return any excess funds accumulated in each participant's account as soon as practicable after the affected Exercise Date of such Offering Period. Common Stock to be sold to participants in the Plan may be, at the election of the Company, either treasury shares or shares authorized but unissued. (b) A participant will have no interest or voting rights in shares covered by his or her option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan will be credited electronically to a brokerage account in the name of the participant at one of the brokerage firms participating from time to time in the Company's direct deposit program. 14. ADMINISTRATION. The Plan shall be administered by the Board or the Committee. The Board or the Committee shall have the authority to (i) make all factual determinations in the administration or interpretation of the Plan, (ii) establish administrative regulations to further the purpose of the Plan, and (iii) take any other action desirable or necessary to interpret, construe or implement properly the provisions of the Plan. The administration, interpretation or application of the Plan by the Board or the Committee shall be final, conclusive and binding upon all participants. Members of the Board or the Committee who are eligible Employees are permitted to participate in the Plan, provided that: (a) Members of the Board who participate in the Plan may not vote on any matter affecting the administration of the Plan or the grant of any option pursuant to the Plan. (b) If a Committee is established to administer the Plan, no member of the Board who participates in the Plan may be a member of the Committee. 15. DESIGNATION OF BENEFICIARY. -7- (a) A participant may file a written designation of a beneficiary who is to receive shares and/or cash, if any, from the participant's account under the Plan in the event of such participant's death at a time when cash or shares are held for his or her account. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant in the absence of a valid designation of a beneficiary who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant; or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may reasonably designate. 16. RIGHTS NOT TRANSFERABLE. Neither Contributions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution, or as provided in paragraph 15 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with paragraph 10. 17. USE OF FUNDS. All Contributions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such Contributions. 18. REPORTS. Individual accounts will be maintained for each participant in the Plan. Statements of account will be given to participating Employees as soon as practicable following each Exercise Date. Such statements will set forth the amounts of Contributions, the per share purchase price, the number of shares purchased and the remaining cash balance, if any. 19. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but have not yet been placed under option (collectively, the "Reserves"), as well as the price per share of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, stock dividend, combination or reclassification of the Common Stock or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to option. -8- In the event of the proposed dissolution or liquidation of the Company, the Offering Period will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each option under the Plan shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation (the "Successor Corporation"). In the event that the Successor Corporation refuses to assume or substitute for the option, any Exercise Periods then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date") and any Offering Periods then in progress shall end on the New Exercise Date. The New Exercise Date shall be before the date of the Company's proposed sale or merger. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, and in the event of the Company being consolidated with or merged into any other corporation. 20. AMENDMENT OR TERMINATION. The Board may at any time and for any reason terminate or amend the Plan. Except as provided in paragraph 19 and this paragraph 20, no such termination will affect options previously granted. Except as provided in paragraph 19 and this paragraph 20, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. In the event the Board determines that the ongoing operation of the Plan may result in unfavorable financial accounting consequences, the Board may, in its discretion and, to the extent necessary or desirable, modify or amend the Plan to reduce or eliminate such accounting consequence including, but not limited to: (a) altering the purchase price for any Offering Period including an Offering Period underway at the time of the change in purchase price; (b) shortening any Offering Period so that Offering Period ends on a new Exercise Date, including an Offering Period underway at the time of the Board action; and (c) allocating shares. Such modifications or amendments shall not require stockholder approval or the consent of any Plan participants. -9- 21. NOTICES. All notices or other communications by a participant to the Company in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. Notices given electronically by the Company will be deemed to be written notices under the Plan. 22. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, if required by applicable securities laws, the Company may require the participant for whose account the option is being exercised to represent and warrant at the time of such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 23. NO RIGHT TO EMPLOYMENT. Nothing shall confer upon any employee or consultant of the Company any right to continued employment or consultancy with the Company or interfere in any way with the right of the Company to terminate the employment or consultancy of any of its employees or consultants at any time, with or without cause. 24. TERM OF PLAN. The Plan shall remain in effect until terminated in accordance with Paragraph 20. 25. GOVERNING LAW. All rights and obligations under the Plan shall be construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of laws. -10- MIPS Technologies Inc. NON-U.S. EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT - ------------------------------------------------------------------------------------------------------------------------- EMPLOYEE LAST NAME FIRST NAME MI SOCIAL SECURITY # EMPLOYEE # - ------------------------------------------------------------------------------------------------------------------------- DAYTIME TELEPHONE NUMBER OFFICE LOCATION - ------------------------------------------------------------------------------------------------------------------------- |_| ORIGINAL APPLICATION |_| CHANGE
1. I hereby elect to participate in each Offering Period of the MIPS Technologies Inc. Non-U.S. Employee Stock Purchase Plan (the "Plan") beginning subsequent to the date set forth below and subscribe to purchase shares of Common Stock of MIPS Technologies Inc. (the "Company") in accordance with this Agreement and the Plan. 2. I hereby authorize payroll and/or invoice deductions from each paycheck and/or invoice during each Offering Period in the amount of (1% to 10%, whole percentages only) ____________% of my compensation (including base pay, consulting fees and, to the extent applicable, any amounts attributable to overtime, shift premium, incentive compensation, bonuses and commissions) in accordance with the Plan. 3. I understand that the deductions will not begin until after the closing date of the initial public offering of the Company's Common Stock (the "Closing Date"). The Company will notify me when payroll deductions will begin and I will be given the opportunity to withdraw from the Plan. If I elect to continue participation in the Plan, payroll deductions for the period from June 10, 1998 until the Closing Date will be made up in equal installments over the first two payroll periods. 4. I understand that said deductions shall be accumulated for the purchase of shares in accordance with the Plan, and that shares will be purchased for me automatically at the end of each six-month Exercise Period unless I withdraw from the Plan by giving written notice to the Company. I authorize the Company to carry over to the next Exercise Period or Offering Period any cash insufficient to purchase a share of Common Stock. 5. I have received a copy of the Company's most recent prospectus which describes the Plan and a copy of the complete "MIPS Technologies Inc. Employee Stock Purchase Plan." I understand that my participation in the Plan is in all respects subject to the terms of the Plan. 6. I hereby agree to be bound by the terms of the Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Plan. 7. In the event of my death, I hereby designate my beneficiary to receive all payments and shares due me under the Plan. 8. I agree that the shares I purchase through the MIPS Technologies Inc. Employee Stock Purchase Plan (ESPP) will be electronically transferred to a brokerage firm for credit to an account set up under my name. Broker selection will be forthcoming and be announced in an additional communication. - ------------------------------------------- ------------------------------ Employee Signature Date - ------------------------------------------- ------------------------------ Employee Signature Date PLEASE RETURN FORM TO Trish Leeper / HR -11- EX-27 7 FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND STATEMENT OF OPERATIONS INCLUDED IN THE COMPANY'S FORM 10-K FOR THE PERIOD ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO. 1,000 12-MOS JUN-30-1998 JUL-01-1997 JUN-30-1998 45 0 250 0 0 913 8,411 (5,624) 4,696 5,443 0 0 0 36 (783) 4,696 56,810 56,810 375 375 56,052 0 7 376 0 376 0 0 0 376 .01 .01
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