<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 1995
Commission File Number 1-10441
SILICON GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2789662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2011 N. SHORELINE BOULEVARD, MOUNTAIN VIEW, CALIFORNIA 94043-1389
(Address of principal executive offices) (Zip Code)
(415) 960-1980
(Registrant's telephone number, including area code)
__________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ----
As of April 30, 1995 there were 144,564,871 shares of Common Stock outstanding.
1
<PAGE>
SILICON GRAPHICS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements:
Consolidated Balance Sheet at
March 31, 1995 and June 30, 1994.......................... 3
Consolidated Statement of Income for the
Three Months and Nine Months Ended March, 1995 and 1994... 4
Consolidated Statement of Cash Flows for the
Nine Months Ended March 31, 1995 and 1994................. 5
Notes to Consolidated Financial Statements................ 6-7
Item 2: Management's Discussion and Analysis of
Results of Operations and Financial Condition............. 8-14
PART II - OTHER INFORMATION
Item 1 .......................................................... 15
Item 5 .......................................................... 15
Item 6 .......................................................... 15
Signatures.......................................................... 16
Index of Exhibits................................................... 17
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
SILICON GRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
March 31, June 30,
ASSETS 1995 1994
- ------ ----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents...................... $ 302,868 $ 310,767
Short-term marketable investments.............. 191,691 90,147
Accounts receivable, net....................... 533,393 391,271
Inventories, net............................... 267,149 164,319
Prepaid expenses and other current assets...... 76,525 67,862
---------- ----------
Total current assets........................ 1,371,626 1,024,366
Other marketable investments..................... 229,784 186,836
Property and equipment:
Land and building.............................. 35,100 28,980
Machinery and equipment........................ 288,634 228,129
Furniture and fixtures......................... 65,223 50,806
Leasehold improvements......................... 58,501 58,066
---------- ----------
447,458 365,981
Accumulated depreciation and amortization...... (227,198) (182,651)
Net property and equipment.................. 220,260 183,330
Other assets..................................... 154,020 124,251
---------- ----------
$1,975,690 $1,518,783
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable............................... $ 165,740 $ 85,781
Accrued compensation........................... 72,953 46,216
Income taxes payable........................... 87,278 50,390
Other accrued liabilities...................... 97,936 80,457
Current portion of long-term debt and other.... 28,007 20,753
Deferred revenue............................... 92,532 72,682
---------- ----------
Total current liabilities................... 544,446 356,279
Long-term debt and other......................... 279,186 241,243
Stockholders' equity:
Preferred stock................................ 33,996 33,996
Common stock................................... 144 139
Additional paid-in capital..................... 722,655 678,211
Retained earnings.............................. 355,148 195,985
Accumulated translation adjustment and other... 40,115 12,930
---------- ----------
Total stockholders' equity.................. 1,152,058 921,261
---------- ----------
$1,975,690 $1,518,783
========== ==========
</TABLE>
See accompanying notes
----------------------
3
<PAGE>
SILICON GRAPHICS, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------- ---------
1995 1994 1995 1994
------- --------- --------- ---------
<S> <C> <C> <C> <C>
Product and other revenues.............. $ 494,771 $ 334,898 $ 1,342,685 $ 930,821
Service revenues........................ 57,249 41,395 160,724 117,504
---------- ------------ ------------ ------------
Total revenues....................... 552,020 376,293 1,503,409 1,048,325
Costs and expenses:
Cost of product and other revenues... 225,993 160,775 623,128 447,464
Cost of service revenues............. 29,934 22,615 83,981 63,471
Research and development............. 57,585 44,568 168,175 126,153
Selling, general and administrative.. 150,150 99,394 400,524 279,024
---------- ------------ ------------ ------------
Total costs and expenses............. 463,662 327,352 1,275,808 916,112
---------- ------------ ------------ ------------
Operating income........................ 88,358 48,941 227,601 132,213
Interest income and other income, net... 3,396 1,197 900 3,325
---------- ------------ ------------ ------------
Income before income taxes.............. 91,754 50,138 228,501 135,538
Provision for income taxes.............. 27,526 15,041 68,550 38,361
---------- ------------ ------------ ------------
Net income.............................. $ 64,228 $ 35,097 $ 159,951 $ 97,177
======= ======== ========= =========
Net income per common share............. $ 0.40 $ 0.23 $ 1.00 $ 0.63
======= ======== ========= =========
Common shares and common share
equivalents used in the calculation of
net income per common share............. 162,236 155,523 159,716 153,782
======= ======= ======= =======
</TABLE>
See accompanying notes
----------------------
4
<PAGE>
SILICON GRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------
1995 1994
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 159,951 $ 97,177
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................ 73,444 60,319
Write-down of equity investment.......................... 7,333 0
Accrued interest on convertible subordinated debenture... 6,431 3,460
Other.................................................... 29,466 6,242
(Increase) in assets:
Accounts receivable..................................... (142,122) (46,072)
Inventories............................................. (102,830) (30,203)
Prepaid expenses and other current assets............... (8,348) (3,117)
Increase (decrease) in liabilities:
Accounts payable........................................ 79,959 (27,725)
Accrued compensation.................................... 26,737 8,316
Income taxes payable.................................... 36,888 22,170
Other accrued liabilities............................... 12,629 10,246
Deferred revenue........................................ 19,850 10,157
--------- ---------
Total adjustments...................................... 39,437 13,793
--------- ---------
Net cash provided by operating activities............... 199,388 110,970
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (93,205) (62,573)
Increase in other assets.................................. (7,405) (13,908)
Available-for-sale investments:
Purchases............................................... (454,983) (326,057)
Sales................................................... 146,381 72,942
Maturities.............................................. 169,018 50,715
--------- ---------
Net cash used in investing activities................... (240,194) (278,881)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock...................................... 43,408 33,405
Issuance of debt.......................................... 1,641 203,345
Payments of debt principal................................ (11,617) (9,360)
Cash dividends - preferred stock.......................... (525) (525)
--------- ---------
Net cash provided by financing activities............... 32,907 226,865
--------- ---------
Net (decrease) increase in cash and cash equivalents...... (7,899) 58,954
Cash and cash equivalents at beginning of period.......... 310,767 142,668
--------- ---------
Cash and cash equivalents at end of period................ $ 302,868 $ 201,622
========= =========
</TABLE>
See accompanying notes
----------------------
5
<PAGE>
SILICON GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
The unaudited results of operations for the interim periods shown herein
are not necessarily indicative of operating results for the entire fiscal year.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows for all periods presented have been made.
The unaudited consolidated financial statements included in this Form 10-Q
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the fiscal year ended June 30, 1994.
2. CASH AND CASH EQUIVALENTS AND MARKETABLE INVESTMENTS
----------------------------------------------------
Effective July 1, 1994 the Company adopted Statement of Financial Accounting
Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and
Equity Securities". The cumulative effect as of July 1, 1994 of adopting SFAS
115 was immaterial.
Cash and cash equivalents consist of cash on deposit with banks and high quality
money market instruments with original maturities of 90 days or less. Cash
equivalents are classified as held-to-maturity and are therefore stated at cost,
which approximates fair value. Short-term marketable investments, classified as
available-for-sale, consist of high quality money market instruments with
original maturities greater than 90 days, but less than or equal to one year,
and are stated at fair market value as of March 31, 1995. Other marketable
investments, also classified as available-for-sale, consist primarily of high
quality debt securities with maturities greater than one year and less than
three years, and are stated at fair market value as of March 31, 1995. The
Company does not actively invest in marketable equity securities, but has from
time to time acquired positions in certain public companies in the ordinary
course of conducting its business. These equity investments are also included
in other marketable investments and are stated at fair market value. The cost
of securities when sold is based upon specific identification. The company sold
its investment in Control Data Systems, Inc. at fair market value resulting in
no further gains or losses for the March 31, 1995 quarter. Unrealized gains and
losses (net of tax) on securities classified as available-for-sale are included
in Accumulated Translation Adjustment and Other in the Stockholders' Equity
section of the Balance Sheet. Included in other cash flows from operating
activities is approximately $12 million representing the estimated impact of
currency translation related to cash, cash equivalents and marketable
investments maintained in foreign currencies for the nine months ended March 31,
1995.
The following tables detail the Company's marketable investments as of March 31,
1995 (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Balance Sheet Classification Cost Gains Losses Fair Value
- ---------------------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash equivalent marketable investments $202,212 $ -- $ -- $202,212
Short term marketable investments 192,844 94 (1,247) 191,691
Long term marketable investments 230,835 924 (1,975) 229,784
-------- ------ -------- --------
Total $625,891 $1,018 ($3,222) $623,687
======== ====== ======== ========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Held-to-Maturity Securities Cost Gains Losses Fair Value
- --------------------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Repurchase agreements $ 73,400 -- -- $ 73,400
U.S. commercial paper 65,128 -- -- 65,128
U.S. government 20,550 -- -- 20,550
Floating rate notes 25,000 -- -- 25,000
Certificates of deposit and
Euro certificates of deposit 17,738 -- -- 17,738
Other investments 396 -- -- 396
-------- ---------- ----------------- --------
Total $202,212 -- -- $202,212
======== ========== ================= ========
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Available-for-Sale Securities Cost Gains Losses Fair Value
- ----------------------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. treasury securities and obligations
of U.S. government agencies $259,696 $ 473 ($2,083) $258,086
U.S. corporate notes 88,345 481 (1,041) 87,785
U.S. commercial paper 28,517 4 (22) 28,499
Certificates of deposit and Euro
certificates of deposit 24,007 60 (3) 24,064
Floating rate notes 23,114 -- (73) 23,041
-------- ---------- ----------------- --------
Total $423,679 $1,018 ($3,222) $421,475
======== ========== ================= ========
</TABLE>
3. INVENTORIES
-----------
Inventories stated at the lower of cost (first-in, first-out) or market
consist of (in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
1995 1994
--------- --------
<S> <C> <C>
Raw material $ 38,059 $ 9,602
Work in process 75,201 48,680
Finished goods 21,388 17,829
Service & marketing 132,501 88,208
-------- --------
Total inventories, net $267,149 $164,319
======== ========
</TABLE>
4. PER SHARE DATA
--------------
Net income per share is computed using the weighted average number of
common shares and dilutive common share equivalents outstanding during the
period. Dilutive common share equivalents for the three month and nine month
periods ended March 31, 1995 and 1994, consist of stock options (using the
treasury stock method or modified treasury stock method, as applicable) and the
Company's Series A convertible preferred stock on an as-if-converted basis. The
Company's zero-coupon convertible subordinated debenture due November 2013 is
not a common stock equivalent and therefore not included in the share count used
in calculating primary earnings per share.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
-----------------------------------------------
OF OPERATIONS AND FINANCIAL CONDITION
-------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Silicon Graphics uses a financial target model to develop its annual operating
plans and to evaluate investment alternatives, business proposals and operations
throughout the fiscal year. This model expresses the Company's current
objectives for gross margins, spending, and operating profit as a percentage of
net revenues. The model also incorporates target ranges for the allocation of
spending between research and development, and selling, general and
administrative expenses.
The Company's current model includes the following financial targets (as a
percentage of net revenues):
Gross margin 50% - 52%
Research and development 11% - 13%
Selling, general and administrative 26% - 28%
---------
Operating margin 11% - 13%
The financial target model reflects a number of assumptions. In particular, the
gross margin target range reflects assumptions about the Company's pricing,
manufacturing costs and volumes, and the mix of products, distribution channels
and geographic distribution. The spending ranges were established based on the
Company's beliefs about the levels of research and development necessary to
develop leading-edge products for its markets, the levels of sales and marketing
expenses appropriate to support its channels of distribution and the levels of
general and administrative spending appropriate for the size and nature of the
business. Many other factors affect the Company's financial performance and may
cause the Company's future results to be markedly outside of the ranges
reflected in the target model.
The financial target model is one management tool that the Company uses to run
its business and measure its performance. IT IS NOT A PROJECTION OF FUTURE
RESULTS. The actual results for any particular period, including the current
quarter, may vary substantially from the model for numerous reasons including
but not limited to the Company's ability to attain planned revenue growth. See
"Factors That May Affect Future Results." Also, in certain periods the Company
may intentionally operate outside the model. In addition, the financial target
model itself is subject to revision from time to time to reflect new strategies,
competitive changes or other developments.
The financial target model is described above to provide a framework for the
Company's discussion and analysis of its results of operations. The Company does
not intend to provide updated information about its planning model or its
performance relative to the model in any period, other than in the context of
management's discussion and analysis in the Company's Form 10-Q.
8
<PAGE>
The following table sets forth, for the periods indicated, certain income and
expense items as a percentage of net revenues:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
March 31, March 31, March 31, March 31, Target
1995 1994 1995 1994 Model
---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Product and other revenues 89.6% 89.0% 89.3% 88.8%
Service revenues............................... 10.4 11.0 10.7 11.2
----- ----- ----- -----
Total revenues................................. 100.0 100.0 100.0 100.0 100%
Cost of product and other revenues............. 40.9 42.7 41.4 42.7
Cost of service revenues....................... 5.4 6.0 5.6 6.1
----- ----- ----- -----
Gross margin................................... 53.6 51.3 53.0 51.3 50-52
Research and development expense............... 10.4 11.8 11.2 12.0 11-13
Selling, general and administrative expenses... 27.2 26.4 26.6 26.6 26-28
----- ----- ----- ----- -----
Operating income............................... 16.0 13.0 15.1 12.6 11-13
Interest income and other income, net.......... 0.6 0.3 0.1 0.3
----- ----- ----- -----
Income before income taxes..................... 16.6 13.3 15.2 12.9
Provision for income taxes..................... 5.0 4.0 4.6 3.7
----- ----- ----- -----
Net Income 11.6% 9.3% 10.6% 9.3%
===== ===== ===== =====
</TABLE>
Percentages may not add due to rounding.
The following table sets forth, for the periods indicated, growth rates for
certain income and expense items:
<TABLE>
<CAPTION>
Increase/(Decrease)for the
Three Months Ended March 31, 1995
--------------------------------------
vs Prior Qtr vs Prior Year Qtr
-------------- ---------------------
<S> <C> <C>
Product and other revenues............ 5% 48%
Service revenues...................... 6% 38%
Total revenues........................ 5% 47%
Gross profit.......................... 8% 53%
Research and development............. 0% 29%
Selling, general and administrative... 11% 51%
Net income............................ 19% 83%
Earnings per share.................... 18% 74%
</TABLE>
Operating results: The Company's product and other revenues are
derived primarily from shipment of computer system products, with subsystem and
software revenues, license fees, and non-recurring engineering (NRE) contract
payments comprising the remainder. NRE contract payments are generally
recognized upon the completion of contract requirements or milestones, and the
expenses related to these efforts are included in research and development
expense. Revenue growth resulted principally from increased unit shipments in
all major regions worldwide, increased service revenues from a larger installed
base of products under contract, as well as a weaker U.S. dollar. The Company
experienced strong demand across its lines of computer system products, which
range from the desktop to supercomputing.
9
<PAGE>
For the three months ended March 31, 1995, the Company exceeded its
gross margin model. The increase in gross margin for the three month period
compared to the prior year was primarily a result of manufacturing efficiencies
due to higher volumes and the favorable effect of depreciation in the U.S.
dollar relative to certain key currencies, including the Japanese yen and major
European currencies. For the nine months ended March 31, 1995, the Company
exceeded its gross margin model. The increase in gross margin for the nine
month period compared to the prior year was primarily a result of manufacturing
efficiencies due to higher volumes, increased portion of international business,
and the weaker U.S. dollar.
The Company's operating margin for the third quarter of fiscal 1995
was 16.0% of net revenues and is above both the target range of 11% - 13% and
the 13.0% recorded in the comparable quarter of fiscal 1994. In order to take
advantage of the positive business climate that the Company is experiencing, the
Company is implementing a variety of incremental spending programs, including
sales and marketing initiatives and expanded research and development programs,
that are designed to improve the Company's long-term growth prospects and market
position, but will increase the growth rate of spending. These programs could
reduce gross margins and increase operating expenses as a percentage of revenue
compared to the levels experienced in the third quarter of fiscal 1995.
However, the Company believes that spending growth may continue to lag revenue
growth, and therefore the Company may operate above the operating margin target
range during the remainder of fiscal 1995.
Revenue by Geography: The geographical mix has remained relatively
constant for the three month and nine month periods. The Company's North
American business revenue increased 46% over the year ago quarter. European
revenue was up 53% and Pacific revenues were up 42% from the same quarter a year
ago, partially as a result of a weaker U.S. dollar. Revenue from Japan
represented approximately 16% of total revenues for the quarter, compared to
approximately 17% in the prior year's comparable quarter.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31, Ended March 31,
------------------------------ Year over Year ----------------------------- Year over Year
1995 1994 Increase 1995 1994 Increase
--------------- ------------ --------------- ------------- ------------- ---------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
North America (U.S. and Canada) $ 268 $ 184 46% $ 773 $ 560 38%
Europe 156 102 53% 421 274 54%
Pacific (including Latin
America) 128 90 42% 310 214 45%
----- ----- -- ------ ------------ --
Total Revenue $ 552 $ 376 47% $1,504 $1,048 44%
===== ===== == ====== ============ ==
<CAPTION>
Three Months Ended March 31, Nine Months Ended March 31,
----------------------------- ----------------------------
(as a percentage of total revenue) 1995 1994 1995 1994
----- ----- ---- -----
North America 49% 49% 51% 53%
Europe 28% 27% 28% 26%
Pacific 23% 24% 21% 21%
</TABLE>
Revenue by product line: The mix between high-end and low-end
systems has remained relatively constant as the Company continues to develop and
deliver a wide range of products to a broadening marketplace.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
March 31, March 31, March 31, March 31,
---------- ---------- ---------- ----------
(as a percent of product shipment revenue, 1995 1994 1995 1994
excluding other revenue) ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
High-end products (Challenge/(TM)/, POWER Challenge/(TM)/, Onyx/(TM)/ 38% 37% 39% 39%
POWER Onyx(TM))
Low-end products (Indy/(TM)/, IRIS Indigo/(R)/, Indigo/2(TM)/ 62% 63% 61% 61%
POWER Indigo/2(TM)
</TABLE>
10
<PAGE>
Other results: Interest income and other income, net for the quarter
was income of $3.4 million, reflecting an improvement over the prior year period
due to increased interest income as a result of higher invested cash balances
net of borrowings, and higher interest earned on investments. For the nine
months ended March 31, 1995 interest income and other income, net was $0.9
million. In the second quarter ended December 31, 1994, the Company reevaluated
its long-term investment in Control Data Systems, Inc. ("CDSI") to reflect the
market value of the securities at December 31, 1994 and therefore took an
expense of $7.3 million. In February 1995, CDSI repurchased the Company's CDSI
stock at the Company's book value.
Taxes: The Company's combined federal, state and foreign effective
income tax rate for the three month and nine month periods ended March 31, 1995
was 30% and was calculated based on an estimated annual effective tax rate
applied to income before income taxes. The tax rates for the same periods of
the prior fiscal year were 30% and 28%, respectively, the latter of which was
comprised of an estimated annual tax rate of 30% and a non-recurring benefit
from the Revenue Reconciliation Act of 1993 in the amount of $2.3 million. The
Company does not provide for U.S. federal income taxes on undistributed earnings
of foreign subsidiaries which it intends to permanently reinvest in those
operations.
Based on the Company's plans, it believes that current levels of
taxable income, adjusted for non-recurring items, will be sufficient to realize
the deferred tax assets. Accordingly, the Company has determined that no
valuation allowance for deferred tax assets is required to reduce such assets to
an amount which is more likely than not to be realized either through
carrybacks, or by offsetting deferred tax liabilities or future taxable income.
FINANCIAL CONDITION
- -------------------
During the nine months ended March 31, 1995, the Company's cash and
cash equivalents, short-term marketable investments and other marketable
investments increased by $137 million. This increase was primarily due to
positive cash flow from operating activities of $199 million, as well as $43
million generated from sales of stock through the Company's employee stock
option plans and the Employee Stock Purchase Plan, and $7.1 million sale of an
investment in Control Data Systems, Inc., which was partially offset by $93
million of capital expenditures, repayment of debt of $12 million, and an $7
million increase in other assets. Long-term debt and other at March 31, 1995
increased to reflect future payments associated with the acquisition of
intellectual property rights. These liabilities will be discharged over eight
years and are not expected to be material to the cash flow in any fiscal period.
As of March 31, 1995, the Company's principal sources of liquidity
included cash and cash equivalents, short-term marketable investments and other
marketable investments of $724 million and up to $20 million available under a
committed line of credit. These resources, and others available to the Company,
should be adequate to fund the Company's projected cash needs beyond fiscal
1995. The Company believes that the level of financial resources is an
important competitive factor in the computer industry, and accordingly, may
elect to raise additional capital in anticipation of future needs.
11
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
- --------------------------------------
As is true for technology companies generally, Silicon Graphics
operates in a rapidly changing environment that involves a number of risks, some
of which are beyond the Company's control. The following discussion highlights
some of these risks.
Period to Period Fluctuations: The Company has experienced substantial
revenue growth in recent years, and it plans its operating expenses, many of
which are relatively fixed in the short term, on the basis that its revenues
will continue to grow. As a result it may not be possible for management to
quickly adjust expense levels in response to revenue shortfalls. Further,
because of short delivery cycles the Company generally does not have a large
order backlog, which makes the forecasting of revenue inherently less certain.
This uncertainty is compounded because each quarter's revenue results
predominantly from orders received and shipments made during the last month of
the quarter, with a disproportionate amount occurring in the latter half of that
month. This pattern sharply limits the Company's ability to react to revenue
shortfalls within a particular quarter. Accordingly, even relatively minor
shipment disruptions, which could result from factors such as supply
constraints, delays in the availability of new products, an unanticipated change
in product mix, transit interruptions or natural disasters, may cause a
particular period's results to be substantially below expectations.
The Company's results have followed a seasonal pattern, with relatively
strong second and fourth fiscal quarters and weaker first and third fiscal
quarters, reflecting the buying patterns of the Company's customers. A variety
of other factors may cause period-to-period fluctuations in revenues and
profitability, including changes in the mix of high-end and desktop products,
the mix of configurations within a product line, the geographic mix of sales,
the mix between direct and indirect channels of distribution, the level of the
Company's product discounts, and the percentage of revenues derived from service
or NRE during any fiscal period.
Additionally, because approximately half of the Company's revenue is
derived from sales outside the United States, and many key components for its
products are produced outside the United States, the Company's results could be
negatively affected by such factors as changes in foreign currency exchange
rates, trade protection measures, generally longer accounts receivable
collection patterns, and changes in regional or worldwide economic or political
conditions, or natural disasters. For example, a marked appreciation in the
value of the U.S. dollar relative to the Japanese yen could have an adverse
impact on the Company's short-term results, which have been affected in recent
quarters by the relative weakness of the U.S. dollar. The Company's sales to
foreign customers also are subject to export regulations, with sales of some of
the Company's high-end products requiring clearance and export licenses from the
U.S. Department of Commerce. The Company's export sales would be adversely
affected if such regulations were tightened, or if they are not modified over
time to reflect the increasing performance of the Company's products.
Sales in foreign countries are generally priced in local currencies
and therefore are subject to the effects of currency exchange fluctuations.
Changes in foreign currency exchange rates can have either a positive or
negative effect on revenue and/or income in any given period. The Company
attempts to reduce the impact of currency fluctuations on net income primarily
through the use of forward exchange contracts and foreign currency options that
hedge foreign currency denominated receivables between the parent and its
international subsidiaries. The Company has generally not hedged capital
expenditures, investments in subsidiaries, inventory purchases or the
anticipated sales or net income of its international subsidiaries, although it
periodically evaluates its hedging practices.
The Company's stock price, like that of other technology companies, is
subject to significant volatility. If revenues or earnings in any quarter fail
to meet expectations of the investment community, there could be an immediate
impact on the Company's stock price. In addition, the Company's stock price may
be affected by broader market trends that may be unrelated to the Company's
performance.
Product Development and Introduction: The Company has achieved revenue
growth and profitability that are well above average within the computer
industry because it has been able to develop and rapidly bring to volume
production highly differentiated, technologically complex and innovative
products. The Company's future results depend on its ability to sustain this
competitive
12
<PAGE>
advantage. The Company continues to introduce new products, including products
that will replace products in the Company's current product offering. A number
of risks are inherent in this process.
The process of developing new technology and incorporating it in the
Company's products is increasingly complex and uncertain, which raises the
potential for delays in new product introduction. The introduction of a new
computer system requires close collaboration and continued technological
advancement involving multiple hardware and software design and manufacturing
teams within the Company as well as teams at outside suppliers of key components
such as semiconductor and storage products. The failure of any one of these
elements could cause the Company's new products to fail to meet specifications
or to miss the aggressive timetables that the Company establishes. As the
variety and complexity of the Company's product offering increases, the process
of planning production and inventory levels also becomes more difficult.
The Company generally has derived a substantial portion of its revenues in
any fiscal period from its most recently introduced products. The Company's
results could be adversely affected by such factors as development or
manufacturing delays, variations in product costs, and delays in customer
purchases of existing products in anticipation of the introduction of new
products.
The Company's customers require applications software that addresses
their needs. The Company develops very limited applications software, and thus
relies on the availability of key third-party applications software addressing
a wide range of customer requirements. The Company actively manages programs to
promote the development of such applications, but there can be no assurance that
all competitively important applications will be available for the Company's
systems.
Development and Acceptance of MIPS/(R)/ RISC Architecture: All of the
Company's system products incorporate microprocessors based upon the Company's
MIPS RISC microprocessor architecture. The Company licenses the manufacturing
and distribution rights to these microprocessors to selected semiconductor
manufacturing companies (the "Semiconductor Partners"). The Company and its
Semiconductor Partners generally have jointly funded the development of new MIPS
RISC microprocessors, including the recently announced R10000/(TM)/
microprocessor. Changes in the timing, level or availability of such funding
could adversely affect the continued development of the MIPS RISC architecture
or increase the portion of the development budget that is borne by the Company.
The Company believes that the continued development and broad acceptance of the
MIPS architecture are critical to its future success.
New Ventures: The Company has entered into several ventures with
other companies to address new and emerging markets, including ventures with
Time-Warner Cable, Nintendo Co., Ltd. and AT&T Corp. While the Company believes
that these new ventures are strategically important, there are substantial
uncertainties associated with the development of new products and technologies
for evolving markets. The success of these ventures will be determined not only
by the Company's efforts, but also by those of its venture partners. Initial
timetables for the development and introduction of new technologies, products or
services may not be achieved, and price/performance targets may not prove
feasible. External factors, such as the development of competitive alternatives
or government regulation, may cause new markets to evolve in an unanticipated
direction.
In May 1995, Nintendo announced that the final chipset for its Ultra
64/TM/ home video game system has been completed by the Company and Nintendo,
but that product shipments of the Ultra 64 system in North America and Europe
have been deferred until April 1996. The Company does not expect to achieve
material revenues from shipments of this product during fiscal 1996.
Management Information Systems: The Company is planning to replace
its current domestic information management system with a comprehensive system
that will be used to manage the entire revenue cycle, including manufacturing,
order administration, billing and collection. The Company expects that this
system will allow it to realize significant operational efficiencies and
facilitate future growth, and it is devoting significant resources to system
design and testing. The Company's operations could be disrupted, however, if
the transition to the new system is not effected smoothly or if the system does
not perform as expected. Initial implementation is currently scheduled for the
second quarter of fiscal 1996.
13
<PAGE>
Competition: The computer industry is highly competitive and is
characterized by rapid technological advances in both hardware and software
development, which result in steadily improving price/performance and shortening
product life cycles. As the segments in which the Company operates continue to
grow faster than the industry as a whole, the Company is experiencing an
increase in competition, and it expects this trend to continue. Many of the
Company's competitors have substantially greater technical, marketing and
financial resources than the Company, as well as a larger installed base of
customers and a wider range of general purpose applications software available
for their platforms. The strong competition faced throughout the Company's
product line can result in significant discounting of sales prices which would
decrease the Company's gross margins.
Business Disruption: The Company's corporate headquarters, including
its research and development operations and most of its manufacturing
facilities, are located in the Silicon Valley area of Northern California, a
region known for seismic activity. Operating results could be materially
affected by a significant earthquake. The Company is predominantly self-insured
for losses and business interruptions of this kind.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 11, 1992, the Company entered into an agreement with MIPS, pursuant to
which the Company has acquired MIPS through the merger of a subsidiary of the
Company into MIPS. On March 17, 1992, a putative class action lawsuit entitled
Diane Provenz and Ahikim Eizenberg v. Robert C. Miller, et al. was filed in the
- --------------------------------------------------------------
United States District Court for the Northern District of California. The
plaintiffs purport to represent a class of all persons who purchased MIPS'
common stock between January 31, 1991 and October 9, 1991 (the "Class Period").
Named as defendants are MIPS and certain executive officers of MIPS. The
Company is not a defendant, but is defending the case as a successor in interest
to MIPS. The complaint alleges that defendants violated various federal
securities laws and California statutes through material misrepresentations and
omissions during the Class Period. On June 27, 1994, the Court granted
defendant's motion for summary judgment as to all counts. On March 29, 1995,
the Court rejected plaintiffs' motion for reconsideration of the order granting
summary judgment. On April 24, 1995, plaintiffs filed a Notice of Appeal with
the U. S. Court of Appeals for the Ninth Circuit. The Company believes that it
has meritorious defenses to the claims alleged in this lawsuit and intends to
continue its defense of the action vigorously.
ITEM 2. CHANGES IN SECURITIES
On May 2, 1995, the Company's Board of Directors approved an amendment to the
Company's Preferred Share Rights Agreement increasing the purchase price under
such agreement from $37.50 to $200 for each one-thousandth of a share of Series
B Participating Preferred Stock, subject to adjustment in certain circumstances
set forth in the Rights Agreement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.7 First Amendment to Rights Agreement dated as of May 2, 1995 between
the Company and The First National Bank of Boston.
10.70 Employment Agreement dated as of February 13, 1995 between the
Company and Javaid Aziz.
11.1 Statement of Computation of Common Shares and Common Share
Equivalents.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
On February 13, 1995, the Company filed a current Report on Form 8-K
relating to its definitive merger agreements dated as of February 6, 1995 with
each of Alias Research Inc. and Wavefront Technologies, Inc.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 12, 1995 SILICON GRAPHICS, INC.
a Delaware corporation
By: /s/ STANLEY J. MERESMAN
-------------------------------
Stanley J. Meresman
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
By: /s/ DENNIS P. McBRIDE
------------------------------
Dennis P. McBride
Vice President, Controller
(Principal Accounting Officer)
By: /s/ TOM OSWOLD
------------------------------
Tom Oswold
Vice President, Finance
and Treasurer
16
<PAGE>
SILICON GRAPHICS, INC.
INDEX TO EXHIBITS
------------------
Exhibit Description
- ------- -----------
4.7 First Amendment to Rights Agreement dated as of
May 2, 1995 between the Company and The First
National Bank of Boston
10.70 Employment Agreement dated as of February 13,
1995 between the Company and Javaid Aziz
11.1 Statement of Computation of Common Shares and
Common Share Equivalents
27.1 Financial Data Schedule
<PAGE>
FIRST AMENDMENT TO RIGHTS AGREEMENT
dated as of May 2, 1995
SILICON GRAPHICS, INC.
and
THE FIRST NATIONAL BANK OF BOSTON, AS RIGHTS AGENT
This First Amendment to Rights Agreement (the "First Amendment") shall amend the
Second Amended and Restated Preferred Share Rights Agreement, dated as of May 6,
1992 (the "Rights Agreement"), between Silicon Graphics, Inc., a Delaware
corporation (the "Company") and The First National Bank of Boston, a national
banking association (the "Rights Agent"). Terms defined in the Rights Agreement
are used herein as therein defined. The parties hereby agree as follows:
1. Increase in Purchase Price. Section 7(b) of the Rights Agreement is
hereby amended by replacing such section with the following:
(b) The Purchase Price for each one-thousandth of a Preferred Share
issuable pursuant to the exercise of a Right shall, effective May 2,
1995, be $200. Such Purchase Price shall thereafter be subject to
adjustment from time to time as provided in Sections 11 and 13 hereof
and shall be payable in lawful money of the United States of America
in accordance with paragraph (c) below.
2. Authorization. The Company hereby certifies that this First Amendment
was duly authorized at a meeting of the Board of Directors of the Company on
May 2, 1995, and that this First Amendment is in compliance with the terms of
Section 27 of the Rights Agreement.
3. Effectiveness. This First Amendment shall be effective as of
May 2, 1995.
IN WITNESS WHEREOF, the parties have caused this First Amendment to be duly
executed as of the day and year first above written.
SILICON GRAPHICS, INC., THE FIRST NATIONAL BANK OF BOSTON,
a Delaware corporation as Rights Agent
By: /s/ WILLIAM M. KELLY By: /s/ KATHERINE S. ANDERSON
------------------------ ----------------------------
Name: William M. Kelly Name: Katherine S. Anderson
Title: Vice President Title: Team Leader
<PAGE>
Mr. Javaid Aziz
[Home Address]
Dear Javaid,
This agreement confirms and restates the terms of your employment as Senior Vice
President, responsible for the European activities of Silicon Graphics,
effective as of February 13, 1995. This position is based in Geneva and reports
directly to Bob Bishop, President of Silicon Graphics World Trade Corporation.
Since you will be maintaining your home in the UK, we will obtain for you a
Geneva professional work permit under which you will be allowed to spend up to
120 days per year physically present in Switzerland. Business expenses will
apply when you travel from your UK address, however.
You will be considered a legal employee of both Silicon Graphics S.A. in
Switzerland and Silicon Graphics Limited in the UK. On the basis that you spend
120 days per year in Switzerland, you will be paid on a split basis with 1/3 of
your compensation (base and bonus) being paid in Switzerland and 2/3 being paid
in the UK. All payments will be calculated in Sterling with the Swiss portion
being converted and paid in Swiss Francs using the company's accounting exchange
rate which is determined at the end of each month.
Your compensation package will be structured as follows:
Base Salary (Pounds)225,000 per annum
European Bonus (Pounds)112,500 per annum
Executive Incentive (Pounds)112,500 per annum
Base, European Bonus and Executive Annual Incentive will all be paid on the 1/3
Switzerland; 2/3 UK basis described above.
It is not our intention that this split payroll arrangement has any effect on
the total taxation payable. In the unlikely event that your combined Swiss and
UK income taxes exceed the theoretical UK tax liability (assuming all income is
paid in the UK and that you are a UK tax resident) then Silicon Graphics will
compensate you for the excess tax paid. Your tax situation will be complex and
therefore we will pay for tax consultation both in Switzerland and UK for up to
(Pounds)1,000 per annum in each location for as long as you remain on this split
payroll.
<PAGE>
Mr. Javaid Aziz Page 2
Your targeted total income for the first fiscal year with the company, FY96,
will therefore be (Pounds)450,000, assuming that both Europe and the Corporation
achieve their respective plans.
Enclosed is a summary of the European Bonus Plan and Executive Annual Incentive
Plan for the remainder of our fiscal year 1995, the details of both of which may
be somewhat altered in FY96.
In recognition of your extensive experience in the industry, we will recommend
that the following stock grants be considered for approval at the February 1,
1995 meeting of our Board of Directors:
Subject to authorization and approval of the Board of Directors of SGI, and
in compliance with all applicable federal and state securities laws, you
will be granted an option to purchase 200,000 shares of common stock at 75%
of market value under the Company's 1985 Stock Incentive Program. The
price will be the closing price of SGI common stock, as listed on the New
York Stock Exchange, on the date of board approval. Specific terms and
conditions will be included in a definitive stock option agreement and will
include your right to purchase your shares according to a vesting schedule.
This schedule will provide for 20% of your shares to become vested after
your tenth month of employment, with the remainder to vest at the rate of
2% per month, thereafter. In order to comply with UK Inland Revenue
regulations, this option will be subject to a maximum exercise period of 7
years.
Subject to authorization and approval of the Board of Directors of SGI, and
in compliance with all applicable federal and state securities laws, you
will be granted an option to purchase 25,000 shares of common stock at fair
market value under the Company's 1993 Long-Term Incentive Stock Plan. The
price will be the closing price of SGI common stock, as listed on the New
York Stock Exchange, on the date of board approval. Specific terms and
conditions will be included in a definitive stock option agreement and will
include your right to purchase your shares according to a vesting schedule.
This schedule will provide for 20% of your shares to become vested after
your tenth months of employment, with the remainder to vest at the rate of
2% per month, thereafter.
Additionally, you will be granted 4,740 shares of restricted stock under
the Company's 1993 Long-Term Incentive Stock Plan that will vest 25% per
year on your anniversary date.
<PAGE>
Mr. Javaid Aziz Page 3
For the time which you spend in Switzerland, we will provide you with the use of
a rental car and a pied-a-terre apartment, and of course, office support at our
Geneva headquarters. You will also be provided with office support at our
Theale address.
In the event that you wish to leave Silicon Graphics, we would hold you to no
specific termination period. However, in the case the Silicon Graphics should
wish to terminate your employment within the first 3 years, for any reason, then
a severance payment of 2 year's base salary would be payable. After 3 years,
this severance payment would reduce to 1 year's base salary. Notwithstanding
anything in this agreement, in the event that you become entitled to a
"Termination Payment" within the meaning of the Employment Continuation
Agreement dated as of February 13, 1995 between you and Silicon Graphics, you
will not be entitled to a severance payment under this agreement.
Finally, we have agreed to pay you a starting bonus of (Pounds)100,000 payable
within the first 30 days of employment.
Javaid, I am very much looking forward to working with you to help shape the
computer company of the next century.
Sincerely yours,
Kenneth L. Coleman
Senior Vice President, Administration
<PAGE>
EXHIBIT 11.1
STATEMENT OF COMPUTATION OF COMMON SHARES AND COMMON
SHARE EQUIVALENTS
WEIGHTED AVERAGE SHARES OUTSTANDING:
(THOUSANDS OF SHARES)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
1995 1994 1995 1994
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Common shares 143,740 136,128 142,213 134,321
Convertible preferred shares 1,175 1,536 1,655 1,963
Stock options 17,321 17,859 15,848 17,498
------- ------- ------- -------
Total weighted average
shares outstanding 162,236 155,523 159,716 153,782
======= ======= ======= =======
Net income available to
common stockholders $64,228 $35,097 $159,951 $97,177
======= ======= ======== =======
Income Per Share:
Net income per share $ 0.40 $ 0.23 $ 1.00 $ 0.63
======= ======= ======== =======
</TABLE>
All share and per share data have been restated for all periods presented to
reflect the two-for-one stock split payable in the form of a stock dividend
which was distributed on December 15, 1993 to holders of record on November 30,
1993.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF INCOME AND CONSOLIDATED
STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD
ENDING MARCH 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 302,868
<SECURITIES> 191,691
<RECEIVABLES> 533,393
<ALLOWANCES> 0
<INVENTORY> 267,149
<CURRENT-ASSETS> 1,371,626
<PP&E> 447,458
<DEPRECIATION> (277,198)
<TOTAL-ASSETS> 1,975,690
<CURRENT-LIABILITIES> 544,446
<BONDS> 279,186
<COMMON> 144
0
33,996
<OTHER-SE> 1,117,918
<TOTAL-LIABILITY-AND-EQUITY> 1,975,690
<SALES> 494,771
<TOTAL-REVENUES> 552,020
<CGS> 225,993
<TOTAL-COSTS> 255,927
<OTHER-EXPENSES> 207,735
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,396
<INCOME-PRETAX> 91,754
<INCOME-TAX> 27,526
<INCOME-CONTINUING> 64,228
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,228
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
</TABLE>
