<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the
- --- Securities Exchange Act of 1934.
For the quarterly period ended DECEMBER 31, 1995.
or
- --- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from to .
Commission File Number 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 JANUARY 31, 1996 THERE WERE 162,615,213 SHARES OF COMMON STOCK
OUTSTANDING.
<PAGE>
SILICON GRAPHICS, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Index to Exhibits 17
TRADEMARKS USED IN THIS FORM 10-Q: CHALLENGE, Indigo and Silicon Graphics
are registered trademarks and Indigo(2), Indigo(2) IMPACT, Onyx and POWER
CHALLENGE are trademarks of Silicon Graphics, Inc. Indy is a trademark used
under license in the United States, and owned by Silicon Graphics, Inc.
in other countries worldwide. MIPS is a registered trademark of MIPS
Technologies, Inc. UNIX is a registered trademark of Novell, Inc. in the
United States and other countries, licensed exclusively through X/Open
Company Ltd. Ultra 64 is a trademark of Nintendo.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
ASSETS December 31, June 30,
1995 1995(1)
(unaudited)
------------ --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $258,380 $307,875
Short-term marketable investments 153,438 208,094
Accounts receivable, net 655,884 627,738
Inventories 342,823 291,587
Prepaid expenses and other current assets 86,755 73,579
---------- ---------
Total current assets 1,497,280 1,508,873
Other marketable investments 282,755 264,043
Property and equipment, at cost 610,453 515,470
Accumulated depreciation and amortization (309,340) (261,024)
---------- ---------
Net property and equipment 301,113 254,446
Other assets 184,339 179,257
---------- ---------
$2,265,487 $2,206,619
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $162,745 $165,152
Other current liabilities 381,883 408,030
---------- ---------
Total current liabilities 544,628 573,182
Long-term debt and other 277,575 287,267
Stockholders' equity:
Preferred stock 16,998 16,998
Common stock 166 161
Additional paid-in capital 922,284 903,139
Retained earnings 475,738 385,915
Accumulated translation adjustment 28,098 39,957
and other
---------- ---------
Total stockholders' equity 1,443,284 1,346,170
---------- ---------
$2,265,487 $2,206,619
---------- ---------
---------- ---------
</TABLE>
(1) The balance sheet at June 30, 1995 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
Ended December 31, Ended December 31,
------------------ ------------------
1995 1994(1) 1995 1994(1)
------- ------- ------ ------
<S> <C> <C> <C> <C>
Product and other revenues $597,474 $491,750 $1,122,203 $887,150
Service revenue 74,259 57,821 144,809 110,924
------- ------- --------- -------
Total revenues 671,733 549,571 1,267,012 998,074
Costs and expenses:
Cost of product and other revenues 291,103 226,123 525,769 406,905
Cost of service revenue 40,253 29,412 78,198 56,465
Research and development 80,797 60,841 153,540 117,071
Selling, general and administrative 193,151 145,687 365,340 269,220
Merger-related expenses 561 -- 1,275 --
------- ------- --------- -------
Total costs and expenses 605,865 462,063 1,124,122 849,661
------- ------- --------- -------
Operating income 65,868 87,508 142,890 148,413
Interest income (expense) and
other, net 6,699 (3,935) 13,040 (1,044)
------- ------- --------- -------
Income before income taxes 72,567 83,573 155,930 147,369
Provision for income taxes 20,214 24,535 45,220 43,230
------- ------- --------- -------
Net income 52,353 59,038 110,710 104,139
------- ------- --------- -------
Preferred stock dividend requirement -- -- -- 54
------- ------- --------- -------
Net income available to common
stockholders $52,353 $59,038 $110,710 $104,085
------- ------- --------- -------
------- ------- --------- -------
Net income per common share $ 0.30 $ 0.34 $ 0.62 $ 0.60
------- ------- --------- -------
------- ------- --------- -------
Common shares and common share
equivalents used in the calculation
of net income per common share 177,319 174,065 178,268 173,155
------- ------- --------- -------
</TABLE>
(1) All balances reflect the June 1995 mergers of Silicon Graphics, Inc.,
Alias Research Inc. and Wavefront Technologies, Inc., which have been
accounted for as poolings of interests.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended December 31,
-----------------------------
1995 1994(1)
------ ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $110,710 $104,139
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 63,826 51,378
Other (461) 12,390
(Increase) decrease in assets:
Accounts receivable (28,146) (92,771)
Inventories (51,236) (38,603)
Prepaid expenses and other current assets (13,157) (3,902)
Increase (decrease) in liabilities:
Accounts payable (2,407) 59,953
Other liabilities (35,974) 40,708
--------- ---------
Total adjustments (67,555) 29,153
--------- ---------
Net cash provided by operating activities 43,155 133,292
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (100,811) (58,597)
(Decrease) increase in other assets (18,822) 2,625
Available-for-sale investments:
Purchases (934,364) (170,662)
Sales 943,470 2,500
Maturities 25,160 101,513
Net increase in cash and cash equivalents of Alias Research
Inc. for the six months ended July 31, 1994 and Wavefront
Technologies, Inc. for the six months ended June 30, 1994 --- 44,479
--------- ---------
Net cash used in investing activities (85,367) (78,142)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt 1,009 1,641
Payments of debt principal (5,155) (5,862)
Cash dividends -- preferred stock (263) (525)
Sale of common stock 40,978 43,127
Purchase of common stock (43,852) ---
--------- ---------
Net cash (used in) provided by financing activities (7,283) 38,381
--------- ---------
Net (decrease) increase in cash and cash equivalents (49,495) 93,531
Cash and cash equivalents at beginning of period 307,875 327,461
--------- ---------
Cash and cash equivalents at end of period $258,380 $420,992
--------- ---------
--------- ---------
</TABLE>
(1) All balances reflect the June 1995 mergers of Silicon Graphics, Inc.,
Alias Research Inc. and Wavefront Technologies, Inc., which have been
accounted for as poolings of interests.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
SILICON GRAPHICS, INC.
NOTES TO CONDENSED 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 accruals) necessary to present fairly the financial position,
results of operations and cash flows for all periods presented have
been made. The unaudited condensed 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, 1995.
2. INVENTORIES.
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1995
----------------- ---------------
<S> <C> <C>
Raw materials $ 84,432 $43,640
Work-in-process 86,502 84,049
Finished goods 28,625 31,887
Service and marketing 143,264 132,011
---------- ---------
Total inventories $342,823 $291,587
---------- ---------
---------- ---------
</TABLE>
3. STOCK REPURCHASE PROGRAM.
On October 19, 1995, the Company announced that its board of directors
had authorized the repurchase of up to seven million shares of its common
stock, either in the open market or in private transactions. The Company
purchased 1,350,000 million shares during the second quarter of fiscal 1996
at an average price of approximately $33.39 per share. As of February 12,
1996, the Company had purchased an additional 975,000 shares at an average
price of approximately $27.98 per share. The repurchased shares will be
available for use under the Company's employee stock plans and for other
corporate purposes. The Company plans to use existing cash to finance the
repurchases.
4. CONTINGENCIES.
The Company has been named in a securities class action lawsuit filed on
January 29, 1996 in the U.S. District Court for the Northern District of
California. The lawsuit alleges that the Company and certain of its
current and former executive officers and directors made material
misrepresentations and omissions between October 19 and December 29, 1995.
The Company believes it has good defenses to the claims alleged in
this lawsuit and is defending itself vigorously against this action.
See Part II, Item 1 for additional information.
The Company is defending a patent infringement lawsuit filed by Martin
Marietta Corp. in September 1995. The Company has filed a counterclaim
seeking to invalidate the patent, and Martin Marietta has requested the
U.S. Patent and Trademark Office to re-examine the patent. The District
Court has set a trial date for the lawsuit in February 1998. The Company
believes that it has good defenses to the infringement lawsuit and is
defending itself vigorously against this action. See Part II, Item 1 for
additional information.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.
THE MATTERS ADDRESSED IN THIS QUARTERLY REPORT ON FORM 10-Q, WITH THE
EXCEPTION OF THE HISTORICAL INFORMATION PRESENTED, ARE FORWARD-
LOOKING STATEMENTS INVOLVING RISKS AND UNCERTAINTIES, INCLUDING THE RISKS
DISCUSSED UNDER THE HEADING "FACTORS THAT MAY AFFECT FUTURE RESULTS" AND
ELSEWHERE IN THIS REPORT.
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 objectives for gross margins, operating expenses, and operating
profit as a percentage of total 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 total revenues):
<TABLE>
<S> <C> <C>
Gross margin 50.5% - 52.5%
Research and development 11.0% - 13.0%
Selling, general and administrative 26.0% - 28.0%
-------------
Operating margin 11.5% - 13.5%
</TABLE>
The financial target model reflects a number of assumptions. 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 operating expense 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 PREDICTION OF
FUTURE RESULTS, although many of the Company's forward-looking statements
contained in this report are expressed in the context of the target
model. 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
Quarterly Reports on Form 10-Q.
<PAGE>
OPERATING ITEMS AS A PERCENTAGE OF TOTAL REVENUES
(PERCENTAGES MAY NOT ADD DUE TO ROUNDING)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Dec. 31, Ended Dec. 31,
-------------- -------------- Target
1995 1994 1995 1994 Model
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Product and other revenues 88.9% 89.5% 88.6% 88.9%
Service revenue 11.1 10.5 11.4 11.1
------ ------ ------ ------
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin 50.7 53.5 52.3 53.6 50.5 - 52.5
Research and development expenses 12.0 11.1 12.1 11.7 11.0 - 13.0
Selling, general & administrative
expenses 28.8 26.5 28.8 27.0 26.0 - 28.0
Merger-related expenses 0.1 -- 0.1 -- --
------ ------ ------ ----- -----------
Operating income 9.8 15.9 11.3 14.9 11.5 - 13.5%
Interest income (expense) and other,
net 1.0 (0.7) 1.0 (0.1)
------ ------ ------ ------
Income before income taxes 10.8 15.2 12.3 14.8
Provision for income taxes 3.0 4.5 3.6 4.3
------ ------ ------ ------
Net income 7.8% 10.7% 8.7% 10.4%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
GROWTH RATES
<TABLE>
<CAPTION>
Increase (Decrease) for the Three Months
Ended December 31, 1995
-----------------------------------------
vs. Prior Qtr. vs. Prior Year Qtr.
---------------- --------------------
<S> <C> <C>
Product and other revenues 14% 21%
Service revenue 5% 28%
Total revenues 13% 22%
Gross profit 5% 16%
Research and development expenses 11% 33%
Selling, general and administrative expenses 12% 33%
Net income (10)% (11)%
Net income per common share (9)% (12)%
</TABLE>
<PAGE>
REVENUES BY GEOGRAPHY
<TABLE>
<CAPTION>
Three Months Year Six Months Year
Ended Dec. 31, /Year Ended Dec. 31, /Year
------------- --------------
($ in millions) 1995 1994 Increase 1995 1994 Increase
----- ----- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
North America (US and Canada) $300 $274 10% $617 $532 16%
Europe 225 174 29% 381 279 37%
Pacific (including Latin America) 147 102 43% 269 187 44%
----- ----- ---- ----- ---- ----
Total revenues $672 $550 22% $1,267 $998 27%
----- ----- ---- ----- ---- ----
----- ----- ---- ----- ---- ----
<CAPTION>
Three Months Six Months
Ended Dec. 31, Ended Dec. 31,
------------- -------------
(as a percentage of total revenues) 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
North America (US and Canada) 45% 50% 49% 53%
Europe 33% 32% 30% 28%
Pacific (including Latin America) 22% 18% 21% 19%
</TABLE>
REVENUES BY PRODUCT LINE
<TABLE>
<CAPTION>
Three Months Six Months
(as a percentage of product revenue, Ended Dec. 31, Ended Dec. 31,
------------- -------------
excluding other revenue) 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
High-end products (primarily the
POWER CHALLENGE-TM-,
CHALLENGE-Registered Trademark
and Onyx-TM- families) 36% 41% 38% 42%
Desktop products (primarily from
the Indy-TM- and Indigo(2)-TM-
families) 64% 59% 62% 58%
</TABLE>
REVENUES. 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. Service revenue is comprised of
hardware and software support and maintenance.
The Company's revenues grew 22% over the year ago quarter due to increased
unit shipments, particularly of the Company's desktop products, and increased
service revenue from a larger installed base of products under contract.
The revenue growth rate for the second quarter represented a substantial
decrease from the Company's recent growth rates of 33% for the first
quarter of fiscal 1996 and 45% for fiscal 1995.
The Company believes that revenue growth was adversely affected by a
combination of factors. Demand for the Company's high-end products,
particularly the Onyx graphics supercomputers, was affected by the
anticipated introduction of new high-end products in the third
quarter, and as a result desktop products represented a higher
percentage of product revenue as compared to recent quarters. The new
high-end products are expected to have their initial shipments in
the third quarter, with higher volumes in the fourth quarter, subject to
the risks and uncertainties inherent in the process of new product
development and introduction. The uncertainty and temporary
shutdowns associated with the U.S. budget impasse affected the Company's
U.S. government business. The Company expects that the lingering
uncertainty associated with the budget process will continue to affect
its third quarter results. The expansion and
<PAGE>
reorganization of the Company's sales organization over the prior three
quarters continued to affect productivity in the second quarter. Sales to
OEM (original equipment manufacturers) customers were lower than in the
same quarter a year ago.
In the desktop product category, revenue from the Indigo(2) family of
workstations grew at a faster rate than the Company's overall revenue growth
rate, reflecting customer acceptance of the Indigo(2) IMPACT-TM- products
announced in July 1995 for initial shipment in the first and second
quarters of fiscal 1996. Indigo(2) Impact models shipped at higher
volumes than in the first quarter, as the Company continued to ramp up to
full volume manufacturing of these new products. However, the Company was not
able to ship all orders received and had a backlog of Indigo(2) Impact
orders at the end of the quarter. The Company expects to ship its full line
of Indigo(2) IMPACT products in volume in the third quarter, subject to the
risks and uncertainties inherent in the process of new product
development and introduction. The Company's revenue from the Indy family
of desktop products grew less than the Company's overall revenue growth rate.
The Company's North American business revenues increased 10% over the year
ago quarter. European revenues were up 29% from the year ago quarter, with
lower than anticipated revenue growth in the major countries also
reflecting the impact of economic and government spending issues. Pacific
(including Latin America) revenues were up 43% from the same quarter a
year ago, with revenue from Japan unchanged as a percentage of total
revenues at approximately 12% for the quarter. Fluctuations in the
value of the dollar versus most major currencies had a slight favorable
impact on revenues for the current quarter as compared to the same
quarter in fiscal 1995, but had a slight unfavorable revenue impact when
compared against the first quarter of fiscal 1996.
GROSS MARGIN. The Company's gross margins for the second quarter and for
the first six months of fiscal 1996 decreased as compared to the same
periods in fiscal 1995. The gross margin for the second quarter of 50.7%
was significantly lower than recent quarters and at the low-end of the
Company's target model of 50.5 - 52.5%. Gross margins were affected by
discounts and other pricing pressures, as well as the shift in product
mix to desktop products, partially offset by the shift in geographic mix
to international sales. The revenue shortfall also affected gross
margins, because manufacturing overhead was spread over fewer units.
OPERATING MARGIN. The Company's operating margin for the second quarter and
for the first six months of fiscal 1996 was significantly lower than in
the same periods in fiscal 1995. Operating expenses grew 33% for the first
quarter and 34% for the first six months of fiscal 1996 as compared to the
same periods in fiscal 1995. Selling expenses increased at a faster
rate than operating expenses generally, reflecting investments in the
sales force over the last several quarters and higher marketing
expenses as the Company prepared to introduce new products. The
combination of these factors with the lower than anticipated growth in
revenues resulted in operating margin for the second quarter of 9.8%,
below the Company's target model of 11.5% - 13.5%. In response to the
lower revenue growth rate, the Company has implemented expense control
measures, including a significant reduction in new hiring. However,
due principally to the hiring and other investments made in the latter
half of fiscal 1995 and the first quarter of fiscal 1996, the
Company's operating expenses in the current quarter are not expected to be
lower than in the second quarter of fiscal 1996. As a consequence, a rate
of revenue growth higher than in the second quarter will be required to
return operating margin to the Company's target model.
OTHER RESULTS. Interest income (expense) and other, net for the second
quarter of fiscal 1996 was $6.7 million, reflecting an increase compared to
the prior year due to larger invested cash balances net of borrowings and
higher yields and realized gains on the Company's cash portfolio in fiscal
1996, offset by the Company's share of the quarterly loss realized by
Interactive Digital Solutions ("IDS"), its joint venture with AT&T, and due
to the $7.3 million charge in the second quarter of fiscal 1995 relating to
the revaluation of the Company's long-term investment in Control Data
Systems, Inc. ("CDSI"). The Company expects interest income and other,
net to be significantly lower for the rest of fiscal 1996, due to lower
<PAGE>
interest rates on the reinvestment of cash from the sale of investments in
the second quarter, the use of cash for the stock repurchase program, and
losses expected to be realized by IDS. Interest income and other, net for
the first six months of fiscal 1996 was $13.0 million, reflecting an
increase compared to the first six months of fiscal 1995 due to gains
realized in fiscal 1996 on the Company's cash portfolio and the $7.3
million charge in fiscal 1995 resulting from the revaluation of the
Company's investment in CDSI.
TAXES. The Company's combined federal, state and foreign effective income
tax rate was 28% for the second quarter of fiscal 1996 and 29% for the
first six months of fiscal 1996. These rates were calculated based on an
estimated annual effective tax rate applied to income before income taxes.
The tax rate for the same periods of fiscal 1995 was 29%. The Company
does not provide for U.S. federal income taxes on undistributed earnings of
foreign subsidiaries, which it intends to reinvest permanently 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 its
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 first six months of fiscal 1996, the Company's cash and
cash equivalents and marketable investments decreased by $85 million.
Cash was principally used for capital expenditures of $101 million and
to repurchase 1,350,000 shares of common stock for $44 million for use
under the Company's employee stock plans, which provided $41 million
during the same period. Cash flows from operating activities were $43
million for the first six months of fiscal 1996 as compared to $133 million
for the first six months of fiscal 1995. The decrease in cash flows from
operating activities in fiscal 1996 as compared to fiscal 1995 principally
reflects the impact of significant increases in accounts payable and other
liabilities in the fiscal 1995 period.
As of December 31, 1995, the Company's principal sources of liquidity
included cash and cash equivalents, and marketable investments of $695
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, including the stock
repurchase program, beyond fiscal 1996. 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
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's operating results may
fluctuate for a number of reasons. The Company has short delivery cycles
and as a result does not have a large order backlog, which makes the
forecasting of revenue inherently uncertain. This uncertainty is
compounded because each quarter's revenue results predominantly from
orders booked and shipped during the third month, and disproportionately
in the latter half of that month. Because the Company plans its operating
expenses, many of which are relatively fixed in the short term, on the
basis that its revenues will continue to grow, even a relatively small
revenue shortfall may cause a period's results to be substantially
below expectations. Such a revenue shortfall could arise from any number of
factors, including lower than expected demand, supply constraints, delays
in the availability of new products, transit interruptions, overall
economic conditions or natural disasters. Margins are heavily influenced by
mix considerations, including geographical mix, the mix of service and
non-recurring engineering revenues, the mix of high-
<PAGE>
end and desktop products and application software and the mix of
configurations within these product categories.
The Company's results have followed a seasonal pattern, with stronger
sequential growth in the second and fourth fiscal quarters, reflecting the
buying patterns of the Company's customers.
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 the investment community's expectations, there could be an
immediate impact on the Company's stock price. The stock price may also
be affected by broader market trends unrelated to the Company's performance.
MANAGEMENT INFORMATION SYSTEMS. In January 1996, the Company replaced
its current information management system in the United States with a
comprehensive system that will be used to manage the entire revenue cycle,
including order administration, billing and collection, as well as
manufacturing and finance. The Company expects that this system, when
fully operational, will allow it to realize significant operational
efficiencies and facilitate future growth, and it has devoted
significant resources to system design, testing and training. The Company
experienced some initial performance and response time problems. System
adjustments implemented by the Company and its vendors have resulted
in substantially improved performance, and the Company believes that it
will be able to carry out key operational and reporting functions in the
current quarter. The risk remains, however, that the system will not
perform as anticipated, particularly as usage increases in the latter part
of the quarter.
REVENUE GROWTH. In the latter half of fiscal 1995 and the first quarter
of fiscal 1996, the Company made substantial investments in its sales and
marketing organizations, in new research and development programs and
increased funding of existing programs, and investments in corporate
infrastructure required to support significant growth. This plan involved
a number of risks, including a higher level of operating expenses,
the difficulty of attracting and assimilating a large number of new
employees, and the complexities associated with managing a larger and faster
growing organization.
In the first six months of fiscal 1996, the Company's revenue growth
rate decreased to 27% over the prior year period, and operating margins
moved below the Company's target model. A number of the factors that the
Company believes have resulted in slower revenue growth, such as product
transition issues, sales force productivity, and economic issues in the
U.S. and major European countries, are likely to continue to affect the
Company's revenue growth for the balance of the fiscal year. Although the
Company has planned the near-term growth in its operating expenses on
the basis of its current revenue expectations, operating expenses are
not expected to be lower than in the second quarter. As a consequence, a
higher rate of revenue growth than in the second quarter will be required
to return operating margins to the low-end of the target model.
PRODUCT DEVELOPMENT AND INTRODUCTION. The Company has in recent years
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 advantage. The Company is in the
midst of significant new product introductions planned for fiscal 1996
and the first half of fiscal 1997, including products that replace
products in the Company's high-end and desktop offerings. A number of risks
are inherent in this process.
The development of new technology and products is increasingly complex
and uncertain, which increases the risk of delays. 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
<PAGE>
fail to meet specifications or to miss the aggressive timetables that the
Company establishes. As the variety and complexity of the Company's
product families increase, the process of planning production and inventory
levels also becomes more difficult.
Short product life cycles place a premium on the Company's ability to manage
the transition from current products to new products. In order to minimize
product transition issues, the Company generally announces new products in
the early part of a quarter, while the product is in the final stages of
development, and seeks to manufacture and ship the product in volume in
the same quarter. 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.
INTERNATIONAL OPERATIONS. Because approximately half or more of the
Company's revenues are from sales outside the United States, and many key
components are produced outside the United States, the Company's results
could be negatively affected by such factors as changes in foreign
currency exchange rates (international sales are generally denominated in
foreign currencies, while the Company's accounts are in U.S. dollars),
trade protection measures, longer accounts receivable collection
patterns, changes in regional or worldwide economic or political
conditions, or natural disasters. For example, a marked short-term
appreciation in the value of the U.S. dollar relative to the Japanese yen or
German mark could adversely affect the Company's results. 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 are
thus subject to the effects of currency exchange fluctuations. The Company
attempts to reduce the impact (positive or negative) 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
of its international subsidiaries, although it periodically evaluates its
hedging practices.
DEVELOPMENT AND ACCEPTANCE OF MIPS-Registered Trademark- 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
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, DreamWorks, AT&T and NTT. 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 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 January 1996, Nintendo announced that product shipments of the Ultra
64-TM- home video game system, to be shipped in Japan in April 1996, have been
deferred in North America until September 1996.
<PAGE>
INTELLECTUAL PROPERTY. The Company routinely 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. In any given case there is a
risk that a license will not be available on terms that the Company
considers reasonable, or that litigation will ensue. The Company
currently has patent infringement lawsuits pending against it. The
Company expects that, as the number of hardware and software patents
issued continues to increase, and as the Company's business grows, the
volume of these intellectual property claims will also increase.
COMPETITION. The computer industry is highly competitive, with
rapid technological advances and constantly improving price/performance.
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. This competition
comes not only from the Company's traditional UNIX workstation rivals,
but also from new sources including the personal computer industry.
Many of the Company's competitors have substantially greater technical,
marketing and financial resources and, in some segments, a larger
installed base of customers and a wider range of available
applications software. Competition can result in significant
discounting and lower gross margins.
EMPLOYEES. The Company's future success depends in part on its ability
to continue to attract, retain and motivate highly qualified technical,
marketing and management personnel, who are in great demand.
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.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is defending a patent infringement case filed against it in the
U.S. District Court for the Middle District of Florida (Orlando
Division) in September 1995 by Martin Marietta Corp. The Company has
filed a counterclaim seeking a declaratory judgment that the Martin
Marietta patent is invalid. On November 9, 1995, Martin Marietta filed a
request for re-examination of its patent with the U.S. Patent and
Trademark Office (the "PTO"), which has been granted. Martin Marietta
also filed a motion with the District Court seeking to stay the litigation
pending the outcome of the patent re-examination by the PTO. Martin
Marietta's motion to stay the litigation was opposed by the Company and
denied by the District Court on December 12, 1995. The District Court has
set a trial date for the lawsuit in February 1998.
The Company has been named as a defendant in a putative class action
lawsuit entitled DEANNA BRODY, ET. AL. V. EDWARD R. MCCRACKEN, ET. AL., which
was filed on January 29, 1996 in the U.S. District Court for the Northern
District of California. Certain current and former executive officers and
directors of the Company are also named as defendants. The plaintiffs
purport to represent a class of all persons who purchased the Company's
common stock between October 19 and December 29, 1995 (the "Class"
Period"). The complaint alleges that the defendants violated various
federal securities laws and California statutes through material
misrepresentations and omissions during the Class Period. The Company
believes it has good defenses to the claims alleged in this lawsuit and is
defending itself vigorously against this action.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
10.34 Consulting Agreement dated as of December 21, 1995 between
the Company and Tom Oswold.
10.35 Addendum to Non-Qualified Deferred Compensation Plan
(previously filed as Exhibit 10.19 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1995).
11.1 Statement of Computation of Common Shares and Common Share
Equivalents.
27.1 Financial Data Schedule.
</TABLE>
<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: February 13, 1996 SILICON GRAPHICS, INC.
a Delaware corporation
By: Stanley J. Meresman
---------------------------
Stanley J. Meresman
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
By: Dennis P. McBride
------------------------------
Dennis P. McBride
Vice President, Controller
(Principal Accounting Officer)
<PAGE>
SILICON GRAPHICS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
------ -----------
<C> <S>
10.34 Consulting Agreement dated as of
December 21, 1995 between the Company
and Tom Oswold.
10.35 Addendum to the Non-Qualified Deferred
Compensation Plan (previously filed as
Exhibit 10.19 to the Company's Annual
Report on Form 10-K for the year ended
June 30, 1995).
11.1 Statement of Computation of Common
Shares and Common Share Equivalents
27.1 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 11.1
STATEMENT OF COMPUTATION OF COMMON SHARES AND COMMON
SHARE EQUIVALENTS
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------- ------------------
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted Average Shares Outstanding:
Common shares 162,282 155,501 161,818 154,084
Convertible preferred shares 460 2,289 442 2,524
Stock options 14,577 16,275 16,008 16,547
------- ------- ------- -------
Total weighted average shares outstanding 177,319 174,065 178,268 173,115
------- ------- ------- -------
------- ------- ------- -------
Income Per Share:
Net income availabe to common stockholders $52,353 $59,038 $110,710 $104,085
------- ------- ------- -------
------- ------- ------- -------
Net income per share $0.30 $0.34 $0.62 $0.60
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
All share and per share data have been restated for all periods presented to
reflect the June 1995 mergers of Silicon Graphics, Inc., Alias Research Inc.
and Wavefront Technologies, Inc.
<PAGE>
EXHIBIT 10.34
CONSULTING AGREEMENT
This Consulting Agreement ("Agreement") is made as of the date set
forth below by and between Silicon Graphics, Inc. (the "Company") and
Tom Oswold, ("Consultant").
RECITALS
Consultant has been employed by the Company since 1988 and has most
recently served in the capacity of Vice President, Finance and
Treasurer. Consultant wishes to resign in order to pursue other personal
interests. The Company wishes to have Consultant remain available to
contribute to certain projects and activities of the Company. Accordingly,
the Company and Consultant have agreed that Consultant will change his
relationship with the Company from that of an employee to that of a
consultant on the terms set forth in this Agreement.
AGREEMENT
In consideration of the mutual promises made herein, the Company and
Consultant hereby agree as follows:
1. SEPARATION AGREEMENT. Consultant and Company have entered into a
letter agreement dated contemporaneously herewith (the "Separation
Agreement") governing the terms of Consultant's resignation as an officer
and employee of Company effective as of the close of business on
December 29, 1995 (the "Effective Separation Date").
2. CONSULTING RELATIONSHIP.
(a) Commencing immediately after the Effective Separation Date and
continuing through September 3, 1996 (the "Consulting Period"), Consultant
shall serve as an independent consultant to the Company.
(b) During the Consulting Period, Consultant shall (i) assist the
Chief Financial Officer of the Company during the transition period until
Consultant's successor begins work at the Company; (ii) handle special
projects with respect to treasury matters identified by the Chief Financial
Officer of the Company; and (iii) provide such other reasonable services as
are agreed to by Consultant and the Company. Consultant will be
available during the Consulting Period for such reasonable hours on an
as needed basis as are mutually agreed upon by the parties. It is
expected that such consulting services may be full-time during certain
times during the Consulting Period.
-1-
<PAGE>
Consultant shall at all times be an independent contractor to the Company,
and nothing in this Agreement shall in any way be construed to constitute
Consultant as an agent, employee or representative of the Company.
(c) Consultant may terminate the consulting relationship at any
time before the end of the Consulting Period, for any or no reason, upon
written notice to the Company. The consulting relationship shall also
terminate automatically if Consultant becomes employed in a full time
capacity during the Consulting Period. Upon any termination, the Company
shall have no obligation to pay Monthly Consulting Period Fees or other
benefits hereunder accruing thereafter.
3. COMPENSATION.
(a) In consideration for Consultant's agreement to provide
consulting services during the Consulting Period as provided herein and
his faithful adherence to the terms and conditions of this Agreement, the
Company shall pay Consultant a Monthly Consulting Fee equal to one-twelfth of
the annual base salary that Consultant was earning as of the Effective
Separation Date. Such compensation shall be paid in monthly installments
(prorated in the case of December 1995, and adjusted if necessary if
Consultant has otherwise received salary payments from the Company in
respect of any portion of the Consulting Period) within ten business days
after receipt of Consultant's monthly invoice, but no earlier than the tenth
business day of each month.
(b) The attached Stock Option Personnel Summary sets forth the
details concerning all outstanding options to purchase Common Stock of
the Company held by Consultant. It is understood and agreed that
during the Consulting Period, such options shall remain outstanding and
continue vesting at their normal rate.
(c) CONSULTANT IS ADVISED THAT AS A RESULT OF THE CONVERSION OF
HIS STATUS FROM EMPLOYEE TO CONSULTANT, ANY ISOS (INCENTIVE STOCK OPTIONS)
WILL BECOME NON-STATUTORY OPTIONS (NSOS), TO THE EXTENT THEY ARE NOT
EXERCISED WITHIN NINETY (90) DAYS AFTER THE DATE CONSULTANT CEASES TO BE AN
EMPLOYEE. If Consultant's consulting relationship terminates for any
reason, then all vesting shall immediately stop, and Consultant's or his
estate's ability to exercise such options shall be governed by the terms
of each of the respective option agreements therefor.
(d) The Company agrees that the computer, car phone and
facsimile machine located in Consultant's residence shall become the property
of Consultant upon the execution of this Agreement, but any ongoing fees,
expenses, etc., related to such equipment are the sole responsibility of
Consultant.
(e) During the Consulting Period, the Company shall provide to
Consultant medical, dental and vision continuation benefits through COBRA
and the Company shall pay the COBRA premiums only during the Consulting
Period or until the earlier termination of the Consulting Period as
specified herein.
-2-
<PAGE>
(f) The Company will directly pay or reimburse Consultant, upon
receipt of the appropriate verification, for (i) out-of-pocket expenses
incurred in connection with services performed by Consultant, to the
extent provided for in the Company's expense reimbursement guidelines, and
(ii) 1995 individual annual tax preparation services, to the extent
provided for in the Company's Executive Perquisite guidelines.
(g) Other than the provisions set forth herein, Consultant has
no expectation of, and shall make no other claims for payment or any other
compensation or benefits from SGI.
4. CONFIDENTIAL INFORMATION. Consultant shall continue to
maintain the confidentiality of all confidential and proprietary information
of the Company pursuant to, and shall continue to comply with all
terms and conditions of, the Proprietary Information and Invention
Agreement between Consultant and the Company (the "Confidentiality
Agreement"). Such obligations shall survive any termination of Consultant's
consulting relationship.
5. TAX CONSEQUENCES. Consultant acknowledges that he is obligated to
report as income all compensation received by Consultant pursuant to this
Agreement, and Consultant acknowledges his obligation to pay all federal,
state or local income, self-employment or other taxes relating to such
compensation or any amounts realized upon exercise of Consultant's options,
and any penalties or assessments thereon. Except as referred to in section
3(c), the Company gives no opinions and makes no representations with
respect to the potential or actual tax consequences or liabilities, if any,
associated with the payment of any amounts to Consultant under the terms
of this Agreement or the continued vesting of Consultant's options.
Consultant assumes sole responsibility for any tax liability that results
from the payment of any compensation described herein.
6. NONSOLICITATION AGREEMENT.
During the Consulting Period, Consultant agrees that he shall not
directly or indirectly recruit or solicit any current employees of the
Company to leave the employ of the Company.
7. TERM AND TERMINATION.
(a) Consultant's consulting relationship may be terminated by the
Company at any time if Consultant (i) willfully fails to perform the
consulting services as reasonably requested by the Company, (ii) violates
any material provision of this Agreement, (iii) commits any act of moral
turpitude in connection with his performance of the consulting services, or
(iv) otherwise commits any willful, egregious or malicious act injurious to
the Company, its business or reputation. The Company shall give thirty
(30) days notice to Consultant of the termination of the Agreement
pursuant to this paragraph and shall provide Consultant with a reasonable
time within said thirty (30) day
-3-
<PAGE>
period in which to respond to and cure the alleged problem. Any
such termination by the Company shall be in addition to and shall not
affect any other remedies to which the Company may be entitled as a result
of the event leading to such termination.
(c) Notwithstanding the expiration and/or termination of this
Agreement, the provisions of Sections 4 (Confidentiality) and 8 (General)
by their terms, shall survive the expiration and/or termination of this
Agreement.
8. GENERAL.
(a) ENTIRE AGREEMENT. Except as set forth in the Separation
Agreement, this Agreement represents the entire agreement and
understanding between the Company and the Consultant concerning
Consultant's consulting relationship and the termination of Consultant's
employment relationship with the Company, and, except as specifically
provided herein, supersedes and replaces all prior agreements and
understandings, written and oral, concerning Consultant's relationship with
the Company and his compensation by the Company. Neither party has relied
upon any representations or statements made by the other party hereto that
are not specifically set forth in this Agreement.
(b) SETTLEMENT OF OUTSTANDING OBLIGATIONS. Consultant agrees that
this Agreement and the Separation Agreement represent settlement in full of
all outstanding obligations owed to him by the Company as a result of
his employment by the Company or his change of status, including without
limitation all obligations for current or past salary, bonus or severance
payments.
(c) NOTICES. Any notice or other communication required
hereunder shall be in writing and shall be delivered personally,
telegraphed, sent by facsimile transmission or sent by certified, registered
or express mail, postage prepaid. Any such notice shall be deemed given
when so delivered personally, telexed or sent by facsimile transmission
or, if mailed, two days after the date of deposit in the United States
mails as follows (or to such other address as to which one party may
advise the other in writing):
(i) if to the Company, to
Silicon Graphics, Inc.
2011 N. Shoreline Blvd.
Mountain View, California 94039
Attention: Janet Cook
with a copy to Legal Services; and
(ii) if to Consultant, to:
Tom Oswold
[street address omitted]
-4-
<PAGE>
(d) WAIVERS AND AMENDMENTS. This Agreement may be amended,
terminated or extended, or the terms hereof may be waived, only by a
written instrument signed by the parties. No delay in exercising any right
hereunder shall operate as a waiver thereof, nor shall any waiver or partial
exercise of a right preclude any other or further exercise thereof or any
other right.
(e) GOVERNING LAW. This Agreement is entered into and
governed by the laws of the State of California. In the event of any
dispute, claim, question, or disagreement arising out of or relating to this
Agreement or the breach thereof, the parties hereto agree to first use their
best efforts to settle such matters in an amicable manner. Initially, they
shall consult and negotiate with each other, in good faith and, recognizing
their mutual interests, attempt to reach a just and equitable solution
satisfactory to both parties. If they do not reach such resolution within
a period of sixty (60) days, then upon written notice by either party
to the other, any unresolved dispute, claim or differences shall be
finally settled by confidential arbitration administered by the
American Arbitration Association in accordance with the provisions of
its then applicable rules. Either party may, without inconsistency
with this Agreement, apply to any court having jurisdiction hereof and seek
injunctive relief so as to maintain the status quo until such time as the
arbitration award is rendered or the controversy is otherwise resolved. The
site of the arbitration shall be in the County of Santa Clara California.
Each party shall bear its own costs and expenses and an equal share
of the arbitrators' fees and administrative expenses of arbitration.
(f) ASSIGNMENT AND ASSUMPTION. This Agreement, and
Consultant's rights and obligations hereunder, are personal in nature
and accordingly may not be assigned by Consultant, except for an
assignment by Consultant of his rights to a corporation, trust,
partnership or other legal entity established by him for personal
financial or tax purposes. If Consultant's consulting relationship
terminates by reason of death, except for all stock option vesting
terminating, Consultant's estate's eligibility to any outstanding
consulting compensation payment provided hereunder, shall survive. This
Agreement and its rights, together with its obligations hereunder, shall be
assumed by the successors in interest of the Company in connection with
any sale, transfer or other disposition of all or substantially all of its
assets or business, whether by merger, consolidation or otherwise. Such
successor or assignee to the business or assets shall be bound by the terms
and provisions of this Agreement.
(g) COUNTERPARTS. This Agreement may be executed in
counterparts, and each counterpart shall have the same force and effect as
an original and shall constitute an effective, binding agreement on the
part of each of the parties.
9. VOLUNTARY EXECUTION OF AGREEMENT. This Agreement is executed
voluntarily and without any duress or undue influence on the part or on
behalf of the parties hereto. The parties acknowledge that:
-5-
<PAGE>
(a) They have carefully read this Agreement;
(b) They have been advised and represented in the preparation,
negotiation, review and execution of this Agreement by legal counsel of
their own choice;
(c) They understand the scope, terms, consequences and effects of
this Agreement; and
(d) They are fully aware of the legal and binding effect of this
Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
respective dates set forth below.
Dated: December 21, 1995.
/s/ Tom Oswold
----------------------------------
TOM OSWOLD
SILICON GRAPHICS, INC.
By: /s/ Stanley J. Meresman
----------------------------------
Stanley J. Meresman
Senior Vice President and
Chief Financial Officer
-6-
<PAGE>
EXHIBIT 10.35
ADDENDUM TO THE
SILICON GRAPHICS, INC.
NON-QUALIFIED DEFERRED COMPENSATION PLAN
This Addendum to the Silicon Graphics, Inc. Non-Qualified Deferred
Compensation Plan (the "Plan") sets forth rules under which non-employee
members of the Board of Directors of Silicon Graphics, Inc. ("Directors")
may elect to have amounts deferred under the Plan credited to the Stock
Credit Account. Amounts credited to the Stock Credit Account shall be
subject to the provisions of this Addendum notwithstanding any Plan
provisions to the contrary, and in the event of any inconsistency between
the terms of this Addendum and the terms of the Plan, the terms of this
Addendum shall control.
RECITALS
1. The Company currently maintains the Plan for the benefit of
certain employees of the Company and for the benefit of Directors.
2. The Company wishes to provide Directors who participate in the Plan
with the opportunity to have deferred amounts converted into hypothetical
shares of the Company's Common Stock.
3. This Addendum is intended to modify the Plan as necessary to
accommodate such hypothetical investment, provided that amounts credited to
the Stock Credit Account do not constitute derivative securities pursuant
to the exclusion set forth in Rule 16a-1(c)(3)(ii) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
NOW THEREFORE, the Company hereby adopts this Addendum and agrees that
the Plan shall be modified, as follows:
SECTION 1
DEFINITIONS
1. DEFINITIONS. Whenever the following words and phrases are used in
this Addendum, with the first letter capitalized, they shall have the
meanings specified below. Other capitalized terms shall have such meanings
as are given to them under the Plan.
<PAGE>
"ANNUAL ELECTION" means a Participating Director's irrevocable election
to have all or a portion of Compensation deferred under the Plan
credited to the Stock Credit Account in accordance with Section 2.2 of
this Addendum.
"COMMON STOCK" means the Common Stock of the Company.
"FAIR MARKET VALUE" means, as of any date, the average of the closing
prices for a share of Common Stock on each business day during the last
month of the previous calendar quarter as reported in THE WALL STREET JOURNAL
or a similar readily-available public source.
"ONE-TIME ELECTION" means a Participating Director's
irrevocable election to transfer all or a portion of his or her Plan
Account, valued as of March 31, 1996, into the Stock Credit Account
pursuant to Section 2.1 of this Addendum.
"PARTICIPATING DIRECTOR" means a Director who is a Participant in the
Plan.
"STOCK CREDIT ACCOUNT" means the bookkeeping account maintained by the
Company for the benefit of each Participating Director who makes a One-Time
Election or an Annual Election in accordance with Section 2 of this
Addendum.
SECTION 2
ALLOCATIONS TO STOCK CREDIT ACCOUNT
2.1 ONE-TIME ELECTION. If a Participating Director makes a One-Time
Election, the Participant's Stock Credit Account shall be credited, as of
April 1, 1996, with Common Stock credits equal to the number of shares of
Common Stock (including fractions of a share rounded to no more than
four decimal places) that could have been purchased with the amount of
deferred Compensation (together with predicted earnings) transferred from the
Participating Director's Plan Account pursuant to the Participating
Director's One-Time Election. The purchase price used to determine the
number of stock credits attributable to the Stock Credit Account shall be
the Fair Market Value of the Common Stock on January 1, 1996.
2.2 ANNUAL ELECTIONS. A Participant's Annual Election for a
calendar year shall be made, in such form as the Committee shall prescribe,
on or prior to the December 15 preceding such calendar year; provided,
however, that any individual who first becomes a Participating Director
during a calendar year may make an Annual Election within 30 days
following the date such individual first becomes a Director. If a
Participating Director makes an Annual Election, the Participating
Director's Stock Credit Account shall be credited, as of the first day
of each calendar quarter of the next calendar year, with a Common Stock
credit equal to the number of shares of Common Stock (including fractions
of a share rounded to no more than four decimal places) that could
-2-
<PAGE>
have been purchased with the amount of Compensation deferred for such
quarter. The purchase price used to determine the number of stock
credits attributable to the Stock Credit Account shall be the Fair Market
Value of the Common Stock on the first day of such calendar quarter.
2.3 ELECTION CHANGES. A Participating Director's One-Time Election and
Annual Elections shall be irrevocable, and no modifications to any such
Election may be made.
SECTION 3
DISTRIBUTIONS
DISTRIBUTION OF STOCK CREDIT ACCOUNT. Notwithstanding anything in the
Plan to the contrary, distributions of a Participating Director's Stock
Credit Account shall be made in cash, and shall be made in a single
lump-sum payment within 30 days after the Participating Director ceases to be
a Director; provided, however, that at least six months must elapse between
a Participating Director's One-Time Election and the date of distribution to
that Participating Director of amounts transferred to the Stock Credit
Account pursuant to such Election. The amount of the distribution of the
Stock Credit Account shall be determined by multiplying the number of
shares of Common Stock credited to the Participating Director's Stock
Credit Account and to be distributed by the Fair Market Value of the Common
Stock as of the cessation of services as a Director. Notwithstanding any Plan
provisions to the contrary, no distributions of or with respect to a
Participating Director's Stock Credit Account may be made while the
Participating Director is a Director.
SECTION 4
MISCELLANEOUS
Amounts credited to a Participating Director's Stock Credit Account
shall be represented by a bookkeeping entry only, and no funds or other
assets shall be held in Trust or otherwise set aside with respect to such
amounts.
-3-
<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 December 31, 1995, and is qualified in its entirety by reference to such
financial statements and the notes thereto.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 258380
<SECURITIES> 153438
<RECEIVABLES> 670762
<ALLOWANCES> 14878
<INVENTORY> 342823
<CURRENT-ASSETS> 1497280
<PP&E> 610453
<DEPRECIATION> 309340
<TOTAL-ASSETS> 2265487
<CURRENT-LIABILITIES> 544628
<BONDS> 236035
0
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</TABLE>
