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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the fiscal year ended June 30, 1996.
[ ] 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 Number)
2011 North Shoreline Boulevard, Mountain View, California 94043-1389
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 960-1980
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED:
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Common Stock, $0.001 par value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant, based upon the closing sale price of the Common
Stock on September 3, 1996 on the New York Stock Exchange as reported in The
Wall Street Journal, was approximately $3,726 million. Shares of voting stock
held by each executive officer and director and by each person who owns 5% or
more of any class of registrant's voting stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
AS OF SEPTEMBER 3, 1996, THE REGISTRANT HAD OUTSTANDING
173,158,255 SHARES OF COMMON STOCK.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference to this Form
10-K Report: (1) Proxy Statement for registrant's Annual Meeting of Stockholders
to be held October 30, 1996 (Part III), and (2) registrant's Annual Report to
Stockholders for the fiscal year ended June 30, 1996 (Parts I, II and IV).
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PART I
ITEM 1. BUSINESS
GENERAL
Silicon Graphics provides computing solutions that range from cost-
effective high performance desktop workstations to database and compute servers
to Cray Research supercomputers. The Company's systems enhance the productivity
of organizations engaged in technical, scientific, corporate and entertainment
applications across a wide range of industries.
Silicon Graphics' Cray Research subsidiary, acquired in fiscal 1996,
provides supercomputing tools and services to help solve customers' most
challenging problems. Another subsidiary, MIPS Technologies, designs the
industry-leading MIPS-Registered Trademark- RISC microprocessor. The Company
licenses its designs to semiconductor partners, who manufacture MIPS
microprocessors for use in the computer, embedded control and consumer
markets. The Company's Alias|Wavefront subsidiary provides innovative
animation and advanced modeling software for entertainment and industrial
applications.
CORE TECHNOLOGIES
The Company's strategy has been to identify and to invest heavily in the
key technologies that will enable it to set the pace of innovation. With
respect to these core elements, the Company's objective is to have the world's
leading technology and to be the first to deliver that technology in new
products. This approach has given Silicon Graphics a clear strategic focus and
has allowed it to obtain high productivity from its research and development
investment. With respect to the other, non-core elements required to develop
its products, the Company seeks to form strategic relationships with leading
suppliers worldwide.
The Company's core technologies are:
GRAPHICS Leading graphics performance has been a distinguishing
characteristic of Silicon Graphics' products since its inception. The
Company's systems use its proprietary dedicated graphics subsystems, which
not only provide strong graphics capability but also improve overall system
performance by freeing up the central microprocessor for other tasks. These
subsystems, such as the Onyx-TM- InfiniteReality-TM- and Indigo2 Impact-TM-
family of graphics subsystems, perform complex functions that allow the user
to render, display and manipulate realistic 3D objects and images in real
time. In addition, Silicon Graphics has developed the OpenGL-Registered
Trademark-, an application programming interface (API) that evolved from the
Company's IRIS GL-TM- API and has become an industry standard for developing
2D and 3D graphics applications. The OpenGL API is controlled by an
independent architecture review board that governs its direction and is
licensed to more than 30 leading companies, including all of the principal
UNIX-Registered Trademark- workstation manufacturers.
RISC MICROPROCESSORS The acquisition of MIPS Computer Systems in 1992 gave
the Company ownership of what it believes to be the industry's leading reduced
instruction set computing (RISC) technology, and the Company continues to devote
substantial resources to extending this technology. Since 1992, the Company and
its semiconductor partners have developed and introduced several new families of
MIPS RISC microprocessors optimized for use in products ranging from consumer
electronic products to high-performance supercomputers.
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SCALABLE COMPUTING The ability to build computer systems that use more
than one processor without major changes in applications software has been an
important factor in the performance of the Company's systems, particularly for
the technical and scientific markets. This multiple CPU design optimizes the
performance of a single application or maximizes system throughput when handling
many applications or users at one time. Silicon Graphics' substantial
investments in symmetric multiprocessing since the late 1980s have enabled it to
become the leading supplier of low and midrange supercomputers. The acquisition
of Cray Research in 1996 has enhanced the Company's capability to deliver large
multiprocessing systems involving hundreds of processors.
DIGITAL MEDIA Digital media integrates 3D graphics, animation and text
with video, audio and video conferencing capabilities. The Company believes
that digital media technology delivers a fundamentally better way to work and
communicate, especially in a networked computing environment enabling
cooperative work in real-time. Examples include "collaborative engineering",
where engineers in different countries share visual information and work
concurrently on 3D models and designs.
COMPUTER SYSTEM PRODUCTS
The Company's computer systems range from desktop workstations to servers
and supercomputers. All of these systems (other than the current Cray Research
product families) are designed around MIPS RISC microprocessors developed by MTI
and the IRIX-TM- operating system, which is the Company's enhanced version of
the System V Release 4 (SVR4) UNIX operating system. The IRIX operating system
includes the Indigo Magic-TM- user environment, a complete family of tools
including desktop utilities, digital media applications and collaborative tools.
Because of their common microprocessor and operating system technology, the
Company's systems generally are binary-compatible, meaning that software
applications run without modification across the entire product line.
DESKTOP SYSTEMS
Silicon Graphics desktop workstations combine key elements of workgroup
collaboration, interactive media and computing at a range of prices and
performance. Systems in this family can be used for tasks as diverse as
manipulating 3D models for computer-aided design (CAD), crunching numbers for
chemistry and geographic information systems applications, or functioning as a
tool for video editing, animation rendering, technical publishing, World Wide
Web and intranet authoring and serving, and software development.
INDY The Indy-TM- family of entry-level desktop workstation features
advanced 3D graphics and imaging, real-time video capability and interactive and
professional quality graphics, audio and imaging capabilities. The Indy has
significant appeal in markets such as mechanical CAD, chemistry, color
publishing, film and video, software development, education and media authoring.
INDIGO(2) The Indigo(2)-TM- family of workstations is designed to
provide the strongest graphics and computational capability available in the
desktop category, for applications such as 3D solids modeling, mechanical
CAD, digital prototyping, 3D visualization, animation, architectural design
and professional audio and video production.
WEBFORCE The WebFORCE-TM- family of computer systems, one of the first
product lines for creating and serving content for the World Wide Web,
integrates hardware and software for professional Web content authoring and
commercial Web serving, and includes Indy and Indigo(2) Impact desktop systems
as well as Challenge-Registered Trademark- servers.
HIGH END SYSTEMS
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ONYX This family of graphics supercomputers uses multiple microprocessors
and sophisticated graphics subsystems to handle the most demanding visual
computing tasks. Graphics subsystems available with the Onyx systems
include the InfiniteReality and Reality Engine(2)-TM- graphics subsystems. The
Onyx family is well-suited for applications such as computational chemistry, oil
and gas research, molecular modeling, global weather modeling, structural
dynamics, fluid dynamics, image processing, visual simulation, medical imaging
and chemistry, interactive entertainment and digital film and video production.
CHALLENGE The Challenge family of network resource servers includes a
range of capabilities, from single processor deskside systems used by small to
mid-size workgroups up to systems employing dozens of processors and capable of
supporting enterprise-wide distributed computing environments. Challenge
servers efficiently store, manage and move large amounts of audio, video and
graphics data as well as traditional databases and textual data for a wide range
of commercial and other applications. Key uses include data mining (to analyze
and organize database information), product data management for manufacturing,
and commercial transaction processing. Challenge servers also are used as media
servers, World Wide Web site servers and file servers.
POWER CHALLENGE The POWER Challenge-TM- family of supercomputing servers
combines low-cost, high-performance CMOS RISC technology, advanced parallel
system architecture and a simple shared-memory programming model. Key
applications in the technical and scientific markets include finite element
analysis (to determine the impact of elements like stress and temperature),
quantum chemistry calculation, seismic analysis and computational fluid
dynamics.
CRAY RESEARCH PRODUCTS
Cray Research, founded in 1973 and acquired by the Company in 1996, is the
world's leading supplier of advanced supercomputers. Cray Research has
continued as a separate division of Silicon Graphics focused on the high end of
the supercomputing market. Cray Research is working closely with the Silicon
Graphics advanced systems division to develop and introduce over the next
several years an integrated family of highly scalable systems that will
eventually cover the full range from affordable deskside servers to the world's
most powerful supercomputers.
The CRAY T90-TM- family of supercomputers deliver maximum performance for
vectorized supercomputing applications. The large memory bandwidth of T90
systems make them ideal for problems involving huge amounts of data, such as
weather and climate modeling and large-scale auto engineering.
The CRAY J90-TM- family uses low-cost CMOS technology to deliver affordable
supercomputing for vectorized applications like molecular modeling, ecosystem
simulation, medical imaging and vehicle dynamics simulation.
The CRAY T3E-TM- highly scalable supercomputing systems employ a massively
parallel architecture ranging from 16 to as many as 2,048 processors for a
broad range of scientific and industrial applications as diverse as petroleum
exploration, aerospace enginering and traffic system simulation.
MIPS RISC MICROPROCESSORS
All of the Company's system products (other than the current Cray Research
families) incorporate the MIPS RISC microprocessor architecture. The Company's
MIPS RISC microprocessor designs incorporate a general purpose architecture and
instruction set designed for high performance over a wide range of applications.
The MIPS RISC microprocessor designs make efficient use of instruction
"pipelining" techniques and proprietary compilers, allowing significant
performance gains to be realized by optimizing the tradeoff between compiler and
microprocessor functions. The versatility of the MIPS
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RISC architecture makes it suitable for computer applications from entry-level
desktop systems up to supercomputers.
MIPS RISC microprocessors are also used in a wide variety of noncomputer
applications, including disk drives, printers and copiers and, increasingly,
consumer electronics products. Silicon Graphics computers represent only a
small percentage of the worldwide consumption of MIPS RISC microprocessors.
The Company does not manufacture or sell MIPS RISC microprocessors and
related devices. It licenses its designs to "semiconductor partners" who
manufacture and sell the parts. The Company's current licensees are:
Integrated Device Technology, Inc.; LSI Logic Corporation; NEC Corporation; NKK
Corporation; Philips Semiconductor; and Toshiba Corporation. Each semiconductor
partner paid an initial license fee at the beginning of the license period and
pays unit royalties based upon sales.
APPLICATIONS SOFTWARE
Because the Company has historically developed only a very limited set of
applications software, its customers must either develop or license from a third
party the software necessary to address their needs. The Company maintains
active programs to encourage independent software development for its systems,
including training, technology support and cooperative marketing. The Company
believes that there currently are over 2,000 registered application software
programs offered for use on its systems.
The Company's Alias|Wavefront division supplies modeling and animation
application software used by creative professionals in the entertainment,
industrial design and visualization and graphic design markets. Its industry-
leading products include Alias PowerAnimator-TM-, Alias Studio-TM-, and
Wavefront Composer-TM-. Alias|Wavefront has also announced the next generation
Maya-TM- product architecture, which will be incorporated in products beginning
in fiscal 1997. Alias|Wavefront is based in Toronto, Canada with sales offices
across North America, Europe and Asia and worldwide distribution.
In fiscal 1996 the Company introduced the Cosmo-TM- family of content
creation, browsing and management tools for the World Wide Web and intranet
markets. The Cosmo products are intended to facilitate the creation of media-
rich three dimensional environments and especially to take advantage of the
power of the industry standard Virtual Reality Modeling Language (VRML)
developed by Silicon Graphics.
MARKETING, SALES AND DISTRIBUTION
The Company sells its products through its own direct sales force and
through several indirect channels. In fiscal 1996 direct sales accounted for
approximately half of the Company's product revenues. The direct sales and
support organization operates throughout the United States and in all
significant international markets. The Company serves smaller international
markets through distributors.
The principal indirect channels through which the Company operates are the
following:
_ VARS, or value added resellers, are software companies that develop
or customize their proprietary software specifically for use with the
special graphics hardware of the Company's workstations. VARs
purchase workstations from the Company or its North American
distributor, incorporate their applications software and resell the
systems to end-users.
_ VADS, or value added dealers, are typically direct sales
organizations that sell primarily into a single vertical market and
incorporate appropriate specialized third-party software with the
Company's hardware for sale to their customers.
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_ OEM ("original equipment manufacturer") customers generally are
computer systems vendors that customize applications software for use
on the Company's workstations and sell turnkey systems under the OEM's
product name. OEMs also provide independent marketing, service and
support programs to their customers. The Company's principal OEMs
include Tandem Computers Incorporated and Siemens Nixdorf AG.
_ SYSTEMS INTEGRATORS include Silicon Graphics systems in much larger
systems customized for use by the federal government and large
commercial clients.
Information with respect to international operations and export sales may
be found on page 60 of the 1996 Annual Report to Stockholders, which is
incorporated herein by reference. See also "Risks That Affect Our Business"
below. Although no customer accounted for 10% or more of the Company's total
revenues for fiscal 1996, 1995 or 1994, a significant reduction or delay in
sales to major customers could adversely affect the Company's operating results.
CUSTOMER SERVICE AND SUPPORT
The Company believes that the quality and reliability of its system
products and the ongoing support of such products are important elements of its
competitive strategy. The Company's customer service organization includes
field service engineers, field product and applications specialists, product
support engineers, training specialists and administrative support personnel.
In addition, the Company provides customer education through regularly scheduled
courses in system software administration, applications programming and hardware
maintenance. The Company provides local customer support from its regional
sales and service offices located in North America, Western Europe and the
Pacific Rim, with spare parts inventory stored at each location. International
distributors provide training and support for products sold by them.
The Company typically provides a standard "return to factory" hardware
warranty against defects in materials and workmanship for periods of up to
one year.
RESEARCH AND DEVELOPMENT
The Company's research and development program is directed principally
toward maintaining and enhancing the Company's competitive position through
incorporating the latest advances in microprocessor, hardware, software and
networking technologies. This effort is focused specifically on developing and
enhancing its computing architectures, MIPS RISC microprocessors, graphics
subsystems, VLSI technology, compiler software, operating system, applications
software and development tools. Simultaneously, the Company seeks to develop
new ways in which to increase product reliability, reduce manufacturing costs
and improve product development lead times.
During fiscal 1996, 1995 and 1994, the Company spent approximately $353
million, $248 million and $191 million, respectively, on research and
development. Those amounts represented 12.1%, 11.1% and 12.4%, respectively, of
revenues.
MANUFACTURING
The Company's manufacturing operations primarily involve assembling high
level subassemblies and systems and testing major purchased subassemblies. All
products are subjected to substantial environmental stress and electronic
testing prior to shipment to customers. The Company primarily manufactures and
ships its products from its main facility in Mountain View, California and the
Cray
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Research facility in Chippewa Falls, Wisconsin. The Company also has a European
manufacturing and support center near Neuchatel, Switzerland.
The Company continually evaluates the allocation of manufacturing
activities among the Company's own operations and those of suppliers and
subcontractors. This allocation may be affected by fluctuations in the volume
of business, geopolitical, economic and technological developments and other
factors.
The Company attempts to utilize standard parts and components available
from multiple vendors rather than to integrate its manufacturing operations
vertically. The Company believes that there are a number of competent vendors
for most of the parts and components used in its system products. In certain
circumstances, despite the availability of multiple sources, the Company may
select a single source or a very limited number of sources in order to maintain
quality or price control or to develop a more strategic relationship with the
supplier.
Reliance on single or limited source vendors involves several risks,
including the possibility of a shortage of certain key components that meet the
Company's product specifications and reduced control over delivery schedules,
manufacturing yields, quality and costs. These issues tend to be especially
acute in the early or "ramp-up" stage as the Company attempts to reach volume
production of new products. In particular, the Company is dependent on a
limited number of semiconductor manufacturers with state of the art fabrication
facilities. During fiscal 1996, for example, the Company was dependent on a
single supplier, NEC, for the great majority of its requirements of MIPS R10000
microprocessors, a dependency that will continue through at least the first half
of fiscal 1997 until a second source begins volume production. Other components
for which the Company currently does not have multiple sources include certain
application-specific integrated circuits ("ASICs"). These are currently
obtained from IBM, LSI Logic, Motorola, VLSI Technology and Toshiba. Components
available from limited sources include floating point coprocessors and certain
memory circuits.
The Company also has single sources for certain peripherals, communications
controllers and power supplies, and the monitors and plastic cabinets used
across the Company's system products. The Company believes that, in most of
these cases, alternative sources of supply could be developed over a period of
time. However, a reduction or interruption in supply or a significant increase
in the price of one or more single or limited source components would, at least
in the short term, adversely affect the Company's operating results.
Many of the Company's suppliers are located outside the United States,
especially in Japan. The prices of parts from these suppliers have been and may
be affected significantly by such factors as protectionist measures and changes
in currency exchange rates between the United States and other countries. In
addition, changes in the availability of certain memory chips (DRAMs, SRAMs and
VRAMs) have caused, and in the future may cause, significant changes in their
prices.
COMPETITION
The computer industry is highly competitive and is characterized by rapid
technological advances in both hardware and software development. These
advances result in frequent new product introductions, short product life cycles
and increased new product capabilities, typically representing significant
price/performance improvements. The principal competitive factors in the
Company's market are product features, price/performance, networking
capabilities, product quality and reliability, ease of use, capabilities of the
system software, availability of applications software, customer support,
product availability, corporate reputation and price. The strong competition
faced throughout the Company's product line can result in significant
discounting from list price.
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The Company's principal competition has historically come from other
workstation and computer system manufacturers and, to a lesser extent, from
graphics subsystem and terminal vendors and graphics integrated circuit
manufacturers. The principal workstation and computer manufacturers that
compete in the Company's markets are Digital Equipment, Hewlett Packard, IBM and
Sun Microsystems. The Company is facing increasing competition at the lowest
end of the workstation market from systems based on personal computer
technologies such as the Windows NT operating system, Intel microprocessors and
graphics acceleration cards.
In the high end of the supercomputer market, the Company faces competition
from IBM as well as from NEC, Hitachi and Fujitsu. In the applications software
market and certain other emerging markets the Company's principal competitor is
Microsoft.
The Company's MIPS RISC microprocessor architecture and technology compete
directly with microprocessor products offered by manufacturers of other
microprocessor designs, in particular those offered by IBM, Digital, HP, Intel,
Motorola and Sun. Although the Company believes its RISC architecture offers
advantages over these other designs, some of these architectures have a larger
installed base and wider availability of application software, which may
adversely affect the adoption of the Company's RISC architecture.
RISKS THAT AFFECT OUR BUSINESS
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. Other than in the Cray Research business, the Company has
short delivery cycles and as a result generally 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 revenue 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. The timing of customer acceptance of large Cray systems may also
have a significant effect on periodic operating results. Margins are heavily
influenced by mix considerations, including geographical mix, the mix of service
and non-recurring engineering revenue, the mix of high-end and desktop products
and application software, as well as 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. Sales of Cray Research systems generally reflect
sequential growth from quarter-to-quarter through the calendar year.
The Company's stock price, like that of other technology companies, is subject
to significant volatility. If revenue 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.
PRODUCT DEVELOPMENT AND INTRODUCTION The Company's continued success depends on
its ability to develop and rapidly bring to volume production highly
differentiated, technologically complex and innovative products. The Company
plans to introduce several new product families in the first half of fiscal
1997, including products that will replace virtually the entire current product
line. A number of risks are inherent in this process.
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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 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 often 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. In the case of the Cray Research product line, new products
are generally announced well in advance of availability, due to the longer
sales cycle for these systems. The Company's results could be adversely
affected by such factors as development delays, quality or yield problems
experienced by suppliers, variations in product costs, and delays in customer
purchases of existing products in anticipation of the introduction of new
products. On September 25, 1996 the Company announced that its revenues for
the first quarter of fiscal 1997 would be only slightly higher than for the
same period in the prior year and that its net income for that period would
be materially below expectations. The results for the quarter are
attributable, at least in part, to customer anticipation of new high-end and
desktop products that the Company plans to introduce in October 1996.
COMPETITION The computer industry is highly competitive, with rapid
technological advances and constantly improving price/performance. As most of
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 and Cray's traditional
supercomputing competitors, but also from new sources including the personal
computer industry. In particular, during fiscal 1996 the Company experienced
increasing competition at the lowest end of its business from workstations based
upon the Intel Pentium microprocessor, Microsoft's Windows NT operating system,
and a variety of 3-D graphics acceleration cards. 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.
VOLUME STRATEGY The Company believes that its long-term success is dependent
on achieving substantial increases in unit volumes over the next several
years. The Company has created a new business unit, the Silicon Desktop
Group, with the charter of implementing a comprehensive strategy for
increasing volumes of desktop products, including new product development,
greater emphasis on lower-cost manufacturing and the strengthening of
indirect distribution channels. Risks associated with this strategy include:
- increased direct competition with the personal computer industry,
portions of which have been seeking to move upmarket to compete with
low-end workstations (see "Competition");
- the impact of lower gross margins, to the extent not mitigated by
savings in distribution costs and other operating expenses; and
- the extent to which the Company is able to adapt its manufacturing and
service philosophies to the demands of higher volumes and lower costs.
ACQUISITION OF CRAY RESEARCH The acquisition of Cray Research will require,
among other things, integration of the Cray Research organization, business
infrastructure and product offerings with those of the Company in a way that
enhances the performance of the combined business. The challenges posed by the
acquisition include the management of a business with a different approach to
product design, manufacturing and sales and service, the development of a
consolidated product road map from a number of incompatible products and the
integration of several geographically separated research and development
centers. The success of this process will be significantly influenced by the
Company's ability to retain key management, sales, and research and development
personnel. The integration process will
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also require the dedication of management resources, which may temporarily
distract attention from the day-to-day business of the Company.
There are several other aspects of Cray Research's business that are different
from the Company's current business and may affect the operations of the
combined business:
- Government agencies and research institutions represent a major
customer group for Cray Research products. As a result of the
acquisition, a greater percentage of the Company's revenue will be
derived from sales to such customers, whose purchasing decisions may
be adversely affected by reductions or changes in government spending.
- International sales of Cray Research's products are more likely to be
subject to export licensing constraints than international sales of
the Company's current products.
- Cray Research derives most of its revenue from the sale of a small
number of large systems, which generally have a longer sales cycle.
Revenue for these systems is recognized at customer acceptance rather
than upon shipment. Cray Research's results for any period are
significantly influenced by the number and mix of systems accepted and
whether a system is sold or leased. Changes affecting even a small
number of systems can have significant financial implications.
- At June 30, 1996, the combined Company's backlog was $572 million,
representing orders scheduled to ship during fiscal 1997. This
backlog primarily consists of orders for Cray Research T90 and T3E
systems, which only recently had their first commercial shipments.
IMPACT OF GOVERNMENT CUSTOMERS A significant portion of the Company's revenue
is derived from sales to the U.S. government, either directly by the Company or
through system integrators and other resellers. This proportion will increase
as the result of the Cray Research acquisition. Sales to the government present
risks in addition to those involved in sales to commercial customers, including
potential disruptions due to appropriation and spending patterns and the
government's reservation of the right to cancel contracts for its convenience.
In the second quarter of fiscal 1996, for example, the Company's results were
adversely affected by purchasing slowdowns related to the federal government
budget impasse.
GLOBAL FINANCIAL MARKET RISKS The Company's business and financial results are
affected by fluctuations in world financial markets, including foreign currency
exchange rates and interest rates. The Company's hedging policy attempts to
mitigate some of these risks, based on management's best judgment of the
appropriate tradeoffs among risk, opportunity and expense. The Company
regularly reviews its overall hedging policies, and it continually monitors its
hedging activities to ensure that they are consistent with policy and
appropriate and effective in light of changing market conditions. Management
may as part of this review determine at any time to change its hedging policies.
However, it is important to recognize that the Company's risk management
activities are not comprehensive, and that there can be no assurance that these
programs will offset more than a portion of the adverse financial impact
resulting from unfavorable movements in either foreign exchange or interest
rates.
Because more than half of the Company's revenue is from sales outside the United
States, and many key components are produced outside the United States, the
Company's results can be significantly affected by changes in foreign currency
exchange rates or weak economic conditions in the foreign markets in which the
Company distributes its products. The Company is primarily exposed to changes
in exchange rates on the Swiss franc, British pound, Japanese yen, German mark
and French franc. When the U.S. dollar strengthens against these currencies,
the value (as expressed in U.S. dollars) of non-U.S. dollar-based sales and
costs decrease. The opposite happens when the U.S. dollar weakens. Because
the Company is a net receiver of currencies other than the U.S. dollar, it
benefits from a weaker dollar and is adversely affected by a stronger dollar
relative to major currencies worldwide. Accordingly, a strengthening of the
U.S. dollar tends to affect negatively the Company's revenue and gross margins.
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To mitigate the short-term impact of fluctuating currency exchange rates on the
Company's non-U.S. dollar-based sales and intercompany receivables, the Company
regularly hedges certain of these net exposures. Historically, the Company has
not sought to hedge future revenues. However, as a result of the Cray Research
acquisition, the Company is continuing Cray Research's policy of entering into
foreign exchange forward contracts that hedge firmly committed Cray Research
backlog. Currently, these hedges extend through December 1999. Beginning in
fiscal 1997, the Company also expects to hedge a portion of anticipated
quarterly revenues from international operations. The Company utilizes foreign
currency forward contracts to hedge non-U.S. dollar intercompany receivables.
The Company has generally not hedged capital expenditures, investments in
subsidiaries or inventory purchases. However, because the Company procures
inventory and its international operations incur expenses in local currencies,
the financial effects of fluctuations in the U.S. dollar values of non-U.S.
dollar-based transactions frequently mitigate or tend to offset each other on a
consolidated basis.
The Company's interest income and expense is most sensitive to fluctuations in
the general level of U.S. interest rates. In this regard, changes in U.S.
interest rates affect the interest earned on the Company's cash equivalents and
marketable investments as well as interest paid on its borrowings. To mitigate
the impact of fluctuations in U.S. interest rates, the Company has entered into
an interest rate swap transaction intended to better match the Company's fixed
rate interest expense on its zero coupon convertible subordinated debentures
with the floating-rate interest income on its cash equivalents and marketable
investments.
OTHER RISKS OF INTERNATIONAL OPERATIONS The Company's results could also be
negatively affected by such factors as changes in trade protection measures,
longer accounts receivable collection patterns, or natural disasters. 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.
MANAGEMENT INFORMATION SYSTEMS The Company replaced its United States
information management system in the third quarter of fiscal 1996 with a
comprehensive system used to manage the entire revenue cycle, including order
administration, billing and collection, as well as manufacturing and finance.
The Company expects that the system will provide operational efficiencies and
support future growth. However, as the system has been in operation for a
relatively short period, there remains a risk of functional or performance
difficulties, particularly if the system is extended to the Company's
international operations and to the Cray Research business.
DEVELOPMENT AND ACCEPTANCE OF MIPS RISC ARCHITECTURE Most 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.
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.
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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 most of its
research and development operations and 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.
PROPRIETARY RIGHTS AND LICENSES
The Company has been granted or has applications pending for a significant
number of U.S. patents, and will continue to seek patent coverage for its
inventions in both the United States and foreign countries. The Company also
has applied for and holds various trademark registrations in the United States
and in selected foreign countries. The Company will continue to seek protection
for its inventions, trademarks, maskworks and copyrights where appropriate.
As is customary in its industry, the Company licenses from third parties a
wide range of software for its internal use and for the use of its customers.
The Company licenses the UNIX operating system on a non-exclusive basis from
Novell, Inc., and sublicenses it to its customers.
The Company's ability to compete may be affected by its ability to protect
proprietary information and to obtain necessary licenses on commercially
reasonable terms. The extent to which U.S. and international intellectual
property laws protect the Company's products, and the enforceability of end-user
license agreements, have not been fully determined, and the computer industry
has seen a substantial increase in litigation with respect to intellectual
property matters. Such litigation or changes in the interpretation of
intellectual property laws could expand or reduce the extent to which the
Company or its competitors are able to protect their intellectual property or
require changes in the design of products which could have an adverse impact on
the Company. There can be no assurance that the Company will not be made a
party to litigation regarding intellectual property matters in the future. See
"Legal Proceedings."
EMPLOYEES
As of June 30, 1996, the Company had approximately 10,485 full-time
employees. The Company's future success will depend, in part, on its ability to
continue to attract, retain and motivate highly qualified technical, marketing
and management personnel, who are in great demand. The Company has never had a
work stoppage, and no employees are represented by a labor union. The Company
believes that its employee relations are good.
CORPORATE DATA
The Company was originally incorporated as a California corporation in
November 1981, and reincorporated as a Delaware corporation in January 1990.
The Company acquired MIPS Computer Systems, Inc. through a merger in June 1992,
and acquired Alias Research Inc. and Wavefront Technologies, Inc. through
mergers in June 1995. The Company recently acquired Cray Research, Inc.
through a merger effective June 30, 1996.
ITEM 2. PROPERTIES
The Company believes that, while it currently has or is developing
sufficient facilities to conduct its operations during fiscal 1997, it will
continue to acquire both leased and owned facilities throughout the world as its
business requires. The Company's corporate offices and its primary research and
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development and manufacturing operations are located in Mountain View,
California. The Company leases twelve adjacent buildings comprising a total of
approximately 726,500 square feet under leases terminating during 2000 through
2005. The Company owns 7.5 acres near its Mountain View headquarters, on which
a 112,000 square foot headquarters building for its sales organization was
completed in fiscal 1995. The Company also leases sixteen other buildings near
its Mountain View headquarters, comprising approximately 736,000 square feet.
The Company also has leased 22 acres of land near its other facilities in
Mountain View on which a four-building, 500,000 square foot general office
complex is being constructed to be leased to the Company for occupancy in fiscal
1997.
As a result of the acquisition of Cray Research, the Company also owns
manufacturing, research and development and service facilities comprising
approximately 747,000 square feet in Chippewa Falls, Wisconsin and
manufacturing, research and development, sales and administrative facilities
comprising 479,300 square feet in Eagan, Minnesota. The Company has vacated
and intends to sell a general and administrative and sales office comprising
approximately 118,900 square feet in Mendota Heights, Minnesota. The
Company's computing services operation leases approximately 100,100 square
feet in Minneapolis.
The Company's European manufacturing and support center near Neuchatel,
Switzerland is located in a facility owned by the Company, consisting of
approximately 75,000 square feet An additional facility comprised of
approximately 60,000 square feet is under construction and due for occupancy in
January 1997.
The Company also leases sales, service and administrative offices
worldwide.
ITEM 3. LEGAL PROCEEDINGS
The Company is defending the lawsuits described below. The Company
believes that it has good defenses to the claims in each of these lawsuits and
is defending each of them vigorously.
The Company is defending a securities class action lawsuit and a derivative
suit filed in U.S. District Court for the Northern District of California in
January and March, 1996. These suits allege that the Company and certain of its
officers and directors made material misrepresentations and omissions during the
period from October to December 1995. On September 25, 1996, the District Court
dismissed the securities class action, while allowing plaintiffs one opportunity
to amend their complaint, and dismissed the derivative action with prejudice.
The Company also is defending securities class action lawsuits involving
MIPS Computers Systems, Inc., which the Company acquired in June 1992, and Alias
Research Inc., which the Company acquired in June 1995. The MIPS case, which
was filed in the U.S. District Court for the Northern District of California in
1992, alleges that MIPS and certain of its officers and directors made material
misrepresentations and omissions during the period from January to October of
1991. On September 11, 1996, the United States Court of Appeals for the Ninth
Circuit reversed the summary judgment granted in defendants' favor in June 1994.
The Company intends to seek rehearing of the Court of Appeals' decision. The
Alias case, which was filed in the U.S. District Court for the District of
Connecticut in 1991, alleges that Alias and certain of its officers and
directors made material misrepresentations and omissions during the period from
May 1991 to April 1992. Alias' motion to dismiss the amended complaint is
pending.
The Company also is defending a patent infringement lawsuit filed by Martin
Marietta Corp. in the U.S. District Court for the Middle District of Florida in
September 1995. The Company has filed a counterclaim seeking to invalidate the
principal patent at issue in the lawsuit, 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.
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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. There can be no assurance in any given case
that a license will be available on terms the Company considers reasonable,
or that litigation will not ensue. Management is not aware of any pending
disputes, including those described above, that would be likely to have a
material adverse effect on the Company's financial condition, results of
operations or liquidity. However, management's evaluation of the likely
impact of these pending disputes could change in the future.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of September 20,
1996, are as follows:
<TABLE>
<CAPTION>
Executive
Officer
Name Age Position and Principal Occupation Since
---- --- --------------------------------- -----
<S> <C> <C> <C>
Edward R. McCracken 52 Chairman, Chief Executive Officer and Director 1984
Robert R. Bishop 53 Chairman, Silicon Graphics World Trade Corporation 1991
and Director, Silicon Graphics, Inc.
Gary L. Lauer 43 Executive Vice President, Worldwide Sales and Marketing, 1988
Silicon Graphics, Inc. and President, Silicon Graphics
World Trade Corporation
Javaid Aziz 44 Senior Vice President, European Field Operations 1995
Forest Baskett 53 Senior Vice President, Research and Development and 1986
Chief Technology Officer
Ross A. Bott 45 Senior Vice President, Enterprise Technologies 1996
John E. Bourgoin 50 President, MIPS Technologies, Inc. and Senior Vice 1996
President, Silicon Graphics, Inc.
Kenneth L. Coleman 53 Senior Vice President, Administration 1987
Robert H. Ewald 48 President, Cray Research, Inc. and Senior Vice President, 1996
Silicon Graphics, Inc.
Stephen Goggiano 43 Senior Vice President, Manufacturing and Customer Service 1989
William M. Kelly 43 Senior Vice President, Silicon Interactive Group, General 1994
Counsel and Secretary
Stanley J. Meresman 49 Senior Vice President, Finance and Chief Financial Officer 1989
David E. Orton 40 Senior Vice President, Scalable Systems Group 1996
Michael Ramsay 46 Senior Vice President, Silicon Desktop Group 1987
Teruyasu Sekimoto 57 Senior Vice President, East Asian Field Operations 1995
Dennis P. McBride 44 Vice President, Controller 1988
Robert W. Saltmarsh 46 Vice President, Treasurer 1996
</TABLE>
Executive officers of the Company are elected annually by the Board of
Directors and serve at the Board's discretion. There are no family
relationships among any directors, nominees for director or executive officers
of the Company.
Except as set forth below, all of the officers have been associated with
the Company in their present positions for more than five years.
Mr. McCracken became Chairman of the Company in 1994.
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Mr. Bishop, who has been an officer of the Company since 1991 and President
of Silicon Graphics World Trade Corporation since 1986, was named Chairman of
the Board of Silicon Graphics World Trade Corporation in July of 1995.
Mr. Lauer joined the Company in 1988 as Vice President, North American
Marketing, became Vice President, North American Field Operations in 1989, was
named Senior Vice President, North American Field Operations in 1991 and became
Executive Vice President, Silicon Graphics, Inc. and President of Silicon
Graphics World Trade Corporation in 1995.
Mr. Aziz joined the Company in 1995 as Senior Vice President, Europe.
Prior to joining the Company, Mr. Aziz spent 20 years at IBM Corporation in
technical, marketing and management positions, most recently as chief executive
officer of the United Kingdom operations.
Mr. Bott joined the Company in 1993 as Vice President/General Manager of
the Company's Network Systems Division. In 1996, he was named Senior Vice
President, Enterprise Technologies. Prior to joining the Company, Mr. Bott was
Vice President of Advanced Development and chief technical officer at Pyramid
Technology.
John E. Bourgoin joined the Company in 1996 as President of MIPS
Technologies, Inc. and Senior Vice President of Silicon Graphics, Inc. Prior to
joining the Company, Mr. Bourgoin served as Vice President, Computation Products
Group at Advanced Micro Devices, Inc.
Robert H. Ewald joined the Company in 1996 as a result of the Company's
acquisition of Cray Research, Inc. and now serves as President of Cray Research
and Senior Vice President of Silicon Graphics, Inc. Prior to the acquisition,
Mr. Ewald had been President and Chief Operating Officer of Cray since late
1994. Prior to that, he was Chief Operating Officer of Cray's Supercomputer
Operations and in 1993 served as Executive Vice President and General Manager,
Supercomputer Operations. During 1991 through 1993, Mr. Ewald was Cray's
Executive Vice President, Development.
Mr. Goggiano joined the Company in 1989 as Director of Operations, Advanced
Systems Division. In 1990, Mr. Goggiano was named Vice President/General
Manager, Operations and, in 1993, he was named Senior Vice President. Prior to
joining the Company, Mr. Goggiano was Vice President, Manufacturing for Altos
Computer Systems.
Mr. Kelly joined the Company in 1994 as Vice President, Business
Development, General Counsel and Secretary. In 1996, Mr. Kelly was named
Senior Vice President, Silicon Interactive Group and remains General Counsel
and Secretary of the Company. Prior to joining the Company, Mr. Kelly had
practiced law since 1978 with the firm of Shearman & Sterling, most recently
as co-managing partner of that firm's San Francisco office.
In 1990, Mr. Orton became Vice President/General Manager of the Advanced
Systems Division and in 1996 was named Senior Vice President, Scalable Systems
Group.
Mr. Ramsay was named Vice President/General Manager, Entry Systems Division
in 1988, and became Senior Vice President/General Manager, Entry Systems
Division in 1991. In 1992, Mr. Ramsay was named Senior Vice President, Visual
Systems Group, in 1994, became President of Silicon Studio, Inc. and in 1996 was
named Senior Vice President, Silicon Desktop Group.
Mr. Saltmarsh joined the Company in 1996 as Vice President, Treasurer. In
1994 and 1995, Mr. Saltmarsh served as Chief Financial Officer at Radius, Inc.
and prior to that was Vice President of Finance at Apple Computer, Inc.
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PART II
With the exception of the information specifically incorporated by
reference from the Company's 1996 Annual Report to Stockholders (the "1996
Annual Report") in Parts I, II and IV of this Form 10-K, the 1996 Annual Report
is not to be deemed filed as part of this Report.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this Item is incorporated by reference to the
section entitled "Price Range of Common Stock" on page 35 of the Company's 1996
Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to the
section entitled "Selected Consolidated Financial Data" on page 34 of the
Company's 1996 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item is incorporated by reference to the
section entitled "Management's Discussion and Analysis" on pages 36 through 43
of the Company's 1996 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to the
consolidated financial statements and notes thereto and to the section entitled
"Quarterly Data" on pages 35 and 44 through 61 of the Company's 1996 Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE>
PART III
Certain information required by Part III is omitted from this Report in
that the Company has filed its definitive proxy statement pursuant to Regulation
14A (the "1996 Proxy Statement") not later than 120 days after the end of the
fiscal year covered by this Report, and certain information included therein is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to pages 3 and 4 of the 1996 Proxy Statement under the
heading "Proposal No. 1 -- Election of Directors - Directors and Nominees for
Director."
The information concerning executive officers and family relationships
required by this Item is incorporated by reference to the section in Part I
hereof entitled "Executive Officers of the Registrant."
The information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, required by this Item is incorporated by
reference to page 9 of the 1996 Proxy Statement under the heading "Executive
Officer Compensation - Compliance with Section 16(a) of the Exchange Act."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to page
5 under the headings "Proposal No. 1 - Election of Directors - Compensation
Committee Interlocks and Insider Participation" and " - Director Compensation",
pages 7 through 9 under the headings "Executive Officer Compensation - Summary
Compensation Table", " - Option Grants in Fiscal 1996" and " - Option Exercises
in Fiscal Year 1996 and Fiscal Year-End Option Values", pages 10 and 11 under
the heading "Report of the Compensation and Human Resources Committee of the
Board of Directors", and page 12 under the heading "Company Stock Price
Performance Graph" of the 1996 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to pages
1 and 2 of the 1996 Proxy Statement under the headings "Information Concerning
Solicitation and Voting - Record Date and Principal Share Ownership" and
" - Voting and Solicitation" and page 6 of the 1996 Proxy Statement under the
heading "Other Information - Security Ownership of Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to pages
9 and 10 of the 1996 Proxy Statement under the heading "Certain Transactions."
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. FINANCIAL STATEMENTS. The following consolidated financial
statements and supplementary information of Silicon Graphics, Inc. and Report of
Independent Auditors are incorporated by reference to pages 35 and 44 through 62
of the Registrant's 1996 Annual Report:
Consolidated Statements of Operations - Years Ended June 30, 1996,
1995 and 1994
Consolidated Balance Sheets - June 30, 1996 and 1995
Consolidated Statements of Cash Flows - Years Ended June 30, 1996,
1995 and 1994
Consolidated Statements of Stockholders' Equity - Years Ended June 30,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Auditors
Supplementary Information
Quarterly Data (Unaudited)
2. FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedule of Silicon Graphics, Inc. is filed as part of this Report and should be
read in conjunction with the Consolidated Financial Statements of Silicon
Graphics, Inc.
Schedule Description Page
- -------- ----------- ----
II Valuation and Qualifying Accounts S-1
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the consolidated financial statements or notes thereto.
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<PAGE>
3. EXHIBITS. The following Exhibits are filed as part of, or
incorporated by reference into, this Report:
2.1(14) Agreement and Plan of Merger and Reorganization,
dated as of February 6, 1995, among Silicon
Graphics, Inc., S Acquisition Corporation and
Wavefront Technologies, Inc.
2.2(14) Agreement and Plan of Acquisition and Arrangement
dated as of February 6, 1995 by and among Silicon
Graphics, Inc., 1103707 Ontario Inc., Silicon
Graphics Manufacturing S.A. and Alias Research
Inc.
2.3(20) Agreement and Plan of Merger dated as of February
25, 1996 by and among Silicon Graphics, Inc.,
C. Acquisition Corporation and Cray Research, Inc.
3.1.1(12) Restated Certificate of Incorporation of the
Company.
3.1.2(18) Certificate of Designation of the Series E
Preferred Stock filed June 13, 1995.
3.2 Bylaws of the Company, as amended.
4.1(5) Silicon Graphics, Inc. $25,000,000 8.98% Senior
Notes Due February 1, 1996, Note Agreement and
Note, dated February 1, 1991.
4.2(7) Amended and Restated Preferred Shares Rights
Agreement, dated as of May 6, 1992 between the
Company and The First National Bank of Boston,
including the Certificate of Designation of
Rights, Preferences and Privileges of Series B
Participating Preferred Stock, the form of Rights
Certificate and the Summary of Rights attached
thereto as Exhibits A, B, and C respectively.
4.3(12) Indenture dated November 1, 1993 between the
Company and The First National Bank of Boston, as
Trustee.
4.4(15) First Amendment to Rights Agreement dated as of
May 2, 1995 between the Company and The First
National Bank of Boston.
9.1(18) Voting and Exchange Trust Agreement between the
Company and Montreal Trust Company of Canada dated
June 15, 1995.
10.1(6)* 1984 Incentive Stock Option Plan, as amended, and
amended form of Incentive Stock Option Agreement.
10.2(8)* 1986 Incentive Stock Option Plan, as amended, and
amended forms of Incentive Stock Option Agreement
and Nonstatutory Stock Option Agreement.
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<PAGE>
10.3(1) Software Agreement dated as of January 4, 1986, as
supplemented June 6, 1986, and Sublicensing
Agreement dated as of June 9, 1986 between the
Company and AT&T Information Systems Inc.
10.4(4)* 1987 Stock Option Plan and form of Stock Option
Agreement.
10.5(2) Software License Agreement dated January 24, 1986,
between the Company and AT&T Information Systems
Inc.
10.6(3) Stock Purchase Agreement dated March 2, 1990 among
the Company, NKK Corporation and NKK U.S.A.
Corporation.
10.7(12)* Directors' Stock Option Plan and form of Stock
Option Agreement as amended as of October 31,
1994.
10.8(8) Form of Indemnification Agreement entered into
between the Company and its directors, executive
officers and certain other agents.
10.9(8) Form of Indemnification Agreement entered into
between the Company and its directors, executive
officers and certain other agents. (Revised)
10.10(8)* 1985 Stock Incentive Program.
10.11(8) Exchange Agreement dated August 14, 1992 among the
Company, NKK Corporation and NKK U.S.A.
Corporation.
10.12(13) Credit Agreement dated December 31, 1994 between
the Company and Bank of America, National Trust
and Savings Association.
10.13(9) Purchase and Sale Agreement, as amended, between
Richard T. Peery, John Arrillaga and Silicon
Graphics, Inc. executed on April 30, 1993.
10.14(9) Waiver and Release Agreement between Richard T.
Peery, John Arrillaga and Silicon Graphics Real
Estate, Inc. dated May 7, 1993.
10.15(10)* 1993 Long-Term Incentive Stock Plan and form of
stock option agreement.
10.16(18)* Employee Stock Purchase Plan, as amended as of
June 12, 1995.
10.17(10)* Form of Employment Continuation Agreement entered
into between the Company and its executive
officers, as amended as of October 21, 1993.
10.18(10)* Consulting Agreement dated as of October 25, 1993
between the Company and Mark W. Perry.
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<PAGE>
10.19(11)* Non-Qualified Deferred Compensation Plan dated as
of September 9, 1994.
10.20(13)* Employment Agreement dated February 1, 1995
between the Company and Thomas A. Jermoluk.
10.21(15)* Employment Agreement dated as of February 13, 1995
between the Company and Javaid Aziz.
10.22(18)* Letter agreement dated as of July 6, 1995 between
the Company and Robert K. Burgess.
10.23(18)* Convertible Debenture dated as of February 3, 1993
issued to Robert K. Burgess.
10.24(18) Ground Lease between Silicon Graphics Real Estate
Inc. and the City of Mountain View dated March 7,
1995.
10.25(18) Agreement for Lease between the Company and
Virtual Funding, Limited Partnership dated
November 18, 1993.
10.26(18) Amendment No. 1 to Agreement for Lease between the
Company and Virtual Funding, Limited Partnership
dated March 15, 1995.
10.27(18) Lease Agreement between the Company and Virtual
Funding, Limited Partnership dated November 18,
1993.
10.28(18) Amendment No. 1 to Lease Agreement between the
Company and Virtual Funding, Limited Partnership
dated March 15, 1995.
10.29(16)* Alias Research Inc.'s 1988 Employee Share
Ownership Plan Option Agreement.
10.30(16)* Alias Research Inc.'s 1989 Employee Share
Ownership Plan Option Agreement.
10.31(16)* Alias Research Inc.'s 1990 Employee Share
Ownership Plan and standard forms of Option
Agreements.
10.32(16)* Alias Research Inc.'s 1994 Stock Plan and standard
forms of Option Agreements.
10.33(17)* Wavefront Technologies, Inc. 1990 Stock Option
Plan with standard form of Option Agreement.
10.34(19)* Consulting Agreement dated as of December 21, 1995
between the Company and Tom Oswold.
10.35(19)* 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).
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<PAGE>
10.36(21)* Consulting Agreement dated as of March 5, 1996
between the Company and Wei Yen.
10.37(21) Credit Agreement dated as of April 12, 1996.
10.38(21)* 1996 Supplemental Non-Executive Equity Incentive
Plan and form of stock option agreement.
10.39(22)* Cray Research, Inc. Amended and Restated 1989
Employee Benefit Stock Plan and form of stock
option agreement.
10.40(22)* Cray Research, Inc. 1989 Non-Employee Directors'
Stock Option Plan and form of stock option
agreement.
11.1 Statement of Computation of Per Share Earnings.
13.1 Excerpts from Annual Report for the year ended
June 30, 1996.
21.1 List of Subsidiaries.
23.1 Consent of Independent Auditors (see page 27).
27.1 Financial Data Schedule.
- -------------------------
* This exhibit is a management contract or compensatory plan required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c).
(1) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-1 (No. 33-8892), which became effective October 29,
1986.
(2) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-1 (No. 33-12863), which became effective March 31,
1987.
(3) Incorporated by reference to exhibits to the Company's Current Report on
Form 8-K dated March 16, 1990.
(4) Incorporated by reference to exhibits to the Company's Post-Effective
Amendment to Registration Statement on Form S-8 (No. 33-16529), which
became effective June 18, 1990.
(5) Incorporated by reference to exhibits to the Company's Quarterly Report on
Form 10-Q for the period ended December 31, 1990.
(6) Incorporated by reference to exhibits to the Company's Annual Report on
Form 10-K for the year ended June 30, 1991.
(7) Incorporated by reference to exhibits to the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 1992.
(8) Incorporated by reference to exhibits to the Company's Annual Report on
Form 10-K for the year ended June 30, 1992.
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(9) Incorporated by reference to exhibits to the Company's Annual Report on
Form 10-K for the year ended June 30, 1993.
(10) Incorporated by reference to exhibits to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1993.
(11) Incorporated by reference to exhibits to the Company's Annual Report on
Form 10-K for the year ended June 30, 1994.
(12) Incorporated by reference to exhibits to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1994.
(13) Incorporated by reference to exhibits to the Company's Quarterly Report on
Form 10-Q for the period ended December 31, 1994.
(14) Incorporated by reference to exhibits to the Company's Current Report on
Form 8-K dated February 13, 1995.
(15) Incorporated by reference to exhibits to the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 1995.
(16) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-8 (No. 33-60215), which became effective June 14, 1995.
(17) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-8 (No. 33-60213), which became effective June 14, 1995.
(18) Incorporated by reference to exhibits to the Company's Annual Report on
Form 10-K for the year ended June 30, 1995.
(19) Incorporated by reference to exhibits to the Company's Quarterly Report on
Form 10-Q for the period ended December 31, 1995.
(20) Incorporated by reference to exhibits to the Company's Schedule 14D-1,
Tender Offer Statement dated February 29, 1996.
(21) Incorporated by reference to exhibits to the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 1996.
(22) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-8 (No. 333-06403), which became effective June 20,
1996.
(b) REPORTS ON FORM 8-K.
No Current Reports on Form 8-K were filed during the quarter ended June 30,
1996.
-22-
<PAGE>
TRADEMARKS USED IN THIS FORM 10-K
Silicon Graphics, CHALLENGE, Indigo, Onyx, OpenGL and the Silicon Graphics logo
are registered trademarks, and Cosmo, Indigo(2), Indigo(2) IMPACT, Indigo Magic,
InfiniteReality, IRIS GL, IRIX, Maya, POWER CHALLENGE, RealityEngine(2) and
WebFORCE are trademarks of Silicon Graphics, Inc. Indy is a registered
trademark used under license in the United States, and owned by Silicon
Graphics, Inc. in other countries worldwide. MIPS is a registered trademark and
R10000 are trademarks of MIPS Technologies, Inc. Cray is a registered trademark
and Cray J90, Cray T3E and Cray T90 are trademarks of Cray Research, Inc.
Alias|Wavefront, Alias Studio, Alias PowerAnimator, and Wavefront Composer are
trademarks of Alias|Wavefront, a division of Silicon Graphics Limited.
Pentium is a registed trademark of Intel Corporation. UNIX is a registered
trademark licensed exclusively through X/Open Company Limited. Windows NT is a
trademark of Microsoft Corporation.
-23-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SILICON GRAPHICS, INC.
By: /s/ Edward R. McCracken
------------------------------
Edward R. McCracken
Chairman and Chief Executive
Officer
Dated: September 27, 1996
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<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ---------------------------------------- ---------------------------------------- ------------------
<S> <C> <C>
/s/ Edward R. McCracken Chairman, Chief Executive Officer September 27, 1996
- ---------------------------------------- and Director (Principal Executive
Edward R. McCracken Officer)
Chairman, Silicon Graphics World
- ---------------------------------------- Trade Corporation, and Director
Robert R. Bishop
/s/ Stanley J. Meresman Senior Vice President, Finance September 27, 1996
- ---------------------------------------- and Chief Financial Officer
Stanley J. Meresman (Principal Financial Officer)
/s/ Dennis P. McBride Vice President, Controller September 27, 1996
- ---------------------------------------- (Principal Accounting Officer)
Dennis P. McBride
/s/ Allen F. Jacobson Director September 27, 1996
- ----------------------------------------
Allen F. Jacobson
/s/ C. Richard Kramlich Director September 27, 1996
- ----------------------------------------
C. Richard Kramlich
/s/Robert A. Lutz Director September 27, 1996
- ----------------------------------------
Robert A. Lutz
Director
- ----------------------------------------
James A. McDivitt
-25-
<PAGE>
<CAPTION>
Signature Title Date
- ---------------------------------------- ---------------------------------------- ------------------
<S> <C> <C>
/s/ Lucille Shapiro Director September 27, 1996
- ----------------------------------------
Lucille Shapiro
/s/ Robert B. Shapiro Director September 27, 1996
- ----------------------------------------
Robert B. Shapiro
/s/ James G. Treybig Director September 27, 1996
- ----------------------------------------
James G. Treybig
</TABLE>
-26-
<PAGE>
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Silicon Graphics, Inc. of our report dated July 19, 1996, included in the
1996 Annual Report to Stockholders of Silicon Graphics, Inc.
Our audits also included the consolidated financial statement schedule of
Silicon Graphics, Inc. listed in item 14(a)2. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 File Nos. 33-11703, 33-16529, 33-18717, 33-26003,
33-34919, 33-38536, 33-40879, 33-44305, 33-44333, 33-48890, 33-59098,
33-65190, 033-50999, 033-51275, 33-58017, 33-60213, 33-60215, 333-01211,
333-06403 and 333-08651) pertaining to the Employee Stock Purchase Plan, 1987
Stock Option Plan, 1986 Incentive Stock Option Plan, 1985 Stock Incentive
Program, 1984 Incentive Stock Option Plan, 1982 Stock Option Plan, Directors'
Stock Option Plan and Subsidiary Stock Agreement, 1993 Long-Term Incentive
Stock Plan and the 1996 Supplemental Non-Executive Equity Incentive Plan of
Silicon Graphics, Inc.; the 1990 Stock Option Plan of Wavefront Technologies,
Inc.; and the 1988 Employee Share Ownership Plan, 1989 Employee Share
Ownership Plan, 1990 Employee Share Ownership Plan, and the 1994 Stock Plan
of Alias Research Inc. and the Amended and Restated 1989 Employee Benefit
Stock Plan and 1989 Non-Employee Directors' Stock Option Plan of Cray
Research, Inc. of our report dated July 19, 1996 with respect to the
consolidated financial statements of Silicon Graphics, Inc. incorporated
herein by reference, and our report included in the preceding paragraph with
respect to the financial statement schedule included in this Annual Report
(Form 10-K).
/s/ Ernst & Young LLP
Palo Alto, California
September 27, 1996
-27-
<PAGE>
Schedule II
SILICON GRAPHICS, INC.
Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Additions
-----------------------------------
Balance at Charged to Balance at
Beginning Costs and Deductions End of
Description of Period Expenses Other Write-offs Period
----------- --------- -------- ------ ---------- ------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1994
Accounts receivable
allowances $10,875 $3,226 $0 $(4,609) $9,492
Year ended June 30, 1995
Accounts receivable
allowances $9,492 $11,534 $0 $(7,561) $13,465
Year ended June 30, 1996
Accounts receivable
allowances $13,465 $4,292 $6,383* $(373) $23,767
</TABLE>
* Acquired Cray Research valuation allowance.
S-1
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
SILICON GRAPHICS, INC.
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
1.2 OTHER OFFICES
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held, each year, on a date and
at a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the third
Thursday of October in each year at 2:00 p.m. However, if such day falls on a
legal holiday, then the meeting shall be held at the same time and place on the
next succeeding full business day. At the meeting, directors shall be elected
and any other proper business may be transacted.
To be properly brought before an annual meeting business must be (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the board of directors, (b) otherwise properly brought before
the meeting by or at the direction of the board of directors, or (c) otherwise
properly
<PAGE>
brought before the meeting by a stockholder. For business to be properly
brought before the meeting by a stockholder, the secretary of the corporation
must have received notice in writing from the stockholder not less than one
hundred twenty (120) calendar days in advance of the date of the
corporation's proxy statement released to stockholders in connection with the
annual meeting of the corporation's stockholders for the immediately prior
year; provided, however, that if no such annual meeting was held or the date
of such annual meeting is more than thirty (30) calendar days different from
the date contemplated for the current year's annual meeting, then such
written notice from a stockholder to be timely must be received not later
than the close of business on the tenth day following the date on which
notice of the date of the current year's annual meeting was mailed or on
which such date was otherwise publicly disclosed. . Such written notice to
the secretary shall set forth, as to each matter the stockholder proposes to
bring before the annual meeting: (i) a brief description of the business,
(ii) the name and address, as they appear on the corporation's books, of the
stockholder proposing such business, (iii) the number of shares of stock of
the corporation beneficially owned by such stockholder, and (iv) any material
interest of such stockholder in such business. Notwithstanding any provision
in the bylaws to the contrary, no business shall be conducted at an annual
meeting except in accordance with the procedures set forth in this Section
2.2.
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by the
board of directors, by the chairman of the board, or by the chief executive
officer of the corporation.
If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of
such meeting and the general nature of the business proposed to be transacted,
and shall be delivered personally or sent by registered mail or by telegraphic
or other facsimile transmission to the chairman of the board, the president,
chief executive officer or the secretary of the corporation. No business may be
transacted at such special meeting otherwise than specified in such notice. The
officer receiving the request shall cause notice to be promptly given to the
stockholders entitled to vote, in accordance with the provisions of Sections 2.4
and 2.5, that a meeting will be held at the time requested by the person or
persons who called the meeting, not less than sixty (60) nor more than ninety
(90) days after the receipt of the request. If the notice is not given within
twenty (20) days after the receipt of the request, the person or persons
requesting the meeting may give the notice. Nothing contained in this paragraph
of this Section 2.3 shall be construed as limiting, fixing, or affecting the
time when a meeting of stockholders called by action of the board of directors
may be held.
-2-
<PAGE>
2.4 NOTICE OF STOCKHOLDERS MEETINGS
All notices of meetings of stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting, except as otherwise provided
herein or required by law (meaning, here and hereinafter, as required from time
to time by the General Corporation Law of Delaware or the certificate of
incorporation of the corporation). The notice shall specify the place, date,
and hour of the meeting, and, in the case of a special meeting, the purpose or
purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 QUORUM
At any meeting of the stockholders, the holders of a majority, present in
person or by proxy, of all of the shares of the stock entitled to vote at the
meeting shall constitute a quorum for all purposes, unless or except to the
extent that the presence of a larger number may be required by law. Where a
separate vote by a class or classes is required, a majority, present in person
or by proxy, of the shares of such class or classes entitled to take action with
respect to that vote on that matter shall constitute a quorum. If a quorum
shall fail to attend any meeting, the chairman of the meeting may adjourn the
meeting to another place, date or time.
If a notice of any adjourned special meeting of stockholders is sent to all
stockholders entitled to vote thereat, stating that it will be held with those
present constituting a quorum, those present at such adjourned meeting shall
constitute a quorum (but in no event shall a quorum consist of less than one-
third of the shares entitled to vote at the meeting), and all matters shall be
determined by a majority of the votes cast at such meeting, except as otherwise
required by law.
-3-
<PAGE>
2.7 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 VOTING
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of the General Corporation Law of Delaware.
Each stockholder shall have one (1) vote for every share of stock entitled
to vote that is registered in his or her name on the record date for the meeting
(as determined in accordance with Section 2.11 of these bylaws), except as
otherwise provided herein or required by law.
At a stockholders' meeting at which directors are to be elected, each
stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes which such stockholder normally
is entitled to cast) if the candidates' names have been properly placed in
nomination (in accordance with these bylaws) prior to commencement of the voting
and the stockholder requesting cumulative voting has given notice prior to
commencement of the voting of the stockholder's intention to cumulate votes. If
cumulative voting is properly requested, each holder of stock, or of any class
or classes or of a series or series thereof, who elects to cumulate votes shall
be entitled to as many votes as equals the number of votes which (absent this
provision as to cumulative voting) he would be entitled to cast for the election
of directors with respect to his shares of stock multiplied by the number of
directors to be elected by him, and he may cast all of such votes for a single
director or may distribute them among the number to be voted for, or for any two
or more of them, as he may see fit.
Every stock vote shall be taken by ballots, each of which shall state the
name of the stockholder or proxy voting and such other information as may be
required under the procedure established for the meeting. All elections shall
be determined by a plurality of the votes cast, and except as otherwise required
by law or provided herein, all other matters shall be determined by a majority
of the votes cast.
-4-
<PAGE>
2.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or able to be taken at any annual or special meeting of
stockholders may be taken without a meeting, without prior notice, and without a
vote if a consent or consents in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and voted
and shall be delivered to the corporation at its registered office in Delaware,
its principal place of business, or to an officer or agent of the corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery to the corporation's registered office shall be made by hand
or by certified or registered mail, return receipt requested.
Every written consent shall bear the date of signature of each stockholder
who signs the consent and no written consent shall be effective to take the
corporate action referred to therein unless, within sixty (60) days after the
date the earliest dated consent is delivered to the corporation, a written
consent or consents signed by holders of a sufficient number of votes to take
action are delivered to the corporation in the manner prescribed in the first
paragraph of this section.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
-5-
<PAGE>
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix a record date, which shall not be more
than sixty (60) nor less than ten (10) days before the date of such meeting, nor
more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held.
(ii) The record date for determining stockholders entitled to receive
payment of any dividend or other distribution or allotment of rights or to
exercise any rights of change, conversion or exchange of stock or for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
In order that the corporation may determine the stockholders entitled to
consent to corporate action in writing without a meeting, the board of directors
may fix a record date, which record date shall neither precede nor be more than
ten (10) days after the date upon which such resolution is adopted by the board
of directors. Any stockholder of record seeking to have the stockholders
authorize or take action by written consent shall, by written notice to the
secretary, request the board of directors to fix a record date. The board of
directors shall promptly, but in all events within ten (10) days after the date
on which such notice is received, adopt a resolution fixing the record date.
If the board of directors has not fixed a record date within such time, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior action by the board of directors is
required by law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
corporation in the manner prescribed in the first paragraph of Section 2.10 of
these bylaws. If the board of directors has not fixed a record date within such
time and prior
-6-
<PAGE>
action by the board of directors is required by law, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the date on which the
board of directors adopts the resolution taking such prior action.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.12 PROXIES
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, filed in
accordance with the procedure established for the meeting or taking of action in
writing, but no such proxy shall be voted or acted upon after three (3) years
from its date, unless the proxy provides for a longer period. Any copy,
facsimile telecommunication or other reliable reproduction of the writing or
transmission created pursuant to this Section 2.12 may be substituted or used in
lieu of the original writing or transmission for any and all purposes for which
the original writing or transmission could be used, provided that such copy,
facsimile telecommunication or other reproduction shall be a complete
reproduction of the entire original writing or transmission. The revocability
of a proxy that states on its face that it is irrevocable shall be governed by
the provisions of Section 212(c) of the General Corporation Law of Delaware.
2.13 CONDUCT OF BUSINESS
Such person as the board of directors may have designated or, in the
absence of such a person, any executive officer of the corporation, shall call
to order any meeting of the stockholders and act as chairman of the meeting. In
the absence of the secretary of the corporation, the secretary of the meeting
shall be such person as the chairman appoints. The chairman of any meeting of
stockholders shall determine the order of business and the procedure at the
meeting, including such regulation of the manner of voting and the conduct of
discussion as seem to him in order. The date and time of the opening and
closing of the polls for each matter upon which the stockholders will vote at
the meeting shall be announced at the meeting.
2.14 INSPECTORS OF ELECTION
The corporation may, and to the extent required by law, shall, in advance
of any meeting of stockholders, appoint one or more inspectors to act at the
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<PAGE>
meeting and make a written report thereof. The corporation may designate one
or more persons as alternate inspectors to replace any inspector who fails to
act. If no inspector or alternate is able to act at a meeting of
stockholders, the person presiding at the meeting may, and to the extent
required by law, shall, appoint one or more inspectors to act at the meeting.
Each inspector, before entering upon the discharge of his duties, shall take
and sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his ability. Every vote taken by
ballots shall be counted by an inspector or inspectors appointed by the
chairman of the meeting.
2.15 INSPECTORS OF ELECTION AND PROCEDURES FOR COUNTING WRITTEN CONSENTS
Within two business days after receipt of written requests or revocations
of stockholders purporting to own a sufficient number of shares of the capital
stock of the corporation issued and outstanding and entitled to vote to take
action pursuant to Section 2.10 hereof or Section 228(c) of the Delaware General
Corporation Law or prevent such action from being taken, respectively, the
secretary may engage nationally recognized independent inspectors of elections
for the purpose of performing a ministerial review of the validity of the
requests and revocations. The cost of retaining inspectors of elections shall
be borne by the corporation. Within five (5) business days after such written
requests and revocations are provided to the inspector, the inspector shall
issue a preliminary report to the corporation and to the stockholder or
stockholders soliciting the consents or revocations in opposition to action by
consent proposed by the corporation (the "Soliciting Stockholders") stating:
(i) the number of valid requests, (ii) the number of valid revocations, (iii)
the number of valid and unrevoked requests, (iv) the number of invalid requests,
(v) the number of invalid revocations, and (vi) whether, based on its
preliminary count, written requests of stockholders owning a sufficient number
of shares of the capital stock of the corporation issued and outstanding and
entitled to vote to take action pursuant to Section 2.10 hereof or Section
228(c) of the Delaware General Corporation Law have been obtained.
Unless the corporation and the Soliciting Stockholders shall agree to a
shorter or longer period, the corporation and the Soliciting Stockholder shall
have two business days to review the requests and revocations and to advise the
inspector and the opposing party in writing as to whether they intend to
challenge the preliminary report of the inspector. If no written notice of an
intention to challenge the preliminary report is received within two business
days after issuance of the preliminary report, the inspector shall issue to the
corporation and the Soliciting Stockholder its final report containing the
information included in the preliminary report. If the corporation or the
Soliciting Stockholders issue written notice of an intention to challenge the
-8-
<PAGE>
preliminary report within two business days after its issuance, the inspector
shall schedule a challenge hearing as promptly as practicable. Following the
challenge hearing, the inspector shall issue to the corporation and the
Soliciting Stockholder as promptly as practicable its final report containing
the information included in the preliminary report, as such information may
have been modified based on the challenge hearing, and a certification of
whether written requests of stockholders owning a sufficient number of shares
of the capital stock of the corporation issued and outstanding and entitled
to vote to take action pursuant to Section 2.10 hereof or Section 228(c) of
the Delaware General Corporation Law have been obtained. Any action taken by
the stockholders without a meeting shall be effective upon the receipt by the
corporation of a certification of the inspector of elections that written
requests of stockholders owning a sufficient number of shares of the capital
stock of the corporation issued and outstanding and entitled to vote to take
action pursuant to Section 2.10 hereof or Section 228(c) of the Delaware
General Corporation Law have been obtained.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
The number of directors of the corporation shall be such number between
nine (9) and twelve (12) as may be established from time to time by a resolution
adopted by a majority of the board of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these bylaws, at each annual meeting
of stockholders, directors of the corporation shall be elected to hold office
until the expiration of the term for which they are elected, and until their
successors have been duly elected and qualified; except that if any such
election shall not be
-9-
<PAGE>
so held, such election shall take place at a stockholders' meeting called and
held in accordance with the Delaware General Corporation Law.
The directors of the corporation shall be divided into three classes as
nearly equal in size as is practicable, which classes are hereby designated
Class I, Class II and Class III. The term of office of the initial Class I
directors shall expire at the next regularly-scheduled annual meeting of
stockholders after the date of this amendment; the term of office of the initial
Class II directors shall expire at the second succeeding annual meeting of
stockholders; and the term of office of the initial Class III directors shall
expire at the third succeeding annual meeting of the stockholders. For the
purposes hereof, the initial Class I, Class II and Class III directors shall be
those directors so designated and elected at the annual meeting of stockholders
scheduled to be held in October 1992.
At each annual meeting after the annual meeting of stockholders scheduled
to be held in October 1992, directors to replace those of the class whose terms
expire at such annual meeting shall be elected to hold office until the third
succeeding annual meeting and until their respective successors shall have been
duly elected and qualified.
If the number of directors is hereafter changed, any newly created
directorships or decrease in directorships shall be so apportioned among the
classes so as to make all classes as nearly equal in number as is practicable.
Directors need not be stockholders unless so required by the certificate of
incorporation or these bylaws, wherein other qualifications for directors may be
prescribed.
Nominations for election to the board of directors of the corporation at an
annual meeting of stockholders may be made by the board or on behalf of the
board by a nominating committee appointed by the board, or by any stockholder of
the corporation entitled to vote for the election of directors at such meeting.
Such nominations, other than those made by or on behalf of the board, shall be
made by notice in writing received by the secretary of the corporation not less
than ninety (90) days nor more than one hundred twenty (120) days in advance of
the date of the annual meeting of the corporation's stockholders for the
immediately prior year; provided, however, that if no such annual meeting was
held or the date of such annual meeting is more than thirty (30) calendar days
different from the date contemplated for the current year's annual meeting, then
such written notice from a stockholder to be timely must be received not later
than the close of business on the tenth day following the date on which notice
of the date of the current year's annual meeting was mailed or on which such
date was otherwise publicly disclosed. Such notice shall set forth (i) the name
and address of the stockholder who intends to make the nomination; (ii) a
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<PAGE>
representation that the nominating stockholder is a holder of record of stock
of the corporation entitled to vote at such meeting and intends to appear in
person or by proxy at the meeting and nominate the person or persons
specified in the notice; (iii) the number of shares of stock held
beneficially and of record by the nominating stockholder; (iv) the name, age,
business address and, if known, residence address of each nominee proposed in
such notice; (v) the principal occupation or employment of such nominee; (vi)
the number of shares of stock of the corporation beneficially owned by each
such nominee; (vii) a description of all arrangements or understandings
between the nominating stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the nominating stockholder; (viii) any other
information concerning the nominee that must be disclosed of nominees in
proxy solicitations pursuant to Regulation 14A under the Securities Exchange
Act of 1934; and (ix) the consent of such nominee to serve as a director of
the corporation if so elected.
The chairman of the annual meeting may, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure. If such determination and declaration is made, the
defective nomination shall be disregarded.
3.4 RESIGNATION AND VACANCIES
Any director may resign at any time upon written notice to the
corporation. When one or more directors so resign and the resignation is
effective at a future date, only a majority of the directors then in office,
including those who have so resigned, shall have power to fill such vacancy
or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office as provided in this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled only by
a majority of the directors then in office, although less than a quorum, or
by a sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled only by a majority of the
directors elected
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by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 REGULAR MEETINGS
Regular meetings of the board of directors shall be held at such place or
places, on such date or dates, and at such time or times as shall have been
established by the board of directors and publicized among all directors. A
notice of each regular meeting shall not be required.
3.7 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the chief executive officer,
the president or the secretary of the corporation, or by one-third of the
directors then in office (rounded up to the nearest whole number) and shall be
held at a place, on a date and at a time as such officer or such directors shall
fix. Notice of the place, date and time of special meetings, unless waived,
shall be given to each director by mailing written notice not less than two (2)
days before the meeting or by sending a facsimile transmission of the same not
less than two (2) hours before the time of the holding of the meeting. If the
circumstances warrant, notice may also be given personally or by telephone not
less than two (2) hours before the time of the holding of the meeting. Oral
notice given personally or by telephone may be communicated either to the
director or to a person at the office of the director who the person giving the
notice has reason to believe will promptly communicate it to the director.
Unless otherwise indicated in the notice thereof, any and all business may be
transacted at a special meeting.
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3.8 QUORUM
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these bylaws.
3.10 ADJOURNED MEETING; NOTICE
If a quorum is not present at any meeting of the board of directors, then
the directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
3.11 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
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3.12 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors. The directors may be paid their expenses, if any, of attendance of
each meeting of the board of directors and may be paid a fixed sum for
attendance at each meeting of the board of directors or a stated salary as
director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
3.13 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiaries, including any officer or employee who is a director of the
corporation or its subsidiaries, whenever, in the judgment of the directors,
such loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.14 REMOVAL OF DIRECTORS
Any director may be removed from office by the stockholders of the
corporation only for cause.
For purposes of the foregoing paragraph, 'cause' shall mean (i) continued
willful failure to perform the obligations of a director, (ii) gross negligence
by the director, (iii) engaging in transactions that defraud the corporation,
(iv) fraud or intentional misrepresentation, including falsifying use of funds
and intentional misstatements made in financial statements, books, records or
reports to stockholders or governmental agencies, (v) material violation of any
agreement between the director and the corporation, (vi) knowingly causing the
corporation to commit violations of applicable law (including by failure to
act), (vii) acts of moral turpitude or (viii) conviction of a felony.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.
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3.15 CONDUCT OF BUSINESS
At any meeting of the board of directors, business shall be transacted in
such order and manner as the board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or required by law.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the bylaws of the corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix the designation and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the corporation or
fix the number of shares of any series of stock or authorize the increase or
decrease of the shares of any series), (ii) adopt an agreement of merger or
consolidation under Section 251 or 252 of the General Corporation Law of
Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all
or substantially all of the corporation's property and assets, (iv) recommend to
the stockholders a dissolution of the corporation or a revocation of a
dissolution, or (v) amend the bylaws of the corporation; and, unless the board
resolution establishing the committee, a supplemental
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resolution of the board of directors, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to
adopt a certificate of ownership and merger pursuant to Section 253 of the
General Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.6 (regular meetings),
Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9
(waiver of notice), Section 3.10 (adjournment and notice of adjournment), and
Section 3.11 (action without a meeting), with such changes in the context of
those bylaws as are necessary to substitute the committee and its members for
the board of directors and its members; provided, however, that the time of
regular meetings of committees may be determined either by resolution of the
board of directors or by resolution of the committee, that special meetings of
committees may also be called by resolutions of the board of directors, and that
notice of special meetings of committees shall also be given to all alternate
members, who shall have the right to attend all meetings of the committee. The
board of directors may adopt rules for the government of any committee not
inconsistent with the provisions of these bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a chief executive officer, a
secretary, and a chief financial officer. The corporation may also have, at the
discretion of the board of directors, a chairman of the board, a vice chairman
of the board, a president, one or more vice presidents, one or more assistant
secretaries, a controller, one or more assistant controllers, a treasurer, one
or more assistant treasurers, and any such other officers as may be appointed in
accordance with the provisions of Section 5.3 of these bylaws. Any number of
offices may be held by the same person.
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5.2 APPOINTMENT OF OFFICERS
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 or 5.5 of these bylaws, shall
be appointed by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or empower the chief executive officer
to appoint, such other officers and agents as the business of the corporation
may require, each of whom shall hold office for such period, have such
authority, and perform such duties as are provided in these bylaws or as the
board of directors may from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
Any vacancy occurring in any office of the corporation shall be filled in
the manner prescribed in these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
chief executive officer, then the chairman of the board shall also be the chief
executive officer of
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the corporation and shall have the powers and duties prescribed in Section
5.7 of these bylaws.
5.7 CHIEF EXECUTIVE OFFICER; PRESIDENT
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the chief
executive officer of the corporation shall , subject to the control of the board
of directors, have general supervision, direction, and control of the business
and the officers of the corporation. He shall preside at all meetings of the
stockholders and, in the absence or nonexistence of a chairman of the board, at
all meetings of the board of directors. He shall have the general powers and
duties of management usually vested in the office of the chief executive officer
of a corporation and shall have such other powers and duties as may be
prescribed by the board of directors or these bylaws.
He shall also function as president of the corporation unless the board of
directors names another person as president, in which case, the president shall
have such powers and duties as may be prescribed by the board of directors.
5.8 VICE PRESIDENTS
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
chief executive officer or the chairman of the board.
5.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or
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registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all
stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the
number and date of cancellation of every certificate surrendered for
cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositories as may be
designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
chief executive officer and directors, whenever they request it, an account of
all of his transactions as chief financial officer and of the financial
condition of the corporation, and shall have such other powers and perform such
other duties as may be prescribed by the board of directors or these bylaws.
The duties of the chief financial officer may be allocated by the board of
directors among one or more persons, in its discretion.
5.11 TREASURER
The treasurer shall keep and maintain, or cause to be kept and maintained,
adequate and correct books and records of accounts or the properties and
business transactions of the corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, retained earnings
and shares. The books of account shall at all reasonable times be open to
inspection by any director.
The treasurer shall deposit all money and other valuables in the name and
to the credit of the corporation with such depositories as may be designated by
the board of directors. He shall disburse the funds of the corporation as may
be
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ordered by the board of directors, shall render to the chief executive
officer and directors, whenever they request it, an account of all of his
transactions as treasurer and of the financial condition of the corporation,
and shall have such other powers and perform such other duties as may be
prescribed by the board of directors or these bylaws.
5.12 ASSISTANT SECRETARY
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.13 ASSISTANT TREASURER
The assistant treasurer, or, if there is more than one, the assistant
treasurers in the order determined by the stockholders or board of directors (or
if there be no such determination, then in the order of their election), shall,
in the absence of the treasurer or in the event of his or her inability or
refusal to act, perform the duties and exercise the powers of the treasurer and
shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.14 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
5.15 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the chief executive officer, the president, any
vice president, the treasurer, the secretary or assistant secretary of this
corporation, or any other person authorized by the board of directors, the chief
executive officer, the president or a vice president, is authorized to vote,
represent, and exercise on behalf of this corporation all rights incident to any
and all shares of any other corporation or corporations standing in the name of
this corporation. The authority granted herein may be exercised either by such
person directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
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ARTICLE VI
INDEMNITY
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation. For purposes of this
Section 6.1, a "director" or "officer" of the corporation includes any person
(i) who is or was a director or officer of the corporation, (ii) who is or was
serving at the request of the corporation as a director or officer of another
corporation partnership, joint venture, trust or other enterprise, or (iii) who
was a director or officer of a corporation which was a predecessor corporation
of the corporation or of another enterprise at the request of such predecessor
corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of its
employees and agents (other than directors and officers) against expenses
(including attorney's fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation
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would have the power to indemnify him against such liability under the
provisions of the General Corporation Law of Delaware.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
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ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
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The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
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8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.7 DIVIDENDS
The directors of the corporation, subject to any restrictions contained in
(i) the General Corporation Law of Delaware or (ii) the certificate of
incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not
be limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 SEAL
The corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof to be
impressed or affixed or in any other manner reproduced.
8.10 TRANSFER OF STOCK
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
-25-
<PAGE>
8.11 STOCK TRANSFER AGREEMENTS
The corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
8.13 NOTICES
Except as otherwise specifically provided herein or required by law, all
notices required to be given to any stockholder, director, officer, employee or
agent shall be in writing and may in every instance be effectively given by hand
delivery, by mail, postage paid, or by facsimile transmission. Any such notice
shall be addressed to such stockholder, director, officer, employee or agent at
his last known address as it appears on the books of the corporation. The time
when such notice shall be deemed received, if hand delivered, or dispatched, if
sent by mail or facsimile, transmission, shall be the time of the giving of the
notice.
ARTICLE IX
AMENDMENTS
Any of these bylaws may be altered, amended or repealed by the affirmative
vote of a majority of the board of directors or, with respect to bylaw
amendments placed before the stockholders for approval and except as otherwise
provided herein or required by law, by the affirmative vote of the holders of a
majority of the shares of the corporation's stock entitled to vote in the
election of directors, voting as one class.
-26-
<PAGE>
ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the board of directors
of the corporation that the corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's
becoming effective in accordance with Section 103 of the General Corporation Law
of Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the Secretary of State shall
have attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
-27-
<PAGE>
EXHIBIT 11.1
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Twelve Months Ended June 30, 1996
1996 1995 1994
- - ---------- --------- ---------
<S> <C> <C> <C>
PRIMARY:
Weighted Average Shares Outstanding:
- ------------------------------------
Common shares 162,658 156,437 144,301
Convertible preferred shares -- 1,610 3,048
Stock options 13,132 17,388 17,800
--------- -------- --------
Total weighted average shares outstanding 175,790 175,435 165,149
--------- -------- --------
--------- -------- --------
Income Per Share:
- -----------------
Net income available to common stockholders $114,512 $224,802 $141,570
--------- -------- --------
--------- -------- --------
Net income per share $0.65 $1.28 $0.86
--------- -------- --------
--------- -------- --------
FULLY DILUTED:
Weighted Average Shares Outstanding:
- ------------------------------------
Common shares 162,658 156,437 144,301
Convertible preferred shares -- 1,610 3,048
Zero coupon convertible subordinated
debentures -- 7,402 4,888
Stock options 13,143 17,946 18,575
--------- -------- --------
Total weighted average shares outstanding 175,801 183,395 170,812
--------- -------- --------
--------- -------- --------
Income Per Share:
- -----------------
Net income available to common stockholders $114,512 $224,802 $141,570
Add discount amortization on zero coupon
convertible subordinated debentures -- 5,433 3,951
--------- -------- --------
Adjusted net income $114,512 $230,235 $145,521
--------- -------- --------
--------- -------- --------
Net income per share $0.65 $1.26 $0.85
--------- -------- --------
--------- -------- --------
</TABLE>
<PAGE>
[LOGO]
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended June 30 1996(1) 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Data
(in thousands, except per share amounts):
Total revenue $ 2,921,316 $ 2,228,268 $ 1,537,766 $ 1,132,869 $ 906,713
Costs and expenses:
Cost of revenue 1,482,439 1,032,059 735,388 532,213 437,575
Research and development 353,461 247,678 190,796 143,981 137,134
Selling, general and administrative 807,830 619,259 417,753 336,054 329,204
Write-off of acquired in-process technology
and merger-related expenses 103,193 22,000 -- -- 110,000
Restructuring costs -- -- -- 650 28,895
----------- ----------- ----------- ----------- ---------
Operating income (loss) from continuing operations 174,393 307,272 193,829 119,971 (136,095)
Interest and other, net 10,413 9,447 4,779 520 5,961
Minority interest in net loss of Cray Research 3,982 -- -- -- --
----------- ----------- ----------- ----------- ---------
Income (loss) from continuing operations
before income taxes 188,788 316,719 198,608 120,491 (130,134)
Income (loss) from continuing operations 115,037 224,856 141,414 82,803 (101,318)
Net income (loss) 115,037 224,856 141,814 73,540 (101,183)
Income (loss) per share:
Income (loss) from continuing operations $ 0.65 $ 1.28 $ 0.86 $ 0.53 $ (0.89)
Net income (loss) $ 0.65 $ 1.28 $ 0.86 $ 0.47 $ (0.89)
Common and common equivalent shares
used in the calculation of income (loss) per share 175,790 175,435 165,149 154,887 119,233
Balance Sheet Data (in thousands):
Cash, cash equivalents and
marketable investments $ 456,937 $ 780,012 $ 604,444 $ 208,538 $ 195,088
Working capital 994,817 889,371 645,296 398,053 362,529
Total assets 3,158,246 2,206,619 1,567,052 1,048,294 892,673
Long-term debt and other 381,490 287,267 252,645 56,832 71,900
Stockholders' equity 1,675,318 1,346,170 937,169 696,649 562,230
Statistical Data:
Number of employees 10,485 6,308 4,707 4,023 3,946
Revenue/employee (average; in thousands) $ 373 $ 400 $ 346 $ 293 $ 237
Long-term debt and other/total capitalization 19% 18% 21% 8% 11%
</TABLE>
(1) Amounts reflect the April 2, 1996 acquisition of Cray Research which was
accounted for as a purchase. See Notes 2 and 3 to the consolidated
financial statements.
(34)
<PAGE>
QUARTERLY DATA
<TABLE>
<CAPTION>
Fiscal 1996 (unaudited) (In thousands, except per share amounts) June 30(1) March 31 Dec. 31 Sept. 30
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $ 977,373 $ 676,931 $ 671,733 $ 595,279
Cost and expenses:
Cost of revenue 548,395 330,077 331,356 272,611
Research and development 121,915 78,006 80,797 72,743
Selling, general and administrative 246,593 195,897 193,151 172,189
Write-off of acquired in-process technology and
merger-related expenses 101,918 -- 561 714
---------- ---------- ---------- ----------
Operating income (loss) (41,448) 72,951 65,868 77,022
Interest and other, net (4,367) 1,740 6,699 6,341
Minority interest in net loss of Cray Research 3,982 -- -- --
---------- ---------- ---------- ----------
Income (loss) before income taxes (41,833) 74,691 72,567 83,363
Net income (loss) (48,704) 53,031 52,353 58,357
Net income (loss) per share $ (0.30) $ 0.31 $ 0.30 $ 0.33
Common and common equivalent shares
used in the calculation of income (loss) per share 164,388 173,545 177,319 179,236
Fiscal 1995 (unaudited) (In thousands, except per share amounts) June 30 March 31 Dec. 31 Sept. 30
- ----------------------------------------------------------------------------------------------------------------------------
Total revenue $ 653,210 $ 576,984 $ 549,571 $ 448,503
Cost and expenses:
Cost of revenue 305,294 263,395 255,535 207,835
Research and development 69,191 61,416 60,841 56,230
Selling, general and administrative 190,221 159,818 145,687 123,533
Merger-related expenses 22,000 -- -- --
---------- ---------- ---------- ----------
Operating income 66,504 92,355 87,508 60,905
Interest and other, net 6,034 4,457 (3,935) 2,891
---------- ---------- ---------- ----------
Income before income taxes 72,538 96,812 83,573 63,796
Net income 52,745 67,972 59,038 45,101
Net income per share $ 0.30 $ 0.38 $ 0.34 $ 0.26
Common and common equivalent shares
used in the calculation of income per share 177,927 177,781 174,065 171,999
</TABLE>
(1) Amounts reflect the April 2, 1996 acquisition of Cray Research which was
accounted for as a purchase. See Notes 2 and 3 to the consolidated
financial statements.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol of SGI. The following table sets forth, for the periods indicated, the
high, low, and close prices for the Common Stock as reported on the NYSE.
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1995
Low High Close Low High Close
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 33.00 $ 45.63 $ 34.38 $ 21.25 $ 26.88 $ 25.75
Second Quarter 26.88 38.75 27.50 24.13 33.13 31.00
Third Quarter 21.25 30.38 25.00 29.13 38.00 35.50
Fourth Quarter 23.13 30.13 24.00 33.75 42.00 39.88
</TABLE>
The Company had 10,597 stockholders of record as of June 30, 1996. The
Company has not paid any dividends on its common stock. The Company currently
intends to retain earnings for use in its business and does not anticipate
paying cash dividends to common stockholders.
(35)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The matters addressed in this discussion, with the exception of the historical
information presented, are forward looking statements involving risks and
uncertainties, including the risks discussed under the heading "Risks That
Affect Our Business" and elsewhere in this report.
INTRODUCTION
During the fourth quarter of fiscal 1996, Silicon Graphics acquired Cray
Research. The acquisition, which resulted in significant fourth quarter charges,
will continue to negatively affect the Company's results in fiscal 1997 as a
result of the different financial models of the Cray Research and Silicon
Graphics businesses and certain ongoing purchase accounting effects, as well as
expenses expected to be incurred to integrate the companies.
The following discussion begins with a detailed review of Silicon Graphics'
pro forma standalone results for fiscal 1996 and the combined company's results.
The discussion of the combined results includes a review of the impact of the
purchase method of accounting, which will affect fiscal 1997 results as well as
those reported for fiscal 1996. The discussion concludes with a review of
certain risk factors that investors should consider.
STANDALONE
YEAR-TO-YEAR COMPARISONS
The information in the following tables is presented for Silicon Graphics'
standalone business on a pro forma basis, excluding any impact of the Cray
Research acquisition, to facilitate year-to-year comparisons.
Operating Items as a Percentage of Total Revenue
- -------------------------------------------------------------------------
Fiscal Years Ended June 30
(Percentages may not add due to rounding) 1996 1995 1994
- -------------------------------------------------------------------------
Product and other revenue 88.6% 89.3% 88.8%
Service revenue 11.4 10.7 11.2
------ ------ ------
Total revenue 100.0 100.0 100.0
Gross margin 51.0 53.7 52.2
Research and development expenses 11.7 11.1 12.4
Selling, general and
administrative expenses 27.8 27.8 27.2
Alias/Wavefront
merger-related expenses * 1.0 --
------ ------ ------
Operating margin 11.5% 13.8% 12.6%
------ ------ ------
------ ------ ------
* Less than one percent
Growth Rates
- -------------------------------------------------------------------------
Increase
Fiscal 1996/ Fiscal 1995/
Fiscal 1995 Fiscal 1994
- -----------------------------------------------------------------------
Product and other revenue 23% 46%
Service revenue 32% 38%
Total revenue 24% 45%
Gross profit 18% 49%
Research and development expenses 31% 30%
Selling, general and administrative expenses 24% 48%
Revenue by Geography
- ------------------------------------------------------------------------
Fiscal Years Ended June 30 Year/Year Increase
($ in millions) 1996 1995 1994 96/95 95/94
- ------------------------------------------------------------------------
United States $ 1,293 $ 1,094 $ 787 18% 39%
Europe 819 635 409 29% 55%
Rest of World* 658 499 342 32% 46%
------- ------- -------
Total revenue $ 2,770 $ 2,228 $ 1,538 24% 45%
------- ------- -------
------- ------- -------
Fiscal Years Ended June 30
(As a percentage of total revenue) 1996 1995 1994
- ------------------------------------------------------------------------
United States 47% 49% 51%
Europe 29% 29% 27%
Rest of World* 24% 22% 22%
* Includes Japan, other Asia/Pacific countries, Canada and Latin America.
Revenue by Product Line
- -------------------------------------------------------------------------
(As a percentage of product revenue, Fiscal Years Ended June 30
excluding other revenue) 1996 1995 1994
- -------------------------------------------------------------------------
High-end products (primarily
from the POWER Challenge-TM-,
Challenge-Registered Trademark- and
Onyx-TM- families) 37% 38% 36%
Desktop products (primarily
from the Indy and
Indigo(2)-TM- families) 63% 62% 64%
REVENUE Revenue growth in fiscal 1996 and fiscal 1995 reflected increased
shipments across the entire product line, as well as increased service revenue
supporting a larger installed base. The revenue growth rate declined
substantially from 45% in fiscal 1995 to 24% in fiscal 1996. Factors
contributing to the fiscal 1996 decline in the revenue growth rate included:
* the effects of reorganization within the Company's United States sales
organization, which hampered field productivity, particularly in the first
half of the fiscal year;
(36)
<PAGE>
* significant product transitions involving new microprocessors and graphics
architectures across the product line, which affected results both because
of parts availability delays in the ramp-up of production of the new
products and because some customers delayed purchases in anticipation of
the new products; and
* various transitory developments that affected particular quarters, such as
the U.S. federal government budget impasse, which curtailed government
sales in the second quarter.
Most of the Company's revenue in fiscal 1996 came from products introduced
during the year. The Company expects this pattern to continue in fiscal 1997. As
illustrated by the Company's fiscal 1996 results, the process of completing new
products and rapidly bringing them into volume production entails substantial
risks. See "Risks That Affect Our Business--Product Development and
Introduction."
The mix of revenue from the Company's high-end and desktop products has not
changed significantly over the past three years as the Company continues to
develop and deliver a wide range of products to a broadening marketplace.
However, as a result of the Cray Research acquisition, high-end product revenue
is expected to represent a higher proportion of product revenue in fiscal 1997.
Unit volumes increased in each of fiscal 1995 and 1996 while overall product
revenue per unit has remained substantially unchanged. Other revenue comes
primarily from subsystem products, royalties, licensing fees and non-recurring
engineering contracts. In fiscal 1997, computer system leasing will also
contribute to other revenue.
Service revenue, which is comprised of hardware and software support and
maintenance, has remained fairly constant as a percentage of total revenue over
the past three years. However, the Company expects that service revenue will
increase as a percentage of total revenue in fiscal 1997 as a result of the Cray
Research acquisition.
The Company's geographic revenue mix has in recent years shifted towards
its international operations. The Company believes this trend will continue.
Revenue from Japan represented approximately 12% of total revenue in fiscal 1996
and 13% in both fiscal 1995 and 1994. Revenue growth in Japan slowed in fiscal
1996 as a result of a strengthened U.S. dollar. European revenue was not
significantly affected by currency changes.
GROSS MARGIN Cost of product and other revenue includes costs related to
product shipments, including materials, labor, overhead and other direct or
allocated costs involved in their manufacture or delivery. Costs associated with
non-recurring engineering revenue are recognized in research and development
expense. Cost of service revenue includes all costs incurred in the support and
maintenance of the Company's products.
Silicon Graphics' standalone overall gross margin decreased from 53.7% in
fiscal 1995 to 51.0% in fiscal 1996. Gross margins also decreased during fiscal
1996, to 48.9% in the fourth quarter. The year to year decline was due
principally to discounting on product sales resulting from increased
competition. Fourth quarter gross margins were primarily affected by aggressive
pricing programs, an increase in the percentage of revenues from the United
States and costs associated with the ramp-up to volume production of new
microprocessors, including expediting costs.
In fiscal 1995, the overall gross margin increased to 53.7% from 52.2% in
fiscal 1994. The increase was primarily due to manufacturing efficiencies due to
higher volumes, the weaker U.S. dollar, and the increased proportion of
international business. The Company's gross margin for fiscal 1995 was higher
than normal largely due to rapid revenue growth and efficiencies associated with
purchasing and manufacturing high volumes of products.
The Company's gross margins are affected by a number of factors, including
geographic and product mix, and will fluctuate from period to period. The
Company expects its gross margins, before the impact of purchase accounting, to
be lower in fiscal 1997 than in fiscal 1996. A significant reason for this
expected decline is the impact of the Cray Research acquisition, reflecting Cray
Research's lower product and service gross margins. The Company expects over
time to achieve synergies and implement other changes that will moderate but not
eliminate the impact of these differences in Cray's business on the combined
organization. Gross margin is also expected to be negatively affected in fiscal
1997 by competitive pricing programs and increased volumes of lower priced
desktop systems in the Silicon Graphics product line. See "Risks That Affect Our
Business."
OPERATING MARGIN The Company has for many years developed its annual operating
plans based on target ranges for operating expense as a percentage of total
revenue. These target ranges reflect the Company's beliefs
(37)
<PAGE>
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 appropriate levels of general
and administrative spending. Because the Company plans its operating expenses,
many of which are relatively fixed in the short term, on the basis that its
revenue will continue to grow, even a relatively small revenue shortfall may
cause a period's results to be substantially below expectations. This was
reflected in the Company's operating margin for fiscal 1996, which was
significantly lower than in fiscal 1995 or 1994, principally due to a lower than
expected revenue growth rate.
Research and development spending has increased at approximately the same
rate in each of the past three fiscal years reflecting the Company's belief that
success in its marketplace requires a continuous flow of new products. The
Company expects to continue to increase the dollar amount of research and
development spending in fiscal 1997 and to plan its investment in research and
development based on a target range of 10.5% - 12.5% of expected revenue.
Selling, general and administrative expenses have remained substantially
unchanged as a percentage of total revenue over the past three years. The
Company invested heavily in its sales organization during fiscal 1995 and the
first part of fiscal 1996. The Company ended fiscal 1996 with an increased focus
on tight operating expense control and expects to plan selling, general and
administrative expenses for fiscal 1997 based on a target range of 25% - 27% of
expected revenue.
The Company expects operating margins for at least the first half of fiscal
1997 to be significantly below the levels of the last few fiscal years. The
Company's ability to achieve operating margins approaching its historical range
during fiscal 1997 will depend in part on its success in achieving revenue
growth, including expected revenue synergies from the joint marketing and sale
of Silicon Graphics and Cray Research systems, as well as in achieving expense
synergies. These expense synergies are expected to result from such factors as
joint materials purchasing, the combination of the field sales and service
organizations, research and development efficiencies and the elimination of
redundant administrative functions. The Company's strategy is to effect a
measured and deliberate consolidation of the Silicon Graphics and Cray Research
organizations, based on the primary goal of providing a smooth technology,
product and support transition path for customers. While some of these synergies
may be realized almost immediately, others will not be fully realized for
several quarters or even longer.
IMPACT OF CURRENCY The net effect of currency changes was not significant in
any of the past three fiscal years.
CONSOLIDATED
YEAR-TO-YEAR COMPARISONS
The Company acquired approximately 75% of the outstanding common stock of Cray
Research in a cash tender offer that closed on April 2, 1996, and acquired the
remaining Cray Research shares in a merger by exchanging one share of Silicon
Graphics common stock for each remaining outstanding share of Cray Research
common stock on June 30, 1996. The aggregate purchase price (including
acquisition costs) was approximately $767 million in cash, common stock and the
value associated with options to purchase common stock. The acquisition has been
accounted for using the purchase method.
IMPACT OF CRAY ACQUISITION ON FISCAL 1996 RESULTS The principal effects of the
acquisition on Silicon Graphics' fiscal 1996 results were as follows:
CONSOLIDATION Cray Research generated $151.4 million in revenue for an
operating loss of $22.7 million in the fourth quarter of fiscal 1996. These
results were consolidated with the Company's for that quarter, subject to
adjustment for the minority interest held by public stockholders prior to the
closing of the merger. The effects of this consolidation on the results
for fiscal 1996 as a whole are illustrated as follows (in thousands):
Silicon Graphics
Fiscal Year Ended June 30, 1996 Pro Forma Standalone Consolidated
- -----------------------------------------------------------------------
Revenue:
Product and other revenue $ 2,454,180 $ 2,553,128
Service revenue 315,707 368,188
Total revenue 2,769,887 2,921,316
----------- -----------
Costs and expenses:
Cost of product and other revenue 1,191,171 1,279,742
Cost of service revenue 165,324 202,697
Research and development 323,722 353,461
Selling, general and administrative 769,352 807,830
Write-off of acquired in-process
technology and merger-related
expenses 1,275 103,193
Total costs and expenses 2,450,844 2,746,923
----------- -----------
Operating income $ 319,043 $ 174,393
----------- -----------
----------- -----------
----------- -----------
(38)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
ACQUIRED IN-PROCESS TECHNOLOGY The Company recognized a one-time charge of
$98.2 million in the fourth quarter of fiscal 1996 for acquired in-process
technology that had not yet reached technological feasibility and that had no
alternative future use.
MERGER-RELATED EXPENSES Merger-related expenses associated with the Cray
Research acquisition of $3.7 million were recorded in the fourth quarter of
fiscal 1996. These expenses related to integrating Silicon Graphics and Cray
Research operations. The Company expects to incur an additional $15 million to
$25 million of similar merger-related expenses during fiscal 1997.
GROSS MARGIN IMPACT Because purchase accounting requires that purchased work-
in-process and finished goods inventories be written up to fair value at the
time of acquisition, gross margins were adversely affected in the fourth quarter
of fiscal 1996 as a portion of the inventory was sold to customers. The effect
of this write-up was to reduce fourth quarter gross margins by approximately $18
million. The Company expects that the continuing effect of the sell-through of
this inventory will reduce gross margins by an aggregate of approximately $41
million, primarily during the first three quarters of fiscal 1997. Likewise,
purchase accounting does not allow recognition of the gross profit on acquired
service contracts. The effect of this was to reduce fourth quarter gross margins
by approximately $1.7 million. The effect on gross margins will be approximately
$6.5 million during the first three quarters of fiscal 1997.
OTHER OPERATING RESULTS The discussion that follows focuses on certain other
consolidated operating results for fiscal 1996.
INTEREST EXPENSE Consolidated interest expense increased in fiscal 1996
principally as a result of borrowings associated with the Cray Research
acquisition. Interest expense increased in fiscal 1995 as a result of increased
market interest rates, and a full year of interest expense on the zero coupon
convertible subordinated debentures issued in November 1993.
INTEREST INCOME AND OTHER, NET Consolidated interest income and other, net for
fiscal 1996 increased by 19% over the prior year. This was primarily the result
of higher invested cash balances prior to the closing of the Cray Research
tender offer on April 2, 1996, offset by the Company's $10 million share of
losses of Interactive Digital Systems ("IDS"), its joint venture with AT&T. IDS,
which was formed in June 1994, was dissolved at the end of fiscal 1996 in
conjunction with the reorganization of AT&T. The Company expects interest income
and other for fiscal 1997 to continue to be affected by lower invested cash
balances as the result of the Cray Research acquisition.
Interest income and other, net for fiscal 1995 increased 111% from fiscal
1994 as a result of higher cash balances and higher interest rates on
investments. In the second quarter of fiscal 1995, the Company recorded a charge
of $7.3 million related to its long-term investment in Control Data Systems,
Inc., which the Company disposed of in the third quarter of fiscal 1995.
PROVISION FOR INCOME TAXES The consolidated effective tax rate for fiscal 1996
was approximately 39%. Silicon Graphics' standalone tax rate, excluding the
effect of the Cray Research acquisition, was approximately 27% for fiscal 1996
compared to 29% in 1995 and 1994, reflecting an increase in foreign earnings
taxed at lower rates. The standalone tax rate was lower than the federal
statutory rate primarily due to the tax benefit from the Company's foreign sales
corporation and foreign earnings taxed at lower rates. The consolidated tax rate
was higher than the standalone rate principally because of the write-off
of acquired in-process technology for which there was no tax benefit.
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. The effective tax rate for fiscal 1997 is expected to increase
due to the acquisition of Cray Research, which does not have manufacturing
facilities in tax-favored jurisdictions.
FINANCIAL CONDITION
The Company's financial condition changed significantly in fiscal 1996 compared
with 1995 principally as a result of the Cray Research acquisition. At June 30,
1996, cash, cash equivalents and short- and long-term investments, net of short-
term borrowings, totaled $320 million, down from $780 million at June 30, 1995.
Operating activities generated $212 million in fiscal 1996, compared with
$234 million in fiscal 1995 and $276 million in fiscal 1994. Fiscal 1996 net
income was affected
(39)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
by a number of charges that did not use cash, including the $98 million write-
off of acquired in-process technology and $18 million of reduced gross margin
associated with the write-up of acquired Cray Research inventories. The impact
of those charges was somewhat offset by increased deferred tax benefit
provisions, as well as the minority interest in Cray Research loss, which do not
provide cash. The growth in receivables, excluding the effects of the Cray
Research acquisition, reflects both higher sales levels and longer collection
cycles. Inventories, excluding the effects of the Cray Research acquisition,
grew at a much lower rate than in fiscal 1995 due to the lower sales growth rate
and increased focus on inventory management.
Investing activities, other than changes in the Company's marketable
investments, consumed $659 million in cash during fiscal 1996, compared with
$127 million during fiscal 1995 and $123 million during fiscal 1994. The
acquisition of Cray Research used approximately $408 million of cash, net of
cash acquired. Capital expenditures of $189 million in fiscal 1996 included
expansion of manufacturing capacity as well as costs related to the Company's
new information system.
In each of the past three years the Company's employee stock plans have
been an additional source of cash. In October 1995, the Company announced a
program to repurchase seven million shares of common stock to manage the
dilution created by employee stock plans. Under this program, 2,452,600 shares
of common stock were repurchased for $76 million. The Company has not
repurchased any shares since it entered into its merger agreement with Cray
Research in February 1996.
At June 30, 1996, the Company's principal sources of liquidity included
cash, cash equivalents and marketable investments of $457 million ($320 million,
net of short-term borrowings) and up to $250 million available under its three-
year revolving credit facility. At this time the Company expects capital
expenditures to be slightly lower as a percentage of total revenue in fiscal
1997 than they were in fiscal 1996. In connection with the acquisition of Cray
Research the Company also has recorded an accrual of approximately $39 million
related to costs of exiting facilities and streamlining duplicate administrative
activities. During fiscal 1996, cash outlays for these activities were $1.7
million.
The Company's cash and marketable investments, along with the credit
facility, cash generated from operations and other resources available to the
Company, should be adequate to fund the Company's projected cash flow needs. 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 through debt or equity financing in anticipation of future
needs.
RISKS THAT AFFECT
OUR BUSINESS
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. Other than in the Cray Research business, the Company has
short delivery cycles and as a result generally 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
revenue 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. The timing of
customer acceptance of large Cray systems may also have a significant effect on
periodic operating results. Margins are heavily influenced by mix
considerations, including geographical mix, the mix of service and non-recurring
engineering revenue, the mix of high-end and desktop products and application
software, as well as 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. Sales of Cray Research systems
generally reflect sequential growth from quarter-to-quarter through the calendar
year.
The Company's stock price, like that of other technology companies, is
subject to significant volatility. If revenue or earnings in any quarter fail to
meet the investment community's expectations, there could be an
(40)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
PRODUCT DEVELOPMENT AND INTRODUCTION The Company's continued success depends
on its ability to develop and rapidly bring to volume production highly
differentiated, technologically complex and innovative products. The Company
plans to introduce several new product families in the first half of fiscal
1997, including products that will replace virtually the entire current product
line. 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 fail to meet specifications
or to miss the aggressive introduction 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 often 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. In the case of the Cray Research product line, new products are
generally announced well in advance of availability, due to the longer sales
cycle for these systems. The Company's results could be adversely affected by
such factors as development delays, quality or yield problems experienced by
suppliers, variations in product costs, and delays in customer purchases of
existing products in anticipation of the introduction of new products.
COMPETITION The computer industry is highly competitive, with rapid
technological advances and constantly improving price/performance. As most of
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 and Cray's traditional
supercomputing competitors, but also from new sources including the personal
computer industry. In particular, during fiscal 1996 the Company experienced
increasing competition at the lowest end of its business from workstations based
upon the Intel Pentium microprocessor, Microsoft's Windows NT operating system,
and a variety of 3-D graphics acceleration cards. 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.
VOLUME STRATEGY The Company believes that its long-term success is dependent
upon achieving substantial increases in its unit volumes over the next several
years. The Company has created a new business unit, Silicon Desktop, with the
charter of implementing a comprehensive strategy for increasing volumes of
desktop products, including new product development, greater emphasis on lower-
cost manufacturing and the strengthening of indirect distribution channels.
Risks associated with this strategy include:
* increased direct competition with the personal computer industry, portions
of which have been seeking to move up market to compete with low-end
workstations (see "Competition");
* the impact of lower gross margins, to the extent not mitigated by savings
in distribution costs and other operating expenses; and
* the extent to which the Company is able to adapt its manufacturing and
service philosophies to the demands of higher volumes and lower costs.
ACQUISITION OF CRAY RESEARCH The acquisition of Cray Research will require,
among other things, integration of the Cray Research organization, business
infrastructure and product offerings with those of the Company in a way that
enhances the performance of the combined business. The challenges posed by the
acquisition include the management of a business with a different approach to
product design, manufacturing and sales and service, the development of a
consolidated product road map from a number of incompatible products and the
integration of several geographically separated research and development
centers.
(41)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The success of this process will be significantly influenced by the Company's
ability to retain key management, sales, and research and development personnel.
The integration process will also require the dedication of management
resources, which may temporarily distract attention from the day-to-day business
of the Company.
There are several other aspects of Cray Research's business that are
different from the Company's current business and may affect the operations of
the combined business:
* Government agencies and research institutions represent a major customer
group for Cray Research products. As a result of the acquisition, a greater
percentage of the Company's revenue will be derived from sales to such
customers, whose purchasing decisions may be adversely affected by
reductions or changes in government spending.
* International sales of Cray Research's products are more likely to be
subject to export licensing constraints than international sales of the
Company's current products.
* Cray Research derives most of its revenue from the sale of a small number
of large systems, which generally have a longer sales cycle. Revenue for
these systems is recognized at customer acceptance rather than upon
shipment. Cray Research's results for any period are significantly
influenced by the number and mix of systems accepted and whether a system
is sold or leased. Changes affecting even a small number of systems can
have significant financial implications.
* At June 30, 1996, the combined Company's backlog was $572 million,
representing orders scheduled to ship during fiscal 1997. This backlog
primarily consists of orders for Cray Research T90 and T3E systems, which
only recently had their first commercial shipments.
IMPACT OF GOVERNMENT CUSTOMERS A significant portion of the Company's revenue
is derived from sales to the U.S. government, either directly by the Company or
through system integrators and other resellers. This proportion will increase as
the result of the Cray Research acquisition. Sales to the government present
risks in addition to those involved in sales to commercial customers, including
potential disruptions due to appropriation and spending patterns and the
government's reservation of the right to cancel contracts for its convenience.
In the second quarter of fiscal 1996, for example, the Company's results were
adversely affected by purchasing slowdowns related to the federal government
budget impasse.
GLOBAL FINANCIAL MARKET RISKS The Company's business and financial results are
affected by fluctuations in world financial markets, including foreign currency
exchange rates and interest rates. The Company's hedging policy attempts to
mitigate some of these risks, based on management's best judgment of the
appropriate tradeoffs among risk, opportunity and expense. The Company regularly
reviews its overall hedging policies, and it continually monitors its hedging
activities to ensure that they are consistent with policy and appropriate and
effective in light of changing market conditions. Management may as part of this
review determine at any time to change its hedging policies. However, it is
important to recognize that the Company's risk management activities are not
comprehensive, and that there can be no assurance that these programs will
offset more than a portion of the adverse financial impact resulting from
unfavorable movements in either foreign exchange or interest rates.
Because more than half of the Company's revenue is from sales outside the
United States, and many key components are produced outside the United States,
the Company's results can be significantly affected by changes in foreign
currency exchange rates or weak economic conditions in the foreign markets in
which the Company distributes its products. The Company is primarily exposed to
changes in exchange rates on the Swiss franc, British pound, Japanese yen,
German mark and French franc. When the U.S. dollar strengthens against these
currencies, the value (as expressed in U.S. dollars) of non-U.S. dollar-based
sales and costs decrease. The opposite happens when the U.S. dollar weakens.
Because the Company is a net receiver of currencies other than the U.S. dollar,
it benefits from a weaker dollar and is adversely affected by a stronger dollar
relative to major currencies worldwide. Accordingly, a strengthening of the U.S.
dollar tends to affect negatively the Company's revenue and gross margins.
To mitigate the short-term impact of fluctuating currency exchange rates on
the Company's non-U.S. dollar-based sales and intercompany receivables, the
Company regularly hedges certain of these net exposures. Historically, the
Company has not sought to hedge future revenues. However, as a result of the
Cray Research acquisition, the Company is continuing Cray Research's policy of
entering into foreign exchange forward contracts that
(42)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
hedge firmly committed Cray Research backlog. Currently, these hedges extend
through December 1999. Beginning in fiscal 1997, the Company also expects to
hedge a portion of anticipated quarterly revenues from international operations.
The Company utilizes foreign currency forward contracts to hedge non-U.S. dollar
intercompany receivables. The Company has generally not hedged capital
expenditures, investments in subsidiaries or inventory purchases. However,
because the Company procures inventory and its international operations incur
expenses in local currencies, the financial effects of fluctuations in the U.S.
dollar values of non-U.S. dollar-based transactions frequently mitigate or tend
to offset each other on a consolidated basis.
The Company's interest income and expense is most sensitive to fluctuations
in the general level of U.S. interest rates. In this regard, changes in U.S.
interest rates affect the interest earned on the Company's cash equivalents and
marketable investments as well as interest paid on its borrowings. To mitigate
the impact of fluctuations in U.S. interest rates, the Company has entered into
an interest rate swap transaction intended to better match the Company's fixed
rate interest expense on its zero coupon convertible subordinated debentures
with the floating-rate interest income on its cash equivalents and marketable
investments.
OTHER RISKS OF INTERNATIONAL OPERATIONS The Company's results could also be
negatively affected by such factors as changes in trade protection measures,
longer accounts receivable collection patterns, or natural disasters. 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.
MANAGEMENT INFORMATION SYSTEM The Company replaced its United States
information management system in the third quarter of fiscal 1996 with a
comprehensive system used to manage the entire revenue cycle, including order
administration, billing and collection, as well as manufacturing and finance.
The Company expects that the system will provide operational efficiencies and
support future growth. However, as the system has been in operation for a
relatively short period, there remains a risk of functional or performance
difficulties, particularly as the system is extended to the Company's
international operations and to the Cray Research business.
DEVELOPMENT AND ACCEPTANCE OF MIPS -Registered Trademark- RISC ARCHITECTURE
Most 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.
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.
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 most of
its research and development operations and 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.
(43)
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended June 30
(In thousands, except per share amounts) 1996(1) 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Product and other revenue $ 2,553,128 $ 1,989,969 $ 1,365,513
Service revenue 368,188 238,299 172,253
----------- ----------- -----------
Total revenue 2,921,316 2,228,268 1,537,766
Costs and expenses:
Cost of product and other revenue 1,279,742 908,516 644,979
Cost of service revenue 202,697 123,543 90,409
Research and development 353,461 247,678 190,796
Selling, general and administrative 807,830 619,259 417,753
Write-off of acquired in-process technology
and merger-related expenses 103,193 22,000 --
----------- ----------- -----------
Total costs and expenses 2,746,923 1,920,996 1,343,937
----------- ----------- -----------
Operating income from continuing operations 174,393 307,272 193,829
Interest expense (22,365) (18,188) (8,321)
Interest income and other, net 32,778 27,635 13,100
Minority interest in net loss of Cray Research 3,982 -- --
----------- ----------- -----------
Income from continuing operations before
income taxes 188,788 316,719 198,608
Provision for income taxes 73,751 91,863 57,194
----------- ----------- -----------
Income from continuing operations 115,037 224,856 141,414
Discontinued operations:
Reduction of loss on disposal -- -- 400
----------- ----------- -----------
Net income $ 115,037 $ 224,856 $ 141,814
----------- ----------- -----------
----------- ----------- -----------
Income per share:
Income from continuing operations $ 0.65 $ 1.28 $ 0.86
----------- ----------- -----------
----------- ----------- -----------
Net income $ 0.65 $ 1.28 $ 0.86
----------- ----------- -----------
----------- ----------- -----------
Common and common equivalent shares used
in the calculation of income per share 175,790 175,435 165,149
</TABLE>
The accompanying notes are an integral part of these financial statements.
(1) Amounts reflect the April 2, 1996 acquisition of Cray Research which was
accounted for as a purchase. See Notes 2 and 3 to the consolidated
financial statements.
(44)
<PAGE>
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30
(Dollars in thousands) 1996(1) 1995
- -----------------------------------------------------------------------------
ASSETS:
Current assets:
Cash and cash equivalents $ 257,080 $ 307,875
Short-term marketable investments 38,316 208,094
Accounts receivable, net of allowance for
doubtful accounts of $23,767 in 1996;
$13,465 in 1995 978,874 627,738
Inventories 520,045 245,267
Deferred tax assets 198,239 44,006
Prepaid expenses and other current assets 103,701 29,573
----------- -----------
Total current assets 2,096,255 1,462,553
Other marketable investments 161,541 264,043
Property and equipment, net of accumulated
depreciation and amortization 464,879 254,446
Other assets 435,571 225,577
----------- -----------
$ 3,158,246 $ 2,206,619
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Short-term borrowings $ 136,718 $ --
Accounts payable 261,120 165,152
Accrued compensation 103,996 75,483
Income taxes payable 59,827 62,567
Accrued merger liabilities 56,251 22,191
Other current liabilities 204,789 112,371
Deferred revenue 273,549 122,748
Current portion of long-term debt 5,188 12,670
----------- -----------
Total current liabilities 1,101,438 573,182
Long-term debt and other 381,490 287,267
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, issuable
in series, 2,000,000 shares authorized;
shares issued and outstanding: 17,500 16,998 16,998
Common stock, $.001 par value, 500,000,000
shares authorized; shares issued :
172,410,082 in 1996; 160,478,815 in 1995 173 161
Additional paid-in capital 1,172,787 903,139
Retained earnings 461,311 385,915
Treasury stock, at cost: 35,614 shares in 1996 (867) --
Accumulated translation adjustment and other 24,916 39,957
----------- -----------
Total stockholders' equity 1,675,318 1,346,170
----------- -----------
$ 3,158,246 $ 2,206,619
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements.
(1) Amounts reflect the April 2, 1996 acquisition of Cray Research which was
accounted for as a purchase. See Notes 2 and 3 to the consolidated
financial statements.
(45)
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Three years ended June 30, 1996
(In thousands)
Accumulated
Additional Translation Total
Preferred Stock Common Stock Paid-In Retained Treasury Stock Adjustment Stockholders'
Shares Amount Shares Amount Capital Earnings Shares Amount and Other Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 809 $ 37,796 140,011 $ 140 $ 646,847 $ 16,855 -- $ -- $ (4,989) $ 696,649
Common stock issued under
employee stock option and
purchase plans including
related tax benefits -- -- 7,774 8 77,084 -- -- -- -- 77,092
Convertible preferred stock,
Series A preferred dividends -- -- -- -- -- (1,050) -- -- -- (1,050)
Currency translation
adjustment -- -- -- -- -- -- -- -- 17,944 17,944
Exercise of warrants -- -- 112 -- 1,000 -- -- -- -- 1,000
Common stock issued upon
purchase of Thomson
Digital Image -- -- 302 -- 1,847 -- -- -- -- 1,847
Conversion of redeemable
preferred stock to
common stock -- -- 251 -- 2,762 -- -- -- -- 2,762
Accreted mandatory
redemption premium of
preferred stock -- -- -- -- (889) -- -- -- -- (889)
Net income -- -- -- -- -- 141,814 -- -- -- 141,814
---- -------- ------- ----- ----------- --------- ------ ------- -------- -----------
Balance, June 30, 1994 809 37,796 148,450 148 728,651 157,619 -- -- 12,955 937,169
Common stock issued under
employee stock option and
purchase plans including
related tax benefits -- -- 7,443 8 108,501 -- -- -- -- 108,509
Conversion of preferred
stock (476) (19,703) 688 1 19,702 -- -- -- -- --
Convertible preferred stock,
Series A preferred
dividends -- -- -- -- -- (1,006) -- -- -- (1,006)
Currency translation
adjustment -- -- -- -- -- -- -- -- 25,885 25,885
Unrealized gain on
available-for-sale
securities, net of tax -- -- -- -- -- -- -- -- 1,157 1,157
Net income -- -- -- -- -- 224,856 -- -- -- 224,856
Net transactions of Alias
and Wavefront from
February 1, 1994 through
July 31, 1994 and January
1, 1994 through June 30,
1994, respectively (316) (1,095) 3,898 4 46,285 4,446 -- -- (40) 49,600
---- -------- ------- ----- ----------- --------- ------ ------- -------- -----------
Balance, June 30, 1995 17 16,998 160,479 161 903,139 385,915 -- -- 39,957 1,346,170
Common stock issued under
employee stock option and
purchase plans including
related tax benefits -- -- 4,606 5 72,613 (39,116) 2,417 75,147 -- 108,649
Common stock issued for
Cray Research acquisition -- -- 7,325 7 197,035 -- -- -- -- 197,042
Convertible preferred
stock, Series A preferred
dividends -- -- -- -- -- (525) -- -- -- (525)
Treasury stock purchased -- -- -- -- -- -- (2,453) (76,014) -- (76,014)
Currency translation
adjustment -- -- -- -- -- -- -- -- (12,047) (12,047)
Unrealized loss on
available-for-sale
securities, net of tax -- -- -- -- -- -- -- -- (2,994) (2,994)
Net income -- -- -- -- -- 115,037 -- -- -- 115,037
---- -------- ------- ----- ----------- --------- ------ ------- -------- -----------
Balance, June 30, 1996(1) 17 $ 16,998 172,410 $ 173 $ 1,172,787 $ 461,311 (36) $ (867) $ 24,916 $ 1,675,318
---- -------- ------- ----- ----------- --------- ------ ------- -------- -----------
---- -------- ------- ----- ----------- --------- ------ ------- -------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
(1) Amounts reflect the April 2, 1996 acquisition of Cray Research which was
accounted for as a purchase. See Notes 2 and 3 to the consolidated
financial statements.
(46)
(47)
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended June 30
(In thousands) 1996(1) 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 115,037 $ 224,856 $ 141,814
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 197,836 115,537 93,300
Interests in equity investments 5,927 7,370 --
Write-off of acquired in-process technology 98,208 -- --
Changes in deferred tax assets and liabilities (66,776) 7,912 (1,777)
Other (8,977) 27,159 23,756
Changes in operating assets and liabilities
(net of effects of Cray Research acquisition):
Accounts receivable (202,061) (222,482) (77,808)
Inventories (19,632) (115,929) (1,287)
Accounts payable 38,109 71,238 (5,328)
Other assets and liabilities 54,015 117,983 102,947
--------- --------- ---------
Total adjustments 96,649 8,788 133,803
--------- --------- ---------
Net cash provided by operating activities 211,686 233,644 275,617
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale investments:
Purchases (1,006,107) (575,191) (394,406)
Sales 1,232,419 178,928 72,942
Maturities 52,938 209,873 99,293
Acquisition of Cray Research, net of cash acquired (408,144) -- --
Capital expenditures (188,853) (147,933) (92,490)
Increase in other assets (62,388) (23,879) (30,716)
Net increase in cash and cash equivalents of Alias
for the period February 1994 to July 1994, and
Wavefront for the period January 1994 to
June 1994 -- 44,479 --
--------- --------- ---------
Net cash used in investing activities (380,135) (313,723) (345,377)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt 137,509 2,286 204,006
Payments of debt principal (24,894) (16,077) (9,988)
Sale of common stock 81,578 75,334 50,527
Repurchase of common stock (76,014) -- --
Cash dividends-preferred stock (525) (1,050) (1,050)
--------- --------- ---------
Net cash provided by financing activities 117,654 60,493 243,495
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents (50,795) (19,586) 173,735
Cash and cash equivalents at beginning of year 307,875 327,461 153,726
--------- --------- ---------
Cash and cash equivalents at end of year $ 257,080 $ 307,875 $ 327,461
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
(1) Amounts reflect the April 2, 1996 acquisition of Cray Research which was
accounted for as a purchase. See Notes 2 and 3 to the consolidated
financial statements.
(48)
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1.
NATURE OF OPERATIONS
Silicon Graphics, Inc. ("Silicon Graphics" or the "Company") is a leading
provider of high-performance computing systems and software to customers
throughout the world. The Company delivers three-dimensional graphics, digital
media and symmetric multiprocessing technologies for a wide range of technical,
scientific, corporate and entertainment applications. The Company's product
portfolio ranges from desktop workstations to database and compute servers
through multi-million dollar, high-performance, supercomputing systems. The
Company's products are primarily manufactured in Mountain View, California with
other manufacturing facilities located in the Midwest and Europe. The Company
distributes its products through its direct sales force, as well as through
indirect channels including resellers and distributors. Product and other
revenue consists primarily of revenue from system and software product
shipments, as well as the sale of software distribution rights, system leasing,
technology licensing agreements and non-recurring engineering ("NRE") contracts.
Service revenue results primarily from customer support and maintenance
contracts.
NOTE 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries after elimination of
significant intercompany transactions and balances, including transactions
between the Company and Alias Research Inc. ("Alias") and Wavefront
Technologies, Inc. ("Wavefront"). The mergers with Alias and Wavefront were
accounted for as a pooling of interests and as such, all periods prior to fiscal
1995 were restated. The consolidated financial statements for all fiscal years
prior to fiscal 1995 were not restated to adjust Alias' and Wavefront's fiscal
year-ends to that of the Company. Thus, such periods include the Company's
results of operations and balance sheet data on a June 30 fiscal year basis,
Alias' on a January 31 fiscal year basis, and Wavefront's on a prior calendar
year basis. The operating results of Cray Research, Inc. ("Cray Research") were
consolidated with those of the Company as of April 2, 1996, and the consolidated
results reflect a 25% minority interest in the operating results of Cray
Research for the period from April 2, 1996 through June 30, 1996. Certain
amounts for prior years have been reclassified to conform to current year
presentation.
FOREIGN CURRENCY TRANSLATION The Company translates the assets and liabilities
of its foreign subsidiaries stated in local functional currencies to U.S.
dollars at the rates of exchange in effect at the end of the period. Revenues
and expenses are translated using rates of exchange in effect during the period.
Gains and losses from currency translation are included in stockholders' equity.
Currency transaction gains or losses are recognized in current operations and,
net of hedging gains or losses, have not been significant to the Company's
operating results in any period.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
CASH EQUIVALENTS AND MARKETABLE INVESTMENTS Cash equivalents consist of high
quality money market instruments with original maturities of 90 days or less.
Short-term marketable investments consist of high quality money market
instruments with original maturities greater than 90 days, but less than one
year, and are stated at fair value. Other marketable investments consist
primarily of high quality debt securities with maturities greater than one year
and less than three years, and are stated at fair value. At June 30, 1996, the
Company's cash equivalents and marketable investments are all classified as
available-for-sale.
The cost of securities when sold is based upon specific identification.
Realized gains and losses and declines in value judged to be other-than-
temporary on available-for-sale securities are included in interest income and
other, net. Unrealized gains and losses (net of tax) on securities classified as
available-for-sale are included in "accumulated translation adjustment and
other" in stockholders' equity.
(49)
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FAIR VALUES OF FINANCIAL INSTRUMENTS Fair values of cash equivalents and
short-term debt approximate cost due to the short period of time to maturity.
Fair values of marketable investments, long-term debt, foreign exchange forward
contracts and interest swaps are based on quoted market prices or pricing models
using current market rates.
DERIVATIVE FINANCIAL INSTRUMENTS Silicon Graphics uses derivatives only for
the purpose of reducing the financial market risks of its business operations.
The Company uses derivative products to hedge the foreign currency and interest
rate market exposures underlying certain assets and liabilities and commitments
related to customer transactions. The Company does not use any derivative
instruments for trading purposes. The Company's accounting policies for these
instruments are based on its designation of such instruments as hedging
transactions. The criteria the Company uses for designating an instrument as a
hedge include its effectiveness in risk reduction and one-to-one matching of
derivative instruments to underlying transactions. Gains and losses on foreign
exchange forward contracts for which a firm commitment related to a customer
transaction has been attained are deferred and recognized in revenue in the same
period that the underlying transactions are settled. Gains and losses on foreign
currency forward contracts that are designated and effective as hedges of
existing assets and liabilities are recognized in interest and other income,
net, in the same period as losses and gains on the underlying transactions are
recognized and generally offset. Forward points, premiums and discounts, if any,
are amortized over the life of the contract and are included in interest and
other, net. The differential between fixed and floating rates to be paid or
received on interest rate swaps is accrued and recognized as an adjustment to
interest expense. The related amount payable or receivable is included in other
current assets or accrued liabilities.
INVENTORIES Manufacturing inventories are stated at the lower of cost (first-
in, first-out) or market. Marketing inventories are stated at cost less
depreciation generally based on a two-year life.
PROPERTY AND EQUIPMENT Property and equipment is stated at cost and
depreciation is computed using the straight-line method. Useful lives of two to
seven years are used for machinery and equipment and furniture and fixtures;
leasehold improvements are amortized over the shorter of their useful lives or
the term of the lease. The Company's buildings are depreciated over twenty-five
to thirty years and improvements over eight to fifteen years.
Leased systems under operating leases are capitalized and carried at cost.
Depreciation is computed using the sum-of-years-digits method over an estimated
useful life of two to four years. Depreciation commences upon system acceptance.
OTHER ASSETS Included in other assets are intangible assets related to the
acquisition of Cray Research in fiscal 1996 and goodwill associated with the
acquisition of Silicon Graphics World Trade Corporation in fiscal 1991.
Amortization of these purchased intangibles and goodwill is provided on a
straight-line basis over the respective useful lives of the assets ranging from
four to twenty years. Also included in other assets are purchased technologies
and spare parts that are generally amortized on a straight-line basis over the
course of their respective useful lives ranging from two to 10 years, as well as
deferred tax assets.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of ("SFAS 121"), which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt SFAS 121 in the first quarter of fiscal year 1997 and, based
on current circumstances, does not believe the effect of adoption will be
material.
REVENUE RECOGNITION Revenue from Cray Research supercomputing system sales
(net of trade-in allowances) is recognized upon acceptance by the customer or
independent distributor, or in the case of a conversion from lease to purchase,
at the time of the customer's election to convert. Revenue from systems under
operating lease contracts is recorded as earned over the lease term. All other
product revenues are recognized when the product is shipped to the customer and
the Company has no additional performance obligations. Initial software fees are
recognized when the product has been shipped, provided that the Company has no
additional performance obligations. Revenue recognition under technology
agreements
(50)
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
is dependent on the nature and level of effort required to deliver and/or
support the technology transfer. Generally, technology revenue is recognized
upon the completion of contract requirements or milestones.
Revenue related to future commitments under service contracts is deferred
and recognized ratably over the related contract term.
PRODUCT WARRANTY The Company provides at the time of sale for the estimated
cost to warrant its products against defects in materials and workmanship for a
period of up to one year.
ADVERTISING COSTS The Company accounts for advertising costs as expense in the
period in which they are incurred. Advertising expense for the years ended June
30, 1996, 1995 and 1994 was $37.5 million, $16.9 million and $6.7 million,
respectively.
PER SHARE DATA Primary earnings per share are computed using the weighted
average number of shares of common stock and dilutive common share equivalents
outstanding during the period. Dilutive common share equivalents include stock
options or warrants using the treasury stock or modified treasury stock method
(whichever applies) and, if dilutive, convertible securities on an as-if-
converted basis. For the purpose of calculating earnings per share, the
Company's convertible preferred stock is considered to be a common stock
equivalent. Fully diluted earnings per share are substantially the same as
reported earnings per share.
STOCK COMPENSATION The Company accounts for stock awards granted to employees
in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees.
NOTE 3.
BUSINESS COMBINATIONS
Acquisition of Cray Research On April 2, 1996, Silicon Graphics acquired
approximately 75% of the outstanding shares of common stock of Cray Research for
cash. On June 30, 1996, the Company acquired the remaining outstanding Cray
Research shares in a merger by exchanging one share of Silicon Graphics common
stock for each remaining share of Cray Research common stock. Silicon Graphics
also assumed the outstanding Cray Research employee stock options. Cray Research
is widely recognized as a leader in the market for large-scale supercomputer
systems and solutions used in government, industry and academia. The aggregate
purchase price (including direct acquisition costs) was $767 million in cash,
common stock and the value associated with options to purchase the Company's
common stock. The Company has accounted for the acquisition using the purchase
method.
The following is a summary of the purchase price allocation (in millions):
Inventories and service contracts $ 281.5
Property, plant & equipment 143.7
Intangible assets 84.3
Accrual for exit costs (39.4)
Other assets/liabilities, net 198.5
Acquired in-process technology 98.2
----------
$ 766.8
----------
----------
Intangible assets consist of customer lists, trade name, completed
technology and workforce-in-place, as determined by an independent appraisal. To
determine the value of the completed technology, the expected future cash flows
of each existing technology product were discounted taking into account risks
related to the characteristics and applications of each product, existing and
future markets, and assessments of the life cycle stage of each product. Based
on this analysis, the existing technology that had reached technological
feasibility was assigned a value of $24.5 million and capitalized. Completed
technology has been assigned a four year life, workforce-in-place a five year
life and customer lists and trade name 15 year lives. The lives were assigned
based on their estimated useful lives.
The accrual for exit costs includes only those direct costs related to
exiting facilities and operations acquired from Cray Research and does not
include any costs related to modifications of the previous Silicon Graphics
business. As part of the acquisition completed in June 1996, the Company
developed a plan regarding utilization and deployment of the assets and
operations acquired from Cray Research. The plan involved primarily streamlining
duplicate administrative activities and consolidating sales office locations.
The Company expects to have substantially completed the plan regarding the
utilization and deployment of the acquired Cray Research assets and operations
by June 1997.
The composition of costs related to the exit activities are as follows (in
millions): non-cancelable lease commitments after closure and related costs --
$16.6; severance and related costs -- $20.5; and other costs -- $2.3.
(51)
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Exit activities through June 30, 1996 have consisted principally of
severance payments resulting in cash outlays of $1.7 million. Approximately
$37.7 million of the exit accrual remains at June 30, 1996, a majority of which
the Company expects will be spent in fiscal 1997.
The $98.2 million allocated to acquired in-process technology, as
determined by an independent appraisal, was expensed immediately as required
under generally accepted accounting principles. To determine the value of the
technology in the development stage, the Company considered, among other
factors, the stage of development of each project, the time and resources needed
to complete each project, expected income and associated risks. Associated risks
included the inherent difficulties and uncertainties in completing the project
and thereby achieving technological feasibility, and risks related to the
viability of and potential changes to future target markets. This analysis
resulted in the value assigned to the in-process technology that had not yet
reached technological feasibility and that did not have alternative future uses.
The unaudited pro forma combined condensed results of operations of the
Company for fiscal 1996 and 1995, had the acquisition occurred at the beginning
of each fiscal year presented and which eliminates the non-recurring charges,
are as follows (in thousands, except per share amounts):
1996 1995
- --------------------------------------------------------------------------------
Net revenue $ 3,447,480 $ 2,955,991
Net income $ 108,044 $ 5,343
Net income per share $ 0.59 $ 0.03
The unaudited pro forma combined results for fiscal 1996 and 1995 exclude
the effects of the write-off of acquired in-process technology and other merger
costs of $102 million, as such amounts are non-recurring. In addition to
combining the historical results of operations of the two companies, the pro
forma calculations include the estimated effect on the Company's historical
results of operations from adjustments to the historical carrying values of Cray
Research inventories and property, plant and equipment; intangible asset
amortization; and loss of interest income as a result of making the acquisition.
The unaudited pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the operating results that would have
occurred had the transaction been completed at the beginning of the periods
indicated, nor is it necessarily indicative of future operating results.
MERGERS WITH ALIAS AND WAVEFRONT On June 15, 1995, the Company merged with
Alias and Wavefront. Alias and Wavefront outstanding common stock was converted
to common stock of Silicon Graphics at rates of .90 and .49, respectively.
Silicon Graphics issued 14,100,577 shares in connection with the mergers. The
mergers were accounted for as a pooling of interests and, accordingly, the
Company's consolidated financial statements and Notes to Consolidated Financial
Statements have been restated to include the results of Alias and Wavefront for
all periods presented. Adjustments to combine these entities, consisting
primarily of intercompany transactions, were not significant.
The Company incurred costs in connection with the mergers and consolidation
of operations. Included in the accompanying consolidated statement of operations
for the year ended June 30, 1995 are merger-related expenses totaling $22.0
million, consisting primarily of charges for transaction and professional fees,
personnel severance costs, and elimination of duplicate facilities.
Separate results of operations for the periods prior to the mergers are as
follows (in thousands):
<TABLE>
<CAPTION>
Merger
Silicon Related
Year ended June 30, 1995 Graphics Alias Wavefront Expenses Adjustments Combined
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue $ 2,142,080 $ 64,270 $ 25,691 $ -- $ (3,773) $ 2,228,268
Net income 231,550 13,164 663 (22,000) 1,479 224,856
Year ended June 30, 1994
- -------------------------------------------------------------------------------------------------------------------
Total revenue $ 1,481,602 $ 38,306 $ 17,858 $ -- $ -- $ 1,537,766
Net income (loss) 140,674 4,167 (3,027) -- -- 141,814
</TABLE>
(52)
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The adjustments for the year ended June 30, 1995 relate to product sales by
Silicon Graphics to Alias and Wavefront during the fourth quarter of fiscal year
1995. Product sales by Silicon Graphics to Alias and Wavefront in prior periods
were not significant. The net income adjustment amount for June 30, 1995
includes a $1.6 million benefit for the effect of the $22.0 million merger
related expenses on the tax provision.
NOTE 4.
FINANCIAL INSTRUMENTS
CASH EQUIVALENTS AND MARKETABLE INVESTMENTS The Company's cash equivalents and
marketable investments as of June 30, 1996 and 1995 are as follows (in
thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
June 30, 1996 Cost Gains Losses Fair Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations
of U.S. government
agencies $ 203,975 $ -- $ (2,624) $ 201,351
Repurchase agreements 55,500 -- -- 55,500
Certificates of deposit
and Euro certificates
of deposit 52,731 -- -- 52,731
U.S. commercial paper 15,277 -- -- 15,277
Other 901 -- -- 901
----------- ----------- ----------- -----------
Total 328,384 -- (2,624) 325,760
Less amounts classified
as cash equivalents (125,903) -- -- (125,903)
----------- ----------- ----------- -----------
Total marketable
investments $ 202,481 $ -- $ (2,624) $ 199,857
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
June 30, 1995 Cost Gains Losses Fair Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations
of U.S. government
agencies $ 285,534 $ 1,972 $ (944) $ 286,562
U.S. corporate notes 111,186 1,128 (551) 111,763
Certificates of deposit
and Euro certificates
of deposit 38,003 161 -- 38,164
Floating rate notes 23,111 -- (128) 22,983
U.S. commercial paper 12,650 15 -- 12,665
----------- ----------- ----------- -----------
Total marketable
investments $ 470,484 $ 3,276 $ (1,623) $ 472,137
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
At June 30, 1995, the Company also had $206.4 million in cash equivalents
designated held-to-maturity and consisting of repurchase agreements--$89.7
million; U.S. commercial paper--$56.8 million; floating rate notes--$34.4
million; certificates of deposit--$14.0 million; U.S. government securities--
$10.6 million and other securities--$0.9 million; all of which matured in fiscal
1996. At June 30, 1995, fair values of held-to-maturity investments approximated
amortized cost and unrealized gains and losses were not material.
Realized gains or losses on sales of available-for-sale securities in
fiscal 1996 were not significant. In fiscal 1995, the Company recognized a $7.3
million loss on the sale of its marketable investment in Control Data Systems,
Inc.
The amortized cost and estimated fair value of marketable investments at
June 30, 1996, by contractual maturity, are as follows (in thousands):
Estimated
Cost Fair Value
- -------------------------------------------------------------------------------
Due in one year or less $ 38,388 $ 38,316
Due after one year through two years 76,240 75,302
Due after two years through three years 87,853 86,239
----------- -----------
Total $ 202,481 $ 199,857
----------- -----------
----------- -----------
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The table below shows the
notional principal, fair value, and credit risk amounts of the Company's foreign
exchange and interest rate instruments as of June 30, 1996 and 1995. The
notional principal amounts for off-balance-sheet instruments provide one measure
of the transaction volume outstanding as of year end, and do not represent the
amount of the Company's exposure to credit loss or market risk. The credit risk
amount represents the Company's gross exposure to potential accounting loss on
these transactions if all counterparties failed to perform as agreed at the
contracted rates and contracts had to be replaced at rates prevailing at each
respective date. The Company's exposure to credit loss and market risk will vary
over time as a function of currency exchange rates and interest rates.
Although the table below reflects the notional principal, fair value, and
credit risk amounts of the Company's foreign exchange and interest rate
instruments, it does not reflect the gains or losses associated with the
exposures and transactions that the foreign exchange and interest rate
instruments are intended to hedge. The amounts ultimately realized upon
settlement of these
(53)
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
financial instruments, together with the gains and losses on the underlying
exposures, will depend on actual market conditions during the remaining life of
the instruments.
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1996
Notional Notional
(In thousands) Amount Fair Value Credit Risk Amount Fair Value Credit Risk
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Foreign exchange instruments:
Forward contracts
German Mark $ 106,584 $ 2,694 $ 1,631 $ 24,753 $ 137 $ --
French Franc 71,180 322 334 23,631 (62) 110
Swiss Franc 60,723 769 918 158,913 1,703 --
British Pound 59,204 (452) 93 38,094 126 --
Japanese Yen 57,235 430 341 26,609 13 --
Other 156,722 (538) 281 80,004 305 226
----------- ----------- ----------- ----------- ----------- -----------
Total forward exchange contracts $ 511,648 $ 3,225 $ 3,598 $ 352,004 $ 2,222 $ 336
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Sold put options $ -- $ -- $ -- $ 7,646 $ (18) $ --
Purchased call options $ -- $ -- $ -- $ (7,646) $ 32 $ --
Interest rate instruments:
Receive fixed, pay floating rate swap $ 200,095 $ (1,312) $ -- $ 200,095 $ (3,745) $ --
</TABLE>
The foreign exchange forward contracts were entered into to hedge the U.S.
dollar value of the Company's net non-U.S. dollar-based intercompany
transactions, as well as certain firmly committed non-U.S. dollar-based customer
transactions. All foreign exchange forward contracts related to recorded
transactions expire within one year. All foreign exchange forward contracts
related to firmly committed customer transactions expire within one to three and
one-half years. Deferred gains and losses on contracts related to firm
commitments were immaterial at June 30, 1996.
The options, entered into by Alias and assumed by Silicon Graphics at the
time of the mergers, were part of a put-call strategy to hedge a fixed monthly
amount of Canadian dollar denominated expenses. This strategy was discontinued
in fiscal 1996.
The Company entered into an interest rate swap agreement, expiring November
1996, on a notional amount of $200.1 million reflecting the gross proceeds of
its zero coupon convertible subordinated debentures (see Note 9). Under the
agreement, the Company receives a fixed rate of interest on the notional amount
at 4.15% in exchange for payment of a variable interest rate based on the six-
month U.S. dollar London Interbank offered rate ("LIBOR") less 47 basis points.
The pay rates at June 30, 1996 and 1995 were 5.32% and 5.53%, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and estimated fair
values of the Company's financial instruments at June 30, 1996 and 1995 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
Carrying Carrying
Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash
equivalents $ 257,080 $ 257,080 $ 307,875 $307,875
Marketable investments 199,857 199,857 472,137 472,137
Debt instruments 443,935 452,708 246,005 329,816
Foreign exchange
contracts 2,400 3,225 2,222 2,222
Sold put options -- -- -- (18)
Purchased call options -- -- -- 32
Interest rate swap (380) (1,312) (468) (3,745)
</TABLE>
NOTE 5.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of cash investments and trade receivables. The
Company places its investments with high-credit-quality counterparties and, by
policy, limits the amount of credit exposure to any one counterparty. The
Company performs ongoing credit evaluations of its customers and except in
connection with the sales of supercomputers, generally does not require
collateral. The Company maintains reserves for potential credit losses and such
losses have been within management's expectations.
(54)
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6.
CONCENTRATIONS OF OTHER RISKS
MATERIALS Certain of the components used by the Company in the manufacture of
its products are available from a limited number of suppliers and frequently in
the initial stages of new product introductions are available from only a single
source. Shortages of various essential materials could occur due to interruption
of supply or increased demand in the industry. If the Company were unable to
procure certain such components, it could affect the Company's ability to meet
demand for its products which would have an adverse short-term effect upon its
results.
INTERNATIONAL OPERATIONS Because more than half of the Company's revenue is
derived 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, trade
protection measures, longer accounts receivable collection patterns, changes in
regional or worldwide economic or political conditions, or natural disasters.
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. The risks of its international operations are mitigated in part by the
Company's foreign exchange hedging program and by the extent to which the
Company's sales and manufacturing activities are diversified.
NOTE 7.
INVENTORIES
Inventories at June 30, 1996 and 1995 are as follows (in thousands):
1996 1995
- -------------------------------------------------------------------------------
Components and subassemblies $ 199,441 $ 43,640
Work-in-process 177,744 84,049
Finished goods 74,997 31,887
Marketing 67,863 85,691
----------- -----------
Total inventories $ 520,045 $ 245,267
----------- -----------
----------- -----------
NOTE 8.
PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1996 and 1995 is as follows (in thousands):
1996 1995
- -------------------------------------------------------------------------------
Land and buildings $ 115,547 $ 36,531
Machinery and equipment 487,122 342,481
Furniture and fixtures 99,332 73,397
Leasehold improvements 102,523 63,061
Leased systems 20,835 --
----------- -----------
825,359 515,470
Accumulated depreciation
& amortization (360,480) (261,024)
----------- -----------
Net property and equipment $ 464,879 $ 254,446
----------- -----------
----------- -----------
NOTE 9.
BORROWING ARRANGEMENTS
SHORT-TERM BORROWINGS Short-term borrowings consist of $136.7 million in
reverse repurchase agreements bearing interest at 5.37%, collateralized by
marketable investments.
The Company also has an unsecured revolving credit facility totaling $250.0
million, expiring in April 1999. There were no cash borrowings under this
facility at June 30, 1996. Interest on borrowings is based upon either a prime
rate, LIBOR rate or competitive bid rate at the Company's option. Under this
credit facility, the Company is subject to certain commitment and utilization
fees on the unused portion of the committed amount. At June 30, 1996, fees
incurred were not material. Covenants governing the credit facility require the
maintenance of certain financial ratios. At June 30, 1996, the Company was in
compliance with these covenants.
LONG-TERM DEBT Long-term debt at June 30, 1996 and 1995 is as follows (in
thousands):
1996 1995
- -------------------------------------------------------------------------------
Zero coupon convertible subordinated
debentures, due 2013 at 4.15%,
net of unamortized discount of
$231,731 ($240,717 in 1995) $ 223,269 $ 214,283
Convertible subordinated debentures,
due 2011 at 6.125%, net of
unamortized discount of $17,529 64,471 --
8.98% Senior Notes due 1996 -- 6,250
Swiss Franc mortgage due 2013
at 3.54%, which resets quarterly 13,691 16,402
Other 5,786 9,070
----------- -----------
307,217 246,005
Less amounts due within one year (5,188) (12,670)
----------- -----------
Amounts due after one year $ 302,029 $ 233,335
----------- -----------
----------- -----------
(55)
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In November 1993, the Company issued zero coupon convertible subordinated
debentures (the "Debentures") with an ultimate maturity amount of $455.0
million. Effective November 2, 1998, the Debentures will be redeemable at any
time, at the option of the Company, at redemption prices equal to the issue
price ($439.77 per debenture) plus accrued original issue discount to the date
of redemption. At the option of the holder, each Debenture is convertible into
16.269 shares of common stock of the Company at any time. Also at the option of
the holder, the Debentures will be purchased by the Company on November 2, 1998,
November 2, 2003 or November 2, 2008, at purchase prices equal to the issue
price plus accrued original issue discount to such purchase date. The Company,
at its option, may elect to pay any such purchase price in cash or shares of
common stock, or any combination thereof. At June 30, 1996 and 1995, the fair
values of the outstanding Debentures were $230.9 million and $298.0 million,
respectively.
Related to the Debentures, the Company has entered into an interest rate
swap agreement on a notional amount of $200.1 million resulting in a variable
interest rate of six-month LIBOR less 47 basis points (5.32% at June 30, 1996).
The swap expires in November 1996.
In connection with the Cray Research acquisition, the Company assumed the
Cray Research convertible subordinated debentures. These debentures are
convertible into the Company's common stock at a conversion price of $78 per
share at any time prior to maturity and may be redeemed at the Company's option
at a price of 100%. In 1994 Cray Research repurchased a portion of the
debentures with a face value of $23.0 million. The repurchase satisfied the
first four required annual sinking fund payments of $5.8 million originally
scheduled for the years 1997 through 2000. Remaining annual sinking fund
payments of $5.8 million each are scheduled from 2001 to 2010 with a final
maturity payment of $24.5 million in 2011. At June 30, 1996 the fair value of
these debentures was $65.6 million.
Principal maturities of long-term debt at June 30, 1996, are as follows (in
millions): 1997 - $5.2; 1998 - $2.7; 1999 - $2.0; 2000 - $1.5; 2001 - $1.4; and
$294.4, thereafter.
NOTE 10.
LEASING ARRANGEMENTS AS LESSOR
In connection with the acquisition of Cray Research, the Company assumed certain
computer leasing arrangements pursuant to which it leases computer equipment to
customers under operating leases with terms that generally range from one to
four years. Contracts with U.S. Government agencies generally provide for
cancellation upon 30 days notice.
At June 30, 1996, leased systems aggregate $20.8 million less accumulated
depreciation of $4.6 million.
The Company also assumed Cray Research lease arrangements which are
accounted for as sales. The net investment in sales-type leases at June 30, 1996
is summarized as follows (in thousands):
Total minimum lease payments receivable $ 43,254
Less unearned interest income (4,927)
----------
Net investment in sales-type leases 38,327
Less current portion included in current receivables (10,443)
----------
Long-term portion included in other assets $ 27,884
----------
----------
Future minimum lease rents on noncancelable sales-type lease agreements as
of June 30, 1996 are as follows (in millions): 1997-$13.2; 1998-$18.0; 1999-
$6.9; 2000-$3.3; and 2001-$1.9. Future minimum lease rents on noncancelable
operating lease agreements as of June 30, 1996 are not material.
NOTE 11.
LEASING ARRANGEMENTS AS LESSEE
The Company leases certain of its facilities and some of
its equipment under non-cancelable operating lease arrangements.
Future minimum annual lease payments under operating leases, net of
subleases and rental income, at June 30, 1996, are as follows (in millions):
1997-$73.9; 1998-$69.5; 1999-$54.2; 2000-$43.8; 2001-$28.8; and $147.8,
thereafter. Leases for facilities that will be vacated as a result of the
acquisition of Cray Research are included in the preceding payment amounts.
Future payments associated with these leases were provided for in the Company's
exit cost accrual (see Note 3) and therefore do not represent future operating
expenses.
Aggregate operating lease rent expense was (in millions): $76.7, $49.6 and
$44.7, in 1996, 1995 and 1994, respectively.
(56)
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Under one of its lease agreements, the Company is contingently liable for
the residual value of five buildings at the end of their lease terms. The lease
for one of the buildings expires in 2000 and the lease for the additional four
buildings expires in 2002. However, the Company has the option to extend these
leases for an additional 35 years after expiration. If at the end of the final
lease renewal, or upon the Company's option to terminate the lease at any time,
the Company does not purchase the property or arrange a third-party purchase,
then the Company would be obligated to the lessor for a guaranteed payment equal
to a specified percentage of the lessor's purchase price for the properties. The
Company would also be obligated to the lessor for all or some portion of this
amount if the price paid by a third party for the property is below a specified
percentage of the lessor's purchase price. The total amount related to the five
properties, for which the Company would be contingently liable, is approximately
$95.9 million at the end of the lease terms.
NOTE 12.
STOCKHOLDERS' EQUITY
PREFERRED STOCK TRANSACTIONS NKK Corporation ("NKK") of Japan, through a
wholly-owned U.S. subsidiary, owns 17,500 shares of Series A Convertible
Preferred Stock. The Series A Preferred stock pays a 3% cumulative annual
dividend, has preference upon liquidation in the amount of the purchase price
and has aggregate voting rights equivalent to 1,400,000 shares of common stock.
The preferred stock is convertible into the common stock of the Company at
certain times at the then-current price of the common stock. The preferred is
perpetual, but is subject to redemption at the option of the Company at certain
times if the market price of the common stock is below $8.75 per share.
STOCK AWARD PLANS The Company has various stock award plans which provide for
the grant of incentive and nonstatutory stock options and the issuance of
restricted stock to employees. Incentive stock options are granted at not less
than the fair market value on the date of grant; the prices of nonstatutory
stock option grants and restricted stock are determined by the board of
directors. Under the plans, options and restricted stock generally vest over a
fifty-month period from the date of grant.
Under one of the plans, the number of shares available for grant or
issuance will be automatically increased each July 1, through 1997 by a number
of shares equal to 3.5% of the total common shares issued and outstanding on the
preceding June 30.
In addition, the Company has a Directors' Stock Option Plan which allows
for the grant of nonstatutory stock options to nonemployee directors at not less
than the fair market value at the date of grant. Eligible directors are granted
an option to purchase 30,000 shares of common stock on the date of their initial
election as a director. On November 1 of each year, each eligible director is
granted an option to purchase an additional 10,000 shares of common stock. These
options generally vest in installments over a four year period. At June 30,
1996, 133,100 shares were available for future option grants under the
Directors' Stock Option Plan.
In connection with the mergers (see Note 3), all outstanding stock options
of Alias and Wavefront converted to stock options for Silicon Graphics common
stock at ratios of .90 and .49, respectively. As a result, outstanding options
to purchase 2,190,153 shares were assumed.
In connection with the acquisition of Cray Research (see Note 3), each
outstanding stock option of Cray Research was converted to an option for Silicon
Graphics common stock. As a result, outstanding options to purchase 3,894,570
shares were assumed.
As of June 30, 1996 and 1995, outstanding options to purchase 20,442,299
and 20,025,442 shares, respectively, were exercisable and 213,855 shares and no
shares of restricted stock, respectively, were subject to repurchase.
(57)
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Activity under all of the stock award plans was as follows:
<TABLE>
<CAPTION>
Shares Available Outstanding Options
For Grant Shares Price
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at June 30, 1993 4,006,818 30,817,016 $ 0.18 - $ 25.83
Additional shares authorized for issuance 5,063,622 -- --
Options granted (6,664,519) 6,664,519 $ 4.08 - $ 25.63
Options exercised -- (5,205,003) $ 0.25 - $ 22.88
Options canceled 979,079 (979,079) $ 0.96 - $ 25.63
Plan shares expired (946) -- --
----------- -----------
Balance at June 30, 1994 3,384,054 31,297,453 $ 0.18 - $ 25.83
Additional shares authorized for issuance 5,902,569 -- --
Options granted (6,531,385) 6,531,385 $ 24.00 - $ 37.13
Options exercised -- (5,712,687) $ 0.18 - $ 31.38
Options canceled 928,870 (928,870) $ 2.78 - $ 37.13
Restricted shares granted (4,740) -- --
Plan shares expired (1,848) -- --
Net transactions of Alias and Wavefront during
eliminated periods from February 1, 1994
to July 31, 1994 and January 1, 1994 to
June 30, 1994, respectively. (1,185,384) 787,656 $ 1.88 - $ 25.83
----------- -----------
Balance at June 30, 1995 2,492,136 31,974,937 $ 0.38 - $ 37.13
Additional shares authorized for issuance 7,116,758 -- --
Cray Research options assumed 2,540,543 3,894,570 $ 14.75 - $ 47.63
Options granted (9,305,575) 9,305,575 $ 12.69 - $ 42.50
Options exercised -- (5,283,368) $ 0.38 - $ 37.09
Options canceled 1,835,013 (1,835,013) $ 3.56 - $ 42.50
Restricted shares granted (232,500) -- --
Restricted shares returned 20,000 -- --
Plan shares expired (160) --
----------- -----------
Balance at June 30, 1996 4,466,215 38,056,701 $ 0.96 - $ 47.63
----------- -----------
----------- -----------
</TABLE>
STOCK PURCHASE PLAN The Company has an employee stock purchase plan under
which eligible employees may purchase stock at 85% of the lower of the closing
prices for the stock at the beginning of a twenty four-month offering period or
the end of each six-month purchase period. The purchase periods generally begin
in May and November. Purchases are limited to 10% of each employee's
compensation. As of June 30, 1996, 11,972,311 shares had been issued under the
plan and 1,087,689 shares were reserved for future issuance.
STOCKHOLDER RIGHTS PLAN The Company has a stockholder rights plan (the "Rights
Plan") which provides existing stockholders with the right to purchase one one-
thousandth (0.001) preferred share for each share of common stock held in the
event of certain changes in the Company's ownership. The Rights Plan may serve
as a deterrent to certain abusive takeover tactics which are not in the best
interests of stockholders.
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 has purchased approximately 2.5 million shares since the commencement of
the repurchase program at an average price of approximately $31.00 per share.
The repurchased shares are available for use under the Company's employee stock
plans and for other corporate purposes.
COMMON SHARES RESERVED The Company has reserved in the aggregate 52,064,281
shares of common stock issuable upon conversion of all convertible subordinated
debentures, as well as shares issuable under its stock award and purchase plans.
(58)
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. INCOME TAXES
The components of income from continuing operations before income taxes are as
follows (in thousands):
Years Ended June 30 1996 1995 1994
- -------------------------------------------------------------------------------
United States $ 106,176 $ 201,131 $ 107,401
International 82,612 115,588 91,207
----------- ----------- -----------
$ 188,788 $ 316,719 $ 198,608
----------- ----------- -----------
----------- ----------- -----------
The provision for income taxes consists of the following (in thousands):
Years Ended June 30 1996 1995 1994
- -------------------------------------------------------------------------------
Federal:
Current $ 111,970 $ 44,781 $ 31,180
Deferred (49,246) (733) (9,303)
State:
Current 13,540 7,761 8,148
Deferred (4,299) 4,929 959
Foreign
Current 17,021 31,905 19,643
Deferred (15,235) 3,220 6,567
----------- ----------- -----------
$ 73,751 $ 91,863 $ 57,194
----------- ----------- -----------
----------- ----------- -----------
The provision for income taxes reconciles to the amounts computed by applying
the statutory federal rate to earnings before taxes as follows (in thousands):
Years Ended June 30 1996 1995 1994
- -------------------------------------------------------------------------------
Tax at U.S. federal
statutory rate $ 66,076 $ 110,852 $ 69,513
State taxes, net of
federal tax benefit 6,006 8,249 5,877
Earnings subject to foreign
taxes at lower rates (33,149) (18,751) (11,302)
Income of Foreign Sales
Corporation not subject
to U.S. tax (8,355) (9,059) (4,660)
Acquired in-process
technology 34,373 -- --
Research and
experimentation credits -- (4,625) (944)
Net operating loss
without tax benefit -- -- (664)
Nondeductible
professional fees -- 2,789 --
Other 8,800 2,408 (626)
----------- ----------- -----------
Provision for income taxes $ 73,751 $ 91,863 $ 57,194
----------- ----------- -----------
----------- ----------- -----------
No provision for residual federal taxes has been made on approximately
$211.8 million of accumulated undistributed earnings of certain of the Company's
foreign subsidiaries since it is the Company's intention to permanently invest
such earnings in foreign operations. The Company has been granted exemptions
from tax on income from certain manufacturing operations located outside the
U.S. for years through 2006. The cumulative income tax benefits attributable to
the tax status of this subsidiary are estimated to be $74.0 million at June 30,
1996.
The tax effects of temporary differences and carryforwards that give rise
to significant portions of deferred tax assets and liabilities are as follows
(in thousands):
Years ended June 30 1996 1995 1994
- -------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 36,266 $ 4,958 $ 19,024
Foreign taxes on unremitted
foreign earnings net of
related U.S. tax liability 23,389 9,418 8,158
General business credit
carryforwards 31,362 16,732 25,296
Foreign tax credit carryforwards 38,561 1,537 4,434
Depreciation 55,993 15,793 12,626
Inventory valuation 59,279 21,586 13,948
Nondeductible vacation
pay accrual 14,172 9,382 8,409
Intercompany profit elimination 10,634 10,690 10,353
Merger expenses 51,468 5,456 6,022
Other 43,161 2,895 9,084
----------- ----------- -----------
Subtotal 364,285 98,447 117,354
Valuation allowance (60,819) -- (10,995)
----------- ----------- -----------
Total deferred tax assets 303,466 98,447 106,359
Deferred tax liabilities:
Intangibles 40,758 -- --
Other 6,012 -- --
----------- ----------- -----------
Total deferred tax liabilities 46,770 -- --
----------- ----------- -----------
Total $ 256,696 $ 98,447 $ 106,359
----------- ----------- -----------
----------- ----------- -----------
At June 30, 1996, the Company had federal net operating loss carryforwards
of approximately $89.4 million for United States federal income tax purposes
expiring in the years 2005 through 2011. At June 30, 1996, the Company also had
general business credit carryovers of approximately $31.3 million for United
States federal tax purposes, expiring in the years 1999 through 2010. In
addition, the Company had foreign tax credit carryforwards of approximately
$38.5 million which expire in the years 1998 through 2001, and a capital loss
carryforward of $7.6 million expiring in 2000.
As a result of the acquisition by Silicon Graphics, Cray Research
experienced a "change in ownership" as defined under Section 382 of the Internal
Revenue Code and is subject to certain limitations on the utilization of its
pre-acquisition net operating loss and tax credit carry-
(59)
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
forwards. The Company has provided a valuation allowance to offset the deferred
tax asset relating to foreign tax credits that may expire prior to utilization
due to this annual limitation. The valuation allowance for defered tax assets of
approximately $60.8 million will be applied to reduce the noncurrent intangible
assets related to the acquisition of Cray Research if future tax benefits are
subsequently realized.
NOTE 14. INDUSTRY SEGMENT AND
GEOGRAPHIC INFORMATION
The Company, operating in a single industry segment, designs, manufactures and
services high-performance computing systems and software. Information regarding
operations in different geographic areas at June 30, 1996, 1995 and 1994, and
for the years then ended, is as follows (in thousands):
1996 1995 1994
- -------------------------------------------------------------------------------
Net sales to unaffiliated
customers:
United States $ 1,412,137 $ 1,093,694 $ 786,832
Europe 836,053 635,268 408,766
Rest of World 673,126 499,306 342,168
----------- ----------- -----------
Total net sales $ 2,921,316 $ 2,228,268 $ 1,537,766
----------- ----------- -----------
----------- ----------- -----------
Transfers between
geographic areas
(eliminated in
consolidation):
United States $ 698,816 $ 485,303 $ 289,776
Europe 65,583 -- --
Rest of World -- -- --
----------- ----------- -----------
Total transfers $ 764,399 $ 485,303 $ 289,776
----------- ----------- -----------
----------- ----------- -----------
Operating income:
United States $ 67,466 $ 190,725 $ 88,556
Europe 121,049 114,837 74,075
Rest of World (12,847) 20,877 34,992
Eliminations (1,275) (19,167) (3,794)
Corporate income, net 14,395 9,447 4,779
----------- ----------- -----------
Income before
income taxes $ 188,788 $ 316,719 $ 198,608
----------- ----------- -----------
----------- ----------- -----------
Identifiable assets:
United States $ 1,802,261 $ 564,187 $ 538,259
Europe 596,818 844,816 313,047
Rest of World 315,740 209,517 148,061
Eliminations (531,197) (406,807) (204,364)
Corporate assets 974,624 994,906 772,049
----------- ----------- -----------
Total assets $ 3,158,246 $ 2,206,619 $ 1,567,052
----------- ----------- -----------
----------- ----------- -----------
"Europe" includes Europe and the Middle East. "Rest of World" includes
Japan, other Asia/Pacific countries, Canada and Latin America. Net revenue from
sales to unaffiliated customers is based on the location of the customer.
Intercompany transfers between geographic areas are accounted for by using the
transfer prices in effect for the respective subsidiaries. Operating income and
identifiable assets are classified based on the location of the Company's
facilities. Corporate assets include cash and cash equivalents, marketable
investments, deferred tax assets and certain other assets. Corporate income is
interest and other income, net.
NOTE 15. BENEFIT PLANS
401(k) RETIREMENT SAVINGS PLAN The Company provides a 401(k) investment plan
covering substantially all of its U.S. employees. The plan provides for a
minimum 25 percent Company match of an employee's contribution up to a specified
limit, but allows for a larger matching subject to certain regulatory
limitations. The Company's matching contributions to the investment plan became
effective October 1, 1994, and for fiscal 1996 and 1995, the Company contributed
$4.7 million and $13.7 million, respectively.
DEFERRED COMPENSATION PLAN The Company has a Non-Qualified Deferred
Compensation Plan that allows eligible executives and directors to defer a
portion of their compensation. The deferred compensation, together with Company
matching amounts and accumulated earnings, is accrued but unfunded. Such
deferred compensation is distributable in cash and at June 30, 1996 and 1995,
amounted to approximately $3.3 million and $1.0 million, respectively. A
participant may elect to receive such deferred amounts in one payment or in
annual installments no sooner than two years following each annual election.
Participant contributions are always 100% vested and Company matching
contributions vest as directed by the board of directors. There have been no
Company matching contributions to date.
DEFINED POSTRETIREMENT BENEFIT PLAN In connection with the acquisition of Cray
Research, the Company assumed responsibility for the defined postretirement
health benefit plan covering substantially all active U.S. Cray Research
employees. The plan is unfunded. At June 30, 1996, there were no retirees
receiving benefits under the plan and the accumulated postretirement obligation
was $7.5 million. Ongoing cost of the plan is not expected to be material.
(60)
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16. RELATED PARTY
TRANSACTIONS
The Company has from time to time engaged in significant transactions with
related parties in the ordinary course of business. Related parties have
included: Tandem Computers, Incorporated, as a director of Tandem is also on the
Company's board of directors; Chrysler Corporation, as the president of Chrysler
became a member of the Company's board of directors in fiscal 1996; Control Data
Systems, Inc. (CDSI) due to the Company's investment in common stock of CDSI
through March 31, 1995; and NKK through its indirect ownership of 100% of Series
A Convertible Preferred Stock (See Note 12).
Product and other revenue for the years ended June 30, 1996, 1995 and 1994
included, in the aggregate, sales to related parties in the amount of $72.9
million, $119.6 million and $83.1 million, respectively. Purchases and amounts
receivable from and amounts payable to such related parties were immaterial at
June 30, 1996, 1995 and 1994.
NOTE 17.
STATEMENT OF CASH FLOWS
Supplemental disclosures of cash flow information
(in thousands):
Years ended June 30 1996 1995 1994
- -------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 9,600 $ 4,600 $ 3,200
Income taxes, net of refunds 122,000 42,200 22,000
Supplemental schedule of noncash investing and financing activities (in
thousands):
Tax benefit from stock options $ 23,000 $ 31,500 $ 26,900
Equipment purchased
under capital leases 200 4,300 6,000
Conversion of preferred stock -- 20,800 --
NOTE 18. CONTINGENCIES
The Company is defending the lawsuits described below. The Company believes
that it has good defenses to the claims in each of these lawsuits and is
defending each of them vigorously.
The Company is defending a securities class action lawsuit and a derivative
suit filed in U.S. District Court for the Northern District of California in
January and March, 1996. These suits allege that the Company and certain of its
officers and directors made material misrepresentations and omissions during the
period from October to December 1995.
The Company also is defending securities class action lawsuits involving
MIPS Computer Systems, Inc., which the Company acquired in June 1992, and Alias
Research Inc., which the Company acquired in June 1995. The MIPS case, which was
filed in the U.S. District Court for the Northern District of California in
1992, alleges that MIPS and certain of its officers and directors made material
misrepresentations and omissions during the period from January to October of
1991. In June 1994 summary judgment was granted in the defendants' favor on all
counts. Plaintiffs appeal to the U.S. Court of Appeals for the Ninth Circuit is
pending. The Alias case, which was filed in the U.S. District Court for the
District of Connecticut in 1991, alleges that Alias and certain of its officers
and directors made material misrepresentations and omissions during the period
from May 1991 to April 1992. Alias's motion to dismiss the amended complaint is
pending.
The Company also is defending a patent infringement lawsuit filed by Martin
Marietta Corp. in the U.S. District Court for the Middle District of Florida in
September 1995. The Company has filed a counterclaim seeking to invalidate the
principal patent at issue in the lawsuit, 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 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. There can be no assurance in any given case that a license will be
available on terms the Company considers reasonable, or that litigation will not
ensue.
Management is not aware of any pending disputes, including those described
above, that would be likely to have a material adverse effect on the Company's
financial condition, results of operation or liquidity. However, management's
evaluation of the likely impact of these pending disputes could change in the
future.
(61)
<PAGE>
Exhibit 21.1
SILICON GRAPHICS, INC. SUBSIDIARIES
Jurisdiction of
Name Incorporation
---- -------------
Alias|Wavefront, Inc. California
Cray Asia/Pacific, Inc. Delaware
Cray Financial Corporation Delaware
Cray Research (America Latina) Ltd. Delaware
Cray Research (Eastern Europe) Ltd. Delaware
Cray Research, Inc. Delaware
Cray Research (India) Ltd. Delaware
Cray Research International, Inc. Delaware
MIPS Technologies, Inc. Delaware
Silicon Graphics Real Estate, Inc. Delaware
Silicon Graphics World Trade Corporation Delaware
Silicon Studio, Inc. Delaware
Research Equipment, Inc. dba Minnesota Minnesota
Supercomputer Center, Inc.
Silicon Graphics S.A. Argentina
Cray Research (Australia) Pty. Ltd. Australia
Silicon Graphics Pty Limited Australia
Silicon Graphics Computer Systems Ges.m.b.H. Austria
Silicon Graphics International Inc. Barbados
Silicon Graphics S.A./N.V. Belgium
Wavefront Technologies N.V. Belgium
Cray Research Computadores do Brasil Ltda. Brazil
Silicon Graphics Comercio e Servi os Limitada Brazil
831495 Ontario Ltd. Canada
Cray Research (Canada) Inc. Canada
Silicon Graphics Limited Canada
Wavefront Canada Limited Canada
Silicon Graphics spolecnost s rucerum omezenym Czech Republic
Silicon Graphics A/S Denmark
Cray Research OY Finland
Silicon Graphics OY Finland
Alias sarl France
Cray Research France S.A. France
Cray Research Superservers S.A.R.L. France
Silicon Graphics France
Wavefront Technologies S.A. France
Alias Research GmbH Germany
APTOS Application Software Technologies GmbH Germany
Cray Research GmbH Germany
Cray Research Business Systems GmbH Germany
Silicon Graphics GmbH Germany
Wavefront Technologies GmbH Germany
Silicon Graphics Limited Hong Kong
Silicon Graphics Kft. Hungary
<PAGE>
Jurisdiction of
Name Incorporation
---- -------------
Silicon Graphics Systems (India) Private Ltd India
Cray Research (Israel) Ltd. Israel
Silicon Graphics Computer Systems Limited Israel
Silicon Graphics Biomedical 1995 Ltd Israel
Alias Srl Italy
Cray Research Srl Italy
Silicon Graphics S.p.A. Italy
Wavefront Technologies Srl Italy
Cray Foreign Sales Corporation, Ltd. Jamaica
Alias Research K.K. Japan
Cray Research Japan, Ltd. Japan
Nihon Silicon Graphics K.K. Japan
Wavefront Japan, Ltd. Japan
Yokogawa Cray ELS, Ltd. Japan
Cray Research (Korea) Ltd. South Korea
Korea Silicon Graphics Ltd. South Korea
Cray Research (Malaysia) Sdn. Bhd. Malaysia
Cray Research de Mexico, S.A. de C.V. Mexico
Silicon Graphics S.A. de C.V. Mexico
Cray Research B.V. Netherlands
Silicon Graphics B.V. Netherlands
Silicon Graphics World Trade B.V. Netherlands
Silicon Graphics Limited New Zealand
Cray Research Scandinavia A/S Norway
Silicon Graphics A/S Norway
Beijing Silicon Graphics Computer People's Republic of
Engineering and Technology Co., Ltd. China
Cray Research (Singapore) Pte. Ltd. Singapore
Silicon Graphics Pte. Limited Singapore
Cray Research (Proprietary) Limited South Africa
Silicon Graphics (Pty) Limited South Africa
Cray Research S.A.E. Spain
Silicon Graphics, S.A. Spain
Cray Research AB Sweden
Silicon Graphics AB Sweden
Cray Research (Suisse) S.A. Switzerland
Silicon Graphics S.A. Switzerland
Silicon Graphics Manufacturing S.A. Switzerland
Silicon Graphics Limited Taiwan
Cray Research Supercomputer Turkey
Trade and Services A.S.
Alias Research Limited United Kingdom
Alias Sonata Limited United Kingdom
Cray Research Europe Ltd. United Kingdom
Cray Research (UK) Ltd. United Kingdom
Silicon Graphics Application Systems Limited United Kingdom
Silicon Graphics Limited United Kingdom
Wavefront Technologies Ltd. United Kingdom
Silicon Graphics Manufacturing Finance Limited Jersey Channel Islands
-2-
<TABLE> <S> <C>
<PAGE>
<ARTICLE>5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of operations and
consolidated statement of cash flows included in the Company's Form 10-K for
the period ending June 30, 1996, and is qualified in its entirety by reference
to such financial statements and the notes thereto.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 257080
<SECURITIES> 38316
<RECEIVABLES> 1002641
<ALLOWANCES> 23767
<INVENTORY> 520045
<CURRENT-ASSETS> 2096255
<PP&E> 825359
<DEPRECIATION> 360480
<TOTAL-ASSETS> 3158246
<CURRENT-LIABILITIES> 1101438
<BONDS> 302029
0
16998
<COMMON> 173
<OTHER-SE> 1658147
<TOTAL-LIABILITY-AND-EQUITY> 3158246
<SALES> 2553128
<TOTAL-REVENUES> 2921316
<CGS> 1279742
<TOTAL-COSTS> 1482439
<OTHER-EXPENSES> 456654
<LOSS-PROVISION> 4292
<INTEREST-EXPENSE> 22365
<INCOME-PRETAX> 188788
<INCOME-TAX> 73751
<INCOME-CONTINUING> 115037
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 115037
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.65
</TABLE>
