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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934.
For the quarterly period ended SEPTEMBER 30, 1996.
or
- --- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from to .
Commission File Number 1-10441
SILICON GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2789662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2011 N. SHORELINE BOULEVARD, MOUNTAIN VIEW, CALIFORNIA 94043-1389
(Address of principal executive offices) (Zip Code)
(415) 960-1980
(Registrant's telephone number, including area code)
__________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
AS OF OCTOBER 31, 1996 THERE WERE 174,930,157 SHARES OF COMMON STOCK
OUTSTANDING.
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SILICON GRAPHICS, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION --------
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders. 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Index to Exhibits 19
TRADEMARKS USED IN THIS FORM 10-Q: Silicon Graphics, CHALLENGE and Onyx are
registered trademarks and O2, Origin, Onyx2, Indigo, Indigo2 and POWER
CHALLENGE 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 is a trademark of MIPS Technologies, Inc. Cray is a registered
trademark and Cray T3E and Cray T90 are trademarks of Cray Research, Inc. UNIX
is a registered trademark of Novell, Inc. in the United States and other
countries, licensed exclusively through X/Open Company Ltd.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, June 30,
ASSETS 1996 1996(1)
------------- ----------
(unaudited)
Current assets:
Cash and cash equivalents $ 245,781 $ 257,080
Short-term marketable investments 46,546 38,316
Accounts receivable, net 821,921 978,874
Inventories 524,632 520,045
Deferred tax assets 188,365 198,239
Prepaid expenses and other current assets 109,868 103,701
------------- ----------
Total current assets 1,937,113 2,096,255
Other marketable investments 145,782 161,541
Property and equipment, at cost 835,332 825,359
Accumulated depreciation and amortization (370,814) (360,480)
------------- ----------
Net property and equipment 464,518 464,879
Other assets 412,204 435,571
------------- ----------
$2,959,617 $3,158,246
------------- ----------
------------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable $ 242,471 $ 397,838
Other current liabilities 698,611 703,600
------------- ----------
Total current liabilities 941,082 1,101,438
Long-term debt and other 349,659 381,490
Stockholders' equity:
Preferred stock 16,998 16,998
Common stock 173 173
Additional paid-in capital. 1,187,127 1,172,787
Retained earnings 439,067 461,311
Accumulated translation adjustment and other 25,511 24,049
------------- ----------
Total stockholders' equity 1,668,876 1,675,318
------------- ----------
$2,959,617 $3,158,246
------------- ----------
------------- ----------
(1) The balance sheet at June 30, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In thousands except per share amounts)
Three Months Ended September 30,
-------------------------------
1996(1) 1995
-------- --------
Product and other revenue $623,413 $524,729
Service revenue 142,189 70,550
-------- --------
Total revenue 765,602 595,279
Costs and expenses:
Cost of product and other revenue 372,960 234,666
Cost of service revenue 77,735 37,945
Research and development 108,279 72,743
Selling, general and administrative 232,167 172,189
Merger-related expenses 2,834 714
-------- --------
Total costs and expenses 793,975 518,257
-------- --------
Operating (loss) income (28,373) 77,022
Interest and other (expense) income, net (818) 6,341
-------- --------
(Loss) Income before income taxes (29,191) 83,363
(Benefit) Provision for income taxes (7,590) 25,006
-------- --------
Net (loss) income (21,601) 58,357
Preferred stock dividend requirement (131) ---
-------- --------
Net (loss) income available to common stockholders $(21,732) $ 58,357
-------- --------
-------- --------
Net (loss) income per common share $ (0.13) $ 0.33
-------- --------
-------- --------
Common shares and common share equivalents used
in the calculation of net (loss) income per common share 172,974 179,236
-------- --------
-------- --------
(1) Amounts reflect the operations of Cray Research, acquired by the Company
in April 1996.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1996(1) 1995
------------ -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (21,601) $ 58,357
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 85,652 33,873
Other (6,458) (8,932)
Changes in operating assets and liabilities:
Accounts receivable 156,953 34,081
Inventories (19,776) (21,370)
Accounts payable (18,649) (20,330)
Other assets and liabilities (12,334) (12,829)
------------ -----------------
Total adjustments 185,388 (4,493)
------------ -----------------
Net cash provided by operating activities 163,787 62,850
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (45,589) (52,816)
Increase in other assets (22,930) (49,972)
Available-for-sale investments:
Purchases (484) (299,230)
Sales 29 362,698
Maturities 8,237 1,000
------------ -----------------
Net cash used in investing activities (60,737) (38,320)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt 11,625 918
Payments of debt principal (138,487) (3,313)
Sale of common stock 12,513 11,879
------------ -----------------
Net cash (used in) provided by financing activities (114,349) 9,484
------------ -----------------
Net increase in cash and cash equivalents (11,299) 34,014
Cash and cash equivalents at beginning of period 257,080 307,875
------------ -----------------
Cash and cash equivalents at end of period $245,781 $341,889
------------ -----------------
------------ -----------------
</TABLE>
(1) Amounts reflect the operations of Cray Research, acquired by the Company
in April 1996.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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SILICON GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS.
During the fourth quarter of fiscal 1996, Silicon Graphics acquired Cray
Research in a business combination accounted for under the purchase method.
The operating results of Cray Research were consolidated with those of the
Company beginning April 2, 1996. Therefore, the unaudited results of
operations and cash flows for fiscal 1997 include the results of the Cray
Research business, while the fiscal 1996 results of operations and cash flows
do not. The unaudited results of operations for the interim periods shown
herein are not necessarily indicative of operating results for the entire
fiscal year. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary to present fairly the financial position,
results of operations and cash flows for all periods presented have been made.
The unaudited condensed consolidated financial statements included in this Form
10-Q should be read in conjunction with the audited consolidated financial
statements and notes thereto for the fiscal year ended June 30, 1996. Certain
amounts for the prior year have been reclassified to conform to current year
presentation.
2. INVENTORIES.
Inventories consist of (in thousands):
September 30, 1996 June 30, 1996
------------------ -------------
Components and subassemblies $134,040 $199,441
Work-in-process 260,252 177,744
Finished goods 63,197 74,997
Marketing 67,143 67,863
------------------ -------------
Total inventories $524,632 $520,045
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------------------ -------------
3. CONTINGENCIES.
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. In September 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. In
October 1996, the plaintiffs in the securities class action filed an amended
complaint alleging that the Company and certain of its officers and directors
made material misrepresentations and omissions during the period from September
to December 1995. The Company believes it has good defenses to the claims
alleged in these lawsuits and is defending itself vigorously against these
actions. See Item 1 - Part II for additional information.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
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."
The following tables and discussion present certain financial information on
a comparative basis. During the fourth quarter of fiscal 1996, Silicon
Graphics acquired Cray Research in a business combination accounted for under
the purchase method. The operating results of Cray Research were consolidated
with those of the Company beginning April 2, 1996. The Company believes it
most meaningful if certain current fiscal year results (revenue, gross margin
and operating expenses other than merger-related expense) are compared with
pro forma combined fiscal 1996 results. The pro forma fiscal 1996 results
combine the Silicon Graphics and Cray Research operations for the respective
fiscal periods, excluding the results of the Cray Research Business Systems
Division which was sold at the end of fiscal 1996. Certain fiscal 1996 Cray
Research amounts have also been reclassified to conform to the current year
presentation.
YEAR-TO-YEAR COMPARISONS
OPERATING ITEMS AS A PERCENTAGE OF TOTAL REVENUE
- -------------------------------------------------------------------------------
(PERCENTAGES MAY NOT ADD DUE TO ROUNDING)
Three Months Pro Forma Three
Ended Months
September 30, Ended September 30,
--------------- -------------------
1996 1995 1995
------- ------ --------
Product and other revenue 81.4% 88.1% 84.0%
Service revenue 18.6 11.9 16.0
------- ------ --------
Total revenue 100.0% 100.0% 100.0%
Gross margin 41.1(1) 54.2 50.4
Research and development 14.1 12.2 12.8
expense
Selling, general and 30.3 28.9 28.0
administrative expense
Merger-related expense 0.4 0.1
------- ------
Operating (loss) income (3.7) 12.9
Interest and other (expense)
income, net (0.1) 1.1
------- ------
(Loss) Income before income (3.8) 14.0
taxes
(Benefit) Provision for
income taxes (1.0) 4.2
------- ------
Net (loss) income (2.8)% 9.8%
------- ------
------- ------
- ----------
(1) 44.9% before charges for the MIPS R10000-TM- microprocessor
replacement program and Cray purchase accounting.
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REVENUES BY GEOGRAPHY (PRO FORMA COMBINED IN FISCAL 1996)
- --------------------------------------------------------------
Three Months Ended September 30,
--------------------------------- Year/Year
1996 1995 (Pro Forma) Increase (Decrease)
------------ ----------------- -------------------
(in millions)
United States $428 $380 13%
Europe 179 208 (14)%
Rest of World 159 170 (6)%
------------ -----------------
Total revenue $766 $758 1%
------------ -----------------
------------ -----------------
Three Months Ended September 30,
1996 1995 (Pro Forma)
------------------- ----------------
(as a percentage of total revenue)
United States 56% 50%
Europe 23% 27%
Rest of World 21% 23%
REVENUE BY PRODUCT LINE (PRO FORMA COMBINED IN FISCAL 1996)
- -------------------------------------------------------------------
Three Months Ended September 30,
1996 1995 (Pro Forma)
----- ---------------
(as a percentage of product revenue, excluding other revenue)
High-end products (primarily from the POWER
CHALLENGE-TM-, CHALLENGE-Registered Trademark-,
Onyx-Registered Trademark-
and Cray-Registered Trademark- families) 58% 51%
Desktop products (primarily from
the Indy-Registered Trademark-
and Indigo2-TM- families) 42% 49%
- --------------------------------------------------------------------
REVENUE. The Company's product and other revenues are derived primarily from
shipment of computer system products, with subsystem and software revenue,
license fees, and non-recurring engineering (NRE) contract payments comprising
the remainder. Service revenue is comprised of hardware and software support
and maintenance.
The Company's revenue of $766 million for the first quarter of fiscal 1997
was essentially flat compared with the pro forma combined revenue of $758
million for the first quarter of fiscal 1996. Product revenue for Cray
systems increased as compared with the same quarter a year ago, while product
revenue for Silicon Graphics desktop products decreased. The geographic mix
for Silicon Graphics systems was essentially unchanged as compared with the
same quarter a year ago, while a much higher proportion of revenue for Cray
systems was derived from U.S. customers.
The Company's revenue growth was affected by several factors, including
product transition issues. In October 1996, the Company introduced its new
Origin-TM-, Onyx2-TM- and O2-TM- product families, based on significantly new
architectures. Revenue growth also was affected by a problem in the
manufacturing fabrication process for the R10000 microprocessor which the
Company believes affected customers' willingness to purchase new systems until
the problem was resolved. The Company and NEC, the principal manufacturer for
the R10000 microprocessor, have corrected this problem and the Company has
initiated a board replacement program for
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customers with potentially affected systems. All geographies were affected
by these factors. Currency changes also depressed international revenue
growth rates.
GROSS MARGIN. Gross margin of 41.1% for the first quarter of fiscal 1997
decreased significantly compared with pro forma combined gross margin of
50.4% for the first quarter of fiscal 1996. Without the R10000
microprocessor replacement program and purchase accounting charges described
below, proforma gross margin for the first quarter of fiscal 1997 would have
been 44.9%. The decrease from the same quarter a year ago is primarily
attributable to lower than expected revenue, competitive pricing pressures
and the Cray Research purchase accounting and other charges taken in the
current period.
Because purchase accounting requires that purchased work-in-process and
finished goods inventories be written up to fair value at the time of the
acquisition, gross margins in subsequent periods are adversely affected until
the purchased inventories are sold to customers. The effect of the write-up
was to reduce the first quarter of fiscal 1997 gross margin by approximately
$17 million. The Company expects that the continuing effect of the
sell-through of this inventory will reduce gross margins by an aggregate of
approximately $21 million during the remainder 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 first quarter
gross margin by approximately $2 million. The effect on gross margins during
the remainder of fiscal 1997 will be approximately $4 million. The Company
also took a charge of approximately $10 million for the estimated cost of the
program to replace the R10000 microprocessor boards as noted above. In
addition, the first quarter of fiscal 1997 gross margin was adversely
affected by the need to provide higher than normal inventory reserves as a
result of product transitions.
Gross margins in fiscal 1997 are expected to be lower than in fiscal 1996. A
significant reason for this expected decline is the impact of the Cray
Research business which has in recent years had lower product and service
gross margins than the Silicon Graphics business. 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 Research's business on
the combined organization. While the Company expects gross margins to
increase gradually over the remainder of fiscal 1997, as new product cost
structures improve during the transition to full production volumes, the
Company also believes gross margins will continue to be affected by
aggressive pricing. In addition, the Company believes that its new O2
desktop workstations will be purchased by some customers who otherwise would
purchase the higher-margin Indigo2 family of workstations. The Company is
unable to predict the extent of this customer substitution.
OPERATING EXPENSE. 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 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
expected revenue, 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 expense for the first quarter of fiscal 1997,
which was significantly higher as a percentage of revenue than the same
quarter a year ago and than the target ranges, principally due to lower than
expected revenue.
Merger-related expenses in fiscal 1997 relate to the Cray Research
acquisition and consist principally of costs associated with integration of
Silicon Graphics and Cray Research information systems, accounting processes
and marketing and human resource activities. The Company expects to incur an
additional $12 million to $22 million of similar merger-related expenses
during the remainder of fiscal 1997.
OPERATING MARGIN. The Company expects operating margins for at least the
next two quarters to be significantly below the level of the last few fiscal
years in part as the result of the acquisition of Cray Research, which has
had much lower gross margins historically than Silicon Graphics. Although
the Company expects to achieve revenue synergies from the joint marketing and
sale of Silicon Graphics and Cray systems and to achieve expense synergies,
these synergies will not be fully realized for several quarters or even
longer.
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OTHER OPERATING RESULTS. Interest and other (expense) income, net for the
first quarter of fiscal 1997 was $(0.8) million compared with $6.3 million for
the first quarter of fiscal 1996. The decrease reflects the much smaller
invested cash balances following the Cray Research acquisition, as well as the
additional interest expense on the 6.125% debentures assumed in the
acquisition.
TAXES. The Company's combined federal, state and foreign effective income tax
rate for the first quarter of fiscal 1997 was 26%. The tax rate for the same
period of fiscal 1996 was 30%. The lower effective tax rate is attributable to
the reinstated research tax credit and to proportionately higher earnings in
low tax jurisdictions. No provision for residual federal taxes has been made
on 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.
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 carryforwards. 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 deferred 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.
FINANCIAL CONDITION
At September 30, 1996, cash and cash equivalents and short- and long-term
marketable investments totaled $438 million, down from $457 million at June 30,
1996. Operating activities generated $164 million in the first quarter of
fiscal 1997 compared with $63 million in the first quarter of fiscal 1996.
Despite the loss in the first quarter of fiscal 1997, cash flow from operating
activities was positive principally due to a significant decrease in accounts
receivable as well as charges that did not use cash, including $19 million of
amortization of the write-up of acquired Cray Research inventories and service
contracts. Investing activities, other than changes in the Company's
marketable investments, consumed $69 million in cash during the first quarter
of fiscal 1997, principally for the acquisition of capital equipment. The
principal financing activity during the first quarter of fiscal 1997 was the
repayment of $137 million in short-term borrowings. The employee stock plans
continue to be an additional source of cash.
As of September 30, 1996, the Company's principal sources of liquidity included
cash and cash equivalents and marketable investments of $438 million and up to
$250 million available under its three-year revolving credit facility. In
connection with the acquisition of Cray Research, the Company recorded an
accrual for costs of exiting facilities and streamlining duplicative
administrative activities. During the first quarter of fiscal 1997, cash
outlays for these activities were approximately $6 million. The Company
anticipates that cash outlays during the remainder of fiscal 1997 for exit
activities will be approximately $29 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.
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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 expected
revenue, 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. In October
1996, the Company introduced the new Origin, Onyx2 and O2 product families,
replacing a substantial portion of its product line. Product transitions are a
recurring part of the Company's business cycle. 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 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. In addition, the extent to which a new product gains
rapid acceptance is strongly affected by the availability of key
software applications optimized for the new systems. Although most of
the key applications for the Company's new systems are expected to be
available in the second quarter, there is no assurance that acceptance
of the Company's new systems will not be affected by delays in this
process.
Short product life cycles place a premium on the Company's ability to manage
the transition from current products to new products. 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, delays in customer purchases of existing products in anticipation of
the introduction of new products, and excess inventories of older products
and components. The operating results for the quarter ended September 30,
1996 are attributable, at least in part, to customer anticipation of the new
high-end and desktop products introduced by the Company 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
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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 may 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's Silicon Desktop Group has 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.
In particular, the Company believes that its new O2 desktop workstations will
be purchased by some customers who otherwise would purchase the higher-margin
Indigo2 family of workstations. The Company is unable to predict the extent
of this customer substitution.
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 also require the dedication of
management resources, which may temporarily distract attention from the day-to-
day business of the Company.
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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 September 30, 1996, the combined Company's backlog was $473
million, representing orders scheduled to ship during fiscal 1997. This
backlog primarily consists of orders for Cray T90-TM- and T3E-TM- 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.
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 a significant portion 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 hedge firmly committed Cray Research
backlog. Currently, these hedges
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extend through December 1999. In addition, beginning in October 1996, the
Company commenced hedging a portion of anticipated quarterly revenues from
international operations using purchased foreign currency options. The
Company also utilizes foreign currency forward contracts to hedge net
non-U.S. dollar monetary assets and liabilities. 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. The swap expires in November 1996. The Company is constantly
evaluating its interest risk management strategy.
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 Cray Research
business and to the Company's international operations.
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.
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.
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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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is defending a securities class action lawsuit (DEANNA BRODY, ET.
AL. V. EDWARD R. MCCRACKEN, ET. AL.) and a derivative suit (EDMUND J. JANAS V.
EDWARD R. MCCRACKEN, ET. AL.) filed in U.S. District Court for the Northern
District of California in January and March 1996. In September 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. On October 18, 1996, the plaintiffs in the securities class
action filed an amended complaint alleging that the Company and certain of its
officers and directors violated various federal securities laws and California
statutes through material misrepresentations and omissions made during the
period from September 13 to December 29, 1995. The Company believes it has
good defenses to the claims alleged in these lawsuits and is defending itself
vigorously against these actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Stockholders on October 30, 1996.
Proxies for the meeting were solicited pursuant to Regulation 14A.
(b) The Company's Board of Directors is divided into three classes, with
directors in each class serving for three-year terms. Accordingly, not
all Directors are elected at each Annual Meeting of Stockholders.
C. Richard Kramlich, Edward R. McCracken, Lucille Shapiro and Robert B.
Shapiro were re-elected as Directors at the meeting. The Directors whose
terms of office continued after the meeting are Robert R. Bishop, Allen F.
Jacobson, Robert A. Lutz, James A. McDivitt and James G. Treybig.
(c) The matters described below were voted on at the Annual Meeting of
Stockholders, and the number of votes cast with respect to each matter
and, with respect to the election of directors, for each nominee, were as
indicated.
1. To elect four Class I Directors of the Company to serve for a three-
year term.
C. RICHARD KRAMLICH:
For: 148,694,422 Withheld: 886,249
EDWARD R. MCCRACKEN:
For: 148,666,662 Withheld: 914,009
LUCILLE SHAPIRO:
For: 148,507,334 Withheld: 1,073,337
ROBERT B. SHAPIRO:
For: 148,525,293 Withheld: 1,055,378
2. To approve an amendment increasing the number of shares of Common
Stock available for issuance under the Company's Employee Stock
Purchase Plan by 8,000,000 shares.
For: 98,412,498 Against: 5,494,594 Abstain: 488,875
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3. To approve an amendment increasing the number of shares of Common
Stock available for issuance under the Company's Directors' Stock
Option Plan by 800,000 shares.
For: 79,663,863 Against: 23,838,017 Abstain: 894,037
4. To ratify the appointment of Ernst & Young LLP, as independent
auditors of the Company for the fiscal year ending June 30, 1997.
For: 148,730,537 Against: 350,612 Abstain: 499,522
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.16 Employee Stock Purchase Plan, as amended as of October 30, 1996.
11.1 Statement of Computation of Per Share Earnings.
27.1 Financial Data Schedule.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 13, 1996 SILICON GRAPHICS, INC.
a Delaware corporation
By: Stanley J. Meresman
-----------------------------
Stanley J. Meresman
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
By: Dennis P. McBride
-----------------------------
Dennis P. McBride
Vice President, Controller
(Principal Accounting Officer)
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SILICON GRAPHICS, INC.
INDEX TO EXHIBITS
Exhibit Description
- -------- ------------
10.16 Employee Stock Purchase Plan, as amended as of October 30, 1996
11.1 Statement of Computation of Per Share Earnings
27.1 Financial Data Schedule
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SILICON GRAPHICS, INC.
EMPLOYEE STOCK PURCHASE PLAN
(Amended and Restated as of October 30, 1996)
The following constitutes the provisions of the Employee Stock Purchase
Plan (herein called the "Plan") of Silicon Graphics, Inc. (herein called the
"Company").
1. PURPOSE. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through payroll deductions. It is the intention of the
Company that the Plan qualify as an "Employee Stock Purchase Plan" under Section
423 of the Internal Revenue Code of 1986. The provisions of the Plan shall,
accordingly, be construed so as to extend and limit participation in a manner
consistent with the requirements of that section of the Code.
2. DEFINITIONS.
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" means the Common Stock, $0.001 par value, of the
Company.
(d) "Compensation" means base pay, plus any amounts attributable to
overtime, shift premium, incentive compensation, bonuses and commissions
(exclusive of "spot bonuses" and any other such item specifically directed for
all Employees by the Board or its committee).
(e) "Continuous Status as an Employee" shall mean the absence of any
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of a leave of absence
agreed to in writing by the Company, provided that such leave is for a period of
not more than 90 days or re-employment upon the expiration of such leave is
guaranteed by contract or statute.
(f) "Designated Subsidiaries" means the Subsidiaries which have been
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "Employee" means any person, including an officer, who is
customarily employed for at least twenty (20) hours per week and more than five
(5) months in a calendar year by the Company or one of its Designated
Subsidiaries.
(h) "Exercise Date" means the last business day of each Exercise
Period in an Offering Period.
<PAGE>
(i) "Exercise Period" means a six-month period commencing on an
Offering Date or on the first business day after any Exercise Date in an
Offering Period.
(j) "Offering Date" means the first day of each Offering Period of
the Plan.
(k) "Offering Period" means a period of twenty-four (24) months
consisting of four six-month Exercise Periods during which options granted
pursuant to the Plan may be exercised.
(l) "Subsidiary" means any corporation, domestic or foreign, in which
the Company owns, directly or indirectly, 50% or more of the voting shares.
3. ELIGIBILITY.
(a) GENERAL RULE. Any person who is an Employee, as defined in
paragraph 2, on the Offering Date of a given Offering Period shall be eligible
to participate in such Offering Period under the Plan, subject to the
requirements of paragraph 5(a) and the limitations imposed by Section 423(b) of
the Code.
(b) EXCEPTIONS. Any provisions of the Plan to the contrary
notwithstanding, no Employee shall be granted an option under the Plan if (i)
immediately after the grant, such Employee (or any other person whose stock
ownership would be attributed to such Employee pursuant to Section 425(d) of the
Code) would own shares and/or hold outstanding options to purchase shares
possessing five percent (5%) or more of the total combined voting power or value
of all classes of shares of the Company or of any subsidiary of the Company, or
(ii) the rate of withholding under such option would permit the employee's
rights to purchase shares under all employee stock purchase plans (described in
Section 423 of the Code) of the Company and its subsidiaries to accrue (i.e.,
become exercisable) at a rate which exceeds Twenty-Five Thousand Dollars
($25,000) of fair market value of such shares (determined at the time such
option is granted) for each calendar year in which such option is outstanding at
any time.
4. OFFERING PERIODS. The Plan shall be implemented by consecutive
Offering Periods with a new Offering Period commencing on or about each May 1
and November 1. The Board of Directors of the Company shall have the power to
change the duration of Offering Periods with respect to future offerings without
stockholder approval, if such change is announced at least fifteen (15) days
prior to the scheduled beginning of the first Offering Period to be affected.
5. PARTICIPATION.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions on the form
provided
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<PAGE>
by the Company and filing it with the Company's payroll office not less than 15
days prior to the Offering Date of the first Offering Period with respect to
which it is to be effective, unless a later time for filing the subscription
agreement is set for all eligible Employees with respect to such Offering
Period. Once enrolled, the Employee remains enrolled in each subsequent
Offering Period of the Plan at the designated payroll deduction unless the
Employee withdraws by providing the Company with a written Notice of Withdrawal
or files a new subscription agreement prior to the applicable Offering Date
changing the Employee's designated payroll deduction. An eligible Employee may
participate in only one Offering Period at a time.
(b) Payroll deductions for a participant shall commence with the
first payroll following the Offering Date, or the first payroll following the
date of valid filing of the subscription agreement, whichever is later, and
shall end when terminated by the participant as provided in paragraph 10.
6. PAYROLL DEDUCTIONS.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each payday
during all subsequent Offering Periods at a rate not exceeding ten percent
(10%), or such other rate as may be determined from time to time by the Board,
of the Compensation which he or she would otherwise receive on such payday
without regard to deferral elections, provided that the aggregate of such
payroll deductions during any Offering Period shall not exceed ten percent
(10%), or such other percentage as may be determined from time to time by the
Board, of the aggregate Compensation which he or she would otherwise have
received during said Offering Period.
(b) All payroll deductions authorized by a participant shall be
credited to his or her account under the Plan. A participant may not make any
additional payments into such account.
(c) A participant may discontinue his or her participation in the
Plan as provided in paragraph 10, or may change the rate of his or her payroll
deductions during an Offering Period by completing and filing with the Company a
new authorization for payroll deduction, provided that the Committee or Board
may, in its discretion, impose reasonable and uniform restrictions on
participants' ability to change the rate of payroll deductions. The change in
rate shall be effective no later than fifteen (15) days following the Company's
receipt of the new authorization. A participant may decrease or increase the
amount of his or her payroll deductions as of the beginning of an Offering
Period by completing and filing with the Company, at least fifteen (15) days
prior to the beginning of such Offering Period, a new payroll deduction
authorization.
(d) Notwithstanding the foregoing, to the extent necessary, but only
to such extent, to comply with Section 423(b)(8) of the Code and paragraph 3(b)
herein, a participant's payroll deductions may be automatically decreased to 0%
at such time during any Exercise Period which is scheduled to end in the current
calendar year that the
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<PAGE>
aggregate of all payroll deductions accumulated with respect to the applicable
Offering Period and any other Offering Period ending within the same calendar
year equals $21,250. Payroll deductions shall recommence at the rate provided
in such participant's subscription agreement at the beginning of the next
succeeding Exercise Period, unless terminated by the participant as provided in
paragraph 10.
7. GRANT OF OPTION.
(a) On each Offering Date, each participant shall be granted an
option to purchase on each Exercise Date (at the per share option price) a
number of full shares of the Company's Common Stock arrived at by dividing such
participant's total payroll deductions to be accumulated prior to such Exercise
Date and retained in the participant's account as of the Exercise Date by the
lower of (i) eighty-five percent (85%) of the fair market value of a share of
the Company's Common Stock at the Offering Date, or (ii) eighty-five percent
(85%) of the fair market value of a share of the Company's Common Stock at the
Exercise Date; provided, however, that the maximum number of shares a
participant may purchase during each Offering Period shall be determined by
(i) dividing $50,000 by the fair market value of a share of the Company's Common
Stock on the Offering Date or (ii) if less, by the "Maximum Cap" set for such
Offering Period; and provided further that such purchase shall be subject to the
limitations set forth in Paragraphs 3(b) and 12 hereof. The "Maximum Cap" for
each Offering Period shall be the number of shares purchasable under the Plan
during that Offering Period with the maximum payroll deductions permitted by
paragraph 6(e) hereof, based upon the fair market value of the Common Stock at
the beginning of the Offering Period. The fair market value of a share of the
Company's Common Stock shall be determined as provided in paragraph 7(b) herein.
(b) The option price per share of such shares shall be the lower of:
(i) eighty-five percent (85%) of the fair market value of a share of the Common
Stock of the Company at the Offering Date; or (ii) eighty-five percent (85%) of
the fair market value of a share of the Common Stock of the Company at the
Exercise Date. The fair market value of the Company's Common Stock on said
dates shall be determined by the Company's Board of Directors, based upon such
factors as the Board determines relevant; provided, however, that if there is a
public market for the Common Stock, the fair market value of a share of Common
Stock on a given date shall be the reported bid price for the Common Stock as of
such date; or, in the event that the Common Stock is listed on a national
securities exchange, the fair market value of a share of Common Stock shall be
the closing price on the exchange as of such date.
8. EXERCISE OF OPTION. Unless a participant withdraws from the Offering
Period as provided in paragraph 10, his or her option for the purchase of shares
will be exercised automatically at each Exercise Date, and the maximum number of
full shares subject to option will be purchased at the applicable option price
with the accumulated payroll deductions in his or her account. The shares
purchased upon exercise of an option hereunder shall be deemed to be transferred
to the participant on the Exercise Date.
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<PAGE>
During his or her lifetime, a participant's option to purchase shares hereunder
is exercisable only by the participant.
9. DELIVERY. As promptly as practicable after the Exercise Date of each
Offering Period, the Company shall arrange for the shares purchased upon
exercise of his or her option to be electronically credited to the participant's
designated brokerage account at one of the securities brokerage firms
participating in the Company's direct deposit program from time to time. Any
cash remaining to the credit of a participant's account under the Plan after a
purchase by him or her of shares at the Exercise Date of each Offering Period
which merely represents a fractional share shall be credited to the
participant's account for the next subsequent Offering Period; any additional
cash shall be returned to said participant.
10. WITHDRAWAL; TERMINATION OF EMPLOYMENT.
(a) A participant may withdraw all, but not less than all, the
payroll deductions credited to his or her account under the Plan at any time
prior to an Exercise Date by giving written notice to the Company on a form
provided for such purpose. If the participant withdraws from the Offering
Period, all of the participant's payroll deductions credited to his or her
account will be paid to the participant as soon as practicable after receipt of
the notice of withdrawal and his or her option for the current Offering Period
will be automatically canceled, and no further payroll deductions for the
purchase of shares will be made during such Offering Period or subsequent
Offering Periods, except pursuant to a new subscription agreement filed in
accordance with paragraph 6 hereof.
(b) Upon termination of the participant's Continuous Status as an
Employee prior to an Exercise Date of an Offering Period for any reason,
including retirement or death, the payroll deductions accumulated in his or her
account will be returned to him or her as soon as practicable after such
termination or, in the case of death, to the person or persons entitled thereto
under paragraph 14, and his or her option will be automatically canceled.
(c) In the event an Employee fails to remain in Continuous Status as
an Employee of the Company for at least twenty (20) hours per week during an
Offering Period in which the employee is a participant, he or she will be deemed
to have elected to withdraw from the Plan, and the payroll deductions credited
to his or her account will be returned to the participant and the option
canceled.
(d) A participant's withdrawal from an Offering Period will not have
any effect upon his or her eligibility to participate in a succeeding Offering
Period or in any similar plan which may hereafter be adopted by the Company.
11. AUTOMATIC TRANSFER TO LOW PRICE OFFERING PERIOD. In the event that
the fair market value of the Company's Common Stock is lower on the first day of
an Exercise Period (the "Subsequent Exercise Period") than it was on the first
Offering Date
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for that Offering Period (the "Initial Offering Period"), all Employees
participating in the Plan on the first day of the Subsequent Exercise Period
shall be deemed to have withdrawn from the Initial Offering Period on the first
day of the Subsequent Exercise Period and to have enrolled as participants in a
new Offering Period which begins on or about that day. A participant may elect
to remain in the Initial Offering Period by filing a written statement declaring
such election with the Company prior to the time of the automatic change to the
new Offering Period.
12. INTEREST. No interest shall accrue on the payroll deductions of a
participant in the Plan.
13. STOCK.
(a) The maximum number of shares of the Company's Common Stock which
shall be reserved for sale under the Plan shall be 20,960,000 shares, subject to
adjustment upon changes in capitalization of the Company as provided in
paragraph 19. The shares to be sold to participants in the Plan may be, at the
election of the Company, either treasury shares or shares authorized but
unissued. If the total number of shares which would otherwise be subject to
options granted pursuant to paragraph 7(a) hereof on the Offering Date of an
Offering Period exceeds the number of shares then available under the Plan
(after deduction of all shares for which options have been exercised or are then
outstanding), the Company shall make a pro rata allocation of the shares
remaining available for option grant in as uniform and equitable a manner as is
practicable. In such event, the Company shall give written notice of such
reduction of the number of shares subject to the option to each participant
affected thereby and shall return any excess funds accumulated in each
participant's account as soon as practicable after the affected Exercise Date of
such Offering Period.
(b) The participant will have no interest or voting rights in shares
covered by his or her option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan will be
credited electronically to a brokerage account in the name of the participant at
one of the brokerage firms participating from time to time in the Company's
direct deposit program.
14. ADMINISTRATION. The Plan shall be administered by the Board of
Directors of the Company or a committee (the "Committee") appointed by the
Board. The administration, interpretation or application of the Plan by the
Board or the Committee shall be final, conclusive and binding upon all
participants. Members of the Board or the Committee who are eligible employees
are permitted to participate in the Plan, provided that:
(a) Members of the Board who participate in the Plan may not vote on
any matter affecting the administration of the Plan or the grant of any option
pursuant to the Plan.
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<PAGE>
(b) If a Committee is established to administer the Plan, no member
of the Board who participates in the Plan may be a member of the Committee.
15. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a beneficiary who
is to receive shares and/or cash, if any, from the participant's account under
the Plan in the event of such participant's death at a time when cash or shares
are held for his or her account.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant in
the absence of a valid designation of a beneficiary who is living at the time of
such participant's death, the Company shall deliver such shares and/or cash to
the executor or administrator of the estate of the participant; or if no such
executor or administrator has been appointed (to the knowledge of the Company),
the Company, in its discretion, may deliver such shares and/or cash to the
spouse or to any one or more dependents or relatives of the participant, or if
no spouse, dependent or relative is known to the Company, then to such other
person as the Company may reasonably designate.
16. TRANSFERABILITY. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution, or as provided in paragraph 15 hereof) by the participant. Any
such attempt at assignment, transfer, pledge or other disposition shall be
without effect, except that the Company may treat such act as an election to
withdraw funds in accordance with paragraph 10.
17. USE OF FUNDS. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. REPORTS. Individual accounts will be maintained for each participant
in the Plan. Statements of account will be given to participating Employees as
soon as practicable following each Exercise Date. Such statements will set
forth the amounts of payroll deductions, the per share purchase price, the
number of shares purchased and the remaining cash balance, if any.
19. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. Subject to any required
action by the stockholders of the Company, the number of shares of Common Stock
covered by each option under the Plan which has not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but have not yet been placed under option (collectively, the
"Reserves"), as well as the price per share of Common Stock covered by each
option under the Plan which has not yet been exercised, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, stock dividend,
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combination or reclassification of the Common Stock or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issue by the Company of shares of stock
of any class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of shares of Common Stock subject to option.
In the event of the proposed dissolution or liquidation of the Company, the
Offering Period will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board. In the event of a
proposed sale of all or substantially all of the assets of the Company, or the
merger of the Company with or into another corporation, each option under the
Plan shall be assumed or an equivalent option shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation,
unless the Board determines, in the exercise of its sole discretion and in lieu
of such assumption or substitution, that the participant shall have the right to
exercise the option as to all of the optioned stock, including shares as to
which the option would not otherwise be exercisable. If the Board makes an
option fully exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Board shall notify the participant that the option
shall be fully exercisable, and the option will terminate upon the expiration of
such period.
The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per share
of Common Stock covered by each outstanding option, in the event that the
Company effects one or more reorganizations, recapitalizations, rights offerings
or other increases or reductions of shares of its outstanding Common Stock, and
in the event of the Company being consolidated with or merged into any other
corporation.
20. AMENDMENT OR TERMINATION. The Board of Directors of the Company may
at any time and for any reason terminate or amend the Plan. Except as provided
in paragraph 19, no such termination will affect options previously granted.
Except as provided in paragraph 19, no amendment may make any change in any
option theretofore granted which adversely affects the rights of any
participant. In addition, to the extent necessary, but only to such extent, to
comply with Rule 16b-3 under the Securities Exchange Act of 1934, as amended,
or with Section 423 of the Code (or any successor rule or provision or any other
applicable law or regulation), the Company shall obtain stockholder approval of
an amendment in such a manner and to such a degree as so required.
21. NOTICES. All notices or other communications by a participant to the
Company in connection with the Plan shall be deemed to have been duly given when
received in the form specified by the Company at the location, or by the person,
-8-
<PAGE>
designated by the Company for the receipt thereof. Notices given by means of
the Company's OnLine HR system will be deemed to be written notices under the
Plan.
22. STOCKHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the stockholders of the Company within twelve months before or after
the date the Plan is adopted. Such stockholder approval shall be obtained in
the manner and degree required under the Delaware General Corporate Law.
23. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, if required by applicable
securities laws, the Company may require the participant for whose account the
option is being exercised to represent and warrant at the time of such exercise
that the shares are being purchased only for investment and without any present
intention to sell or distribute such shares if, in the opinion of counsel for
the Company, such a representation is required by any of the aforementioned
applicable provisions of law.
24. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company as described in paragraph 22. It shall continue in
effect for a term of twenty (20) years unless sooner terminated under paragraph
20.
-9-
<PAGE>
EXHIBIT 11.1
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(In thousands except per share amounts)
Three Months Ended September 30,
-------------------------------
1996 1995
--------------- ----------
PRIMARY:
Weighted Average Shares Outstanding:
Common shares 172,974 161,354
Convertible preferred shares -- 442
Stock options -- 17,440
--------------- ----------
Total weighted average shares outstanding 172,974 179,236
--------------- ----------
--------------- ----------
(Loss) Income per Share:
Net (loss) income $ (21,601) $ 58,357
Preferred stock dividend requirement (131) --
--------------- ----------
Net income available to common stockholders $ (21,732) $ 58,357
--------------- ----------
--------------- ----------
Net (loss) income per share $ (0.13) $ 0.33
--------------- ----------
--------------- ----------
FULLY DILUTED:
Weighted Average Shares Outstanding:
Common shares 172,974 161,354
Convertible preferred shares -- 442
Zero coupon convertible subordinated debentures -- 7,402
Stock options -- 17,440
--------------- ----------
Total weighted average shares outstanding 172,974 186,638
--------------- ----------
--------------- ----------
(Loss) Income per Share:
Net (loss) income $ (21,732) $ 58,357
Add zero coupon convertible subordinated
debenture interest, net of tax -- 1,341
--------------- ----------
Adjusted net (loss) income $ (21,732) $ 59,698
--------------- ----------
--------------- ----------
Net (loss) income per share $ (0.13) $ 0.32
--------------- ----------
--------------- ----------
<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-Q for the
period ending September 30, 1996, and is qualified in its entirety by reference
to such financial statments and the notes thereto.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 245781
<SECURITIES> 46546
<RECEIVABLES> 848940
<ALLOWANCES> 27019
<INVENTORY> 524632
<CURRENT-ASSETS> 1937113
<PP&E> 835332
<DEPRECIATION> 370814
<TOTAL-ASSETS> 2959617
<CURRENT-LIABILITIES> 941082
<BONDS> 303642
0
16998
<COMMON> 173
<OTHER-SE> 1651705
<TOTAL-LIABILITY-AND-EQUITY> 2959617
<SALES> 623413
<TOTAL-REVENUES> 765602
<CGS> 372960
<TOTAL-COSTS> 450695
<OTHER-EXPENSES> 111113
<LOSS-PROVISION> 14
<INTEREST-EXPENSE> 6982
<INCOME-PRETAX> (29191)
<INCOME-TAX> (7590)
<INCOME-CONTINUING> (21601)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21601)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
