<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended MARCH 31, 1997.
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 APRIL 30, 1997 THERE WERE 177,010,182 SHARES OF COMMON STOCK OUTSTANDING.
<PAGE>
SILICON GRAPHICS, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of 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 . . . . . . . . . . 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 16
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Index to Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
TRADEMARKS USED IN THIS FORM 10-Q: Silicon Graphics, CHALLENGE and Onyx are
registered trademarks and O2, Octane, 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.
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, June 30,
ASSETS 1997 1996(1)
---- -------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 265,233 $ 257,080
Short-term marketable investments . . . . . . . 30,172 38,316
Accounts receivable, net. . . . . . . . . . . . 861,683 978,874
Inventories . . . . . . . . . . . . . . . . . . 674,063 520,045
Deferred tax assets . . . . . . . . . . . . . . 187,426 198,239
Prepaid expenses and other current assets . . . 76,729 103,701
---------- ----------
Total current assets . . . . . . . . . . . . 2,095,306 2,096,255
Other marketable investments . . . . . . . . . . . 116,044 161,541
Property and equipment, at cost. . . . . . . . . . 896,468 825,359
Accumulated depreciation and amortization. . . . . (398,120) (360,480)
---------- ----------
Net property and equipment . . . . . . . . . 498,348 464,879
Other assets . . . . . . . . . . . . . . . . . . . 422,445 435,571
---------- ----------
$3,132,143 $3,158,246
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable. . . . . . . . . . . $322,686$ 397,838
Other current liabilities . . . . . . . . . . . 710,004 703,600
---------- ----------
Total current liabilities. . . . . . . . . . 1,032,690 1,101,438
Long-term debt and other . . . . . . . . . . . . . 398,335 381,490
Stockholders' equity:
Preferred stock . . . . . . . . . . . . . . . . 16,998 16,998
Common stock. . . . . . . . . . . . . . . . . . 176 173
Additional paid-in capital. . . . . . . . . . . 1,230,715 1,172,787
Retained earnings . . . . . . . . . . . . . . . 435,425 461,311
Accumulated translation adjustment and other. 17,805 24,049
Total stockholders' equity . . . . . . . . . 1,701,118 1,675,318
---------- ----------
$3,132,143 $3,158,246
---------- ----------
---------- ----------
</TABLE>
(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.
-3-
<PAGE>
SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31, Ended March 31,
--------------------------- -------------------------
1997 (1) 1996 1997 (1) 1996
-------- ---- -------- ----
<S> <C> <C> <C> <C>
Product and other revenue. . . . . . . . . . . . . $ 768,673 $ 595,661 $ 2,074,895 $ 1,717,864
Service revenue. . . . . . . . . . . . . . . . . . 140,697 81,270 425,389 226,079
---------- ---------- ------------ ------------
Total revenue . . . . . . . . . . . . . . . . 909,370 676,931 2,500,284 1,943,943
Costs and expenses:
Cost of product and other revenue . . . . . . 435,695 290,294 1,185,052 816,063
Cost of service revenue . . . . . . . . . . . 81,597 39,783 239,872 117,981
Research and development. . . . . . . . . . . 121,532 78,006 353,905 231,546
Selling, general and administrative . . . . . 254,086 195,897 740,601 561,237
Merger-related expenses . . . . . . . . . . . 2,482 --- 7,647 1,275
---------- ---------- ------------ ------------
Total costs and expenses. . . . . . . . . 895,392 603,980 2,527,077 1,728,102
---------- ---------- ------------ ------------
Operating income (loss). . . . . . . . . . . . . . 13,978 72,951 (26,793) 215,841
Interest (expense) income and other, net . . . . . (2,156) 1,740 (4,371) 14,780
---------- ---------- ------------ ------------
Income (loss) before income taxes. . . . . . . . . 11,822 74,691 (31,164) 230,621
Provision (benefit) for income taxes . . . . . . . 1,284 21,660 (7,312) 66,880
---------- ---------- ------------ ------------
Net income (loss). . . . . . . . . . . . . . . . . 10,538 53,031 (23,852) 163,741
Preferred stock dividend requirement . . . . . . . (131) --- (394) ---
---------- ---------- ------------ ------------
Net income (loss) available to common
stockholders . . . . . . . . . . . . . . . . . . $ 10,407 $ 53,031 $ (24,246) $ 163,741
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
Net income (loss) per common share . . . . . . . . $ 0.06 $ 0.31 $ (0.14) $ 0.93
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
Common shares and common share
equivalents used in the calculation
of net income (loss) per common share. . . . . . . 184,555 173,545 174,761 176,663
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
</TABLE>
(1) Amounts include the operations of Cray Research, acquired by the Company in
April 1996.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-4-
<PAGE>
SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended March 31,
---------------------------
1997(1) 1996
------- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income. . . . . . . . . . . . . . . . . . . . . . . . . . $ (23,852) $ 163,741
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . 238,982 100,111
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,730) 3,368
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . 117,191 (71,397)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . (186,275) (81,515)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . 61,566 13,854
Other assets and liabilities. . . . . . . . . . . . . . . . 27,724 (15,270)
----------- ----------
Total adjustments. . . . . . . . . . . . . . . . . . . . 251,458 (50,849)
----------- ----------
Net cash provided by operating activities. . . . . . . . . . . . 227,606 112,892
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . (182,948) (146,713)
Increase in other assets . . . . . . . . . . . . . . . . . . . . . . (66,423) (34,470)
Available-for-sale investments:
Purchases. . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,023) (999,515)
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,222 1,225,918
Maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,258 50,954
----------- ----------
Net cash (used in) provided by investing activities. . . . . . . (194,914) 96,174
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt . . . . . . . . . . . . . . . . . . . . . . . . . . 63,873 1,651
Payments of debt principal . . . . . . . . . . . . . . . . . . . . . (141,231) (12,809)
Sale of common stock . . . . . . . . . . . . . . . . . . . . . . . . 53,082 51,909
Purchase of common stock . . . . . . . . . . . . . . . . . . . . . . -- (76,014)
Cash dividends - preferred stock . . . . . . . . . . . . . . . . . . (263) (263)
----------- ----------
Net cash used in financing activities. . . . . . . . . . . . . . (24,539) (35,526)
----------- ----------
Net increase (decrease) in cash and cash equivalents . . . . . . . . 8,153 173,540
Cash and cash equivalents at beginning of period . . . . . . . . . . 257,080 307,875
----------- ----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . $ 265,233 $ 481,415
----------- ----------
----------- ----------
</TABLE>
(1) Amounts include the operations of Cray Research, acquired by the Company
in April 1996.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-5-
<PAGE>
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):
March 31, 1997 June 30, 1996
-------------- -------------
Components and subassemblies $ 236,589 $ 199,441
Work-in-process 270,049 177,744
Finished goods 85,303 74,997
Marketing 82,122 67,863
---------- ----------
Total inventories $ 674,063 $ 520,045
---------- ----------
---------- ----------
3. BORROWINGS.
In December 1996, the Company's subsidiary in Japan entered into long-term
borrowing arrangements under which it borrowed 6 billion yen (representing the
U.S. dollar equivalent of approximately $52 million) for a period of five years
at an interest rate of 2.06% payable quarterly.
4. EARNINGS PER SHARE.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share," which is required to be adopted on December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share (referred to as basic earnings per share), the dilutive effect of
convertible securities and stock options will be excluded. The new
requirements are not expected to affect either primary or fully diluted
earnings per share for the quarter ended March 31, 1997. The new requirements
are expected to increase primary earnings per share by $0.02 but not to
affect fully diluted earnings per share for the quarter ended March 31, 1996.
5. STOCK OPTION PLANS.
On April 23, 1997, the Company initiated an option exchange program to allow
employees (excluding senior executives) to exchange their out-of-the-money stock
options for new options to purchase a smaller number of shares based on exchange
ratios ranging from one new option for every 1.25 to 2 canceled options. The
new options will have an exercise price equal to the higher of $16.50 or the
closing price on May
-6-
<PAGE>
23, 1997, will vest over the longer of two years or the original vesting
schedule and cannot be exercised prior to May 1998. If all eligible options
are exchanged under the program, the number of outstanding options will be
reduced by about 5 million shares, to approximately 34 million shares.
6. CONTINGENCIES.
The Company is defending a securities class action lawsuit filed in U.S.
District Court for the Northern District of California in January 1996. In
October 1996, the plaintiffs 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.
The Company is also defending a securities class action lawsuit involving MIPS
Computer Systems, Inc., which the Company acquired in June 1992. 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. The Company believes it has good defenses to the claims
alleged in this lawsuit and is defending itself vigorously.
-7-
<PAGE>
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)
<TABLE>
<CAPTION>
Three Months Nine Months Pro Forma
Ended Mar. 31, Ended Mar. 31, Ended Mar. 31, 1996
------------------ ---------------- -------------------
1997 1996 1997 1996 3 months 9 months
---- ---- ---- ----- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Product and other revenue. . . . . . . . . . . . . . . . . . . . 84.5% 88.0% 83.0% 88.4% 83.4% 84.4%
Service revenue. . . . . . . . . . . . . . . . . . . . . . . . . 15.5 12.0 17.0 11.6 16.6 15.6
------- ------- ------- ------- ------- -------
Total revenue. . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . 43.1(1) 51.2 43.0(2) 52.0 47.5 48.3
Research and development . . . . . . . . . . . . . . . . . . . . 13.4 11.5 14.2 11.9 13.1 12.5
Selling, general & administrative. . . . . . . . . . . . . . . . 27.9 28.9 29.6 28.9 29.3 27.5
Merger-related expenses. . . . . . . . . . . . . . . . . . . . . 0.3 -- 0.3 0.1
------- ------- ------- -------
Operating income (loss). . . . . . . . . . . . . . . . . . . . . 1.5 10.8 (1.1) 11.1
Interest (expense) income and other, net . . . . . . . . . . . . (0.2) 0.3 (0.2) 0.8
------- ------- ------- -------
Income (loss) before income taxes. . . . . . . . . . . . . . . . 1.3 11.0 (1.3) 11.9
Provision (benefit) for income taxes . . . . . . . . . . . . . . 0.1 3.2 (0.3) 3.4
------- ------- ------- -------
------- ------- ------- -------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . 1.2% 7.8% (1.0)% 8.4%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
_________
(1) 43.8% before the effects of Cray purchase accounting adjustments.
(2) 45.0% before charges for the MIPS R10000-TM- microprocessor replacement
program and the effects of Cray purchase accounting adjustments.
-8-
<PAGE>
REVENUES BY GEOGRAPHY (PRO FORMA COMBINED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Mar. 31, Year Ended Mar. 31, Year
-------------- /Year -------------- /Year
($ in millions) 1997 1996 Change 1997 1996 Change
---- ---- ------ ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
United States $445 $350 27% $1,292 $1,105 17%
Europe 236 227 4% 647 739 (12)%
Rest of World 228 211 8% 561 601 (7)%
---- ---- ---- ------ ------ -----
Total revenue $909 $788 15% $2,500 $2,445 (2)%
---- ---- ---- ------ ------ -----
---- ---- ---- ------ ------ -----
<CAPTION>
Three Months Nine Months
Ended Mar. 31, Ended Mar. 31,
-------------- --------------
(as a percentage of total revenue) 1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States 49% 44% 52% 45%
Europe 26% 29% 26% 30%
Rest of World 25% 27% 22% 25%
</TABLE>
REVENUE BY PRODUCT LINE (PRO FORMA COMBINED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Mar. 31, Ended Mar. 31,
-------------- --------------
(as a percentage of total revenue) 1997 1996 1997 1996
excluding other revenue) ---- ---- ---- ----
<S> <C> <C> <C> <C>
Servers and high performance computing systems
(primarily from the Origin-TM-, POWER CHALLENGE-TM-,
CHALLENGE-Registered Trademark-, Onyx-Registered
Trademark- and Cray-Registered Trademark- families) 63% 43% 59% 50%
Workstations (primarily from the O2-TM-,
Indy-Registered Trademark- and
Indigo2-TM- families) 37% 57% 41% 50%
</TABLE>
- ---------------------------------------------------------------------------
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 for the third quarter and first nine months of fiscal 1997
of $909 million and $2.5 billion, respectively, increased compared with the
pro forma combined revenue of $788 million and $2.4 billion, respectively, for
the corresponding periods of fiscal 1996. Product revenue for the Company's
servers and high performance computing systems for the third quarter and first
nine months of fiscal 1997 grew 71% and 21%, respectively, compared with the
same periods a year ago. Product revenue for the Company's workstations for the
third quarter and first nine months of fiscal 1997 declined 22% and 18%,
respectively, compared with the same periods a year ago.
The increase in the Company's revenue during the third quarter and first nine
months of fiscal 1997 was primarily the result of strong sales of the Company's
newer products including the O2, Origin 200, Origin 2000 and T3E products,
offset in part by a decline in sales of earlier generations of these products.
The Company's third quarter revenue in the "power desktop" market served by the
Indigo2 and Octane families of workstations was also adversely affected by the
release to manufacturing late in the quarter of its new
-9-
<PAGE>
Octane workstations. Revenue for the first nine months of fiscal 1997 also
was affected by a problem in the manufacturing fabrication process for the
R10000 microprocessor which was identified and resolved by the Company and
NEC, the principal manufacturer for the R10000 microprocessor, in the first
quarter. The Company completed a board replacement program in the second
quarter of fiscal 1997 for customers with potentially affected systems.
Currency changes also depressed international revenue growth rates during
both the third quarter and first nine months of fiscal 1997.
The Company's consolidated backlog at March 31, 1997 was $709 million,
compared with backlog of $757 million at December 31, 1996. A majority of
the backlog at March 31, 1997 represented orders scheduled to ship during the
fourth quarter of fiscal 1997.
GROSS MARGIN. Gross margin of 43.1% and 43.0% for the third quarter and
first nine months of fiscal 1997, respectively, decreased compared with pro
forma combined gross margin of 47.5% and 48.3%, respectively, for the
corresponding periods of fiscal 1996. Pro forma combined gross margin for
the first nine months of fiscal 1997 would have been 45.0% without the $10
million in first quarter charges relating to the R10000 microprocessor
replacement program and the purchase accounting charges described below. The
decline in gross margin is primarily attributable to manufacturing variances
associated with new product introductions, competitive pricing pressures and
the Cray Research purchase accounting and other charges taken during the
first nine months of fiscal 1997.
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 gross margin for the third quarter and first nine months of
fiscal 1997 by approximately $4 million and $33 million, respectively. The
Company expects that the continuing effect of the sell-through of this
inventory will reduce gross margins by an aggregate of approximately $3
million during the fourth quarter 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 gross margin for the third
quarter and first nine months by approximately $2 million and $6 million,
respectively. The effect on gross margins during the fourth quarter of
fiscal 1997 is expected to be immaterial. In addition, the first quarter of
fiscal 1997 gross margin was adversely affected by the need to provide
inventory reserves as a result of product transitions.
OPERATING EXPENSE. The Company plans its annual operating expenses based on
a target percentage range of anticipated revenue. These targets 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 most
of the Company's operating expenses are relatively fixed in the short term,
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 nine months of fiscal 1997, which was higher
as a percentage of revenue than the corresponding period a year ago and 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 $4 million to $6 million of similar merger-related expenses during
the fourth quarter of fiscal 1997.
OTHER OPERATING RESULTS. Interest (expense) income and other, net for the
third quarter of fiscal 1997 was $(2.2) million compared with $1.7 million
for the third quarter of fiscal 1996. Correspondingly, interest (expense)
income and other, net for the first nine months of fiscal 1997 was $(4.4)
million compared with $14.8 million for the first nine months of fiscal 1996.
The changes for both the third quarter and first nine months of fiscal 1997
compared with the corresponding periods of fiscal 1996 reflect substantially
smaller invested cash balances following the Cray Research acquisition,
interest expense on the
-10-
<PAGE>
6.125% debentures assumed in the Cray Research acquisition and costs
associated with the expansion of the Company's economic hedging program.
TAXES. The Company revised its estimated fiscal year tax rate during the
third quarter of fiscal 1997 from 20% resulting in an anticipated 11%
effective tax rate for the third and fourth quarters. The tax rate was 29%
for both the third quarter and first nine months of fiscal 1996. The lower
effective tax rate for fiscal 1997 is primarily attributable to the
reinstated U.S. federal 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. In fiscal 1998, the
Company expects that the tax rate will return to a level of approximately 26%.
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 carryforward. 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 March 31, 1997, cash and cash equivalents and short- and long-term
marketable investments totaled $411 million, down from $457 million at June
30, 1996. Operating activities generated $228 million during the first nine
months of fiscal 1997 compared with $113 million during the first nine months
of fiscal 1996. Despite the net loss during the first nine months of fiscal
1997, cash flow from operating activities was positive principally due to a
decrease in accounts receivable, an increase in account payable, and charges
that did not use cash, including $39 million of amortization of the write-up
of acquired Cray Research inventories and service contracts, offset in part
by a significant increase in inventories. Investing activities, other than
changes in the Company's marketable investments, consumed $249 million in
cash during the first nine months of fiscal 1997, principally for the
acquisition of capital equipment. The principal financing activities during
the first nine months of fiscal 1997 were to repay $141 million in short-term
borrowings and to secure 6 billion in long-term yen-denominated borrowings
representing the U.S. dollar equivalent of approximately $52 million. The
employee stock plans continue to be an additional source of cash.
As of March 31, 1997, the Company's principal sources of liquidity included
cash and cash equivalents and marketable investments of $411 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 duplicate
administrative activities. During the first nine months of fiscal 1997, cash
outlays for these activities were approximately $25 million. The Company
anticipates that cash outlays during the remainder of fiscal 1997 for exit
activities will be approximately $7 million to $9 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.
-11-
<PAGE>
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 derives each quarter's revenue
predominantly from orders booked and shipped during the third month, and
disproportionately in the latter half of that month which makes the
forecasting of revenue inherently uncertain. 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 announced the new O2, Origin and Onyx2 product families
and in January 1997, announced the Octane line of workstations, replacing a
substantial portion of its current 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. 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,
the release of products to manufacturing late in any quarter, 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 third quarter and first nine
months of fiscal 1997 were strongly influenced by product transition issues.
These issues may also affect the Company's results for the fourth quarter as
the Company ramps up volume manufacturing of its new Octane workstation line.
-12-
<PAGE>
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, the Company is experiencing
increasing competition in its desktop 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 workstation 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.
CORPORATE ORGANIZATION In May 1997, the Company announced an internal
reorganization of business units and management roles and responsibilities
intended to streamline operations within its core businesses and align key
resources to focus on growth markets. While the Company believes that the
internal reorganization will enhance operational efficiency over time, there
is no assurance that the Company's business will not be disrupted in the
current quarter.
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. 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.
-13-
<PAGE>
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. 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.
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.
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.
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.
-14-
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.41 Guaranty from Silicon Graphics, Inc. to Virtual Funding,
Limited Partnership dated as of November 18, 1993.
10.42 Amendment No. 1 to Guaranty from Silicon Graphics, Inc. to
Virtual Funding, Limited Partnership dated as of March 15, 1995.
10.43 Amendment No. 2 to Guaranty from Silicon Graphics, Inc. to
Virtual Funding, Limited Partnership dated as of March 7, 1997.
10.44 Amendment to the Silicon Graphics, Inc. 1985 Stock Incentive
Program dated April 23, 1997.
10.45 Amendment to the Silicon Graphics, Inc. 1993 Long-Term
Incentive Stock Plan dated April 23, 1997.
10.46 Amendment to the Silicon Graphics, Inc. 1996 Supplemental
Non-Executive Equity Incentive Plan dated April 23, 1997.
10.47 Amendment to the Silicon Graphics, Inc. Amended and Restated
1989 Employee Benefit Stock Plan dated April 23, 1997.
10.48 Amendment to the Silicon Graphics, Inc. Directors' Stock
Option Plan dated April 23, 1997.
11.1 Statement of Computation of Per Share Earnings.
27.1 Financial Data Schedule.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 1997 SILICON GRAPHICS, INC.
a Delaware corporation
By: /s/ William M. Kelly
----------------------------------------
William M. Kelly
Senior Vice President, Corporate
Operations
(Principal Financial Officer)
By: /s/ Dennis P. McBride
----------------------------------------
Dennis P. McBride
Vice President, Controller
(Principal Accounting Officer)
-16-
<PAGE>
SILICON GRAPHICS, INC.
INDEX TO EXHIBITS
Exhibit Description
------- -----------
10.41 Guaranty from Silicon Graphics, Inc. to Virtual Funding,
Limited Partnership dated as of November 18, 1993.
10.42 Amendment No. 1 to Guaranty from Silicon Graphics, Inc. to
Virtual Funding, Limited Partnership dated as of March 15, 1995.
10.43 Amendment No. 2 to Guaranty from Silicon Graphics, Inc. to
Virtual Funding, Limited Partnership dated as of March 7, 1997.
10.44 Amendment to the Silicon Graphics, Inc. 1985 Stock Incentive
Program dated April 23, 1997.
10.45 Amendment to the Silicon Graphics, Inc. 1993 Long-Term
Incentive Stock Plan dated April 23, 1997.
10.46 Amendment to the Silicon Graphics, Inc. 1996 Supplemental
Non-Executive Equity Incentive Plan dated April 23, 1997.
10.47 Amendment to the Silicon Graphics, Inc. Amended and Restated
1989 Employee Benefit Stock Plan dated April 23, 1997.
10.48 Amendment to the Silicon Graphics, Inc. Directors' Stock
Option Plan dated April 23, 1997.
11.1 Statement of Computation of Per Share Earnings
27.1 Financial Data Schedule
-17-
<PAGE>
GUARANTY
from
SILICON GRAPHICS, INC.
to
VIRTUAL FUNDING, LIMITED PARTNERSHIP
Dated as of November 18, 1993
<PAGE>
GUARANTY
--------
GUARANTY, dated as of November 18, 1993 (the "Guaranty"), from SILICON
GRAPHICS, INC., a Delaware corporation (the "Guarantor") to VIRTUAL FUNDING,
LIMITED PARTNERSHIP, a Delaware limited partnership (the "Lessor").
WHEREAS, the Guarantor wishes to induce the Lessor to enter into a
certain Agreement for Lease (the "Agreement for Lease") and a certain Lease
Agreement (the "Master Lease") both dated as of the date hereof and both entered
into with Silicon Graphics Real Estate, Inc., a Delaware corporation and a
wholly-owned subsidiary of the Guarantor (the "Initial Lessee") (the Agreement
for Lease and the Master Lease, as each of them may be amended, modified,
supplemented, or extended from time to time, are collectively referred to
hereinafter as the "Guaranteed Agreements"); and
WHEREAS, the Initial Lessee and each direct or indirect subsidiary of
the Guarantor which hereinafter becomes a party to the Guaranteed Agreements are
hereinafter referred to as a "Guaranteed Subsidiary"; and
WHEREAS, the Lessor is unwilling to enter into the Guaranteed
Agreements with each Guaranteed Subsidiary unless the Guarantor enters into this
Guaranty.
NOW, THEREFORE, in order to induce the Lessor to enter into the
Guaranteed Agreements and to consummate the transactions contemplated thereby,
the Guarantor hereby agrees as follows:
1. GUARANTY. (a) The Guarantor unconditionally and irrevocably
guarantees to the Lessor the due and punctual performance of and compliance by
each Guaranteed Subsidiary with all obligations, covenants, warranties,
undertakings and conditions contained in or arising under the Guaranteed
Agreements including but not limited to, the full and punctual payment by each
Guaranteed Subsidiary, when due, whether at the stated due date, by acceleration
or otherwise, of any and all rent, obligations, liabilities, indebtedness and
other amounts of every kind arising out of the Guaranteed Agreements, all
amounts in respect to indemnities provided for in the Guaranteed Agreements, and
all damages (whether provided for in the Guaranteed Agreements or otherwise
permitted by law) in respect of a failure or refusal by each Guaranteed
Subsidiary to make any such payment, howsoever created, arising or evidenced,
voluntary or involuntary, whether direct or indirect, absolute or contingent,
now or hereafter existing or owing to the Lessor (all the foregoing obligations
and undertakings are collectively referred to hereinafter as the "Obligations").
<PAGE>
(b) This Guaranty is an absolute and unconditional guaranty of
performance and payment when due under the Guaranteed Agreements and not of
collection of any indebtedness contained in or arising under the Guaranteed
Agreements. This Guaranty is in no way conditioned upon any attempt to collect
from each Guaranteed Subsidiary or upon any other event or contingency, and
shall be binding upon and enforceable against the Guarantor without regard to
the validity or enforceability of the Guaranteed Agreements, or of any term
thereof. If for any reason each Guaranteed Subsidiary shall fail or be unable
duly and punctually to pay any such amount when due under the Guaranteed
Agreement, the Guarantor will forthwith pay, if not already paid by such
Guaranteed Subsidiary, the same immediately upon demand.
(c) In case either of the Guaranteed Agreements shall be terminated
as a result of the rejection thereof by any trustee, receiver or liquidating
agent of each Guaranteed Subsidiary or any of its properties in any bankruptcy,
insolvency, reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar proceeding, the Guarantor's obligations hereunder shall
continue to the same extent as if such agreement had not been so rejected. The
Guarantor agrees that this Guaranty shall continue to be effective or be
reinstated, as the case may be, if at any time payment to the Lessor of the
Obligations or any part thereof is rescinded or must otherwise be returned by
the Lessor upon the insolvency, bankruptcy or reorganization of each Guaranteed
Subsidiary, or otherwise, as though such payment to the Lessor had not been
made.
(d) The Guarantor shall pay all reasonable costs, expenses and
damages incurred (including, without limitation, attorneys' fees and
disbursements) in connection with the enforcement of the Obligations of each
Guaranteed Subsidiary pursuant to the respective documents or otherwise and in
connection with the enforcement of the obligations of the Guarantor under this
Guaranty.
2. GUARANTY CONTINUING AND UNLIMITED. The obligations of the
Guarantor hereunder shall be continuing and unlimited, shall not be subject to
any counterclaim, set-off, deduction or defense (other than payment or
performance) based upon any claim the Guarantor may have against the Lessor or
each Guaranteed Subsidiary or any other Person, and shall remain in full force
and effect without regard to, and shall not be released, discharged or in any
way affected by any circumstance or condition (whether or not the Guarantor
shall have any knowledge or notice thereof) whatsoever which might constitute a
legal or equitable discharge or defense including, but not limited to, (a) any
express or implied amendment or modification of or supplement to the Guaranteed
Agreements or any other agreement referred to in either thereof, or any other
instrument applicable to each Guaranteed Subsidiary or to the Obligations, or
any part thereof, or any assignment or transfer of any
<PAGE>
thereof; (b) any failure on the part of each Guaranteed Subsidiary to perform or
comply with the Guaranteed Agreements or any failure of any other Person to
perform or comply with any term of the Guaranteed Agreements, or any other
agreement as aforesaid; (c) any waiver, consent, change, extension, indulgence
or other action or any action or inaction under or in respect of the Guaranteed
Agreements, or any other agreement as aforesaid, or this Guaranty, whether or
not the Lessor, each Guaranteed Subsidiary or the Guarantor has notice or
knowledge of any of the foregoing; (d) any bankruptcy, insolvency,
reorganization, arrangement, readjustment, composition, liquidation or similar
proceeding with respect to the Guarantor or each Guaranteed Subsidiary , or
their respective properties or their creditors, or any action taken by any
trustee or receiver or by any court in any such proceeding; (e) any furnishing
or acceptance of additional security or any release of any security (and the
Guarantor authorized the Lessor to furnish, accept or release said security);
(f) any limitation on the liability or Obligations of each Guaranteed Subsidiary
under the Guaranteed Agreements (other than any limitation expressly provided
for therein) or any termination, cancellation, frustration, invalidity or
unenforceability, in whole or in part, of the Guaranteed Agreements, or any term
of any thereof; (g) any lien, charge or encumbrance on or affecting the
Guarantor's or any of each Guaranteed Subsidiary's respective assets and
properties; (h) any act, omission or breach on the part of the Lessor under the
Guaranteed Agreements, or any other agreement at any time existing between the
Lessor and each Guaranteed Subsidiary or any other law, governmental regulation
or other agreement applicable to the Lessor or any Obligation; (i) any claim as
a result of any other dealings among the Lessor, the Guarantor or each
Guaranteed Subsidiary or any of them; (j) the assignment of the Guaranteed
Agreements by the Lessor to any other Person, or the assignment of this Guaranty
by the Lessor to any Person permitted under Section 6 of that certain
Guarantor's Consent dated as of the date hereof among the Guarantor, the Lessor
and The Dai-Ichi Kangyo Bank, Lt., New York Branch; or (k) any change in the
name of the Lessor, each Guaranteed Subsidiary or any other person referred to
herein.
The unconditional obligations of the Guarantor set forth herein
constitute the full recourse obligations of the Guarantor enforceable against it
to the full extent of all of its assets and properties.
3. WAIVER. The Guarantor unconditionally waives: (a) notice of any
of the matters referred to in Section 2 hereof; (b) all notices which may be
required by statute, rule of law or otherwise to preserve any rights against the
Guarantor hereunder, including, without limitation, notice of the acceptance of
this Guaranty, or the creation, renewal, extension, modification or accrual of
the Obligations or notice of any other matters relating thereto, any
presentment, demand, notice of dishonor, protest, nonpayment of any damages or
other amounts payable under
<PAGE>
the Guaranteed Agreements; (c) any requirement for the enforcement, assertion or
exercise of any right, remedy, power or privilege under or in respect of the
Guaranteed Agreements, including, without limitation, diligence in collection or
protection of or realization upon the Obligation or any part thereof or any
collateral thereof; (d) any requirement of diligence; (e) any requirement to
mitigate the damages resulting from a default by each Guaranteed Subsidiary
under the Guaranteed Agreements; (f) the occurrence of every other condition
precedent to which the Guarantor or each Guaranteed Subsidiary may otherwise be
entitled; and (g) the right to require the Lessor to proceed against each
Guaranteed Subsidiary or any other Person, or to pursue any other remedy in the
Lessor's power whatsoever, and the Guarantor waives the right to have the
property of each Guaranteed Subsidiary first applied to the discharge of the
Obligations.
The Lessor may, at its election, exercise any right or remedy it may
have against each Guaranteed Subsidiary or any security held by the Lessor,
including, without limitation, the right to foreclose upon any such security by
judicial or nonjudicial sale, without affecting or impairing in any way the
liability of the Guarantor hereunder, except to the extent the Obligations have
been paid, and the Guarantor waives any defense arising out of the absence,
impairment or loss of any right of reimbursement, contribution or subrogation or
any other right or remedy of the Guarantor against each Guaranteed Subsidiary or
any such security, whether resulting from such election by the Lessor or
otherwise. The Guarantor waives any defense arising by reason of any disability
or other defense of each Guaranteed Subsidiary or by reason of the cessation
from any cause whatsoever of the liability, either in whole or in part, of each
Guaranteed Subsidiary to the Lessor for the Obligations. The Guarantor
understands that the liability of each Guaranteed Subsidiary to the Lessor for
the Obligations may be secured by real property and that the Guarantor shall be
liable for the full amount of its liability hereunder notwithstanding
foreclosure on such real property by trustee sale or any other reason impairing
the Guarantor's right to proceed against each Guaranteed Subsidiary. The
Guarantor hereby waives, to the fullest extent permitted by law, all rights and
benefits under section 2809 of the California Civil code purporting to reduce a
guarantor's obligation in proportion to the principal obligation, all rights and
benefits under section 580a of the California Code of Civil Procedure governing
determination of fair market value following the exercise of power of sale, all
rights and benefits under section 580b of the California Code of Civil Procedure
stating that no deficiency may be recovered on a real property purchase money
obligation and all rights and benefits under section 580d of the California Code
of Civil Procedure stating that no deficiency may be recovered on a note secured
by a deed of trust on real property in case such real property is sold under the
power of sale contained in such deed of trust, and all rights and benefits under
section 726 of the California Code of Civil Procedure and
<PAGE>
any and all similar laws now in effect or hereafter enacted in the State of
California regarding the procedures to be followed by a creditor with real
property security and/or limiting the right of such a creditor to a deficiency
judgment, including, without limitation, the California law now in effect
stating that the Lessor must first proceed against any real property collateral
before commencing an action to collect the Obligations, if such sections, or any
of them, have any application hereto or any application to the Guarantor. The
Guarantor expressly waives any and all benefits under the California Civil Code
section 2808, 2810, 2819, 2821, 2825, 2839, 2845 through 2850, 2854 and 2855.
The Guarantor understands that the Lessor's exercise of certain rights
and remedies contained in the Guaranteed Agreements may affect or eliminate the
Guarantor's rights of subrogation against each Guaranteed Subsidiary and that
the Guarantor may therefore incur partially or totally nonreimbursable liability
hereunder; nevertheless, the Guarantor hereby authorizes and empowers the
Lessor, its successors, endorsees and/or assignees, to exercise in its or their
sole discretion, any rights and remedies, or any combination thereof, which may
then be available, it being the purpose and intent of the Guarantor that its
obligations hereunder shall be absolute, independent and unconditional under any
and all circumstances.
The Guarantor assumes the responsibility for being and keeping
informed of the financial condition of each Guaranteed Subsidiary and of all
other circumstances bearing upon the risk of nonpayment of the Obligations and
agrees that the Lessor shall not have any duty to advise the Guarantor of
information regarding any condition or circumstance or any change in such
condition or circumstance. The Guarantor acknowledges that the Lessor has not
made any representation to the Guarantor concerning the financial condition of
each Guaranteed Subsidiary.
4. REPRESENTATIONS AND WARRANTIES OF THE GUARANTOR. The Guarantor
represents and warrants to the Lessor that:
(a) CORPORATE EXISTENCE; COMPLIANCE WITH LAW. The Guarantor (i) is
duly organized, validly existing and in good standing under the laws of the
State of Delaware, (ii) has the corporate power, authority and legal right to
own or operate its properties or to lease the properties it operates and to
conduct the business in which it is currently engaged and (iii) is duly
qualified as a foreign corporation and in good standing under the laws of each
jurisdiction where its ownership, lease or operation of properties or the
conduct of its business requires such qualification, except where such failure
to qualify would not have a material adverse effect of the financial condition
or business of Guarantor and its subsidiaries, taken as a whole.
(b) CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The
Guarantor has the corporate power, authority
<PAGE>
and legal right to make, deliver and perform this Guaranty and has taken all
necessary corporate action to authorize the execution, delivery and performance
of this Guaranty. No consent of any other Person (including, without
limitation, stockholders and creditors of the Guarantor), and no authorization
of, notice to, or other act by or in respect of the Guarantor by or with any
governmental authority, agency or instrumentality is required in connection with
the execution, delivery, performance, validity or enforceability of this
Guaranty. This Guaranty has been duly executed and delivered on behalf of the
Guarantor and constitutes a legal, valid and binding obligation of the
Guarantor, enforceable against the Guarantor in accordance with its terms.
(c) NO LEGAL BAR. The execution, delivery and performance by the
Guarantor of this Guaranty will not violate any provision of any existing law or
regulation applicable to the Guarantor or of any award, order or degree
applicable to the Guarantor of any court, arbitrator or governmental authority,
or of the Certificate of Incorporation or By-Laws of the Guarantor, or of any
security issued by the Guarantor or of any material mortgage, indenture, lease,
contract or other agreement or undertaking to which the Guarantor is a party or
by which the Guarantor or any of its properties or assets may be bound.
(d) NO MATERIAL LITIGATION. There is no action, suit, proceeding or
investigation at law or in equity by or before any court, governmental body,
agency, commission or other tribunal now pending or, to the best knowledge of
Guarantor threatened, against or affecting the Guarantor or any of its property
or rights which questions the enforceability of this Guaranty or which, if
adversely determined, would have a material adverse impact on the financial
condition or business of the Guarantor and its subsidiaries, taken as a whole
or, which if adversely determined, would materially impair the ability of the
Guarantor to perform its obligations hereunder.
(e) ERISA. The Guarantor has not established and does not maintain
or contribute to any employee benefit plan that is covered by Title IV of the
Employee Retirement Income Security Act of 1974, as amended.
(f) GUARANTEED SUBSIDIARY. The Guarantor owns and will continue to
own directly or indirectly, not less than 90% of the issued and outstanding
shares of capital stock of each Guaranteed Subsidiary. All such shares have
been validly issued, are fully paid and non-assessable and are free and clear of
any liens or encumbrances.
5. PAYMENTS. Each payment by the Guarantor to the Lessor under
this Guaranty shall be made by transferring the amount thereof in immediately
available funds without set-off or counterclaim; provided that, no such payment
shall be deemed a waiver of any rights the Guarantor may have.
<PAGE>
6. PARTIES. This Guaranty shall inure to the benefit of the Lessor
and its successors, assigns or transferees, and shall be binding upon the
Guarantor and its successors and assigns. The Guarantor may not delegate any of
its duties under this Guaranty without the prior written consent of the Lessor
or any Person to whom the Lessor has assigned this Guaranty. Upon notice to the
Guarantor, the Lessor and its successors, assigns and transferees may assign its
or their rights and benefits under this Guaranty to any financial institution
providing financing to the Lessor in connection with the Guaranteed Agreements.
7. NOTICES. All notices, demands and other communications between
the Lessor and the Guarantor under this Guaranty shall be in writing and shall
be delivered or sent to the address or telecopier number shown below, or to such
other address or telecopier number as either of us may be written notice to the
other have designated for such purpose. Any such notice, demand or other
communication shall not be effective until actually received.
If to the Lessor:
c/o ML Leasing Equipment Corp. -
Project and Lease Finance Group
World Financial Center
North Tower - 27th Floor
250 Vesey Street
New York, New York 10281-1327
Attention: Jean Tomaselli
Telecopier: (212) 449-2854
Telephone: (212) 449-7925
With a copy of each such notice to be simultaneously given,
delivered or served to Gary Carlin at the following address:
ML Leasing Equipment Corp.
Controllers Office
World Financial Center
South Tower - 8th Floor
225 Liberty Street
New York, New York 10080-6108
Attention: Marty McInerney
Telecopier: (212) 236-7584
Telephone: (212) 236-7203
If to the Guarantor:
Silicon Graphics, Inc.
2011 N. Shoreline Boulevard
Mountain View, California 94043-1389
Attention: Treasury, Mail Stop 6U-645
<PAGE>
Telecopier: (415) 964-5215
Telephone: (415) 960-1980
Overnight Courier Address:
2011 N. Shoreline Boulevard
Mountain View, California 94043-1389
with a copy to:
Silicon Graphics, Inc.
2011 N. Shoreline Boulevard
Mountain View, California 94043-1389
Attention: Legal Services, Mail Stop 6U-710
Telecopier: (415) 965-1586
Telephone: (415) 960-1980
Overnight Courier Address:
2011 N. Shoreline Boulevard
Mountain View, California 94043-1389
8. REMEDIES. The Guarantor stipulates that the remedies at law in
respect of any default or threatened default by the Guarantor in the performance
of or compliance with any of the terms of this Guaranty are not and will not be
adequate, and that any of such terms may be specifically enforced by a decree
for specific performance or by an injunction against violation of any such terms
or otherwise.
9. RIGHTS TO DEAL WITH EACH GUARANTEED SUBSIDIARY. At any time and
from time to time, without terminating, affecting or impairing the validity of
this Guaranty or the obligations of the Guarantor hereunder, the Lessor may deal
with each Guaranteed Subsidiary in the same manner and as fully and as if this
Guaranty did not exist and shall be entitled, among other things, to grant each
Guaranteed Subsidiary, without notice or demand and without affecting the
Guarantor's liability hereunder, such extension or extensions of time to
perform, renew, compromise, accelerate of otherwise change the time for payment
of or otherwise change the terms of payment or any part thereof contained in or
arising under the Guaranteed Agreements, or to waive any Obligation of each
Guaranteed Subsidiary to perform, any act or acts as the Lessor may deem
advisable.
10. SUBROGATION. The Guarantor irrevocably waives any and all rights
to which it may be entitled, by operation of law or otherwise, upon making any
payment hereunder to be subrogated to the rights of the payee against each
Guaranteed Subsidiary with respect to such payment or otherwise to be
reimbursed, indemnified or exonerated by each Guaranteed Subsidiary in respect
thereof.
<PAGE>
11. GUARANTOR'S COVENANTS. The Guarantor hereby covenants and agrees
that until the Obligations and all obligations of the Guarantor under this
Guaranty have been paid or discharges in full:
(a) COMPLIANCE WITH LAW. The Guarantor shall comply, and shall cause
each of its subsidiaries to comply, in all material respects with all applicable
laws, rules, regulations and orders of any governmental authority having
jurisdiction over its or such subsidiary's business, as the case may be, except
(i) such noncompliance as would not materially adversely affect the financial
condition or business of the Guarantor and its subsidiaries, taken as a whole,
or (ii) such noncompliance as is being contested in good faith or as to which a
bona fide dispute may exist.
(b) PAYMENT OF TAXES. The Guarantor shall, and shall cause each of
its subsidiaries to, pay and discharge all taxes, assessments and governmental
charges or levies imposed upon it or such subsidiary or upon its or such
subsidiary's income or properties, as the case may be, prior to the date on
which penalties attached thereto, except to the extent that (i) any such tax,
assessment, charge or levy is being contested in good faith by appropriate
proceedings and adequate reserves therefor have been established by the
Guarantor or such subsidiary, as the case may be, or (ii) the failure so to pay
or discharge any such tax, assessment, charge or levy would not materially
adversely affect the financial condition or business of the Guarantor and its
subsidiaries, taken as a whole.
(c) MAINTENANCE OF INSURANCE. The Guarantor shall maintain, and
shall cause each of its subsidiaries to maintain, with financially sound and
reputable independent insurers, insurance with respect to its or such
subsidiary's properties and business, as the case may be, against loss or damage
of the kinds customarily insured against by entities engaged in the same or
similarly situated business, of such types and in such amounts as are
customarily carried under similar circumstances by such other entities;
provided, however, that this subsection shall not be construed as requiring the
Guarantor to maintain or cause to be maintained earthquake, errors and
omissions, directors' and officers' or professional liability insurance.
12. SURVIVAL OF REPRESENTATIONS, WARRANTIES, ETC. All
representations, warranties, covenants and agreements made herein and in
statements or certificates delivered pursuant hereto shall survive any
investigation or inspection made by or on behalf of the Lessor and shall
continue in full force and effect until all of the obligations of the Guarantor
under this Guaranty shall be fully performed in accordance with the terms
hereof, and until the payment in full of all sums payable by each Guaranteed
Subsidiary under the Guaranteed Agreements, and until performance
<PAGE>
in full of all obligations of each Guaranteed Subsidiary in accordance with the
terms and provisions of such agreements.
13. GOVERNING LAW AND CONSENT OT JURISDICTION; WAIVER OF JURY TRIAL.
(A) THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
SUBSTANTIVE LAWS OF THE STATE OF NEW YORK. THE GUARANTOR HEREBY IRREVOCABLY
SUBMITS TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN
DISTRICT OF NEW YORK AND ANY COURT IN THE STATE OF NEW YORK LOCATED IN THE CITY
AND COUNTY OF NEW YORK IN ANY ACTION, SUIT OR PROCEEDING BROUGHT AGAINST IT AND
RELATED TO OR IN CONNECTION WITH THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED
THEREBY, AND TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE GUARANTOR HEREBY
WAIVES AND AGREES NOT TO ASSERT BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE IN
ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT
OT THE JURISDICTION OF SUCH COURTS, THAT THE SUIT, ACTION OR PROCEEDING IS
BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR
PROCEEDING IS IMPROPER, OR THAT THIS GUARANTY OR ANY DOCUMENT OR ANY INSTRUMENT
REFERRED TO HEREIN OR THE SUBJECT MATTER HEREOF MAY NOT BE LITIGATED IN OR BY
SUCH COURTS. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE GUARANTOR AGREES
NOT TO SEEK AND HEREBY WAIVES THE RIGHT TO ANY REVIEW OF THE JUDGMENT OF ANY
SUCH COURT BY ANY COURT OF ANY OTHER NATION OR JURISDICTION WHICH MAY BE CALLED
UPON TO GRANT AN ENFORCEMENT OF SUCH JUDGMENT. THE GUARANTOR AGREES THAT
SERVICE OF PROCESS MAY BE MADE UPON IT BY CERTIFIED OR REGISTERED MAIL TO THE
ADDRESS FOR NOTICE SET FORTH IN THIS GUARANTY OR ANY METHOD AUTHORIZED BY THE
LAWS OF NEW YORK.
(b) The parties hereto knowingly, voluntarily and expressly waive all
right to trial by jury in any action, proceeding or counterclaim enforcing or
defending any rights arising out of or relating to this Guaranty or the
transactions contemplated hereby. The Guarantor acknowledges that the
provisions of this Section 13(b) have been bargained for and that it has been
represented by counsel in connection therewith.
14. MISCELLANEOUS. If any term of this Guaranty or any application
thereof shall be invalid or unenforceable, the remainder of this Guaranty and
any other application of such term shall not be affected thereby. Any term of
this Guaranty may be amended, waived, discharged or terminated only by an
instrument in writing signed by the Guarantor and the Lessor. The headings in
this Guaranty are for purposes of reference only and shall not limit or define
the meaning hereof. This Guaranty may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Guaranty to be
executed and delivered as of the date first above written.
SILICON GRAPHICS, INC.
as Guarantor
By: /s/ Stanley J. Meresman
---------------------------
Name: Stanley J. Meresman
Title: Senior Vice President,
Finance and Chief Financial
Officer
By: /s/ Tom Oswold
------------------
Name: Tom Oswold
Title: Vice President, Finance
Acknowledged and Agreed:
VIRTUAL FUNDING, LIMITED PARTNERSHIP
By: Virtual Capital, Inc.
General Partner
By: /s/ Teresa A. Miles
-----------------------
Name: Teresa A. Miles
Title: Vice President and
Assistant Secretary
<PAGE>
AMENDMENT NO. 1 TO GUARANTY
AMENDMENT No. 1 ("Amendment No. 1"), dated as of March 15, 1995, from
SILICON GRAPHICS, INC., a Delaware corporation (the "Guarantor"), to VIRTUAL
FUNDING, LIMITED PARTNERSHIP, a Delaware limited partnership (the "Lessor").
WHEREAS, the Lessor and Silicon Graphics Real Estate, Inc. entered
into an Agreement for Lease dated as of November 18, 1993, as amended by
Amendment No. 1 to Agreement for Lease dated as of March 15, 1995; and
WHEREAS, the Lessor and Silicon Graphics Real Estate, Inc, entered
into a Lease Agreement dated as of November 18, 1993, as amended by Amendment
No. 1 to Lease Agreement dated as of March 15, 1995; and
WHEREAS, the Guarantor and the Lessor entered into a Guaranty, dated
as of November 18, 1993 (the "Guaranty"); and
WHEREAS, in connection with Amendment No. 1 to Lease Agreement and
Amendment No. 1 to Agreement for Lease, the Guarantor and the Lessor now desire
to amend the Guaranty.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and for good and valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto agree as follows:
1. Section 11 of the Guaranty is hereby amended by adding the
following new subparagraphs (d), (e) and (f) to such section, which new
subparagraphs shall read in their entirety as follows:
(d) CONSOLIDATED TANGIBLE NET WORTH. The Guarantor's Consolidated
Tangible Net Worth as of the last day of any fiscal quarter of the
Guarantor ending after the date hereof shall not be less than the sum
of (i) $402 million PLUS (ii) an amount equal to fifty percent (50%)
of the Guarantor's cumulative positive net income for each of its
fiscal quarters that shall have commenced after December 31, 1994 and
ended prior to (but not on) the date such determination is being made.
For purposes hereof, the term: (1) "Consolidated Tangible Net Worth"
means, on any date of determination, the total shareholder equity of
the Guarantor, less goodwill and intangible assets (other than
intangibles for capitalized software, prepaid royalties, patents and
other intellectual property), all as determined on a consolidated
basis in accordance with generally accepted accounting principles and
as
<PAGE>
shown on the Guarantor's Compliance Certificate (as hereinafter
defined) delivered by the Guarantor pursuant to this Section 11(d),
provided that if the Guarantor shall fail to furnish any such
certificate, Consolidated Tangible Net Worth shall be determined on
the basis of the Guarantor's most recent quarterly financial
statements; and (2) "net income" shall mean, for any period, the net
income of the Guarantor and its subsidiaries for such period,
determined on a consolidated basis in accordance with generally
accepted accounting principles. The Guarantor shall deliver to the
Lessor promptly, and in any event not more than 100 days after the end
of each fiscal year of the Guarantor, and in any event not more than
60 days after the end of each fiscal quarter), a certificate of an
appropriate officer of the Guarantor (a "Compliance Certificate")
setting forth the calculation and/or information in respect of (x) the
Guarantor's Consolidated Tangible Net Worth as of the end of such
fiscal period, determined in accordance with this Section 11(d), (y)
the Guarantor's Fixed Charge Coverage Ratio (as defined in Section
11(e)) as of the end of such fiscal period, determined in accordance
with Section 11(e) hereof and (z) any purchases, redemptions or
acquisitions of the capital stock of the Guarantor and/or any of its
subsidiaries other than the type described in clause (ii) of Section
11(f) hereof made during such fiscal period.
(e) FIXED CHARGE COVERAGE RATIO. The Guarantor shall not permit its
Fixed Charge Coverage Ratio as of the end of any Measurement Period,
to be less than 2.00:1.00. For purposes hereof, the term "Fixed
Charge Coverage Ratio" means, on any date of determination, determined
on a consolidated basis in accordance with generally accepted
accounting principles, the ratio of (i) the sum of the Guarantor's
earnings before interest expense, rent expense, income taxes and
non-recurring charges (i.e., restructuring and merger related charges)
for such Measurement Period, but including interest income for such
Measurement Period, TO (ii) all obligations of the Guarantor paid in
such Measurement Period in respect of interest expense and rent
expense. For purposes hereof, the term "Measurement Period" means,
with respect to any fiscal quarter of the Guarantor, the period of
four fiscal quarters ending on the last day of such fiscal quarter.
(f) STOCK REPURCHASE. The Guarantor shall not, and shall not suffer
or permit any of its subsidiaries to purchase, redeem, or otherwise
acquire for value any shares of its capital stock or any warrants or
options to acquire such shares, now or hereafter outstanding; except
that (i) the Guarantor and its subsidiaries may
<PAGE>
purchase shares of their respective capital stock; PROVIDED, that the
aggregate amount of cash or other consideration for such purchases
does not exceed $250 million during any fiscal year of the Guarantor
and (ii) the Guarantor and its subsidiaries may effect purchases,
redemptions or other acquisitions for value of the capital stock of
any subsidiary of the Guarantor in connection with the merger,
consolidation, or other corporate reorganization or restructuring
involving the Guarantor and/or its subsidiaries, provided that such
merger, consolidation or other corporate reorganization or
restructuring is otherwise permitted by this Guaranty.
2. The Guarantor hereby agrees to deliver to the Lessor on the date
hereof a certificate dated the date of this Amendment No. 1, from the Secretary
or Assistant Secretary of the Guarantor certifying (i) as to the incumbency and
signature of each officer of the Guarantor authorized to execute and deliver
this Amendment No. 1, (ii) that attached thereto are true and complete copies of
the Restated Certificate of Incorporation and By-Laws of the Guarantor as in
full force and effect on the date of this Amendment No. 1 and (iii) that
attached thereto is a true and complete copy of the resolutions of the Board of
Directors of the Guarantor authorizing the execution, delivery and performance
of this Amendment No. 1 and the transactions contemplated hereby, together with
a certificate of another officer of the Guarantor as to the incumbency and
signature of such Secretary or Assistant Secretary.
3. The Guarantor hereby represents and warrants that each of the
representations and warranties made in Section 4 of the Guaranty are Accurate
and Complete with the same force and effect as though made on and as of the date
of this Amendment No. 1, except to the extent that any such representations or
warranties expressly relate to an earlier date, in which case, such
representations and warranties were Accurate and Complete on and as of such
earlier date.
For purposes of this paragraph, the term "Accurate and Complete" means
when referring to any representation or warranty, that such representation and
warranty is true in all material respects and that the Guarantor has not failed
to disclose to the Lessor in writing any fact which if not disclosed to the
Lessor would make the facts actually stated materially misleading.
4. Except as expressly modified and amended hereby, the Guaranty
remains unchanged and in full force and effect in all respects. As expressly
modified and amended hereby, the Guarantor hereby affirms the Guaranty.
5. THIS AMENDMENT NO. 1 SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
<PAGE>
6. This Amendment No. 1 may be executed in any number of
counterparts and by different parties hereto on separate counterparts, each of
which counterparts, when so executed and delivered, shall be deemed to be an
original and all of which counterparts, taken together, shall constitute but one
and the same Amendment No. 1.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Amendment No. 1 to be executed by their officers thereunto duly authorized as of
the date first above written.
SILICON GRAPHICS, INC.,
as Guarantor
By: /s/ Stanley J. Meresman
------------------------------
Name: Stanley J. Meresman
Title: Senior Vice President,
Finance and Chief
Financial Officer
By: /s/ Tom Oswold
--------------------
Name: Tom Oswold
Title: Vice President,
Finance and Treasurer
Acknowledged and Agreed:
VIRTUAL FUNDING, LIMITED PARTNERSHIP
By: Virtual Capital, Inc.,
General Partner
By: /s/ Clinton W. Lane
-------------------------
Name: Clinton W. Lane
Title: Vice President and
Assistant Secretary
<PAGE>
AMENDMENT NO. 2 TO GUARANTY
AMENDMENT NO. 2 ("Amendment No. 2"), dated as of March 7, 1997, from
SILICON GRAPHICS, INC., a Delaware corporation (the "Guarantor"), to VIRTUAL
FUNDING, LIMITED PARTNERSHIP, a Delaware limited partnership (the "Lessor").
WHEREAS, the Lessor and Silicon Graphics Real Estate, Inc. entered
into an Agreement for Lease dated as of November 18, 1993, as amended by
Amendment No. 1 to Agreement for Lease dated as of March 15, 1995; and
WHEREAS, the Lessor and Silicon Graphics Real Estate, Inc. entered
into a Lease Agreement dated as of November 18, 1993, as amended by Amendment
No. 1 to Lease Agreement dated as of March 15, 1995 and Amendment No. 2 to Lease
Agreement dated as of July 1, 1996; and
WHEREAS, the Guarantor and the Lessor entered into a Guaranty, dated
as of November 18, 1993, as amended by Amendment No. 1 to Guaranty dated as of
March 15, 1995 (as amended, the "Guaranty"); and
WHEREAS, the Guarantor and the Lessor now desire to amend further the
Guaranty as set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and for good and valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto agree as follows:
1. Section 11(e) of the Guaranty is hereby amended by deleting
Section 11(e) in its entirety and inserting in its place the following:
(e) FIXED CHARGE COVERAGE RATIO. The Guarantor shall not permit its
Fixed Charge Coverage Ratio to be less than (x) for the Measurement
Periods ending March 31, 1997 and June 30, 1997, 3.75:1.00, and (y)
for all other Measurement Periods thereafter, 4.00:1.00. For purposes
hereof, the term "Fixed Charge Coverage Ratio" means, for any
Measurement Period, determined on a consolidated basis in accordance
with generally accepted accounting principles, the ratio of (i) the
sum of the Guarantor's earnings before interest expense, rent expense,
income taxes, depreciation, amortization and non-recurring charges
(i.e., restructuring and merger related charges) for such Measurement
Period, but including interest income for such Measurement Period, TO
(ii) all obligations of the Guarantor
<PAGE>
paid in such Measurement Period in respect of interest expense and
rent expense. For purposes hereof, the term "Measurement Period"
means, with respect to any fiscal quarter of the Guarantor, the period
of four fiscal quarters ending on the last day of such fiscal quarter.
2. The Guarantor hereby agrees to deliver to the Lessor on the date
hereof a certificate dated the date of this Amendment No. 2, from the Secretary
or Assistant Secretary of the Guarantor certifying (i) as to the incumbency and
signature of each officer of the Guarantor authorized to execute and deliver
this Amendment No. 2, (ii) that attached thereto are true and complete copies of
the Restated Certificate of Incorporation and By-Laws of the Guarantor as in
full force and effect on the date of this Amendment No. 2 and (iii) that
attached thereto is a true and complete copy of the resolutions of the Board of
Directors of the Guarantor authorizing the execution, delivery and performance
of this Amendment No. 2 and the transactions contemplated hereby, together with
a certificate of another officer of the Guarantor as to the incumbency and
signature of such Secretary or Assistant Secretary.
3. The Guarantor hereby represents and warrants that each of the
representations and warranties made in Section 4 of the Guaranty are Accurate
and Complete with the same force and effect as though made on and as of the date
of this Amendment No. 2, except to the extent that any such representations or
warranties expressly relate to an earlier date, in which case, such
representations and warranties were Accurate and Complete on and as of such
earlier date.
For purposes of this paragraph, the term "Accurate and Complete" means
when referring to any representation or warranty, that such representation and
warranty is true in all material respects and that the Guarantor has not failed
to disclose to the Lessor in writing any fact which if not disclosed to the
Lessor would make the facts actually stated materially misleading.
4. Except as expressly modified and amended hereby, the Guaranty
remains unchanged and in full force and effect in all respects. As expressly
modified and amended hereby, the Guarantor hereby affirms the Guaranty.
5. THIS AMENDMENT NO. 2 SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
6. This Amendment No. 2 may be executed in any number of
counterparts and by different parties hereto on
<PAGE>
separate counterparts, each of which counterparts, when so executed and
delivered, shall be deemed to be an original and all of which counterparts,
taken together, shall constitute but one and the same Amendment No. 2.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Amendment No. 2 to be executed by their officers thereunto duly authorized as of
the date first above written.
SILICON GRAPHICS, INC.,
as Guarantor
By: /S/ STANLEY J. MERESMAN
---------------------------
Name: Stanley J. Meresman
Title: Senior Vice President,
Finance and Chief
Financial Officer
By: /S/ ROBERT W. SALTMARSH
---------------------------
Name: Robert W. Saltmarsh
Title: Vice President, Finance
and Treasurer
Acknowledged and Agreed:
VIRTUAL FUNDING, LIMITED PARTNERSHIP
By: Virtual Capital, Inc.,
General Partner
By: /S/ JEAN M. TOMASELLI
---------------------------
Name: Jean M. Tomaselli
Title: Vice President and
Assistant Secretary
<PAGE>
Exhibit 10.44
AMENDMENT TO THE
SILICON GRAPHICS, INC.
1985 STOCK INCENTIVE PROGRAM
This following Amendment to the Silicon Graphics, Inc. (the "Company") 1985
Stock Incentive Program (the "Plan") was approved by the Company's Board of
Directors at a meeting held on April 23, 1997.
1. NON-TRANSFERABILITY OF OPTIONS. Section 9 of the Plan is hereby
amended to read in its entirety as follow:
9. TRANSFERABILITY OF OPTIONS. Unless otherwise determined by the
Committee to the contrary, Options may not be sold, pledged, assigned,
hypothecated, transferred or disposed of in any manner other than by will or
by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee only by the Optionee. The Committee may, in the
manner established by the Committee, provide for the transfer, without
payment of consideration, of an Option by the Optionee to any member of the
Optionee's immediate family or to a trust or partnership whose beneficiaries
are members of the Optionee's immediate family. In such case, the Option
will be exercisable only by such transferee. Following transfer, any such
Options shall continue to be subject to the same terms and conditions as were
applicable immediately prior to the transfer. For purposes of this Section,
an Optionee's "immediate family" shall mean the Optionee's spouse, children
and grandchildren.
This amendment shall be effective as of the date first above written.
<PAGE>
Exhibit 10.45
AMENDMENT TO THE
SILICON GRAPHICS, INC.
1993 LONG-TERM INCENTIVE STOCK PLAN
This following Amendment to the Silicon Graphics, Inc. (the "Company") 1993
Long Term Incentive Stock Plan (the "Plan") was approved by the Company's
Board of Directors at a meeting held on April 23, 1997.
1. NON-TRANSFERABILITY OF OPTIONS AND RIGHTS. Section 10 of the Plan
is hereby amended to read in its entirety as follow:
10. TRANSFERABILITY OF OPTIONS AND RIGHTS. Unless otherwise
determined by the Committee to the contrary, Options and Rights may not be sold,
pledged, assigned, hypothecated, transferred or disposed of in any manner other
than by will or by the laws of descent or distribution and may be exercised,
during the lifetime of the Optionee only by the Optionee. The Committee may, in
the manner established by the Committee, provide for the transfer, without
payment of consideration, of an Option or Right by the Optionee to any member of
the Optionee's immediate family or to a trust or partnership whose beneficiaries
are members of the Optionee's immediate family. In such case, the Option or
Right will be exercisable only by such transferee. Following transfer, any such
Options or Rights shall continue to be subject to the same terms and conditions
as were applicable immediately prior to the transfer. For purposes of this
Section, an Optionee's "immediate family" shall mean the Optionee's spouse,
children and grandchildren.
This amendment shall be effective as of the date first above written.
<PAGE>
Exhibit 10.46
AMENDMENT TO THE
SILICON GRAPHICS, INC.
1996 SUPPLEMENTAL NON-EXECUTIVE
EQUITY INCENTIVE PLAN
This following Amendment to the Silicon Graphics, Inc. (the "Company") 1996
Supplemental Non-Executive Equity Incentive Plan (the "Plan") was approved by
the Company's Board of Directors at a meeting held on April 23, 1997.
1. NON-TRANSFERABILITY OF OPTION AND RIGHTS . Section 10 of the Plan
is hereby amended to read in its entirety as follow:
10. TRANSFERABILITY OF OPTIONS AND RIGHTS. Unless otherwise
determined by the Committee to the contrary, Options and Rights may not be sold,
pledged, assigned, hypothecated, transferred or disposed of in any manner other
than by will or by the laws of descent or distribution and may be exercised,
during the lifetime of the Optionee only by the Optionee. The Committee may, in
the manner established by the Committee, provide for the transfer, without
payment of consideration, of an Option or Right by the Optionee to any member of
the Optionee's immediate family or to a trust or partnership whose beneficiaries
are members of the Optionee's immediate family. In such case, the Option or
Right will be exercisable only by such transferee. Following transfer, any such
Options or Rights shall continue to be subject to the same terms and conditions
as were applicable immediately prior to the transfer. For purposes of this
Section, an Optionee's "immediate family" shall mean the Optionee's spouse,
children and grandchildren.
This amendment shall be effective as of the date first above written.
<PAGE>
Exhibit 10.47
AMENDMENT TO THE
SILICON GRAPHICS, INC.
AMENDED AND RESTATED
1989 EMPLOYEE BENEFIT STOCK PLAN
This following Amendment to the Silicon Graphics, Inc., (the "Company")
Amended and Restated 1989 Employee Benefit Stock Plan (the "Plan") was
approved by the Company's Board of Directors at a meeting held on April 23,
1997.
1. Section 6(i) of the Plan is hereby amended to read in its
entirety as follow:
(i) Unless otherwise determined by the Committee to the contrary,
Options may not be sold, pledged, assigned, hypothecated, transferred or
disposed of in any manner other than by will or by the laws of descent or
distribution and may be exercised, during the lifetime of the Optionee only
by the Optionee. The Committee may, in the manner established by the
Committee, provide for the transfer, without payment of consideration, of an
Option by the Optionee to any member of the Optionee's immediate family or to
a trust or partnership whose beneficiaries are members of the Optionee's
immediate family. In such case, the Option will be exercisable only by such
transferee. Following transfer, any such Options shall continue to be
subject to the same terms and conditions as were applicable immediately prior
to the transfer. For purposes of this Section, an Optionee's "immediate
family" shall mean the Optionee's spouse, children and grandchildren.
This amendment shall be effective as of the date first above written.
<PAGE>
Exhibit 10.48
AMENDMENT TO THE
SILICON GRAPHICS, INC.
DIRECTORS' STOCK OPTION PLAN
This following Amendment to the Silicon Graphics, Inc. (the "Company")
Directors' Stock Option Plan (the "Plan") was approved by the Company's Board
of Directors at a meeting held on April 23, 1997.
1. NON-TRANSFERABILITY OF OPTIONS. Section 9 of the Plan is hereby
amended to read in its entirety as follow:
9. TRANSFERABILITY OF OPTIONS. Unless otherwise determined by the
Committee to the contrary, Options may not be sold, pledged, assigned,
hypothecated, transferred or disposed of in any manner other than by will or
by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee only by the Optionee. The Committee may, in the
manner established by the Committee, provide for the transfer, without
payment of consideration, of an Option by the Optionee to any member of the
Optionee's immediate family or to a trust or partnership whose beneficiaries
are members of the Optionee's immediate family. In such case, the Option
will be exercisable only by such transferee. Following transfer, any such
Options shall continue to be subject to the same terms and conditions as were
applicable immediately prior to the transfer. For purposes of this Section,
an Optionee's "immediate family" shall mean the Optionee's spouse, children
and grandchildren.
This amendment shall be effective as of the date first above written.
<PAGE>
EXHIBIT 11.1
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY:
Weighted Average Shares Outstanding:
Common shares. . . . . . . . . . . . . . . . 176,382 162,606 174,761 162,080
Convertible preferred shares . . . . . . . . -- 535 -- 442
Stock options. . . . . . . . . . . . . . . . 8,173 10,404 -- 14,141
-------- --------- --------- ----------
Total weighted average shares outstanding. . 184,555 173,545 174,761 176,663
-------- --------- --------- ----------
-------- --------- --------- ----------
Income (loss) Per Share:
Net income (loss). . . . . . . . . . . . . . $ 10,538 $ 53,031 $(23,852) $ 163,741
Preferred stock dividend requirement . . . . (131) -- (394) --
-------- --------- --------- ----------
Net income (loss) available to common
stockholders . . . . . . . . . . . . . . . $ 10,407 $ 53,031 $(24,246) $ 163,741
-------- --------- --------- ----------
-------- --------- --------- ----------
Net income (loss) per share. . . . . . . . . $ 0.06 $ 0.31 $ ( 0.14) $ 0.93
-------- --------- --------- ----------
-------- --------- --------- ----------
FULLY DILUTED:
Weighted Average Shares Outstanding:
Common shares. . . . . . . . . . . . . . . . 176,382 162,606 174,761 162,080
Convertible preferred shares . . . . . . . . -- 535 -- 442
Zero coupon convertible subordinated
debentures . . . . . . . . . . . . . . . . -- 7,402 -- 7,402
Stock options. . . . . . . . . . . . . . . . 8,196 10,404 -- 14,141
-------- --------- --------- ----------
Total weighted average shares outstanding. . 184,578 180,947 174,761 184,065
-------- --------- --------- ----------
-------- --------- --------- ----------
Income (Loss) Per Share:
Net income (loss). . . . . . . . . . . . . . $ 10,538 $ 53,031 $ (23,852) $ 163,741
Zero coupon convertible subordinated
debentures . . . . . . . . . . . . . . . . -- 1,397 -- 4,154
Preferred stock dividend requirement . . . . (131) -- (394) --
-------- --------- --------- ----------
Net income (loss) available to common
stockholders . . . . . . . . . . . . . . . $ 10,407 $ 54,428 $ (24,246) $ 167,895
-------- --------- --------- ----------
-------- --------- --------- ----------
Net income (loss) per share. . . . . . . . . $ 0.06 $ 0.30 $ ( 0.14) $ 0.91
-------- --------- --------- ----------
-------- --------- --------- ----------
</TABLE>
<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 MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 265,233
<SECURITIES> 30,172
<RECEIVABLES> 883,321
<ALLOWANCES> 21,638
<INVENTORY> 674,063
<CURRENT-ASSETS> 2,095,306
<PP&E> 896,468
<DEPRECIATION> 398,120
<TOTAL-ASSETS> 3,132,143
<CURRENT-LIABILITIES> 1,032,690
<BONDS> 353,519
0
16,998
<COMMON> 176
<OTHER-SE> 1,683,945
<TOTAL-LIABILITY-AND-EQUITY> 3,132,143
<SALES> 2,074,895
<TOTAL-REVENUES> 2,500,284
<CGS> 1,185,052
<TOTAL-COSTS> 1,424,924
<OTHER-EXPENSES> 361,552
<LOSS-PROVISION> 5,905
<INTEREST-EXPENSE> 18,433
<INCOME-PRETAX> (31,164)
<INCOME-TAX> (7,312)
<INCOME-CONTINUING> (23,852)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,852)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
