<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934.
For the quarterly period ended DECEMBER 31, 1996.
or
- ----- Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from to .
Commission File Number 1-10441
SILICON GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2789662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2011 N. SHORELINE BOULEVARD, MOUNTAIN VIEW, CALIFORNIA 94043-1389
(Address of principal executive offices) (Zip Code)
(415) 960-1980
(Registrant's telephone number, including area code)
__________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
AS OF JANUARY 31, 1997 THERE WERE 176,394,911 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................... 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 15
Item 6. Exhibits and Reports on Form 8-K............................... 15
Signatures.............................................................. 16
Index to Exhibits....................................................... 17
TRADEMARKS USED IN THIS FORM 10-Q: 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.
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1996 1996 (1)
- ------ ------------ ---------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . $ 291,734 $ 257,080
Short-term marketable investments. . . . . . . . . . . 5,825 38,316
Accounts receivable, net . . . . . . . . . . . . . . . 833,544 978,874
Inventories. . . . . . . . . . . . . . . . . . . . . . 600,260 520,045
Deferred tax assets. . . . . . . . . . . . . . . . . . 187,371 198,239
Prepaid expenses and other current assets. . . . . . . 78,608 103,701
----------- ----------
Total current assets. . . . . . . . . . . . . . . 1,997,342 2,096,255
Other marketable investments . . . . . . . . . . . . . . . 146,670 161,541
Property and equipment, at cost. . . . . . . . . . . . . . 850,103 825,359
Accumulated depreciation and amortization. . . . . . . . . (372,718) (360,480)
----------- ----------
Net property and equipment. . . . . . . . . . . . 477,385 464,879
Other assets . . . . . . . . . . . . . . . . . . . . . . . 419,207 435,571
----------- ----------
$3,040,604 $3,158,246
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts and notes payable . . . . . . . . . . . . . . $ 251,888 $ 397,838
Other current liabilities. . . . . . . . . . . . . . . 698,740 703,600
----------- ----------
Total current liabilities . . . . . . . . . . . . 950,628 1,101,438
Long-term debt and other . . . . . . . . . . . . . . . . . 403,461 381,490
Stockholders' equity:
Preferred stock. . . . . . . . . . . . . . . . . . . . 16,998 16,998
Common stock . . . . . . . . . . . . . . . . . . . . . 174 173
Additional paid-in capital . . . . . . . . . . . . . . 1,217,063 1,172,787
Retained earnings. . . . . . . . . . . . . . . . . . . 425,871 461,311
Accumulated translation adjustment and other . . . . . 26,409 24,049
----------- ----------
Total stockholders' equity. . . . . . . . . . . . 1,686,515 1,675,318
----------- ----------
$3,040,604 $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.
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<PAGE>
SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
Ended December 31, Ended December 31,
------------------------- ---------------------------
1996 (1) 1995 1996 (1) 1995
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Product and other revenue. . . . . . . . . . . . . . . . . . . . $ 682,809 $ 597,474 $ 1,306,222 $1,122,203
Service revenue. . . . . . . . . . . . . . . . . . . . . . . . . 142,503 74,259 284,692 144,809
---------- ---------- ------------ ----------
Total revenue. . . . . . . . . . . . . . . . . . . . . . . . 825,312 671,733 1,590,914 1,267,012
Costs and expenses:
Cost of product and other revenue. . . . . . . . . . . . . . . 376,397 291,103 749,357 525,769
Cost of service revenue. . . . . . . . . . . . . . . . . . . . 80,540 40,253 158,275 78,198
Research and development . . . . . . . . . . . . . . . . . . . 124,094 80,797 232,373 153,540
Selling, general and administrative. . . . . . . . . . . . . . 254,348 193,151 486,515 365,340
Merger-related expenses. . . . . . . . . . . . . . . . . . . . 2,331 561 5,165 1,275
---------- ---------- ------------ ----------
Total costs and expenses . . . . . . . . . . . . . . . . . . 837,710 605,865 1,631,685 1,124,122
---------- ---------- ------------ ----------
Operating (loss) income. . . . . . . . . . . . . . . . . . . . . (12,398) 65,868 (40,771) 142,890
Interest (expense) income and other, net . . . . . . . . . . . . (1,397) 6,699 (2,215) 13,040
---------- ---------- ------------ ----------
(Loss) income before income taxes. . . . . . . . . . . . . . . . (13,795) 72,567 (42,986) 155,930
(Benefit) provision for income taxes . . . . . . . . . . . . . . (1,006) 20,214 (8,596) 45,220
---------- ---------- ------------ ----------
Net (loss) income. . . . . . . . . . . . . . . . . . . . . . . . (12,789) 52,353 (34,390) 110,710
Preferred stock dividend requirement . . . . . . . . . . . . . . (131) -- (262) --
---------- ---------- ------------ ----------
Net (loss) income available to common stockholders . . . . . . . $ (12,920) $ 52,353 $ (34,652) $ 110,710
---------- ---------- ------------ ----------
---------- ---------- ------------ ----------
Net (loss) income per common share . . . . . . . . . . . . . . . $ (0.07) $ 0.30 $ (0.20) $ 0.62
---------- ---------- ------------ ----------
---------- ---------- ------------ ----------
Common shares and common share
equivalents used in the calculation
of net (loss) income per common share. . . . . . . . . . . . . . 174,926 177,319 173,950 178,268
---------- ---------- ------------ ----------
---------- ---------- ------------ ----------
</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.
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<PAGE>
SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended December 31,
-----------------------------
1996 (1) 1995
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income. . . . . . . . . . . . . . . . . . . . . . . . $ (34,390) $ 110,710
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . 164,585 63,826
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,101 (461)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . 145,329 (28,146)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . (107,746) (55,702)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . (9,232) (2,407)
Other assets and liabilities. . . . . . . . . . . . . . . . 19,936 (49,131)
---------- ----------
Total adjustments . . . . . . . . . . . . . . . . . . . . 216,973 (72,021)
---------- ----------
Net cash provided by operating activities. . . . . . . . . . . 182,583 38,689
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . (119,135) (100,811)
Increase in other assets . . . . . . . . . . . . . . . . . . . . (42,310) (14,356)
Available-for-sale investments:
Purchases. . . . . . . . . . . . . . . . . . . . . . . . . . . (6,023) (934,364)
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,222 943,470
Maturities . . . . . . . . . . . . . . . . . . . . . . . . . . 38,706 25,160
---------- ----------
Net cash used in investing activities. . . . . . . . . . . . . (112,540) (80,901)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt . . . . . . . . . . . . . . . . . . . . . . . . 63,609 1,009
Payments of debt principal . . . . . . . . . . . . . . . . . . . (140,248) (5,155)
Sale of common stock . . . . . . . . . . . . . . . . . . . . . . 41,513 40,978
Purchase of common stock . . . . . . . . . . . . . . . . . . . . -- (43,852)
Cash dividends - preferred stock.. . . . . . . . . . . . . . . . (263) (263)
---------- ----------
Net cash used in financing activities. . . . . . . . . . . . . (35,389) (7,283)
---------- ----------
Net increase (decrease) in cash and cash equivalents . . . . . . 34,654 (49,495)
Cash and cash equivalents at beginning of period . . . . . . . . 257,080 307,875
---------- ----------
Cash and cash equivalents at end of period . . . . . . . . . . . $291,734 $258,380
---------- ----------
---------- ----------
</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):
December 31, 1996 June 30, 1996
----------------- -------------
Components and subassemblies $160,919 $199,441
Work-in-process 268,065 177,744
Finished goods 77,243 74,997
Marketing 94,033 67,863
-------- --------
Total inventories $600,260 $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. 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. See Item 1 - Part II for additional information.
-6-
<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 Six Months Pro Forma
Ended Dec. 31, Ended Dec. 31, Ended Dec 31, 1995
----------------- ------------------ ------------------
1996 1995 1996 1995 3 months 6 months
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Product and other revenue. . . . . . . . . . . . 82.7% 88.9% 82.1% 88.6% 86.0% 84.9%
Service revenue. . . . . . . . . . . . . . . . . 17.3 11.1 17.9 11.4 14.0 15.1
----- ----- ----- ----- ----- -----
Total revenue. . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin . . . . . . . . . . . . . . . . . . 44.6(1) 50.7 42.9(2) 52.3 47.7 48.7
Research and development . . . . . . . . . . . . 15.0 12.0 14.6 12.1 11.9 12.3
Selling, general & administrative. . . . . . . . 30.8 28.8 30.6 28.8 25.9 26.7
Merger-related expenses. . . . . . . . . . . . . 0.3 0.1 0.3 0.1
----- ----- ----- -----
Operating (loss) income. . . . . . . . . . . . . (1.5) 9.8 (2.6) 11.3
Interest (expense) income and other, net . . . . (0.2) 1.0 (0.1) 1.0
----- ----- ----- -----
(Loss) income before income taxes. . . . . . . . (1.7) 10.8 (2.7) 12.3
(Benefit) provision for income taxes . . . . . . (0.1) 3.0 (0.5) 3.6
----- ----- ----- -----
Net (loss) income. . . . . . . . . . . . . . . . (1.5)% 7.8% (2.2)% 8.7%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
- ------------
(1) 46.4% before the effects of Cray purchase accounting adjustments.
(2) 45.7% before charges for the MIPS R10000-TM- microprocessor replacement
program and the effects of Cray purchase accounting adjustments.
-7-
<PAGE>
REVENUES BY GEOGRAPHY (PRO FORMA COMBINED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Six Months
Ended Dec. 31, Year Ended Dec. 31, Year
---------------- /Year ----------------- /Year
($ in millions) 1996 1995 Change 1996 1995 Change
------- ------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
United States $ 419 $ 377 11% $ 848 $ 755 12%
Europe 232 303 (24)% 411 512 (20)%
Rest of World 174 219 (21)% 332 390 (15)%
------ ------ ----- ------ ------ -----
Total revenue $ 825 $ 899 (8)% $1,591 $1,657 (4)%
------ ------ ----- ------ ------ -----
------ ------ ----- ------ ------ -----
</TABLE>
<TABLE>
<CAPTION>
Three Months Six Months
Ended Dec. 31, Ended Dec. 31,
--------------- ----------------
(as a percentage of total revenue) 1996 1995 1996 1995
------ ----- ----- -----
<S> <C> <C> <C> <C>
United States 51% 42% 53% 46%
Europe 28% 34% 26% 31%
Rest of World 21% 24% 21% 23%
</TABLE>
REVENUE BY PRODUCT LINE (PRO FORMA COMBINED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Six Months
Ended Dec. 31, Ended Dec. 31,
(as a percentage of product revenue, ---------------- ----------------
excluding other revenue) 1996 1995 1996 1995
------ ------ ------ ------
<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) 56% 53% 57% 53%
Workstations (primarily from the
O2-TM-, Indy-Registered Trademark-
and Indigo2-TM- families) 44% 47% 43% 47%
</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 second quarter and first six months of fiscal 1997
of $825 million and $1,591 million, respectively, declined compared with the pro
forma combined revenue of $899 million and $1,657 million, respectively, for the
corresponding periods of fiscal 1996. Product revenue for the Company's servers
and high performance computing systems declined 7% compared with the same
quarter a year ago, and was essentially flat for the first six months of fiscal
1997 compared with the same period a year ago. Product revenue for the
Company's workstations for the second quarter and first six months of fiscal
1997 was 16% and 15% lower, respectively, than for the same periods a year ago.
The decline in the Company's revenue during the second quarter and first six
months of fiscal 1997 was primarily the result of product transition issues
across a substantial portion of the Company's product line. During the
second quarter, the Company introduced its new O2, Origin and Onyx2 product
families. Although product bookings for the second quarter were strong, the
Company was not able to ship all systems ordered by customers, in part due to
the timing of the manufacturing ramp-up for the new systems and in part due
to variations in product mix, especially in the server and high-performance
computing product families. The Company's second quarter revenue in the
"power desktop" market served by the Indigo2 family of workstations was also
adversely affected by customer anticipation of the
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<PAGE>
new Octane-TM- workstations announced by the Company in January 1997.
Revenue for the first six 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 second
quarter and first six months of fiscal 1997.
The Company's consolidated backlog at December 31, 1996 was $757 million,
compared with backlog of $473 million at September 30, 1996. A majority of the
backlog at December 31, 1996 represented orders scheduled to ship during
fiscal 1997.
GROSS MARGIN. Gross margin of 44.6% and 42.9% for the second quarter and first
six months of fiscal 1997, respectively, decreased compared with pro forma
combined gross margin of 47.7% and 48.7%, respectively, for the corresponding
periods of fiscal 1996. Pro forma combined gross margin for the first six
months of fiscal 1997 would have been 45.7% 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 competitive pricing pressures, manufacturing variances
associated with new product introductions and the Cray Research purchase
accounting and other charges taken during the first six 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 second quarter and first six months of fiscal 1997 by
approximately $12 million and $29 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 $8 million during the remainder
of fiscal 1997. Likewise, purchase accounting does not allow recognition of the
gross profit on acquired service contracts. The effect of this was to reduce
gross margin for the second quarter and first six months by approximately $2
million and $4 million, respectively. The effect on gross margins during the
remainder of fiscal 1997 will be approximately $2 million. In addition, the
first quarter of fiscal 1997 gross margin was adversely affected by the need to
provide higher than normal inventory reserves as a result of product
transitions.
Gross margins in fiscal 1997 are expected to be lower than in fiscal 1996. A
significant reason for this expected decline is the impact of the Cray
Research business which has in recent years had lower product and service
gross margins than the Silicon Graphics business. The Company expects over
time to achieve synergy and implement other changes that will moderate but
not eliminate the impact of these differences in Cray Research's business on
the combined organization. While the Company expects gross margins to
increase gradually over the remainder of fiscal 1997 as new product cost
structures improve during the transition to full volumes, the Company
believes gross margins will continue to be adversely affected by aggressive
pricing.
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 second quarter and first six months of fiscal 1997,
which was significantly higher as a percentage of revenue than the
corresponding periods 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
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<PAGE>
processes and marketing and human resource activities. The Company expects
to incur an additional $8 million to $12 million of similar merger-related
expenses during the remainder of fiscal 1997.
OTHER OPERATING RESULTS. Interest (expense) income and other, net for the
second quarter of fiscal 1997 was $(1.4) million compared with $6.7 million
for the second quarter of fiscal 1996. Correspondingly, Interest (expense)
income and other, net for the first six months of fiscal 1997 was $(2.2)
million compared with $13.0 million for the first six months of fiscal 1996.
The changes for both the second quarter and first six months of fiscal 1997
compared with the corresponding periods of fiscal 1996 reflect gains realized
in the second quarter and first six months of fiscal 1996 on the Company's
cash portfolio that were not realized in the corresponding periods of fiscal
1997, costs associated with the expansion of the Company's economic hedging
program, substantially smaller invested cash balances following the Cray
Research acquisition and additional interest expense on the 6.125% debentures
assumed in the Cray Research acquisition.
TAXES. The Company revised its estimated fiscal year tax rate during the second
quarter of fiscal 1997 from 26% to 20%. This revision resulted in a 7%
effective tax rate for the second quarter of fiscal 1997. The tax rate for the
second quarter and first six months of fiscal 1996 was 28% and 29%,
respectively. The lower effective tax rate 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.
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 December 31, 1996, cash and cash equivalents and short- and long-term
marketable investments totaled $444 million, down from $457 million at June
30, 1996. Operating activities generated $183 million during the first six
months of fiscal 1997 compared with $39 million during the first six months
of fiscal 1996. Despite the net loss during the first six months of fiscal
1997, cash flow from operating activities was positive principally due to a
significant decrease in accounts receivable as well as charges that did not
use cash, including $33 million of amortization of the write-up of acquired
Cray Research inventories and service contracts, offset in part by an
increase in inventories. Investing activities, other than changes in the
Company's marketable investments, consumed $161 million in cash during the
first six months of fiscal 1997, principally for the acquisition of capital
equipment. The principal financing activities during the first six months of
fiscal 1997 were to repay $137 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 December 31, 1996, the Company's principal sources of liquidity included
cash and cash equivalents and marketable investments of $444 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 six months of fiscal 1997, cash
outlays for these activities were approximately $18 million. The Company
anticipates that cash outlays during the remainder of fiscal 1997 for exit
activities will be approximately $14 million to $18 million.
-10-
<PAGE>
The Company's cash and marketable investments, along with the credit facility,
cash generated from operations and other resources available to the Company,
should be adequate to fund the Company's projected cash flow needs. The Company
believes that the level of financial resources is an important competitive
factor in the computer industry, and accordingly, may elect to raise additional
capital through debt or equity financing in anticipation of future needs.
RISKS THAT AFFECT OUR BUSINESS
Silicon Graphics operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks.
PERIOD TO PERIOD FLUCTUATIONS The Company's operating results may fluctuate
for a number of reasons. Other than in the Cray Research business, the
Company has short delivery cycles and derives each quarter's revenue
predominantly from orders booked and shipped during the third month, and
disproportionately in the latter half of that month. This 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 introduced the new O2, Origin and Onyx2 product families and
in January 1997, introduced 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,
-11-
<PAGE>
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 second quarter
and first six months of fiscal 1997 were strongly influenced by product
transition issues. These issues may also affect the Company's results for
the third quarter as the Company ramps up volume manufacturing of the 02,
Origin and Onyx2 products, introduces its new Octane workstation line, and
expects to continue to ship significant units in its existing Indigo2
workstation line.
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 upmarket to compete with
low-end workstations (see "Competition");
- the impact of lower gross margins, to the extent not mitigated by
savings in distribution costs and other operating expenses; and
- the extent to which the Company is able to adapt its manufacturing and
service philosophies to the demands of higher volumes and lower costs.
ACQUISITION OF CRAY RESEARCH The acquisition of Cray Research will require,
among other things, integration of the Cray Research organization, business
infrastructure and product offerings with those of the Company in a way that
enhances the performance of the combined business. The challenges posed by the
acquisition include the management of a business with a different approach to
product design, manufacturing and sales and service, the development of a
consolidated product road map from a number of incompatible products and the
integration of several geographically separated research and development
centers. The success of this process will be significantly influenced by the
Company's ability to retain key management, sales, and research and development
personnel. The integration process will also require the dedication of
management resources, which may temporarily distract attention from the
day-to-day business of the Company.
There are several other aspects of Cray Research's business that are different
from the Company's current business and may affect the operations of the
combined business:
- Government agencies and research institutions represent a major
customer group for Cray Research products. As a result of the
acquisition, a greater percentage of the Company's revenue will be
derived from sales to such customers, whose purchasing decisions may
be adversely affected by reductions or changes in government spending.
- International sales of Cray Research's products are more likely to be
subject to export licensing constraints than international sales of
the Company's current products.
-12-
<PAGE>
- Cray Research derives most of its revenue from the sale of a small
number of large systems, which generally have a longer sales cycle.
Revenue for these systems is recognized at customer acceptance rather
than upon shipment. Cray Research's results for any period are
significantly influenced by the number and mix of systems accepted and
whether a system is sold or leased. Changes affecting even a small
number of systems can have significant financial implications.
- At December 31, 1996, the combined Company's backlog was $757 million.
Over half of this backlog consists of orders for Cray systems.
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.
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.
-13-
<PAGE>
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 1. LEGAL PROCEEDINGS
The Company is 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. On February 4, 1997, the United States
Court of Appeals for the Ninth Circuit denied the Company's petition for
rehearing of its decision reversing the summary judgment granted in the
defendants' favor in June 1994. The Company intends to seek review of this
decision by the United States Supreme Court. The Company believes it has
good defenses to the claims alleged in this lawsuit and is defending itself
vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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: February 13, 1997 SILICON GRAPHICS, INC.
a Delaware corporation
By: /s/ Stanley J. Meresman
-----------------------------------
Stanley J. Meresman
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
By: /s/ Dennis P. McBride
-----------------------------------
Dennis P. McBride
Vice President, Controller
(Principal Accounting Officer)
-16-
<PAGE>
SILICON GRAPHICS, INC.
INDEX TO EXHIBITS
Exhibit Description
------- -----------
11.1 Statement of Computation of Per Share Earnings
27.1 Financial Data Schedule
-17-
<PAGE>
EXHIBIT 11.1
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
PRIMARY: December 31, December 31,
-------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted Average Shares Outstanding:
Common shares. . . . . . . . . . . . . . . . . . . . . . . 174,926 162,282 173,950 161,818
Convertible preferred shares . . . . . . . . . . . . . . . -- 460 -- 442
Stock options. . . . . . . . . . . . . . . . . . . . . . . -- 14,577 -- 16,008
-------- -------- -------- --------
Total weighted average shares outstanding. . . . . . . . . 174,926 177,319 173,950 178,268
-------- -------- -------- --------
-------- -------- -------- --------
(Loss) Income Per Share:
Net (loss) income. . . . . . . . . . . . . . . . . . . . . $(12,789) $ 52,353 $(34,390) $110,710
Preferred stock dividend requirement . . . . . . . . . . . (131) -- (262) --
-------- -------- -------- --------
Net (loss) income available to common stockholders . . . . $(12,920) $ 52,353 $(34,652) $110,710
-------- -------- -------- --------
-------- -------- -------- --------
Net (loss) income per share. . . . . . . . . . . . . . . . $ (0.07) $ 0.30 $ (0.20) $ 0.62
-------- -------- -------- --------
-------- -------- -------- --------
FULLY DILUTED:
Weighted Average Shares Outstanding:
Common shares. . . . . . . . . . . . . . . . . . . . . . . 174,926 162,282 173,950 161,818
Convertible preferred shares . . . . . . . . . . . . . . . -- 460 -- 442
Zero coupon convertible subordinated debentures. . . . . . -- 7,402 -- 7,402
Stock options. . . . . . . . . . . . . . . . . . . . . . . -- 14,577 -- 16,008
-------- -------- -------- --------
Total weighted average shares outstanding. . . . . . . . . 174,926 184,721 173,950 185,670
-------- -------- -------- --------
-------- -------- -------- --------
(Loss) Income Per Share:
Net (loss) income. . . . . . . . . . . . . . . . . . . . . $(12,789) $ 52,353 $(34,390) $110,710
Zero coupon convertible subordinated debentures. . . . . . -- 1,388 -- 2,757
Preferred stock dividend requirement . . . . . . . . . . . (131) -- (262) --
-------- -------- -------- --------
Net (loss) income available to common stockholders . . . . $(12,920) $ 53,741 $(34,652) $113,467
-------- -------- -------- --------
-------- -------- -------- --------
Net (loss) income per share. . . . . . . . . . . . . . . . $ (0.07) $ 0.29 $ (0.20) $ 0.61
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
-18-
<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 December 31, 1996 and is qualified in its entirety by reference to
such financial statements and the notes thereto.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 291734
<SECURITIES> 5825
<RECEIVABLES> 857771
<ALLOWANCES> 24227
<INVENTORY> 600260
<CURRENT-ASSETS> 1997342
<PP&E> 850103
<DEPRECIATION> 372718
<TOTAL-ASSETS> 3040604
<CURRENT-LIABILITIES> 950628
<BONDS> 356451
0
16998
<COMMON> 174
<OTHER-SE> 1669343
<TOTAL-LIABILITY-AND-EQUITY> 3040604
<SALES> 1306222
<TOTAL-REVENUES> 1590914
<CGS> 749357
<TOTAL-COSTS> 907632
<OTHER-EXPENSES> 237538
<LOSS-PROVISION> 4333
<INTEREST-EXPENSE> 12514
<INCOME-PRETAX> (42986)
<INCOME-TAX> (8596)
<INCOME-CONTINUING> (34390)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34390)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
