<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, 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)
(650) 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 30, 1998 there were 187,746,249 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.....................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................16
Item 2. Changes in Securities and use of Proceeds...........................16
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, IRIX and Onyx are
registered trademarks and O2, Octane, Origin and Onyx2 are trademarks of
Silicon Graphics, Inc. in the United States and other countries. MIPS is a
registered trademark of MIPS Technologies, Inc. and CRAY is a registered
trademark of Cray Research, Inc. in the United States and other countries.
UNIX is a registered trademark of The Open Group in the United States and
other countries. Windows NT is either a registered trademark or a trademark
of Microsoft Corporation in the United States and other countries. Other
products and company names mentioned in this report may be the trademarks of
their respective owners.
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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,
1997 1997(1)
---- ----
<S> <C> <C>
(unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents. . . . . . . . . . . $ 432,557 $ 227,222
Short-term marketable investments. . . . . . . 197,754 60,109
Accounts receivable, net . . . . . . . . . . . 722,305 1,131,647
Inventories. . . . . . . . . . . . . . . . . . 521,696 628,064
Prepaid expenses and other current assets. . . 247,276 268,552
----------- -----------
Total current assets. . . . . . . . . . . . 2,121,588 2,315,594
Other marketable investments. . . . . . . . . . . 24,331 86,961
Property and equipment, net . . . . . . . . . . . 518,842 525,452
Other assets. . . . . . . . . . . . . . . . . . . 483,314 416,585
----------- -----------
$ 3,148,075 $ 3,344,592
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts and notes payable . . . . . . . . . . $ 162,627 $ 303,647
Other current liabilities. . . . . . . . . . . 738,561 782,559
----------- -----------
Total current liabilities . . . . . . . . . 901,188 1,086,206
Long-term debt and other. . . . . . . . . . . . . 408,559 419,144
Total stockholders' equity. . . . . . . . . . . . 1,838,288 1,839,242
----------- -----------
$ 3,148,075 $ 3,344,592
----------- -----------
----------- -----------
</TABLE>
(1) The balance sheet at June 30, 1997 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,
------------------------------ ---------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Product and other revenue. . . . . . . . . . . . .$ 697,100 $ 682,809 $ 1,317,796 $ 1,306,222
Service revenue. . . . . . . . . . . . . . . . . . 153,665 142,503 300,962 284,692
---------- ---------- ------------ ------------
Total revenue . . . . . . . . . . . . . . . . . 850,765 825,312 1,618,758 1,590,914
Costs and expenses:
Cost of product and other revenue. . . . . . . . 393,219 376,397 744,879 749,357
Cost of service revenue. . . . . . . . . . . . . 85,772 80,540 172,035 158,275
Research and development . . . . . . . . . . . . 117,113 124,094 233,467 232,373
Selling, general and administrative. . . . . . . 251,262 254,348 512,683 486,515
Restructuring charges. . . . . . . . . . . . . . 52,553 - 52,553 -
Write-off of acquired in-process technology
and merger-related expenses . . . . . . . . . . 176 2,331 19,277 5,165
---------- ---------- ------------ ------------
Total costs and expenses . . . . . . . . . . . 900,095 837,710 1,734,894 1,631,685
---------- ---------- ------------ ------------
Operating loss . . . . . . . . . . . . . . . . . . (49,330) (12,398) (116,136) (40,771)
Interest and other income (expense), net . . . . . 1,538 (1,397) (769) (2,215)
---------- ---------- ------------ ------------
Loss before income taxes . . . . . . . . . . . . . (47,792) (13,795) (116,905) (42,986)
Income tax benefit . . . . . . . . . . . . . . . . (16,313) (1,006) (29,888) (8,596)
---------- ---------- ------------ ------------
Net loss . . . . . . . . . . . . . . . . . . . . . (31,479) (12,789) (87,017) (34,390)
Preferred stock dividend requirement . . . . . . . (131) (131) (262) (262)
---------- ---------- ------------ ------------
Net loss available to common stockholders. . . . .$ (31,610) $ (12,920) $ (87,279) $ (34,652)
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
Net loss per common share - basic and diluted. . . $ (0.17) $ (0.07) $ (0.47) $ (0.20)
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
Common shares outstanding - basic and diluted. . . 187,874 174,926 185,017 173,950
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
</TABLE>
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,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . $ (87,017) $ (34,390)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization. . . . . . . . . 154,314 187,567
Write-off of acquired in-process technology. . 16,900 --
Other. . . . . . . . . . . . . . . . . . . . . 1,504 4,101
Changes in operating assets and liabilities
(net of effects of ParaGraph acquisition):
Accounts receivable . . . . . . . . . . . . 410,170 145,329
Inventories . . . . . . . . . . . . . . . . 86,876 (126,430)
Accounts payable. . . . . . . . . . . . . . (97,946) (9,232)
Other assets and liabilities. . . . . . . . (38,998) 19,936
--------- ---------
Total adjustments. . . . . . . . . . . . 532,820 221,271
--------- ---------
Net cash provided by operating activities . 445,803 186,881
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . (89,258) (117,041)
Increase in other assets. . . . . . . . . . . . . (72,569) (48,702)
Acquisition of Paragraph, net of cash acquired. . 831 --
Available-for-sale investments:
Purchases. . . . . . . . . . . . . . . . . . . (77,518) (6,023)
Sales. . . . . . . . . . . . . . . . . . . . . 3,000 16,222
Maturities . . . . . . . . . . . . . . . . . . -- 38,706
--------- ---------
Net cash used in investing activities. . . . . (235,514) (116,838)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt. . . . . . . . . . . . . . . . . 10,822 63,609
Payments of debt principal. . . . . . . . . . . . (55,319) (140,249)
Sale of common stock. . . . . . . . . . . . . . . 65,707 41,513
Purchase of common stock. . . . . . . . . . . . . (25,902) --
Cash dividends - preferred stock. . . . . . . . . (262) (262)
--------- ---------
Net cash used in financing activities. . . . . (4,954) (35,389)
--------- ---------
Net increase in cash and cash
equivalents. . . . . . . . . . . . . . . . . . 205,335 34,654
Cash and cash equivalents at beginning of period. 227,222 257,080
--------- ---------
Cash and cash equivalents at end of period. . . . $ 432,557 $ 291,734
--------- ---------
--------- ---------
</TABLE>
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.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries after elimination of significant intercompany
transactions and balances. 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, 1997.
Certain amounts for the prior year have been reclassified to conform to current
year presentation.
2. BUSINESS COMBINATIONS.
On September 30, 1997, the Company completed its acquisition of ParaGraph
International, Inc. ("ParaGraph"), a software company, in exchange for cash
and shares of the Company's common stock for an aggregate purchase price of
approximately $50 million, including direct acquisition costs. The Company
accounted for the acquisition using the purchase method. The purchase price
was allocated based on an independent valuation. The following is a summary
of the purchase price allocation (in millions):
<TABLE>
<S> <C>
Completed product technology . . . . . . . . . . . . . . . . . . . . $ 3.6
Assembled workforce. . . . . . . . . . . . . . . . . . . . . . . . . 1.1
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33.9
Other liabilities, net . . . . . . . . . . . . . . . . . . . . . . . (5.5)
Acquired in-process technology . . . . . . . . . . . . . . . . . . . 16.9
------
$ 50.0
------
------
</TABLE>
3. INVENTORIES.
(in thousands)
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1997
----------------- -------------
<S> <C> <C>
Components and subassemblies $ 210,407 $ 235,492
Work-in-process 144,633 235,426
Finished goods 78,849 74,519
Marketing 87,807 82,627
--------- ---------
Total inventories $ 521,696 $ 628,064
--------- ---------
--------- ---------
</TABLE>
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<PAGE>
4. PROPERTY AND EQUIPMENT.
(in thousands)
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1997
----------------- -------------
<S> <C> <C>
Property and equipment, at cost $ 945,859 $ 940,695
Accumulated depreciation and amortization (427,017) (415,243)
--------- ---------
Net property and equipment $ 518,842 $ 525,452
--------- ---------
--------- ---------
</TABLE>
5. RESTRUCTURING CHARGES.
In the second quarter of fiscal 1998, the Company announced and began to
implement a restructuring program aimed at bringing operating expenses more
in line with the current environment and restoring profitability to the
Company's operations. The Company's restructuring activity in the second
quarter consisted primarily of eliminating approximately 800 positions,
writing down operating assets, vacating leased facilities and canceling
contracts. These actions resulted in an initial charge of $53 million, of
which approximately $39 million in cash expenditures and $14 million in
non-cash charges were recorded through December 31, 1997. The Company
expects that the remaining $32 million accrued balance at December 31, 1997
will result in cash expenditures of approximately $29 million over the next 6
months and will be financed through current working capital. The Company
anticipates that there will be further charges during the remainder of fiscal
1998 as it completes its restructuring program.
The following table depicts the restructuring activity through December 31,
1997:
<TABLE>
<CAPTION>
(in thousands)
Total Spending/ Balance at
Category Restructuring Charge Charges December 31, 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Severance and related charges $ 37,828 $ (14,548) $ 23,280
Operating asset reserves 5,887 (2,699) 3,188
Canceled contracts 3,967 (2,435) 1,532
Vacated facilities 3,453 (86) 3,367
Other 1,418 (642) 776
--------- --------- ---------
$ 52,553 $ (20,410) $ 32,143
--------- --------- ---------
--------- --------- ---------
</TABLE>
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<PAGE>
6. EARNINGS PER SHARE.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NUMERATOR:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . $ (31,479) $ (12,789) $ (87,017) $ (34,390)
Preferred stock dividends. . . . . . . . . . . . . . . . (131) (131) (262) (262)
---------- ---------- --------- ---------
Numerator for basic and diluted earnings per
share - net loss available to common shareholders . . $ (31,610) $ (12,920) $ (87,279) $ (34,652)
---------- ---------- --------- ---------
---------- ---------- --------- ---------
DENOMINATOR:
Denominator for basic and diluted earnings per
share - weighted-avarage shares . . . . . . . . . . . 187,874 174,926 185,017 173,950
---------- ---------- --------- ---------
---------- ---------- --------- ---------
Net loss per common share - basic and diluted . . . . . . . $ (0.17) $ (0.07) $ (0.47) $ (0.20)
---------- ---------- --------- ---------
---------- ---------- --------- ---------
Potentially dilutive securities excluded from
computations because they are anti-dilutive. . . . . . . 10,096 16,585 13,923 33,412
---------- ---------- --------- ---------
---------- ---------- --------- ---------
</TABLE>
7. STOCK REPURCHASE PROGRAM.
On November 14, 1997, the Company announced that its board of directors had
extended the stock repurchase program originally authorized in October 1995.
The Company originally planned to purchase seven million shares of its common
stock under the plan through June 1998. The modified plan permits the
purchase of up to 12.5 million shares, either in the open market or in
private or option transactions through June 1999. The Company has purchased
approximately 4.5 million shares since the commencement of the repurchase
program in 1995 at an average price of approximately $23.00 per share. This
includes approximately 2 million shares purchased in the quarter ended
December 31, 1997 in open market transactions. The Company also has the
right through call option contracts to purchase up to 3.5 million shares of
its common stock through October 1998. The repurchased shares will be
available for use under the Company's employee stock plans and for other
corporate purposes.
8. CONTINGENCIES.
The information set forth in Item 1 of Part II of this Quarterly Report is
incorporated herein by this reference.
-8-
<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 Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
RESULTS OF OPERATIONS
OPERATING ITEMS AS A PERCENTAGE OF TOTAL REVENUE
- -------------------------------------------------------------------------------
(PERCENTAGES MAY NOT ADD DUE TO ROUNDING)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Dec. 31, Ended Dec. 31,
----------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Product and other revenue . . . . . . . . . . . . 81.9% 82.7% 81.4% 82.1%
Service revenue . . . . . . . . . . . . . . . . . 18.1 17.3 18.6 17.9
----- ----- ----- -----
Total revenue . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Gross margin. . . . . . . . . . . . . . . . . . . 43.7 44.6(1) 43.4 42.9(2)
Research and development. . . . . . . . . . . . . 13.8 15.0 14.4 14.6
Selling, general and administrative. . . . . . . 29.5 30.8 31.7 30.6
Restructuring charges . . . . . . . . . . . . . . 6.2 -- 3.2 --
Write-off of acquired in-process technology
and merger-related expenses. . . . . . . . . . -- 0.3 1.2 0.3
----- ----- ----- -----
Operating loss. . . . . . . . . . . . . . . . . . (5.8) (1.5) (7.2) (2.6)
Interest and other expense, net . . . . . . . . . .2 (0.2) -- (0.1)
----- ----- ----- -----
Loss before income taxes. . . . . . . . . . . . . (5.6) (1.7) (7.2) (2.7)
Benefit for income taxes. . . . . . . . . . . . . (1.9) (0.1) (1.8) (0.5)
----- ----- ----- -----
Net loss. . . . . . . . . . . . . . . . . . . . . (3.7)% (1.5)% (5.4)% (2.2)%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
________
(1) 46.4% before the effects of Cray Research purchase accounting adjustments.
(2) 45.0% before the effects of Cray Research purchase accounting adjustments.
REVENUE BY GEOGRAPHY
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Six Months
Ended Dec. 31, Year Ended Dec. 31, Year
----------------------- /Year --------------------- /Year
($ in millions) 1997 1996 Change 1997 1996 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
United States $ 413 $ 419 (1)% $ 815 $ 848 (4)%
Europe 259 232 12% 450 411 9%
Rest of World 179 174 3% 354 332 7%
------ ------ --- ------ ------ ---
Total revenue $ 851 $ 825 3% $1,619 $1,591 2%
------ ------ --- ------ ------ ---
------ ------ --- ------ ------ ---
</TABLE>
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<PAGE>
REVENUE BY GEOGRAPHY (CONTINUED)
- -------------------------------------------------------------------------------
(as a percentage of total revenue)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Dec. 31, Ended Dec. 31,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States 49% 51% 50% 53%
Europe 30% 28% 28% 26%
Rest of World 21% 21% 22% 21%
</TABLE>
REVENUE BY PRODUCT LINE
- -------------------------------------------------------------------------------
(as a percentage of product revenue, excluding
other revenue)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Dec. 31, Ended Dec. 31,
--------------- ---------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Servers (primarily from the CRAY-Registered Trademark-
and Origin-TM-families) 51% 46% 50% 47%
Graphics Systems (primarily from the O2-TM-, Octane-TM-
and Onyx2-TM- families) 49% 54% 50% 53%
</TABLE>
REVENUE. The Company's product and other revenue are derived primarily from
shipment of computer system products, with subsystem and software revenue,
fees and royalty 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
1998 of $851 million and $1,619 million, respectively, increased slightly
compared with revenue of $825 million and $1,591 million, respectively, for
the corresponding periods of fiscal 1997. Revenue growth in Europe was 12%
as compared to the same quarter a year ago, or 22% in local currency. The
Asian economic crisis accounted for significant year to year reductions in
the Company's business in Korea and certain Southeast Asian markets, but did
not have the same effect in Japan, which accounts for most of the Company's
Asian revenue. As the Asian crisis continues, the Company expects that the
Japanese market will reflect regional conditions to a greater extent than was
evident in the second quarter.
Product revenue for the Company's servers for the second quarter and first
six months of fiscal 1998 increased 11% and 5%, respectively, compared with
the same periods a year ago, reflecting year over year increases in the
Origin server product line offset by a decline in the Cray supercomputer
business. Product revenue for the Company's graphics systems for the second
quarter and first six months of fiscal 1998 declined 9% and 7%, respectively,
compared with the same periods a year ago. The decline in graphics systems
revenue reflected the highly competitive environment in the shrinking UNIX
workstation market. The Company believes that the declines in the UNIX
workstation and vector supercomputer markets are long-term trends, and that
its future success will require that a larger proportion of its revenues come
from growing markets.
The Company's consolidated backlog at December 31, 1997 was $393 million, down
slightly from backlog of $398 million at September 30, 1997.
GROSS MARGIN. Gross margin of 43.7% and 43.4% for the second quarter and first
six months of fiscal 1998, respectively, decreased compared with gross margin of
44.6% and 42.9%, respectively, for the corresponding periods of fiscal 1997.
Gross margin for the second quarter and first six months of fiscal 1997 would
have been 46.4% and 45.0%, respectively, without purchase accounting adjustments
related to acquired Cray Research inventory and service contracts of
approximately $14 million and $33 million, respectively. Excluding the impact
of purchase accounting adjustments, gross margins were down primarily due
to competitive pricing pressures for both graphics systems and
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<PAGE>
servers. The Company believes it will continue to experience margin pressure,
particularly in UNIX graphics systems products, for the foreseeable future.
OPERATING EXPENSES (EXCLUDING RESTRUCTURING CHARGES). Operating expenses for
the second quarter of fiscal 1998 declined 3% compared with the same period a
year ago and decreased from 45.9% to 43.3% as a percentage of revenue. The
decrease in absolute dollars resulted from a concerted effort to control
spending through more focused project management and a reduction in
administrative expenses. Operating expenses for the first six months of fiscal
1998 increased 4% compared with the same period a year ago and increased from
45.2% to 46.1% as a percentage of revenue principally due to the significant
revenue shortfall in the first quarter of fiscal 1998. The Company's
operating expenses as a proportion of revenue continues to be well above
acceptable levels, and will need to be addressed through a combination of
continuing expense management and revenue growth.
The Company acquired ParaGraph during the first quarter of fiscal 1998. As a
result, approximately $17 million of acquired in-process technology was written
off in the first quarter. Merger-related expenses in fiscal 1998 relate to the
acquisitions of ParaGraph and Cray Research. Expenses related to these mergers
are not expected to be significant for the remainder of fiscal 1998.
RESTRUCTURING CHARGES. The restructuring charges for the second quarter of
fiscal 1998 consist principally of severance and related charges, as well as
asset write-downs and lease and other contract cancelation charges. The
Company anticipates that there will be further charges during the remainder
of fiscal 1998 as it completes its restructuring program. For more
information, see Note 5 of the Notes to Condensed Consolidated Financial
Statements (Unaudited) included in Part I of this Quarterly Report.
OTHER OPERATING RESULTS. Interest and other income (expense), net for the
second quarter of fiscal 1998 was $1.5 million compared with $(1.4) million for
the second quarter of fiscal 1997. The $2.9 million improvement primarily
reflects higher interest income attributable to much higher invested cash
balances for the second quarter of fiscal 1998 compared with the second quarter
of fiscal 1997. Interest and other income (expense), net for the first six
months of fiscal 1998 was $(.8) million compared with $(2.2) million for the
first six months of fiscal 1997. The $1.4 million improvement primarily
reflects higher interest income attributable to much higher invested cash
balances and decreased interest expense due to lower average short-term
borrowings. Also included in the six month period are one-time charges related
to fees incurred in connection with the Company's exchange of its newly issued
Senior Convertible Notes for its existing Zero Coupon Debentures during the
first quarter of fiscal 1998, as well as the write-off of an investment.
TAXES. The Company's effective tax rate for the first six months of both
fiscal 1998 and 1997 was 20%, excluding the impact of the $17 million
non-deductible write-off of acquired in-process technology in the first
quarter of fiscal 1998, and the 38% tax benefit resulting from the $53
million restructuring charge in the second quarter of fiscal 1998. The
Company revised its projected effective tax rate during the second quarter of
both fiscal 1998 and 1997 from 26% to 20%, and accordingly, the taxes
provided in the second quarter of each fiscal year reflect an adjustment to
the first quarter. The lower effective tax rate of 20% is primarily
attributable to the reinstatement of the U.S. federal research tax credit and
to proportionately higher earnings in low tax foreign 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.
FINANCIAL CONDITION
At December 31, 1997, cash and cash equivalents and marketable investments
totaled $655 million, up from $374 million at June 30, 1997. Operating
activities generated $446 million during the first six months of fiscal 1998
compared with $187 million during the first six months of fiscal 1997. Despite
the net loss during the first six months of fiscal 1998, cash flow from
operating activities was positive principally due to
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<PAGE>
a significant decrease in accounts receivable due in part to shorter
collection cycles, as well as the effect of charges that did not use cash,
including a $17 million write-off of acquired in-process technology related
to the acquisition of ParaGraph. Investing activities, other than changes in
the Company's marketable investments, consumed $162 million in cash during
the first six months of fiscal 1998, principally for the acquisition of
capital equipment and spare parts in support of the Company's service
organization. The principal financing activities during the first six months
of fiscal 1998 included repayment of $45 million in short-term borrowings and
the use of $26 million to repurchase shares of the Company's common stock,
offset in part by proceeds from employee stock purchase plan issuances and
employee stock option exercises.
In the second quarter of fiscal 1998, the Company announced and began to
implement a restructuring program aimed at bringing operating expenses more
in line with the current environment and restoring profitability to the
Company's operations. For more information, see Note 5 of the Notes to
Consolidated Financial Statements (Unaudited) included in Part I of this
Quarterly Report. The remaining restructuring charges will be funded through
current working capital.
As of December 31, 1997, the Company's principal sources of liquidity included
cash and cash equivalents and marketable investments of $655 million and up to
$250 million available under its three-year revolving credit facility. The
Company believes that these principal sources of liquidity along with 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.
BUSINESS TRANSITION. Two of the principal market sectors in which the Company
competes -- UNIX workstations and vector supercompters -- have declined over the
past year, and the Company believes that these declines represent long-term
trends. The Company's goal is to increase its market share in these sectors and
to transition an increasing proportion of its revenues to growing markets,
including Windows NT workstations and UNIX-based scalable servers such as the
Company's Origin server product family. The Company's ability to grow its
revenue over the next several quarters will largely depend on the extent to
which growth in the Origin family and (beginning in fiscal 1999) Windows NT
workstation products compensates for the expected decline in the other market
sectors.
DESKTOP SYSTEM STRATEGY. The Company has under development a desktop system
that will be based upon Intel microprocessors and the Windows NT operating
system. There can be no assurance that this system will be introduced. In any
event the system will not account for any material revenues in fiscal 1998.
Success in this market segment will require that the Company adapt to the very
different requirements of this higher volume, lower margin market, including
lower-cost manufacturing and distribution, marketing to a broader audience in
markets that could extend beyond the Company's traditional markets, and new
approaches to customer interface and support. The Company will also be required
to maintain and extend its customer franchise through a complex product
transition and to support a product line including multiple operating systems.
In particular, although the Company plans to continue to invest in and support
its current line of UNIX/MIPS-based workstations, there is a risk that revenue
from this business will be materially reduced by the announcement of the new
product. The Company believes that its future success will depend in
significant part on its making the right strategic choices in this market
segment and on executing its strategy effectively.
MANAGEMENT TRANSITION. The Company announced on January 23, 1998 that
Richard E. Belluzzo has been named Chairman and Chief Executive Officer,
succeeding Edward R. McCracken who had previously announced his intention to
step down. Although the Company has begun to fill key leadership positions,
other key positions, including the chief financial officer and the leadership
role in the Company's sales organization, have not yet been filled. Continued
uncertainties surrounding the remaining key leadership positions may
adversely affect the Company's ability to execute effectively and may also
affect customers' buying decisions.
RESTRUCTURING PROGRAM. In the second quarter of fiscal 1998, the Company
announced and began to implement a restructuring program aimed at bringing
operating expenses more in line with the current environment and restoring
profitability to the Company's operations. The Company is seeking to reduce
costs in ways that will not have a material impact on revenue levels, but there
can be no assurance that these goals will be achieved.
PERIOD TO PERIOD FLUCTUATIONS. The Company's operating results may fluctuate
for a number of reasons. Delivery cycles are typically short, other than for
certain supercomputer and large-scale server products. Well over half of each
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quarter's revenue results from orders booked and shipped during the third
month, and disproportionately in the latter half of that month. These factors
make 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. Demand can also be adversely affected by product and technology
transition announcements by the Company or its competitors. The timing of
customer acceptance of certain large-scale server products 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.
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.
PROCESS RE-ENGINEERING. The Company is undertaking a series of programs aimed
at redesigning some of its core business processes, including forecasting,
supply chain management, order fulfillment and collection of accounts
receivable. The goals of these programs include more predictable results of
operations, greater quality and customer satisfaction, and improved asset
management. The Company believes that the success of these programs is critical
to its long-term competitive position. Implementing these changes will require,
among other things, enhanced information systems, substantial training and
disciplined execution. There can be no assurance that these programs will be
implemented successfully, or that disruptions of the Company's operations will
not occur in the process.
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. Product
transitions are a recurring part of the Company's business. During fiscal 1997,
for example, the Company replaced most of its product line, including both
graphics and server systems. 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. 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. 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.
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YEAR 2000 COMPLIANCE. Many computer systems and applications experience
problems handling dates beyond the year 1999 and will need to be modified
prior to the year 2000 in order to remain functional. The Company is
assessing the year 2000 readiness of the systems used in the operation of its
business, many of which are provided by outside suppliers, and the compliance
of the computer products and related software, including operating system
software, sold by the Company to its customers. The Company expects to
implement successfully the systems and programming changes necessary to
address year 2000 issues, including a new release of its IRIX operating
system, and does not believe that the cost of such actions will have a
material effect on the Company's results of operations or financial
condition. There can be no assurance, however, that there will not be a
delay in, or increased costs associated with, the implementation of such
changes, or that the new version of the operating system will be implemented
by all of the Company's customers. The Company's inability to implement such
changes could have an adverse effect on future results of operations.
COMPETITION. The computer industry is highly competitive, with rapid
technological advances and constantly improving price/performance. Most 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.
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.
EXPORT REGULATION. The Company's sales to foreign customers are subject to
export regulations. Sales of many of the Company's high-end products require
clearance and export licenses from the U.S. Department of Commerce under
these regulations. The Department of Commerce is currently investigating the
Company's compliance with the export regulations in connection with the sale
of several computer systems to a customer in Russia in fiscal 1997. The
Company believes that this matter will be resolved without a significant
adverse effect on the Company's business. However, there is no assurance
that this matter will not have an unforeseen outcome that could impair the
conduct of the Company's business outside the United States.
The Company's international sales would also 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.
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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
competition in the markets addressed by the Company intensifies, the volume
of these intellectual property claims will also increase.
EMPLOYEES. The Company's success depends on its ability to continue to attract,
retain and motivate highly qualified technical, marketing and management
personnel, who are in great demand. The current uncertainties surrounding the
Company have increased the challenges of retaining world-class talent.
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 not insured for most losses and business
interruptions of this kind.
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
reduce 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 the Company's policy
and are 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. No such policy can be comprehensive, and the Company
remains subject to risks that cannot be hedged effectively, especially in
periods of high volatility.
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 German mark, British
pound, Japanese yen, French franc, and Korean won. 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. In the second
quarter of fiscal 1998 for example, a sharp decline in the value of the
Korean won adversely affected the Company's revenues from that country and
made hedging prohibitively expensive. 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.
Countries in the Asia Pacific region, including Japan, which accounts for a
significant proportion of the Company's business in that region, have recently
experienced weaknesses in their currency, banking and equity markets. These
weaknesses could adversely affect demand for the Company's products, the U.S.
dollar value of the Company's foreign currency denominated sales, the
availability and supply of product components to the Company, and ultimately the
Company's consolidated results of operations.
The Company's currency hedging program currently involves hedging (i) net
non-U.S. dollar monetary assets and liabilities and generally all server backlog
where the delivery cycle is expected to exceed three months using currency
forward contracts and (ii) a significant portion of anticipated quarterly
revenue using currency options which expire within each fiscal quarter. 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been named as a defendant in the following putative class action
lawsuits filed in the U.S. District Court for the Northern District of
California in December 1997 and January 1998: RONALD L. REISER, ET. AL. V.
SILICON GRAPHICS, INC., ET. AL., PHILIP ZOVE, ET. AL. V. SILICON GRAPHICS, ET.
AL., JOANNA KERR, ET. AL. V. SILICON GRAPHICS, ET. AL., RAYMOND ALLARD ET. AL.
V. SILICON GRAPHICS, ET. AL., and DAVID CHIU, ET. AL. V. SILICON GRAPHICS, ET.
AL. These lawsuits are identical and will likely be consolidated. The Company
has also been named in two putative class action lawsuits filed in the
California Superior Court for the County of Santa Clara in December, 1997 and
January, 1998: RALPH SCALISE ET. AL. V. SILICON GRAPHICS, ET. AL., and JACK
FISHBAUM ET. AL. V. SILICON GRAPHICS, ET. AL. Certain current and former
executive officers of the Company are also named as defendants in the state and
federal suits. The plaintiffs in all lawsuits purport to represent a class of
all persons who purchased the Company's common stock between July 24 and October
6, 1997 (the "Class Period"). The complaints in these actions allege that the
defendants violated various federal securities laws and California statutes
through material misrepresentations and omissions during the Class Period. The
Company believes it has good defenses to the claims alleged in these lawsuits
and is defending itself vigorously against these actions.
The Company is also defending a patent infringement lawsuit filed by Martin
Marietta Corp. in the U.S. District Court for the Middle District of Florida in
September 1995. The Company has filed a counterclaim seeking to invalidate the
principal patent at issue in the lawsuit and the U.S. Patent and Trademark
Office is re-examining the patent at Martin Marietta's request. The Company's
motion for summary judgment is pending with the District Court. A trial date
for the lawsuit is currently set for August 1998.
ITEM 2(c). CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 30, 1997, the Company issued 2,934,447 shares (the "Shares") of its
common stock, par value $0.001 per share, in a private placement to the
stockholders of ParaGraph International, Inc. ("ParaGraph") as consideration for
the Company's acquisition of all of the outstanding equity securities of
ParaGraph pursuant to an agreement and plan of merger and reorganization dated
as of May 14, 1997, as amended, among the Company, ParaGraph, ParaGraph
Acquisition Corporation and certain stockholders of ParaGraph. As described in
the Company's current report on Form 8-K dated October 10, 1997, 367,232 of the
Shares were issued to certain non-U.S. persons pursuant to Regulation S under
the Securities Act of 1933, as amended (the "Securities Act") and the remainder
of the shares of Common Stock were issued pursuant to the exemption from
registration under Section 4(2) of the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.7 Form of Employment Continuation Agreement entered into by the
Company with its executive officers, as amended and restated as
of November 14, 1997.
10.38 Form of Agreement entered into by the Company with its
executive officers, dated as of November 14, 1997.
10.39 Agreement dated as of December 31, 1997 between the Company and
Edward R. McCracken
10.40 Agreement dated as of January 22, 1998 between the Company and
Richard E. Belluzzo.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
A current report on Form 8-K dated November 17, 1997 was filed with the
Securities and Exchange Commission (the "SEC") to report under Item 5 of
that Form the press release issued to the public on November 17, 1997
regarding the Company's stock repurchase program.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 13, 1998 SILICON GRAPHICS, INC.
a Delaware corporation
By: William M. Kelly
------------------------------
William M. Kelly
Senior Vice President
(Principal Financial Officer)
By: Ron Curtola, Jr.
------------------------------
Ron Curtola, Jr.
(Acting Principal Accounting Officer)
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SILICON GRAPHICS, INC.
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
10.7 Form of Employment Continuation Agreement entered into by the
Company with its executive officers, as amended and restated as
of November 14, 1997.
10.38 Form of Agreement entered into by the Company with its executive
officers, dated as of November 14, 1997.
10.39 Agreement dated as of December 31, 1997 between the Company and
Edward R. McCracken
10.40 Agreement dated as of January 22, 1998 between the Company and
Richard E. Belluzzo
27.1 Financial Data Schedule
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SILICON GRAPHICS, INC.
2011 North Shoreline Boulevard
Mountain View, California 94043-1389
November 14, 1997
Silicon Graphics, Inc.
2011 North Shoreline Boulevard
Mountain View, California 94043-1389
Dear:
This agreement amends and restates the prior agreement between you and
Silicon Graphics, Inc. (the "Company") dated as of ___________.
The Company considers it essential to the best interests of its
shareholders to foster the continuous employment of key management personnel.
In this connection, the Board of Directors of the Company (the "Board")
recognizes that, as is the case with many publicly held corporations, the
possibility of a change in control may exist and that such possibility, and
the uncertainty and questions which it may raise among management, may result
in the departure or distraction of management personnel to the detriment of
the Company and its shareholders.
The Board has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of officers of
the Company, including you, to their assigned duties without distraction in
the face of potentially disturbing circumstances arising from the possibility
of a change in control of the Company, although no such change is now
contemplated.
In order to induce you to remain in the employ of the Company and in
consideration of your agreements set forth in subparagraph 2(g) hereof, the
Company agrees that you shall receive the benefits set forth in this
agreement ("Agreement") under the circumstances described below.
1. TERM OF AGREEMENT. This Agreement shall commence on the date
hereof and shall continue in effect until your employment with the Company is
terminated other than after a change in control unless sooner terminated by
written agreement of the Company and you.
2. DEFINITIONS. As used in this Agreement:
(a) "Beneficial Owner" shall have the meaning ascribed to such term
in Rule 13d-3 of the General Rules and Regulations under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
(b) "Board" shall mean the Board of Directors of the Company.
<PAGE>
(c) "Business Combination" means and includes each and all of the
following occurrences:
(i) A consolidation or merger pursuant to which more than 75%
of the Company's voting stock is transferred to different holders, except
for a transaction intended primarily to change the state of the Company's
incorporation.
(ii) More than 75% of the assets of the Company are sold or
otherwise disposed of.
(iii) The Company dissolves or liquidates or effects a
partial liquidation involving more than 75% of its assets.
(d) "Change in Control" of the Company means and includes each and
all of the following occurrences:
(i) A Business Combination.
(ii) When any "person" as defined in Section 3(a)(9) of the
Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a
"group" as defined in Section 13(d) of the Exchange Act but excluding the
Company and any subsidiary and any employee benefit plan sponsored or
maintained by the Company or any subsidiary (including any trustee of such
plan acting as trustee), directly or indirectly, becomes the Beneficial
Owner of securities of the Company representing thirty percent (30%) or
more of the combined voting power of the Company's then outstanding
securities with respect to the election of the directors of the Company.
(iii) During any period of three (3) consecutive years (not
including any period prior to the date hereof), individuals who, at the
beginning of such period, constitute the Board (the "Incumbent Board")
cease for any reason to constitute at least a majority of the Board,
provided that any person becoming a Director subsequent to the date hereof
whose election, or nomination for election by the Company's shareholders,
was approved by the vote of at least a majority of the Directors then
comprising the Incumbent Board (other than an election or nomination of
any individual whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of the
Directors of the Company, as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act) shall be, for purposes
of this Agreement, considered as though such person were a member of the
Incumbent Board.
For purposes of this Agreement, the Board of Directors may by resolution,
clarify the date as of which a Change in Control shall be deemed to have
occurred.
(e) "Current Compensation" shall mean your monthly base salary, as
in effect immediately prior to your termination of employment with the Company.
In addition, if you participate in a variable compensation program (other than
the corporate annual executive incentive plan or a similar incentive plan in
which all senior executives participate), then your
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<PAGE>
Current Compensation will be based on your target compensation (including
base and variable compensation) in effect under that plan during the six (6)
months immediately preceding the month in which your termination occurs.
(f) "Disability" shall mean a physical or mental illness or injury
which, as determined by the Company, continuously prevents you from performing
your duties with the Company for a period of six months prior to termination.
(g) "Good Reason" shall mean grounds for termination by you of your
employment by the Company based upon prior constructive termination by the
Company as provided in Paragraph 5 hereof.
(h) "Potential Change in Control of the Company" shall be deemed
to have occurred if (i) the Company enters into an agreement or letter of
intent, the consummation of which would result in the occurrence of a Change
in Control of the Company; (ii) any person (including the Company) publicly
announces an intention to take or to consider taking actions which if
consummated would constitute a Change in Control of the Company; (iii) any
person, other than a trustee or other fiduciary holding securities under an
employee benefit plan for the Company, who is or becomes the beneficial
owner, directly or indirectly, of securities of the Company representing 9.5%
or more of the combined voting power of the Company's then outstanding
securities increases his beneficial ownership of such securities by five (5)
percentage points or more over the percentage so owned by such person on the
date hereof; or (iv) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control of the Company has
occurred. You agree that, subject to the terms and conditions of this
Agreement, in the event of a Potential Change in Control of the Company, you
will remain in the employ of the Company (or the subsidiary thereof by which
you are employed at the date such Potential Change in Control occurs) until
the earliest of (x) a date which is six months from the occurrence of such
Potential Change in Control of the Company, (y) the termination by you of
your employment by reason of Disability, as defined in subparagraph 2(e) or
(z) the occurrence of a Change in Control of the Company.
(i) "Termination Payment" shall mean the severance pay to which you
are entitled upon termination of your employment within 24 months after a
Change in Control as provided in Subparagraph 3(a) hereof.
3. COMPENSATION FOLLOWING A CHANGE IN CONTROL.
(a) Subject to Sections 6 and 7 below, if your employment with the
Company is terminated within 24 months after a Change in Control, you shall be
entitled to a Termination Payment, payable in cash, in an amount equal to
twenty-four (24) months of your Current Compensation at the rate in effect
immediately prior to such Change in Control.
(b) In addition to the Termination Payment,
(i) you shall have the right during the period of six months
following such Change in Control either (i) to exercise all non-statutory
options granted to you by
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<PAGE>
the Company and all incentive stock options granted to you by the
Company after ISODate, as to all or any part of the shares covered
thereby, including shares as to which such options would not otherwise
then be exercisable, or (ii) to have such options "cashed out" at their
market value determined as provided herein. The cash out proceeds shall
be paid to you or, in the event of your death prior to payment, the
representative of your estate. For this purpose, the fair market value
of an outstanding option shall be measured as the difference between the
option exercise price and the "Change in Control Price" as defined in
subparagraph 3(d), as of the date such Change in Control is determined
to have occurred or such other date as the Board of Directors may
determine prior to the Change in Control.
(ii) all outstanding incentive stock options granted to you by
the Company on or prior to ISODate (including any options issued in
substitution or assumption of such options as a result of a Change in
Control), shall be accelerated 15 calendar days after the date of such
Change in Control to the extent then unvested, and shall be fully
exercisable through the period ending three (3) months after the
termination of your employment with the company, subject to any further
limitation on your right to exercise such options upon termination of your
employment pursuant to the terms of any applicable option agreement.
(iii) all restricted stock granted to you by the Company
shall be released from the Company's repurchase right (which is set forth
in your restricted stock purchase agreements) 15 calendar days after the
date of such Change in Control.
(c) Any cash payable to you under subparagraph 3(a) shall be payable
between 30 and 60 calendar days after your termination of employment. Any cash
payable to you under subparagraph 3(b)(i) shall be made within 30 calendar days
after the earlier of (i) the expiration of the respective periods in the
subsections thereof, or (ii) the date the Company receives your written notice
electing to be cashed out on the value of your options in lieu of exercise
thereof.
(d) For purposes of this Paragraph 3, "Change in Control Price"
shall be, as determined by the Board, (i) the highest closing sale price of a
share of the Company's Common Stock as reported by the NASDAQ National Market
System and as appearing in the Wall Street Journal (or, in the event the Common
Stock is listed on a stock exchange, the highest closing price on such exchange
as reported on the composite transactions reporting system), at any time within
the 60-day period immediately preceding the date of determination of the Change
in Control Price by the Board (the "60-day period"), or (ii) the highest price
paid or offered for a share of the Common Stock, as determined by the Board, in
any bona fide transaction or bona fide offer related to the Change in Control
of the Company, at any time within the 60-day period.
(e) Anything contained in subparagraphs (a) or (b) above to the
contrary notwithstanding, the Company shall have no obligation to pay a
Termination Payment or to accelerate vesting of shares or to cash out options
or to release shares from the Company's repurchase right under this Agreement
in the event of a termination prior to a Change in Control. The Company also
shall have no obligation to pay a Termination Payment if, after a Change in
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Control, it terminates your employment for "Cause" or if your employment
terminates due to death, retirement or resignation other than for "Good
Reason." Furthermore, if it is determined by the Company's Board of
Directors, upon receipt of a written opinion of the Company's independent
public accountants that acceleration of vesting of shares or cash out of
outstanding options or releasing of shares from the Company's repurchase
right would preclude accounting for the acquisition of the Company as a
pooling of interests, and the Board otherwise desires to approve a proposed
acquisition of the Company by an acquiring Company which requires as a
condition to closing of the acquisition that the acquisition be accounted for
as a pooling of interests, then the Company shall not be obligated to
accelerate your options or cash out your options or release your restricted
stock from its repurchase right under this Paragraph 3.
(f) In the event that the terms of this Agreement relating to
options or restricted stock conflict with the terms of any option, stock award
or related agreement between you and the Company, the terms that are more
favorable to you will control."
4. TERMINATION FOR CAUSE. Termination of your employment with the
Company shall be regarded as termination for Cause only upon:
(a) your willful and continued failure to substantially perform your
duties with the Company (other than such failure resulting from your incapacity
due to physical or mental illness) after there is delivered to you by the Board
a written demand for substantial performance which sets forth in detail the
specific respects in which it believes you have not substantially performed
your duties;
(b) your willfully engaging in gross misconduct which is materially
and demonstrably injurious to the Company;
(c) your committing a felony or an act of fraud against the Company
or its affiliates; or
(d) your breaching materially the terms of your employee
confidentiality and proprietary information agreement with the Company.
No act, or failure to act, by you shall be considered "willful" if done,
or omitted to be done, by you in good faith and in your reasonable belief that
your act or omission was in the best interest of the Company and/or required by
applicable law.
Anything contained in this paragraph 4 to the contrary notwithstanding,
you shall not be deemed to have been terminated for Cause unless and until
there shall have been delivered to you a copy of a resolution duly adopted by
the affirmative vote of not less than a majority of the entire membership of
the Board at a meeting of the Board called and held for that purpose (after
reasonable notice to and an opportunity for you, together with your counsel, to
be heard before the Board), finding that in the good faith opinion of the
Board, you were guilty of conduct set forth in subparagraphs (a) or (b) of this
Paragraph 4 and specifying the particulars thereof in detail.
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5. TERMINATION FOR GOOD REASON. Your employment with the Company may be
regarded as having been constructively terminated by the Company, and you may
therefore terminate your employment for Good Reason and thereupon become
entitled to compensation pursuant to Paragraph 3 above, if, after a Change in
Control, one or more of the following events shall occur (unless such event(s)
applies generally to all officers of the Company and any successor to the
Company, or applies to a person solely in his capacity as a member of the
Board):
(i) without your express written consent, the assignment to you
of any duties or the significant reduction of your duties, either of which
is inconsistent with your position with the Company (or the duties and
responsibilities of such position) immediately prior to a Change in
Control, or your removal from or any failure to re-elect you to any such
position;
(ii) without your express written consent, the substantial
reduction, without good business reasons, of the facilities and
perquisites (including office space and location) available to you
immediately prior to a Change in Control;
(iii) a reduction by the Company in your salary or in any
bonus compensation formula applicable to you as in effect immediately
prior to a Change in Control, or the failure by the Company to increase
such base salary each year following a Change in Control by an amount
which equals at least one-half (1/2), on a percentage basis, of the
average annual percentage increase in base salary for all officers of the
Company (and any successor of the Company) during the prior two full
calendar years;
(iv) a material reduction by the Company in the kind or level of
employee benefits to which you were entitled prior to a Change in Control
with the result that your overall benefits package is significantly
reduced after the Change in Control; or the taking of any action by the
Company which would materially and adversely affect your participation in
any plan, program or policy generally applicable to executives or
employees of the Company or any successor of the Company (including but
not limited to paid vacation days), or deprive you in a material and
substantial way of any fringe benefits enjoyed by you prior to a Change in
Control;
(v) the Company's requiring you to be based anywhere other than
your then present location (except for required travel on the Company's
business to an extent substantially consistent with your present business
travel obligations) or a location more than 25 miles from your then
present location, without your consent;
(vi) any purported termination of your employment by the Company
which is not effected for Disability or for Cause, or any purported
termination for which the grounds relied upon are not valid; or
(vii) the failure of the Company to obtain the assumption of
this Agreement by any successor as contemplated in Paragraph 10 hereof.
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6. PARACHUTE PAYMENTS. In the event that any payment or benefit
received or to be received by you in connection with a termination of your
employment with the Company or any corporation which is a related corporation
within the meaning of section 280G(e) of the Internal Revenue Code of 1986
(the "Code") (collectively, the "Severance Payments") would (i) constitute a
"parachute payment" within the meaning of section 280G of the Code or any
similar or successor provision and (ii) but for this Paragraph 6, be subject
to the excise tax imposed by section 4999 of the Code or any similar or
successor provision (the "Excise Tax"), then, subject to the provisions of
Paragraph 7 hereof, such Severance Payments (which Severance Payments shall
collectively be referred to herein as the "Severance Parachute Payments")
shall be reduced to the largest amount which you, in your sole discretion,
determine would result in no portion of the Severance Parachute Payments
being subject to the Excise Tax. The determination of any required reduction
pursuant to this Paragraph 6 (including the determination as to which
specific Severance Parachute Payments shall be reduced) shall be made by you
in your sole discretion, and such determination shall be conclusive and
binding upon the Company or any related corporation for all purposes. The
Company and its related corporations waive all claims and rights against you
with respect thereto except as specifically set forth in the next sentence.
If the Internal Revenue Service (the "IRS") determines that a Severance
Parachute Payment is subject to the Excise Tax, then the Company or any
related corporation, as their exclusive remedy, shall seek to enforce the
provisions of Paragraph 7 hereof. Such enforcement of Paragraph 7 hereof
shall be the only remedy, under any and all applicable state and federal laws
or otherwise, for your failure to reduce the Severance Parachute Payments so
that no portion thereof is subject to the Excise Tax. The company or related
corporation shall reduce a Severance Parachute Payment in accordance with
Paragraph 6 only upon written notice by you indicating the amount of such
reduction, if any.
7. REMEDY. If, notwithstanding the reduction described in Paragraph 6
hereof, the IRS determines that you are liable for the Excise Tax as a result
of the receipt of a Severance Parachute Payment, then you shall, subject to
the provisions of this Agreement, be obligated to pay to the Company (the
"Repayment Obligation") an amount of money equal to the "Repayment Amount."
The Repayment Amount with respect to a Severance Parachute Payment shall be
the smallest such amount, if any, as shall be required to be paid to the
Company so that your net proceeds with respect to any Severance Parachute
Payment (after taking into account the payment of the Excise Tax imposed on
such Severance Parachute Payment) shall be maximized. Notwithstanding the
foregoing, the Repayment Amount with respect to a Severance Parachute Payment
shall be zero if a Repayment Amount of more than zero would not eliminate the
Excise Tax imposed on such Severance Parachute Payment. If the Excise Tax is
not eliminated through the performance of the Repayment Obligation, you shall
pay the Excise Tax. The Repayment Obligation shall be performed within 30
days of either (i) your entering into a binding agreement with the IRS as to
the amount of your Excise Tax liability or (ii) a final determination by the
IRS or a court decision requiring you to pay the Excise Tax with respect to
such a Severance Parachute Payment from which no appeal is available or is
timely taken.
8. DISPUTES. To dispute a termination for Good Reason by you, the
Company must give you written notice of such dispute within ten working days
after your effective date of termination. To dispute a termination by the
Company or any failure to make payments claimed to be due hereunder, you must
give written notice of such dispute to the Company within 30 days
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after receiving a notice of termination, or within 30 days after the date on
which a payment claimed by you to be due hereunder was due to be made, as the
case may be.
If any such dispute is finally determined in your favor, the Company shall
pay all reasonable fees and expenses, including attorneys' and consultants'
fees, that you incur in good faith in connection therewith.
9. NO MITIGATION.
(a) You shall not be required to mitigate the amount of any payment
provided for in Paragraph 3 hereof by seeking other employment or otherwise,
nor shall the amount of such payment be reduced by reason of compensation or
other income you receive for services rendered after your termination of
employment with the Company.
(b) In addition to the Termination Payment payable pursuant to
Paragraph 3 hereof, you shall be entitled to receive all benefits payable to
you under any benefit plan of the Company in which you participate.
10. COMPANY'S SUCCESSORS. The Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation, or otherwise)
to all or substantially all of the business and/or assets of the Company, to
expressly assume and agree to perform the obligations under this Agreement in
the same manner and to the same extent that the Company would be required to
perform if no such succession had taken place. As used in this Paragraph 10,
"Company" includes any successor to its business or assets as aforesaid which
executes and delivers this Agreement or which otherwise becomes bound by all
the terms and provisions of this Agreement by operation of law.
11. NOTICE. Notices and all other communications provided for in this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or five (5) days after deposit with postal authorities
transmitted by United States registered or certified mail, return receipt
requested, postage prepaid, addressed to the respective addresses set forth on
the first or last page of this Agreement, or to such other address as either
party may have furnished to the other in writing in accordance herewith, except
that notices of change of address shall be effective only upon receipt.
12. AMENDMENT OR WAIVER. No provisions of this Agreement may be
modified, waived, or discharged unless such waiver, modification, or discharge
is agreed to in writing by you and the Company. No waiver of either party at
any time of the breach of, or lack of compliance with, any conditions or
provisions of this Agreement shall be deemed a waiver of other provisions or
conditions hereof.
13. SOLE AGREEMENT. This Agreement represents the entire agreement
between you and the Company with respect to the matters set forth herein. No
agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter of this Agreement will be made by either party
which are not set forth expressly herein.
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<PAGE>
14. EMPLOYEE'S SUCCESSORS. This Agreement shall inure to the benefit of
and be enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees, and legatees. If you
should die while any amounts are still payable to you hereunder, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to your devisee, legatee, or other designee or, if
there be no such designees, to your estate.
15. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
16. APPLICABLE LAW. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of California.
17. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together will constitute
one and the same instrument.
If the foregoing conforms with our understanding, please indicate your
agreement to the terms hereof by signing where indicated below and returning
one copy of this Agreement to the undersigned.
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<PAGE>
IN WITNESS WHEREOF, this Agreement is executed effective as of the date
set forth above.
Very truly yours,
SILICON GRAPHICS, INC.
By: _____________________________________
Edward R. McCracken
Chairman and Chief Executive Officer
ACCEPTED AND AGREED TO AS OF
THE DATE FIRST SET FORTH ABOVE:
_____________________________________
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SILICON GRAPHICS, INC.
2011 North Shoreline Boulevard
Mountain View, CA 94043-1389
November 14, 1997
Silicon Graphics, Inc.
2011 North Shoreline Boulevard
Mountain View, California 94043-1389
Dear:
Silicon Graphics, Inc. (the "Company") considers it essential to the best
interests of its shareholders to foster the continuous employment of key
management personnel. In this connection, the Board of Directors of the
Company (the "Board") desires to provide additional financial security and
benefits to its key management personnel in the event of certain terminations
of employment.
In order to induce you to remain in the employ of the Company and in
consideration of your obligations under Paragraph 4 hereof, the Company agrees
that you shall receive the benefits set forth in this agreement ("Agreement")
under the circumstances described below.
1. TERM OF AGREEMENT. This Agreement shall commence on the date hereof
and shall continue in effect until the earlier of (i) the date that all
obligations of the parties hereunder have been satisfied, or (ii) midnight,
December 31, 1999, unless sooner terminated by written agreement of the Company
and you.
2. DEFINITIONS. As used in this Agreement:
(a) "Cause" shall mean the occurrence of one or more of the
following:
(i) your willful and continued failure to substantially
perform your duties with the Company (other than such failure resulting from
your incapacity due to physical or mental illness) after which there is
delivered to you by the Company's chief executive officer a written demand
for substantial performance which sets forth in detail the specific respects
in which it believes you have not substantially performed your duties;
(ii) your willfully engaging in gross misconduct which is
materially and demonstrably injurious to the Company;
(iii) your committing a felony or an act of fraud against
the Company or its affiliates; or
<PAGE>
(iv) your breaching materially the terms of your employee
confidentiality and proprietary information agreement with the Company.
No act, or failure to act, by you shall be considered "willful" if done,
or omitted to be done, by you in good faith and in your reasonable belief
that your act or omission was in the best interests of the Company and/or
required by applicable law.
(b) "Consulting Period" shall mean the twelve (12) month period
following a termination of your employment with the Company under
circumstances that entitle you to Termination Payments under Paragraph 3.
(c) "Current Compensation" shall mean your monthly base salary, as
in effect immediately prior to your termination of employment with the
Company. In addition, if you participate in a variable compensation program
(other than the corporate annual executive incentive plan or a similar
incentive plan in which all senior executives participate), then your Current
Compensation will be based on your target compensation (including base and
variable compensation) in effect under that plan during the six (6) months
immediately preceding the month in which your termination occurs.
(d) "Disability" shall mean a physical or mental illness or injury
which, as determined by the Company, continuously prevents you from
performing your duties with the Company for a period of six months prior to
termination.
(e) "Employment Continuation Agreement" shall mean the amended and
restated employment continuation agreement dated as of November 14, 1997
between you and the Company.
(f) "Good Reason" for your voluntary resignation from the Company
shall mean your resignation as a result of and within thirty (30) days
following the assignment to you of duties or responsibilities that are
inconsistent with the role of a senior executive of the Company.
(g) "Termination Payment" shall mean the termination pay to which
you may become entitled upon termination of your employment as provided in
Paragraph 3 hereof.
3. TERMINATION BENEFITS.
(a) TERMINATION FOR GOOD REASON; TERMINATION WITHOUT CAUSE. If,
on or before December 31, 1999, you terminate your employment with the
Company for Good Reason, or the Company terminates your employment other than
for Cause, you shall be entitled to termination benefits as provided below;
provided, however, that this agreement will terminate upon the occurrence of
a Change in Control as defined in the Employment Continuation Agreement and
you will not be entitled to termination or other
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benefits under this Agreement thereafter.
(i) TERMINATION ON OR BEFORE DECEMBER 31, 1998. If such
termination occurs on or before December 31, 1998, you shall be entitled to
receive (A) a lump sum termination payment, within ten (10) business days of
the date of your termination, in an amount equal to twelve (12) months of
your Current Compensation, and (B) so long as you do not breach your
obligations under Paragraphs 4, 5 and 6, continuing payments during the
Consulting Period in an amount equal to your Current Compensation.
(ii) TERMINATION AFTER DECEMBER 31, 1998. If such termination
occurs after December 31, 1998 (but on or before December 31, 1999), you
shall be entitled to receive continuing payments during the Consulting Period
in an amount equal to your Current Compensation.
(iii) CONSULTING PERIOD; TERMINATION PAYMENTS. Following
such termination, (A) the Company shall retain you as a consultant during the
Consulting Period, and (B) you shall make yourself available for up to ten
(10) hours per month during the Consulting Period as reasonably requested by
the Company. Nothing in this Agreement shall be construed to prohibit you
from accepting full-time empoyment with another employer during the
Consulting Period, subject to your obligations under Paragraphs 4, 5 and 6.
(iv) OPTIONS AND RESTRICTED STOCK VESTING. All restricted
stock granted to you by the Company shall continue to be released from the
Company's repurchase right (at the rate provided in your applicable
restricted stock purchase agreement) during the Consulting Period. All
outstanding stock options granted to you by the Company prior to the date of
this Agreement with an exercise price higher than the per share fair market
value of the Common Stock on (A) the date of this Agreement or (B) the
effective date of your termination (whichever is lower), and all stock
options granted to you on or after the date of this Agreement, shall remain
outstanding and continue vesting (at their normal rate provided in your
applicable stock option agreement) during the Consulting Period. All other
stock options held by you will be unaffected by the terms of this Agreement.
You are advised that as a result of the conversion of your status from
employee to consultant, any incentive stock options will become non-statutory
options, to the extent they are not exercised within ninety (90) days after
the date you cease to be an employee.
Notwithstanding the termination of the Employment Continuation
Agreement upon the termination of your employment, if a Change in Control of
the Company (as defined in the Employment Continuation Agreement) occurs
during the Consulting Period, you shall have the rights provided under
Section 3(b) of the Employment Continuation Agreement with respect to your
then outstanding stock options and restricted stock awards to the extent that
such rights could have been exercised by you if the Employment Continuation
Agreement had been in effect at the time of the
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<PAGE>
Change in Control.
In the event that the terms of this Agreement relating to
restricted stock and options conflict with the terms of any restricted stock
purchase, option or related agreement between you and the Company, the terms
that are more favorable to you will control.
(v) COBRA CONTINUATION COVERAGE. The Company agrees to pay
directly or reimburse you for the amount of your premium payments for group
health, dental and vision coverage elected by you pursuant to the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA");
provided, however, that you shall be solely responsible for all matters
relating to your continuation of coverage pursuant to COBRA, including,
without limitation, your election of such coverage and your timely payment of
premiums. The Company will pay or reimburse your COBRA premium payments
pursuant to this Paragraph 3(a)(v) until the earlier of (A) the termination
of the Consulting Period, or (B) the date that you and your covered
dependents become covered under another employer's group health plan
providing benefits and levels of coverage comparable to that of the Company.
(vi) EXECUTIVE PERQUISITE PROGRAM. The Company agrees to pay
or reimburse you for expenses (other than automobile allowance and cellular
telephone charges) in accordance with the Company's executive perquisite
program until the earlier of (A) the termination of the Consulting Period or
(B) the date at which you accept full-time employment with another employer.
(vii) OTHER BENEFITS. In addition to the Termination
Payments and other benefits payable pursuant to Paragraph 3, you shall be
entitled to receive all benefits as may then be established under the
Company's then existing benefits plans and policies at the time of such
termination.
(b) VOLUNTARY RESIGNATION; TERMINATION FOR CAUSE. If you
voluntarily resign from the Company (other than for Good Reason), or if the
Company terminates your employment for Cause, then you shall not be entitled
to receive termination or other benefits under this Agreement. In such case,
you shall only be entitled to such benefits (if any) as may then be
established under the Company's then existing benefits plans and policies at
the time of such termination.
(c) DISABILITY; DEATH. If the Company terminates your employment
as a result of your Disability, or your employment is terminated due to your
death, then you shall not be entitled to receive termination or other
benefits under this Agreement. In such case, you shall only be entitled to
receive such benefits (if any) as may then be established under the Company's
then existing benefits plans and policies at the time of your Disability or
death.
4. NONSOLICITATION. You agree that during the twelve months following
any
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termination of your employment with the Company for any or no reason that you
shall not, directly or indirectly solicit or influence any person in the
employment of the Company or any affiliated entity to (i) terminate such
employment, (ii) accept employment, or enter into any consulting arrangement,
with any entity other than the Company or any affiliated entity or (iii)
interfere with the customers, suppliers, clients or business of the Company
or any affiliated entity in any manner.
5. CONFIDENTIAL INFORMATION. You acknowledge that, because of your
position with the Company, you have specific knowledge of many types of
information that are confidential and proprietary to the Company and its
affiliated entities, including, without limitation, its current and planned
technology; its current and planned sales, marketing, and corporate
strategies; strategic customer and business partners; and the organizational
structure, identity, skills and interests of its employees. You agree to
continue to maintain the confidentiality of all confidential and proprietary
information of the Company pursuant to, and will continue to comply with all
terms and conditions of, the Proprietary Information and Invention Agreement
between you and the Company. Such obligations shall survive any termination
of your employment or consulting relationship or of this agreement.
6. COOPERATION. In the event your employment with the Company
terminates, you further agree, upon the Company or its agent's request and
reasonable notice, to cooperate with the Company in connection with any claim
or litigation or other matter about which you may have relevant information.
Upon request, you will also provide the Company with information that you
obtained from your employment with the Company regarding its business or
operations. Additionally, you will immediately notify the Company's General
Counsel if you receive any written or oral request for information from any
persons (other than your full-time employer), or their counsel, who are
asserting or investigating claims or litigation asserted against, or
otherwise adverse to, the Company. You will not disclose information to such
persons except as required by legal process. You will not disclose to
anyone, except the Company, confidential or privileged matters obtained from
or related to your employment with the Company, except as required by law.
7. AT-WILL EMPLOYMENT. You acknowledge that your employment is and
shall continue to be at-will, as defined under applicable law. If your
employment terminates for any reason, you shall not be entitled to any
payments, benefits, damages, awards or compensation other than as provided by
this Agreement, the Employment Continuation Agreement or as may otherwise be
established under the Company's then existing benefits plans and policies at
the time of your termination.
8. DISPUTES. To dispute a termination for Good Reason by you, the
Company must give you written notice of such dispute within ten working days
after your effective date of termination. To dispute a termination by the
Company or any failure to make payments claimed to be due hereunder, you must
give written notice of such dispute to the Company within 30 days after
receiving a notice of termination, or within 30 days
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<PAGE>
after the date on which a payment claimed by you to be due hereunder was due
to be made, as the case may be.
In the event of any dispute, claim, question, or disagreement arising
out of or relating to this agreement or the breach thereof, the parties
hereto agree to first use their best efforts to settle such matters in an
amicable manner. Initially, they shall consult and negotiate with each
other, in good faith and, recognizing their mutual interests, attempt to
reach a just and equitable solution satisfactory to both parties. If they do
not reach such resolution within a period of sixty (60) days, then upon
written notice by either party to the other, any unresolved dispute, claim or
differences shall be submitted to confidential mediation by a mutually agreed
upon mediator. Either party may, without inconsistency with this agreement,
apply to any court having jurisdiction hereof and seek injunctive relief so
as to maintain the status quo until such time as the mediation is concluded
or the controversy is otherwise resolved. The site of the mediation shall be
in the County of Santa Clara, California. Each party shall each bear its own
costs and expenses and an equal share of the mediators' and any similar
administrative fees.
If any such dispute is finally determined in your favor, the Company
shall reimburse all reasonable fees and expenses, including attorneys' and
consultants' fees, that you incur in good faith in connection therewith.
9. NO MITIGATION. You shall not be required to mitigate the amount of
any payment or benefit provided for in Paragraph 3 hereof by seeking other
employment or otherwise, nor shall the amount of such payment or benefit be
reduced by reason of compensation or other income you receive for services
rendered after your termination of employment with the Company.
10. COMPANY'S SUCCESSORS. The Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation, or
otherwise) to all or substantially all of the business and/or assets of the
Company, to expressly assume and agree to perform the obligations under this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. As used in this
Paragraph 10, "Company" includes any successor to its business or assets as
aforesaid which executes and delivers this Agreement or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation
of law.
11. NOTICE. Notices and all other communications provided for in this
Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or five (5) days after deposit with postal
authorities transmitted by United States registered or certified mail, return
receipt requested, postage prepaid, addressed to the respective addresses set
forth on the first or last page of this Agreement, or to such other address
as either party may have furnished to the other in writing in accordance
herewith, except that notices of change of address shall be effective only
upon receipt.
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12. AMENDMENT OR WAIVER. No provisions of this Agreement may be
modified, waived, or discharged unless such waiver, modification, or
discharge is agreed to in writing by you and the Company. No waiver of
either party at any time of the breach of, or lack of compliance with, any
conditions or provisions of this Agreement shall be deemed a waiver of other
provisions or conditions hereof.
13. SOLE AGREEMENT. This Agreement and the Employment Continuation
Agreement represent the entire agreement between you and the Company with
respect to the matters set forth herein. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter of
this Agreement or the Employment Continuation Agreement will be made by
either party which are not set forth expressly herein.
14. EMPLOYEE'S SUCCESSORS. This Agreement shall inure to the benefit
of and be enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees, and legatees. If
you should die while any amounts are still payable to you hereunder, all such
amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to your devisee, legatee, or other designee or,
if there be no such designees, to your estate.
15. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
16. APPLICABLE LAW. This Agreement shall be interpreted and enforced
in accordance with the laws of the State of California.
17. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
If the foregoing conforms with our understanding, please indicate your
agreement to the terms hereof by signing where indicated below and returning
one copy of this Agreement to the undersigned.
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<PAGE>
IN WITNESS WHEREOF, this Agreement is executed effective as of the date
set forth above.
Very truly yours,
SILICON GRAPHICS, INC.
By: __________________________________
William M. Kelly
Senior Vice President
ACCEPTED AND AGREED TO AS OF
THE DATE FIRST SET FORTH ABOVE:
___________________________________
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AGREEMENT
AGREEMENT, dated as of December 31, 1997 (the "AGREEMENT"), between
SILICON GRAPHICS, INC., a Delaware corporation (the "COMPANY") and EDWARD R.
MCCRACKEN (the "EXECUTIVE").
WHEREAS, the Executive currently serves as the Chairman and Chief
Executive Officer of the Company, having served as Chief Executive Officer
since 1984 and Chairman since 1994; and
WHEREAS, in October 1997 the Executive informed the Board of
Directors of the Company (the "BOARD") of his intention to step down from his
role as Chairman and Chief Executive Officer and agreed at the request of the
Board to continue as Chairman and Chief Executive Officer during the search
for a successor; and
WHEREAS, the Company and the Executive wish to set forth in this
Agreement their understandings and agreements with respect to the Executive's
resignation and his responsibilities and compensation in connection with the
transition to his successor;
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the adequacy of which is hereby acknowledged, the
parties, intending to be legally bound, hereby agree as follows (capitalized
terms used herein without definition having the meanings assigned thereto in
Section 11 below):
1. RESIGNATION
(a) RESIGNATION AS CHAIRMAN AND CHIEF EXECUTIVE OFFICER. The
Executive hereby resigns as Chairman and Chief Executive Officer as of the
earlier of June 15, 1998 and the effective date of the appointment of the
Executive's successor as Chief Executive Officer (such earlier date being
referred to in this Agreement as the "TERMINATION DATE"). At the request of
the Executive's successor, the Executive will, at any time after the
Termination Date, resign as a member of the Board. Except as provided in
Section 2 below, the Executive also resigns as of the Termination Date from any
other position as an employee or director of any subsidiary of the Company with
which he holds such a position. No further action on the part of the Executive
will be required to effect or evidence such resignations, which are hereby
accepted by the Company.
(b) STATUS UNTIL THE TERMINATION DATE. Until the Termination Date,
the Executive shall continue as Chairman and Chief Executive Officer of the
Company, with the
<PAGE>
2
authority and responsibilities of such positions. The Executive shall
continue to assist the Company, including the Board and any search committee
appointed by the Board, in its search for, and transition to, the Executive's
successor as Chief Executive Officer.
2. CONTINUED RELATIONSHIP WITH THE COMPANY
(a) CONSULTING ARRANGEMENT. Following the Termination Date and
continuing through June 30, 1999, the Executive shall be retained by the
Company as a consultant and shall make himself available on a reasonable basis
as requested by the Chief Executive Officer to provide advice and services on
matters relating to the transition to new management and to the Company's
restructuring program. The Company acknowledges that the Executive's
responsibilities as a consultant shall not require his full-time services and
shall not preclude him from accepting part-time or full-time employment with a
third party, subject, however, to the Executive's compliance with the covenants
referred to in Section 7 below. It is contemplated by the parties that the
Executive will not be required to devote more than an average of 40 hours per
month (exclusive of any time that may be required of the Executive pursuant to
Section 10(c) below) to the affairs of the Company following the Termination
Date.
(b) DURATION OF CONSULTING/EMPLOYMENT ARRANGEMENT. The Company
agrees to maintain the Executive's consulting arrangement as contemplated by
Section 2(a) until June 30, 1999 and during such period shall have the right to
terminate the Executive's arrangement only for Cause.
(c) STATUS AS INDEPENDENT CONTRACTOR WHILE A CONSULTANT. As a
consultant to the Company, the Executive shall act in the capacity of an
independent contractor and not as an employee of the Company. The Company
shall not exercise direction or control over the Executive in the performance
of his services as a consultant. The Executive shall act solely in an advisory
capacity and in consequence shall not in any way hold himself out as an
officer, employee or (following any resignation from the Board) director of the
Company or any of its affiliates, and unless otherwise instructed or authorized
in writing shall not have any authority to act for the Company or any of its
subsidiaries or affiliates or to give instructions or orders on behalf of, or
to make any decisions or commitments for or on behalf of, the Company or any of
its subsidiaries or affiliates.
(d) OFFICE AND SECRETARY. The Company will provide the Executive
with an office and shared secretarial assistance through June 30, 1999.
3. PAYMENTS. The Company shall make the following payments to the
Executive:
(a) SALARY/CONSULTING FEE. In consideration of the Executive's
continued
<PAGE>
3
service as Chief Executive Officer through the Termination Date, including
his agreement to make himself available for such continued service, if
required, until June 15, 1998, the Company agrees to pay the Executive, for
the period starting October 1, 1997 and continuing through the Termination
Date, an aggregate amount of $900,000 in salary. Such amount shall be in
lieu of any further payments of salary at the rate in effect for the
Executive prior to the date of this Agreement and shall be paid as follows:
(i) on the first normal salary payment date for Company officers
following the date of this Agreement, the Company will make a cash payment
to the Executive of the difference between (A) the amount of salary that
the Executive would have earned for all pay periods commencing on or after
October 1, 1997 and ending before the date of this Agreement based on a
salary rate of $100,000 per month and (B) the amount of salary heretofore
earned by the Executive for all such periods; and
(ii) the balance of the $900,000 shall be paid at the rate of
$100,000 per month through June 1998.
For the period July 1, 1998 through June 30, 1999, the Executive will be paid
a consulting fee at the rate of $10,000 per month. For so long as the
Executive remains an employee of the Company, payments provided for in this
Section 3(a) will be made in accordance with the Company's normal payroll
practice; thereafter, all such payments will be made monthly.
(b) BONUS. For the fiscal year of the Company ending June 30, 1998
("FISCAL 1998"), the Executive will be eligible to earn a cash bonus of up to
$2,800,000. Of this amount, $1,300,000 has been earned based on the
Executive's performance to date in assisting in the identification of his
successor as Chief Executive Officer, his efforts to facilitate the
transition of his responsibilities, and his performance in achieving the
Company's strategic objectives. The balance of up to $1,500,000 will be
based on the Executive's continuing contribution to the identification of and
transition to his successor as Chief Executive Officer and to the attainment
of the ten strategic projects discussed at the meetings of the Board held on
October 30 and December 15, 1997. The amount of the bonus in addition to the
$1,300,000 already earned will be based primarily on the number of goals
achieved and the degree to which the identified strategies have been
designed, adopted and are being pursued. Substantial achievement of the
specified goals and development of most of the identified strategies in
Fiscal 1998 would justify the payment of a substantial portion or all of the
remaining $1,500,000. The Executive's bonus will be paid at the same time
bonus payments are made to other executives of the Company in respect of
Fiscal 1998, but in no event later than July 31, 1998.
(c) SEVERANCE. The Company will pay the Executive a severance
amount of $3,250,000, net of any amounts previously loaned to the Executive
(including interest thereon in accordance with the terms of any such loans).
Of the severance amount, $500,000, net of any
<PAGE>
4
such loan amounts, will be paid to the Executive upon the signing of this
Agreement, and the balance will be paid within five business days of the
Termination Date.
(d) REIMBURSEMENT OF EXPENSES. The Executive shall be reimbursed in
accordance with the policies of the Company for any traveling and other
expenses incurred in the performance of the business of the Company.
4. STOCK OPTIONS AND RESTRICTED STOCK.
(a) OUTSTANDING OPTIONS. The Company confirms that the Compensation
Committee of the Board has taken all necessary action so that all other stock
options awarded to the Executive under the 1993 Plan to purchase shares of the
Company's Common Stock will vest as of the Termination Date, to the extent not
vested earlier in accordance with their terms. Thereafter, all stock options
awarded to the Executive under the 1993 Plan or any other stock option plan of
the Company (including the 1987 Nonstatutory Stock Option Plan, the 1986
Incentive Stock Option Plan, the 1985 Stock Incentive Plan and the 1984 Stock
Option Plan) will remain outstanding and exercisable by the Executive until the
earlier of (i) 30 days following the end of the Continuation Period and (ii)
the expiration of the normal term of each such option, and the terms and
conditions of each such stock option are hereby modified to the extent
necessary to provide for the expiration of such option, to the extent not
theretofore exercised or expired, as of 30 days following the end of the
Continuation Period. Notwithstanding the foregoing, any stock option the
normal expiration of which would occur prior to September 30, 1998 is hereby
amended so that the normal expiration date shall be considered to be September
30, 1998. Under no circumstances shall the Company be obligated to lend the
Executive all or any portion of the exercise price for any stock options
previously awarded to him.
(b) RESTRICTED STOCK. The July 1997 restricted stock grant made to
the Executive under the 1993 Plan shall remain outstanding in accordance with
its terms until June 30, 1998, after which, to the extent not vested, it shall
expire and the Executive shall have no further rights or interest therein. The
terms of such restricted stock grant are hereby modified to the extent
necessary to give effect to the preceding sentence.
(c) NO FURTHER GRANTS. No additional grants or stock options or
other equity awards will be made to the Executive under the 1993 Plan or any
other equity plan of the Company after the date hereof. Without limiting the
generality of the preceding sentence, the Executive will not be eligible for an
award of stock options in January 1998 at the time stock options are
anticipated to be made generally to officers of the Company.
5. OTHER BENEFITS.
(a) MEDICAL, LIFE INSURANCE, DENTAL BENEFITS. During the
Continuation Period,
<PAGE>
5
the Executive and his family will remain eligible for medical, life insurance
and dental benefits under the applicable plans of the Company, on the same
terms and conditions (including without limitation any provisions concerning
payment of premiums, deductibles and co-payments) that apply to senior
officers of the Company, PROVIDED HOWEVER, that such eligibility shall cease
prior to the end of the Continuation Period if the Executive becomes eligible
to be covered by a comparable program of a subsequent employer, and PROVIDED,
FURTHER, that following the date hereof the Executive shall have no right to
participate in any equity, incentive, bonus or similar compensation plan or
arrangement of the Company or any of its subsidiaries, or in any severance
plan or arrangement of the Company or any of its subsidiaries, it being
understood that the compensation, benefits and severance provided for in this
Agreement shall be in lieu of any compensation, benefits and severance that
the Executive might otherwise have been eligible to earn or receive from the
Company or any of its subsidiaries under such other plans or arrangements.
Nothing in this Agreement, however, shall be construed to alter or in any way
impair the Executive's rights to previously earned but deferred compensation.
(b) MISCELLANEOUS. The Executive will be permitted to retain,
without any payment to the Company, the laptop computer, color printer and
cellular telephone previously provided to him. The Executive agrees to
delete from the memory of such computer, and not to make or retain any copies
of, all Confidential Information (as defined in Section 11 below).
6. TERMINATION
(a) DEATH. If the Executive should die before all amounts required
to be paid as set forth in Section 3 of this Agreement have been paid, the
Executive's beneficiary (or if no beneficiary has been designated, his
estate) shall be entitled to receive such payments at the time they would
have been paid to the Executive, PROVIDED, HOWEVER, that in lieu of such
payment schedule, the Executive's beneficiary (or if no such beneficiary is
designated, his estate) may elect, by written notice to the Company given not
more than 90 days following the date of the Executive's death, to receive all
such amounts that have not theretofore been paid in a single lump sum equal
to the present value of all such payments, EXCEPT that the portion of the
Executive's bonus for Fiscal 1998 in excess of the $1,300,000 already earned
shall not be subject to early payment to the Executive's beneficiary or
estate but shall instead be determined and paid as provided in Section 3(b).
For purposes of the previous sentence, present value shall be calculated on
the basis of the applicable short-term federal interest rate (applicable to
loans with monthly compounding) as determined pursuant to Section 1274(d) of
the Internal Revenue Code of 1986, as amended, for the month in which death
occurs.
(b) TERMINATION WITHOUT CAUSE. If the Company terminates the
Executive's status as Chairman and Chief Executive Officer of the Company
prior to the Termination Date, or, following the Termination Date but before
June 30, 1999, terminates the Executive's consulting or employment
arrangement provided for in Section 2 above, in any such case without
<PAGE>
6
Cause, then all amounts due to the Executive under this Agreement shall
become immediately due and payable and shall be paid to the Executive in a
lump sum. For purposes of calculating the amount due hereunder, if the
Executive's bonus for Fiscal 1998 has not been determined as of the date of
termination, then it will be assumed that the Executive would have earned the
maximum bonus provided for in Section 3(b). In the event of such termination
without Cause, the Executive and, in the case of the benefits provided for in
Section 5(a), the members of his family, shall remain entitled to the
benefits provided for in this Agreement as though the Executive's employment
had continued until June 30, 1999.
(c) TERMINATION FOR CAUSE; RESIGNATION. If the Company terminates
the Executive's status as Chairman and Chief Executive Officer of the Company
prior to the Termination Date, or, following the Termination Date but before
June 30, 1999, terminates the Executive's consulting or employment
arrangement provided for in Section 2 above, in any such case for Cause, or
if the Executive resigns as Chairman and Chief Executive Officer of the
Company prior to the Termination Date, the Company shall pay the Executive
(i) all amounts of salary earned through the effective date of termination or
resignation, (ii) if not previously paid, the $1,300,000 portion of the
Executive's bonus for Fiscal 1998 that has already been earned and (iii) the
unpaid balance, if any, of the severance amount provided for in Section 3(c),
all of which amounts shall be paid at the times provided for in this
Agreement. Except as provided in the previous sentence, the Company shall
have no obligation to make any further payment of bonus or to provide
benefits continuation under Section 5(a) following the effective date of
termination. If the Executive resigns from the consulting arrangement
provided for in Section 2 above following the Termination Date but before
June 30, 1999, the Company shall be relieved of any obligation to pay the
Executive consulting fee in respect of periods following the effective date
of resignation, but shall make all other payments provided for herein
(including the full amount of the Executive's bonus for Fiscal 1998,
determined in accordance with Section 3(b)) at the times provided for such
payments; the Executive's resignation, however, will result in termination of
the Continuation Period and, consequently, the rights of the Executive (and
his family) under Section 5(a) above shall terminate.
7. CERTAIN COVENANTS.
(a) CONFIDENTIAL INFORMATION. The Executive agrees that he will
not, whether during the Continuation Period or thereafter, make use, for his
own benefit or the benefit of any other person or entity, of any Confidential
Information of any kind or character, nor divulge Confidential Information
except to the extent the Company's Chief Executive Officer or its board of
directors may so authorize in writing, and that within 10 days of the
Termination Date he will surrender to the Company all records, in whatever
form maintained (including without limitation records maintained as computer
files) and other documents and materials obtained by him or entrusted to him
during the course of his employment by the Company or any of its subsidiaries
or affiliates (together with all copies thereof) which relate to any such
Confidential Information.
<PAGE>
7
Nothing set forth in this Section 7(a), however, shall be interpreted to
prohibit the Executive from disclosing any such information as may be
required by law, including pursuant to any court or government decree and/or
subpoena. The obligations of this Section 7(a) shall survive any termination
of the Executive's employment or consulting relationships with the Company
and any termination of this Agreement.
(b) COMPETITION; SOLICITATION. In consideration of the Company's
obligation to pay the amounts provided for in Section 3 and its other
undertakings set forth herein, the Executive agrees that, during the period
beginning on the date of this Agreement and continuing through June 30, 1999,
he will not, without the express written consent of the Board (which consent
may be withheld in the sole discretion of the Board):
(i) directly or indirectly hire or attempt to hire any person
who is, or during the 90 days preceding Termination Date was, employed
by the Company or any of its subsidiaries; or
(ii) solicit, in competition with the Company or any of its
subsidiaries, any business of any person or entity who is or was a
customer or client of the Company or any of its subsidiaries; or
(iii) engage in any activities, whether as employee, director,
consultant, agent, proprietor, owner, partner, contractor,
stockholder (other than the holder of less than 5% of the stock of a
corporation the securities of which are traded on a national
securities exchange or in the over-the-counter market), or
otherwise, with or for the account of any corporation or firm
engaged in the Computer Systems Business that competes with the
Company or any of its subsidiaries.
Anything in this Agreement to the contrary notwithstanding, the Company
agrees that the Executive's continued service as a member of the board of
directors of National Semiconductor Corporation shall not constitute a
violation of the Executive's obligations under this Section 7(b).
(c) NON-DISPARAGEMENT. The Executive and the Company agree that,
from and after the date of this Agreement and continuing until one year after
the end of the Continuation Period, each party shall not, in any
communications with the press or other media, any customer or client of the
Company or any of the Company's affiliates, criticize, ridicule or make any
statement which disparages or is derogatory of the other party or, in the
case of communications by the Executive, of the Company's divisions or
affiliates or any of its or their senior officers or directors. For purposes
of the foregoing covenant, a statement shall be attributable to the Company
if made or authorized by any of its senior corporate executives having the
rank of Senior Vice President or higher, internal or retained public
relations or communications staff or any member of the Board.
<PAGE>
8
(d) REMEDIES. Without limiting the right of the Company to pursue
all other legal and equitable remedies available for violation by the
Executive of the covenants contained in this Section 7, it is expressly
agreed that if the Executive materially breaches the covenants set forth in
Section 7 and fails to cure such breach to the reasonable satisfaction of the
Company within 30 days after written notice thereof, any further obligations
of the Company pursuant to this Agreement (including without limitation
pursuant to Section 3 hereof, but not including the severance payments
provided for in Section 3(c) and the $1,300,000 portion of the Executive's
bonus for Fiscal 1998 that has already been earned) shall be canceled. In
addition, both the Executive and the Company acknowledge that a breach of any
of the covenants contained in this Section 7 (in the case of a breach by the
Executive) or in Section 7(c) (in the case of a breach by the Company) may
result in material irreparable injury to the other party for which there is
no adequate remedy at law, that it will not be possible to measure damages
for such injuries precisely and that, in the event of such a breach or threat
thereof, the Executive or the Company, as the case may be, shall be entitled,
in addition to any other rights or remedies he or it may have (including
without limitation the remedy provided in the preceding sentence), to obtain
a temporary restraining order and/or a preliminary or permanent injunction
enjoining or restraining the Executive or the Company, as the case may be,
from engaging in activities prohibited by Section 7 of this Agreement or
requiring his or its compliance with the affirmative obligations provided for
in such Section.
8. TAX WITHHOLDING. All amounts payable to the Executive pursuant
to this Agreement shall be subject to all legal requirements with respect to
the withholding of taxes. Without limiting the generality of the foregoing,
the Executive acknowledges that the Company will withhold applicable taxes
from payments of salary, bonus and severance contemplated hereby. The
Executive further acknowledges that he shall be solely responsible for and
shall file, on a timely basis, tax returns and payments required to be filed
with or made to any relevant tax authorities with respect to consulting fee
paid hereunder.
9. SOURCE OF PAYMENTS. All payments provided under this Agreement,
other than payments made pursuant to a benefit plan which may provide
otherwise, shall be paid in cash from the general funds of the Company, and no
special or separate fund shall be established, and no other segregation of
assets made, to assure payment. The Executive shall have no right, title or
interest whatever in or to any investments which the Company may make to aid
the Company in meeting its obligations hereunder. Nothing contained in this
Agreement, and no action taken pursuant to its provisions, shall create or be
construed to create a trust of any kind, or a fiduciary relationship, between
the Company and the Executive or any other person. To the extent that any
person acquires a right to receive payments from the Company hereunder, such
right shall be no greater than the right of an unsecured creditor of the
Company.
<PAGE>
9
10. MISCELLANEOUS
(a) ENTIRE AGREEMENT/AUTHORIZATION. This Agreement sets forth the
entire understanding of the parties hereto with respect to the subject matter
hereof and supersedes any other oral or written understandings relating to the
Executive's employment by the Company or to his rights, benefits and
obligations upon termination of such employment, including without limitation
the employment continuation agreement between the Executive and the Company as
amended as of October 21, 1993, BUT EXCLUDING the Amended and Restated
Indemnification Agreement, dated as of October 22, 1992, between the Executive
and the Company, which shall continue in full force and effect. Without
limiting the generality of the preceding sentence, the compensation, benefits
and severance provided for in this Agreement shall be in lieu of any
compensation, benefits and severance that the Executive might otherwise have
been eligible to earn or receive through the end of the Continuation Period.
This Agreement cannot be amended or modified except by a writing signed by all
such parties. The waiver by either party of compliance with any provision of
this Agreement by the other party shall not operate or be construed as a waiver
of any other provision of this Agreement or of any subsequent breach by such
party of a provision of this Agreement. The Company represents and warrants
that it has full power and authority, and has taken all necessary action and
obtained any necessary corporate approvals, in order to enter into this
Agreement and fulfill its obligations hereunder.
(b) FULL SATISFACTION/WAIVER.
(i) The Executive acknowledges and agrees that the compensation and
other benefits provided for in this Agreement will constitute, in the
aggregate, full satisfaction of all claims for payment or other benefits
that the Executive may have against the Company or any of its subsidiaries
arising out of (A) his employment by the Company or his status as an
officer and director of the Company or any of the Company's subsidiaries,
(B) the termination of such employment and status and (C) the services he
will perform as a consultant pursuant to Section 2 above. Nothing in this
Agreement, however, shall be construed to alter or in any way impair the
Executive's rights to previously earned but deferred compensation.
(ii) In consideration of the agreements set forth herein, the Company,
on the one hand, and the Executive, on the other hand, release and waive
all claims, causes of action or the like arising on or before the date
hereof, regardless of whether or not known at present (INCLUDING WITHOUT
LIMITATION, in the case of the Executive, any claims arising under the Age
Discrimination in Employment Act of 1967 ("ADEA"), Title VII of the Civil
Rights Act of 1964 as amended by the Civil Rights Act of 1991, the Equal
Pay Act of 1962, The Americans with Disabilities Act of 1990, or any other
federal, state or local statute or ordinance, BUT EXCLUDING, in the case of
both the Company and the Executive, any claims that arise out of an
asserted breach of the terms of this Agreement), that either has or may
have in the future against the other, and in the case of the Company, its
successors,
<PAGE>
10
shareholders, directors, officers, agents and employees, regarding all
matters relating to the Executive's service as an officer and director of
the Company or any of its subsidiaries and to the termination of such
relationships, including, without limitation, all claims related to the
payment of compensation and benefits and all claims arising under any
Federal or state statute or regulation. Without limiting the generality
of the preceding sentence, the Executive specifically waives the
provisions of Section 1542 of the California Civil Code, which reads as
follows: "A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of executing
the release, which if known by him [might] have materially affected his
settlement with the debtor." Notwithstanding the provisions of Section
1542, and for the purpose of implementing a full and complete release and
discharge of the Company, the Executive expressly acknowledges that this
Agreement is intended to include in its effect, without limitation, all
claims described herein, whether known or unknown, and that this
Agreement contemplates the extinction of any and all such claims,
including claims for attorney's fees. Furthermore, the Executive
expressly waives any right to assert hereafter that any such claim,
demand, obligation, or cause of action, has, through ignorance or
oversight, been omitted from the scope of this Agreement.
(iii) In addition to the general and specific release and waiver
of claims contained above, the Executive specifically waives any rights or
claims he may have under ADEA against the Company and its successors,
shareholders, directors, officers, agents and employees. As contemplated
under ADEA, the Executive shall have up to 21 days from receipt of this
Agreement to accept its terms, although the Executive may accept the
Agreement at any time within those 21 days. The Company hereby advises the
Executive to consult with, and the Executive hereby acknowledges that he
has consulted with, his own personal legal counsel concerning any questions
about the Agreement. This Agreement will not become effective or
enforceable until seven days following the date the Executive signs and
returns it to the Company. During that seven-day period, the Executive may
rescind the Agreement by notifying the Company in writing that he no longer
wishes to enter into the Agreement, in which event the Company shall not be
required to provide the Executive with any payment or benefit hereunder.
If the Executive does not rescind the Agreement, the eighth day after the
date of the Executive's acceptance will be the "effective date" of this
Agreement.
(c) COOPERATION. The Executive agrees that he will, upon the
Company's or its agent's request and reasonable notice, cooperate with the
Company in connection with any claim or litigation or other matter about which
the Executive may have relevant information. Upon request, the Executive will
also provide the Company with information that he obtained from his employment
or consulting arrangement with the Company regarding the Company's business or
operations. Additionally, the Executive will immediately notify the Company's
General Counsel if he receives any written or oral request for information from
any persons, or their counsel, who are asserting or investigating claims or
litigation asserted against, or otherwise adverse to, the
<PAGE>
11
Company. The Executive will not disclose information to such persons except
as required by legal process.
(d) NO DUTY TO MITIGATE; NO OFFSET. The Executive shall have no duty
of mitigation with respect to amounts payable to him pursuant to this Agreement
or other benefits to which he is entitled pursuant hereto, and subject to the
specific provisions concerning medical, dental and insurance plans set forth in
Section 5(a) above, no amounts payable to the Executive pursuant to hereto, or
other benefits to which he is entitled pursuant hereto, will be offset or
reduced by any compensation, payments or benefits he may receive from a
subsequent employer.
(e) ASSIGNMENT AND DELEGATION. Neither this Agreement nor any right,
duty, obligation or interest hereunder shall be assignable by the Executive
without the Company's prior written consent; PROVIDED, HOWEVER, that nothing in
this Section shall preclude the Executive from designating any of his
beneficiaries to receive any benefits payable hereunder upon his death or
disability, or his executors, administrators, or other legal representatives,
from assigning any rights hereunder to the person or persons entitled thereto.
This Agreement shall be binding upon, and inure to the benefit of, the parties
hereto, any successors to or assigns of the Company and the Executive's heirs
and the personal representatives of the Executive's estate. The Company will
not consolidate with or merge into, or sell all or substantially all of its
assets to, another corporation, partnership or other entity, unless such other
corporation, partnership or entity shall assume this Agreement, and upon such
assumption the Executive and the successor corporation, partnership or other
entity shall become obligated to perform all of the terms and conditions set
forth herein.
(f) HEADINGS. The headings of the Sections of this Agreement are
included solely for convenience of reference and shall not be construed or
interpreted in any way as affecting the meaning of such Sections.
(g) COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original but all of which together shall
constitute one and the same instrument.
(h) GOVERNING LAW. This Agreement is to be governed by and
interpreted in accordance with the laws of the State of California, without
giving effect to the choice-of-law provisions thereof.
(i) DISPUTE RESOLUTION. In the event of any dispute, claim,
question, controversy or disagreement arising under or in connection with this
Agreement, the parties agree to use their best efforts to settle such matters
in an amicable manner. Initially, they shall consult and negotiate with each
other, in good faith and, recognizing their mutual interests, attempt to reach
a just and equitable solution satisfactory to both parties. If they do not
reach such
<PAGE>
12
resolution within a period of six weeks, then upon written notice by either
party to the other, any unresolved matter shall be submitted to confidential
mediation conducted by a mediator mutually acceptable to each of them.
Either party may, without inconsistency with this Agreement, apply to any
court having jurisdiction and seek injunctive relief so as to maintain the
status quo until such time as the mediation is concluded or the controversy
is otherwise resolved. The site of the mediation shall be in San Francisco,
California. Following resolution of all claims between the parties in a
mediation or legal proceeding, the Company shall promptly reimburse the
Executive for all legal fees and expenses incurred by the Executive in
connection any claim to enforce his rights under this Agreement, except for
any claim which shall have been determined, in such mediation or legal
proceedings, to have been brought by the Executive in bad faith.
11. DEFINITIONS
For purposes of this Agreement, the following terms shall have the
meanings indicated below:
"CAUSE" means any of (i) the grounds for termination of employment
specified in Section 2924 of the California Labor Code, (ii) a material
breach by the Executive of any of the covenants referred to in Section 7
above which the Executive fails to cure to the reasonable satisfaction of
the Company within 30 days after delivery of written notice thereof to the
Executive or (iii) conviction of the Executive of any felony or any other
crime resulting in material harm to the financial condition or business
reputation of the Company or any of its subsidiaries.
A corporation or other firm will be considered to be engaged in the
"COMPUTER SYSTEMS BUSINESS" if it is engaged in the design, manufacture or
marketing of desktop or deskside computer systems, servers, graphics
microprocessors or graphics hardware components, or in any combination of
such activities.
"CONFIDENTIAL INFORMATION" means information concerning the business
or financial affairs of the Company or any of its subsidiaries which (i)
has not been disclosed publicly by the Company or one of its subsidiaries
and (ii) is otherwise not a matter of public knowledge or is a matter of
public knowledge but the Executive has reason to know that such information
became a matter of public knowledge through an unauthorized disclosure.
Confidential Information may include, without limitation, client lists of
the Company and its subsidiaries, their respective trade secrets and
technological know-how, information concerning products under development
or for which patent applications are pending or in preparation,
confidential information about (or provided by) any customer or supplier,
or prospective or former customer or supplier, information concerning the
business or financial affairs of the Company or any of its subsidiaries,
including books and records, commitments, procedures, plans and prospectus,
strategies, or current or
<PAGE>
13
prospective transactions or business, and any other "inside information".
"CONTINUATION PERIOD" means the period beginning on the date of this
Agreement and ending on June 30, 1999, PROVIDED, HOWEVER, that if the
Executive's employment is terminated for Cause prior to June 30, 1999, or
if the Executive either resigns as Chairman and Chief Executive Officer
prior to the Termination Date or, following the Termination Date but prior
to June 30, 1999 resigns from the consulting arrangement provided for in
Section 2 above, then the Continuation Period shall end as of the effective
date of such termination or resignation.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
SILICON GRAPHICS, INC.
William M. Kelly
----------------------------------------
Name: William M. Kelly
Title: Senior Vice President
APPROVED BY THE BOARD OF DIRECTORS:
C. Richard Kramlich
----------------------------------------
Name: C. Richard Kramlich
Title: Chairman, Compensation and Human
Resources Committee
EXECUTIVE
Edward R. McCracken
----------------------------------------
Edward R. McCracken
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AGREEMENT
AGREEMENT, dated as of January 22, 1998 (the "EFFECTIVE DATE"), by
and between SILICON GRAPHICS, INC., a Delaware corporation (the "COMPANY"),
and RICHARD E. BELLUZZO (the "EXECUTIVE").
WHEREAS, the Company has offered to engage the Executive as its
Chief Executive Officer on the terms set forth in an offer letter of even
date herewith (the "OFFER LETTER"), and the Executive has indicated his
willingness to accept such offer; and
WHEREAS, the Company and the Executive wish to set forth in this
Agreement certain additional terms relating to the Executive's employment
with the Company;
NOW, THEREFORE, in consideration of the promises and the mutual
covenants herein contained, the parties hereto hereby agree as follows
(capitalized terms used herein without definition having the meanings
assigned to such terms in Section 7 below):
1. SUPPLEMENTAL PAYMENT
Subject to the other provisions of this Agreement, promptly
following Final Measurement Date the Company will make a payment (the
"SUPPLEMENTAL PAYMENT") to the Executive (or upon the Executive's death, to
his Beneficiary) equal to the Shortfall Amount determined as of the Final
Measurement Date, PROVIDED, HOWEVER, that if the Shortfall Amount determined
as of the First Measurement Date is zero, then the obligations of the Company
under this Section 1 shall lapse and the Company shall not thereafter be
obligated to make any Supplemental Payment. In no event shall the
Supplemental Payment be greater than $10,000,000 or less than zero. No later
than the time of payment, the Company shall provide the Executive with a
written explanation in reasonable detail of its calculation of the Shortfall
Amount. The Supplemental Payment shall be subject to applicable withholding
taxes.
2. SUPPLEMENTAL ANNUITY
Promptly following the Effective Date the Company shall purchase an
annuity contract from an insurance company of national standing selected by
the Executive, which contract shall name the Executive as beneficiary. The
Company commits to spend $1.25 million (inclusive of commissions and other
third-party expenses) for the purchase of the annuity contract. The
Executive shall have the right to specify the terms of the annuity contract,
including terms relating to alternate forms of payment, beneficiary
designations, etc. In no event will the Company's commitment under this
Section 2 exceed payment of the $1.25 million referred to herein.
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3. TERMINATION OF EMPLOYMENT. Subject to the notice and other
provisions of this Section 3, the Company shall have the right to terminate the
Executive's employment with the Company, and the Executive shall have the right
to resign from such employment, at any time for any reason or for no stated
reason.
(a) TERMINATION FOR CAUSE; RESIGNATION WITHOUT GOOD REASON.
(i) If the Executive's employment is terminated by the Company
for Cause, or if the Executive resigns from his employment with the
Company other than for Good Reason, the Executive shall be entitled to
payment of his salary through and including the date of termination or
resignation as well as any unreimbursed expenses and any bonus earned in
respect of a prior year and not yet paid. The Executive shall not be
entitled to a bonus for the year in which termination for Cause or
resignation other than for Good Reason occurs. Except to the extent
required by the terms of any grant of Options or other equity-based awards
to the Executive or under applicable law, and except for the Executive's
rights in the annuity contract provided for in Section 2 above, the
Executive shall have no right under this Agreement or otherwise to receive
any other compensation (including without limitation the Supplemental
Payment) or to participate in any other compensation or benefit plan,
program or arrangement of the Company after such termination or
resignation of employment with respect to the year of such termination or
resignation and later years.
(ii) Notwithstanding termination for Cause or resignation other than
for Good Reason, the Executive shall retain his rights in the supplemental
annuity described in Section 2 above.
(iii) Termination of the Executive's employment for Cause shall
be communicated by delivery to the Executive of a copy of a resolution
duly adopted by the affirmative vote of not less than a majority of the
entire membership of the Board at a meeting of the Board called and held
for such purpose (after reasonable notice to the Executive and reasonable
opportunity for the Executive, together with the Executive's counsel, to
be heard before the Board prior to such vote), finding that in the good
faith opinion of the Board an event constituting Cause has occurred and
specifying the particulars thereof (a "NOTICE OF TERMINATION"). If the
event constituting Cause is of the type described in clause (i) or clause
(ii) of the definition of Cause in Section 7 below and which in the good
faith judgment of the Board is capable of being cured, the Executive shall
have 20 business days from the date of receipt of such Notice of
Termination to effect a cure of the event described therein and, upon cure
thereof by the Executive to the reasonable satisfaction of the Board, such
event shall no longer constitute Cause for purposes of this Agreement. The
Executive shall provide at least 90 days' advance written notice of
resignation without Good Reason.
(b) INVOLUNTARY TERMINATION. This subsection (b) shall apply if,
prior to July 1, 2005, the Company terminates the Executive's employment for
any reason other than Cause
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or the Executive resigns from his employment with the Company for Good Reason
(such a resignation or termination being referred to as an "INVOLUNTARY
TERMINATION"). This subsection (b) shall not apply under any other
circumstances (including without limitation upon termination of employment by
reason of death or Disability or termination occurring on or after July 1,
2005). The payments and benefits provided for in this subsection (b) shall
be conditioned upon the Executive's satisfaction of the conditions set forth
in Section 5.
(i) In the event of Involuntary Termination, the Company shall
pay to the Executive his salary accrued up to and including the effective
date of Involuntary Termination as well as any unreimbursed expenses and
any bonus earned in respect of a prior year and not yet paid. In
addition, the Company shall pay to the Executive as severance (the
"SEVERANCE PAYMENTS") (A) his salary, at the rate in effect immediately
prior to Involuntary Termination, for the 24-month period beginning
immediately following the effective date of Involuntary Termination (the
"SEVERANCE PERIOD") and (B) a pro rata bonus for the fiscal year in which
termination occurs. The salary component of the Severance Payments shall
be paid in payroll installments in accordance with the Company's payroll
practices in effect from time to time. The bonus component of the
Severance Payments will be determined at the end of the fiscal year based
on the terms of the bonus program applicable to the Executive for such
year and the Company's performance during such year, with the proration
based on the number of days of the year elapsed through the effective date
of Involuntary Termination. Notwithstanding the preceding sentence, the
Company, in its sole discretion, may at any time during the Severance
Period pay to the Executive the then remaining portion of Severance
Payments due during the Severance Period in a cash lump sum.
(ii) If Involuntary Termination occurs before the Supplemental
Payment has been made (or it has been determined that the Company's
obligation under Section 1 is zero), then, in addition to the Severance
Payments, within five business days of the Final Measurement Date (which
shall be ascertained in accordance with Section 7), the Company shall make
the Supplemental Payment, it being acknowledged by both parties that, in
accordance with Section 7 below, the calculation of the Shortfall Amount
will take into account the In-the-Money Value only of those Options and
restricted stock or stock units that have vested as of the effective date
of the Executive's Involuntary Termination (including any Options and
restricted stock or stock units that vest by virtue of clause (iii)
below).
(iii) As of the effective date of Involuntary Termination, the
Executive will be credited with an additional six months of service credit
for vesting purposes in respect of all Options and other equity-based
awards that have been awarded to him by the Company prior to such
effective date.
(iv) During the Severance Period, the Executive and his dependents,
if any, shall continue to participate (at no greater expense to them than
was the case for such coverage prior to his termination) in the Company's
health and medical plans,
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PROVIDED, HOWEVER, that such benefits shall cease to the extent the
Executive begins coverage under plans of a subsequent employer. Anything
herein to the contrary notwithstanding, the Company shall have no
obligation to continue to maintain during the Severance Period any plan
or program solely as a result of the provisions of this Agreement.
(v) In the event of the Executive's death prior to the end of the
Severance Period, the balance of the Severance Payments for such Severance
Period, shall continue to be paid in periodic installments to the
Executive's Beneficiary for the balance of the Severance Period; PROVIDED,
HOWEVER, that the Company, in its sole discretion, may at any time pay
such Beneficiary the then remaining Severance Payments in a cash lump sum.
(vi) The Executive shall have no duty of mitigation with respect to
amounts payable to him pursuant to this Agreement or other benefits to
which he is entitled pursuant hereto, and subject to the specific
provisions concerning medical, dental and insurance plans set forth in
Section 3(b)(iv) above, no amounts payable to the Executive pursuant
hereto, or other benefits to which he is entitled pursuant hereto, will be
offset or reduced by any compensation, payments or benefits he may receive
from a subsequent employer.
(vii) The date of termination of employment without Cause shall
be the date specified in a written notice of termination to the Executive.
The date of resignation for Good Reason shall be the date specified in a
written notice of resignation from the Executive to the Company; PROVIDED,
HOWEVER, that no such written notice shall be effective unless the cure
period specified Section 7 has expired without the Company having
corrected, to the reasonable satisfaction of the Executive, the event or
events subject to cure.
(c) TERMINATION DUE TO DISABILITY. In the event that the Company
terminates the Executive's employment due to Disability, the Executive shall
be entitled to payment of the Salary through and including the date of
termination, as well as any unpaid expense reimbursements and any bonus
earned in respect of a prior year and not yet paid. Following termination of
employment, the Company shall continue to pay the Executive or his
conservator or guardian, as the case may be, his salary (at the rate in
effect immediately prior to termination of employment) for two years from the
date of such termination (the "DISABILITY CONTINUATION PERIOD"); in the event
of the Executive's death prior to the end of the Disability Continuation
Period, the balance of the salary continuation payments for such period shall
continue to be paid in periodic installments to the Executive's Beneficiary
for the balance of the Disability Continuation Period, PROVIDED, HOWEVER,
that the Company, in its sole discretion, may at any time pay such
Beneficiary the then remaining salary continuation payments in a cash lump
sum. Notwithstanding the preceding sentence, the payments provided for in
this Section 3(c) shall be reduced by the amount of any benefits payable to
the Executive or his conservator or guardian, or to his Beneficiary, as the
case may be, during the Disability Continuation Period under any disability
or other welfare benefits plan or program of the Company or any of its
subsidiaries in
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respect of the Executive's Disability. In addition to salary continuation,
the Executive shall be entitled to the Supplemental Payment (the Final
Measurement Date for, and amount of, which will be ascertained in accordance
with Section 7).
(d) DEATH. Except as provided in Sections 1, 2, 3(b)(iv) and (v)
and this Section 3(d), no compensation or benefits shall be payable under
this Agreement following the date of the Executive's death. In the event of
the Executive's death, all Salary earned by the Executive up to the date of
death, all unreimbursed expenses and any bonus earned in respect of a prior
year and not yet paid, shall be paid to the Executive's Beneficiary within 30
days of such termination.
(e) EQUITY AWARDS/SUPPLEMENTAL ANNUITY. Except for the additional
vesting provided for in Section 3(b)(iii) above, upon termination of the
Executive's employment, or in the event of the Executive's death, all Options
and other equity-based awards made to the Executive will be governed by the
terms of the relevant plan and agreement under which the relevant Option or
other award was granted. In addition, no termination of employment shall
affect the Executive's rights in the supplemental annuity provided for in
Section 2 above.
4. CHANGE IN CONTROL.
(a) CHANGE-IN-CONTROL PAYMENT. In the event of a Change in
Control, the Company (or any successor of the Company) shall pay the
Change-in-Control Payment to the Executive, within five days after the
occurrence of the Change in Control. The Change-in-Control Payment shall be
made whether or not the Executive's employment with the Company (or any
successor of the Company) continues following the Change in Control and shall
be in lieu of any severance or similar payment that the Executive would
otherwise be entitled to receive upon termination or resignation of his
employment with the Company following a Change in Control, whether pursuant
to this Agreement or otherwise, including without limitation the Severance
Payments provided for in Section 3(b) above.
(b) STOCK OPTIONS; RESTRICTED STOCK. In addition to the
Change-in-Control Payment:
(i) The Executive shall have the right during the period of six
months following a Change in Control either (i) to exercise all Options
(whether non-qualified or incentive stock options) granted to the
Executive by the Company as to all or any part of the shares covered
thereby, including shares as to which such Options would not otherwise
then be exercisable, or (ii) to have such Options "cashed out" at their
fair market value determined as provided herein. The cash out proceeds
shall be paid to the Executive or, in the event of the Executive's death
prior to payment, the Executive's Beneficiary. For this purpose, the fair
market value of an outstanding Option shall be measured as the difference
between the Option exercise price and the Change in Control Price, as of
the date the Change in Control is determined to have occurred or such
other date as the Board may determine prior to the Change in Control. Any
cash payable to the Executive under this subsection (b) shall be made
within 30 calendar days after the
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date the Company receives the Executive's written notice electing to be
cashed out on the value of his Options in lieu of exercise thereof.
(ii) All restricted stock granted to the Executive shall be released
from the Company's repurchase right (as set forth in the applicable
restricted stock repurchase agreements) 15 calendar days after the Change
in Control.
(c) TERMINATION OF EMPLOYMENT/POOLING CONSIDERATIONS. Anything
contained in Section 4 (a) or 4(b) above to the contrary notwithstanding, the
Company shall have no obligation to pay the Change-in-Control Payment, to
accelerate vesting of shares, to cash out Options or to release restricted
stock from the Company's repurchase right under this Agreement in the event
that the Executive's employment with the Company terminates prior to, but not
in connection with, a Change in Control. Furthermore, if it is determined by
the Board, upon receipt of a written opinion of the Company's independent
public accountants, that acceleration of vesting of shares, cash out of
outstanding Options or release of restricted stock from the Company's
repurchase right would preclude accounting for the acquisition of the Company
as a "pooling of interests", and the Board otherwise desires to approve a
proposed acquisition of the Company by an acquiring Company which requires as a
condition to closing of the acquisition that the acquisition be accounted for
as a "pooling of interests", then the Company shall not be obligated to
accelerate the Executive's Options or cash out such Options or release the
Executive's restricted stock from the Company's repurchase right under this
Section 4.
(d) CONFLICTS. In the event that the terms of this Section 4
relating to Options conflict with the terms of any option or related agreement
between the Executive and the Company, the terms that are more favorable to the
Executive will control.
(e) REDUCTION IN CERTAIN CASES. Anything in this Agreement to the
contrary notwithstanding, if any amounts due to the Executive under this
Agreement and any other benefits to which he becomes entitled hereunder
constitute "parachute payments" as such term is defined in Section 280G(b)(2)
of the Code, and if the amount of such parachute payments, reduced by all
federal, state and local taxes applicable thereto, including the excise tax
imposed pursuant to Section 4999 of the Code, would be less than the amount the
Executive would receive if he were paid three times his "base amount", as
defined in Section 280G(b)(3) of the Code, less, $1.00, reduced by all federal,
state and local taxes applicable thereto, then the aggregate of the amounts
constituting parachute payments shall, at the request of the Executive, be
reduced to an amount that will equal three times the Executive's base amount
less $1.00 The determination of any required reduction pursuant to this
Section 4(e) (including the determination as to which specific amounts or
benefits shall be reduced) shall be made by the Executive in his sole
discretion, and such determination shall be conclusive and binding upon the
Company or any related corporation for all purposes. The Company shall reduce
a payment or other benefit in accordance with this Section 4(e) only upon
written notice by the Executive indicating the amount of such reduction, if
any.
5. PROTECTION OF THE COMPANY'S INTERESTS.
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(a) NO COMPETING EMPLOYMENT. The Severance Payments provided for in
Section 3(b) are made in consideration of, and their continued payment is
conditioned upon, the Executive's refraining, for so long as the Executive is
employed by the Company and continuing for two years after the termination of
such employment or resignation therefrom (such period being referred to
hereinafter as the "RESTRICTED PERIOD"), from engaging in any of the following,
unless he has obtained the prior written consent of the Board (which consent
may be withheld in the Board's sole discretion):
(i) directly or indirectly soliciting any person who is, or during
the 90 days preceding the effective date of the Executive's termination or
resignation from employment was, employed by the Company or any of its
subsidiaries to leave the employ of the Company; or
(ii) soliciting, in competition with the Company or any of its
subsidiaries, any business of any person or entity who is, or during the
one year preceding the effective date of the Executive's termination or
resignation from employment was, a customer or client of the Company or
any of its subsidiaries; or
(iii) engaging in any activities, whether as employee, director,
consultant, agent, proprietor, owner, partner, contractor, stockholder, or
otherwise, with or for the account of any corporation or firm engaged in
the Computer Systems Business that competes with the Company or any of its
subsidiaries, PROVIDED, HOWEVER, that this condition (iii) shall not fail
to be satisfied solely by virtue of (A) the Executive's serving as an
employee, officer, consultant or member of the board of directors of any
corporation or firm having gross revenues, during its last completed
fiscal year, of $75 million or less or (B) the Executive's serving as a
partner or affiliate of a venture capital fund or (C) the Executive's
passive investment of no more than $10 million in, or 5% of the equity of
(whichever is greater), any corporation or other firm.
The Executive's engaging in any of the activities described in clauses (i)
through (iii) above during the Restricted Period will result in forfeiture of
his right to receive any further Severance Payment. The Company acknowledges
that this Section 5(a) does not constitute a covenant on the part of the
Executive to refrain from engaging in such activities and is not intended to
confer on the Company any right to injunctive or other equitable relief to
prevent the Executive from engaging therein.
(b) PROPRIETARY INFORMATION. Concurrently with the execution of
this Agreement, the Executive shall enter into a confidentiality and
proprietary information agreement with the Company in the standard form used
for the Company's other senior officers.
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6. GENERAL PROVISIONS.
(a) INDEMNIFICATION. Concurrently with the execution of this
Agreement, the Executive shall enter into an indemnification agreement with the
Company in the standard form used for the Company's other senior officers.
(b) SOURCE OF PAYMENTS. All payments provided under this Agreement,
other than payments made pursuant to a plan which provides otherwise, shall be
paid in cash from the general funds of the Company, and no special or separate
fund shall be established, and no other segregation of assets made, to assure
payment. The Executive shall have no right, title or interest whatever in or
to any investments which the Company may make to aid the Company in meeting its
obligations hereunder. To the extent that any person acquires a right to
receive payments from the Company hereunder, such right shall be no greater
than the right of an unsecured creditor of the Company; PROVIDED, HOWEVER, that
this provision shall not be deemed to waive or abrogate any preferential or
other rights to payment accruing to the Executive under applicable bankruptcy
laws by virtue of the Executive's status as an employee of the Company.
(c) NO OTHER SEVERANCE BENEFITS. Except as specifically set forth
in this Agreement, the Executive covenants and agrees that he shall not be
entitled to any other form of severance benefits from the Company, including,
without limitation, benefits otherwise payable under any of the Company's
regular severance policies, in the event his employment with the Company ends
for any reason and, except with respect to obligations of the Company expressly
provided for herein, the Executive unconditionally releases the Company and its
subsidiaries and affiliates, and their respective directors, officers,
employees and stockholders, or any of them, from any and all claims,
liabilities or obligations under this Agreement or under any severance or
termination arrangements of the Company or any of its subsidiaries or
affiliates for compensation or benefits in connection with his employment or
the termination thereof.
(d) TAX WITHHOLDING. Payments to the Executive of all compensation
contemplated under this Agreement shall be subject to all applicable tax
withholding.
(e) NOTICES. Any notice hereunder by either party to the other
shall be given in writing by personal delivery, or certified mail, return
receipt requested, or (if to the Company) by telex or facsimile, in any case
delivered to the applicable address set forth below:
(i) To the Company: Silicon Graphics, Inc.
2011 North Shoreline Boulevard
Mountain View, CA 94039-7311
attention: General Counsel
with a copy to:
William Hinman
Shearman & Sterling
555 California Street
San Francisco, CA 94104
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(ii) To Executive: At the address indicated
on the signature page hereof
with a copy to:
Craig Johnson
Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
or to such other persons or other addresses as either party may specify to the
other in writing.
(f) REPRESENTATION BY THE EXECUTIVE. The Executive represents and
warrants that his entering into this Agreement does not, and that his
performance under this Agreement and acceptance of the Offer Letter and the
consummation of the transactions contemplated hereby and thereby will not,
violate the provisions of any agreement or instrument to which the Executive is
a party, including without limitation any agreement with his former employer,
or any decree, judgment or order to which the Executive is subject, and that
this Agreement constitutes a valid and binding obligation of the Executive in
accordance with its terms. Breach of this representation will render all of
the Company's obligations under this Agreement and the Offer Letter void AB
INITIO.
(g) LIMITED WAIVER. The waiver by the Company or the Executive of a
violation of any of the provisions of this Agreement, whether express or
implied, shall not operate or be construed as a waiver of any subsequent
violation of any such provision.
(h) ASSIGNMENT; ASSUMPTION OF AGREEMENT. No right, benefit or
interest hereunder shall be subject to assignment, encumbrance, charge, pledge,
hypothecation or setoff by the Executive in respect of any claim, debt,
obligation or similar process. The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company to assume expressly
and to agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.
(i) AMENDMENT; ACTIONS BY THE COMPANY. This Agreement may not be
amended, modified or canceled except by written agreement of the Executive and
the Company. Any and all determinations, judgments, reviews, verifications,
adjustments, approvals, consents, waivers or other actions of the Company
required or permitted under this Agreement shall be effective only if
undertaken by the Company pursuant to authority granted by a resolution duly
adopted by the Board; PROVIDED, HOWEVER, that by resolution duly adopted in
accordance with this subsection (j), the Board may delegate its
responsibilities hereunder to one or more of its members other than the
Executive.
(j) SEVERABILITY. If any term or provision hereof is determined to
be invalid or unenforceable in a final court or arbitration proceeding, (i) the
remaining terms and
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provisions hereof shall be unimpaired and (ii) the invalid or unenforceable
term or provision shall be deemed replaced by a term or provision that is
valid and enforceable and that comes closest to expressing the intention of
the invalid or unenforceable term or provision.
(k) LEGAL FEES. The Company will reimburse the Executive for his
reasonable legal fees and expenses incurred in connection with the negotiation
of this Agreement and the Offer Letter.
(l) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California (determined
without regard to the choice of law provisions thereof).
(m) DISPUTE RESOLUTION. In the event of any dispute, claim,
question, controversy or disagreement arising under or in connection with this
Agreement, the Offer Letter or the other agreements referred to herein, the
parties agree to use their best efforts to settle such matters in an amicable
manner. Initially, they shall consult and negotiate with each other, in good
faith and, recognizing their mutual interests, attempt to reach a just and
equitable solution satisfactory to both parties. If they do not reach such
resolution within a period of six weeks, then upon written notice by either
party to the other, any unresolved matter shall be submitted to confidential
mediation conducted by a mediator mutually acceptable to each of them. The
site of the mediation shall be in the county of Santa Clara, California.
Either party may, without inconsistency with this Agreement, apply to any court
having jurisdiction and seek injunctive relief so as to maintain the status quo
until such time as the mediation is concluded or the controversy is otherwise
resolved and, if the claims between the parties are not resolved within six
weeks of the commencement of mediation, either party may initiate litigation in
a court having jurisdiction over the matter to enforce such party's claim.
Following resolution of all claims between the parties in a mediation or legal
proceeding, the Company shall promptly reimburse the Executive for all legal
fees and expenses incurred by the Executive in connection with a successful
claim to enforce his rights under this Agreement.
(n) ENTIRE AGREEMENT. This Agreement, together with the Offer
Letter, the non-disclosure agreement between the Company and the Executive, the
stock option agreement between the Company and the Executive relating to the
Executive's initial grant of Options, the confidentiality agreement referred to
in Section 5(b) and the indemnification agreement referred to in Section 6(a),
set forth the entire agreement and understanding of the parties hereto with
respect to the matters covered hereby and supersede all prior agreements and
understandings of the parties with respect to the subject matter hereof.
(o) CONFLICTS. To the extent that any of the terms of this
Agreement and the Offer Letter conflict with any policies or procedures of the
Company in effect from time to time, the terms of this Agreement and the Offer
Letter will prevail.
(p) HEADINGS. The headings and captions of the sections of this
Agreement are included solely for convenience of reference and shall not
control the meaning or interpretation of any provisions of this Agreement.
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(q) COUNTERPARTS. This Agreement may be executed by the parties
hereto in counterparts, each of which shall be deemed an original, but both
such counterparts shall together constitute one and the same document.
7. DEFINED TERMS
For purposes of this Agreement, the following terms shall have the
meanings indicated below:
"AVERAGE FAIR MARKET VALUE" means the average of the Fair Market
Values for the 30 calendar days ending with the relevant date of
determination.
"BENEFICIAL OWNER" has the meaning ascribed to such term in Rule 13d-
3 under the Exchange Act.
"BENEFICIARY" means the person or persons designated in writing by
the Executive to receive benefits under a plan, program or arrangement or
to receive the balance of the Severance Payments, if any, in the event of
the Executive's death, or, if no such person or persons are designated by
the Executive, the Executive's estate. No Beneficiary designation shall
be effective unless it is in writing and received by the Company prior to
the date of the Executive's death.
"BOARD" means the board of directors of the Company.
"BUSINESS COMBINATION" means and includes each of the following
occurrences:
(i) a consolidation or merger pursuant to which more than
75% of the Company's voting stock is transferred to different
holders, except for a transaction intended primarily to change the
state of the Company's incorporation;
(ii) more than 75% of the assets of the Company are sold or
otherwise disposed of; or
(iii) the Company dissolves or liquidates or effects a partial
liquidation involving more than 75% of its assets.
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"CAUSE" for termination of the Executive's employment means:
(i) willful and continued failure to substantially perform his
duties with the Company (other than such failure resulting from
incapacity due to physical or mental illness) after there has been
delivered to the Executive by the Board a written demand for
substantial performance which sets forth in detail the specific
respects in which it believes the Executive has not substantially
performed his duties;
(ii) willful misconduct which is inconsistent with Company
policy and is materially and demonstrably injurious to the Company;
(iii) commission of a felony or an act of fraud against the
Company or any of its affiliates; or
(iv) material breach of the terms of this Agreement or the
terms of the confidentiality and proprietary information agreement
referred to in Section 5(b) of this Agreement.
"CHANGE IN CONTROL" means and includes each of the following
occurrences:
(i) a Business Combination;
(ii) when any "person" as defined in Section 3(a)(9) of the
Exchange Act and as used in Sections 13(d) and 14(d) thereof,
including a "group" as defined in Section 13(d) of the Exchange Act
but excluding the Company and any subsidiary and any employee benefit
plan sponsored or maintained by the Company or any subsidiary
(including any trustee of such plan acting as trustee), directly or
indirectly, becomes the Beneficial Owner of securities of the Company
representing thirty percent (30%) or more of the combined voting
power of the Company's then outstanding securities with respect to
the election of the directors of the Company;
(iii) during any period of three (3) consecutive years (not
including any period prior to the date hereof), individuals who, at
the beginning of such period, constitute the Board (the "INCUMBENT
BOARD") cease for any reason to constitute at least a majority of the
Board, provided that any person becoming a director subsequent to the
date hereof whose election, or nomination for election by the
Company's shareholders, was approved by the vote of at least a
majority of the directors then comprising the Incumbent Board (other
than an election or nomination of any individual whose initial
assumption of office is in connection with an actual or threatened
election contest relating to the election of the directors of the
Company, as such terms are used in Rule 14a-11 under the Exchange
Act) shall be, for purposes of this Agreement, considered as though
such person were a member of the Incumbent Board.
<PAGE>
For purposes of this Agreement, the Board may, by resolution, clarify the
date as of which a Change in Control shall be deemed to have occurred.
"CHANGE-IN-CONTROL PAYMENT" means a payment, equal to 24 months of
the Executive's base salary as in effect immediately prior to a Change in
Control, to which the Executive shall become entitled as provided in
Section 4(a) above.
"CHANGE IN CONTROL PRICE" means (i) the highest closing price of a share
of Common Stock on the New York Stock Exchange (or, if the Common Stock is no
longer listed on the New York Stock Exchange but is listed on another stock
exchange, on such other stock exchange) as reported on the composite
transactions reporting system (or in the event that the Common Stock is no
longer listed on any stock exchange but is traded on the NASDAQ National
Market System, the highest closing sale price of a share of Common Stock as
reported by the NASDAQ National Market System and as appearing in the WALL
STREET JOURNAL), at any time within the 60-day period immediately preceding
the date of determination of the Change in Control Price by the Board (the
"60-DAY PERIOD"), or (ii) the highest price paid or offered for a share of
Common Stock, as determined by the Board, in any bona fide transaction or
bona fide offer related to the Change in Control at any time within the
60-day period. The Change in Control Price shall be determined by the Board.
"CODE" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
A corporation or other firm will be considered to be engaged in the
"COMPUTER SYSTEMS BUSINESS" if it is engaged in the design, manufacture or
marketing of desktop or deskside computer systems, servers, graphics
microprocessors or graphics hardware components, or in any combination of
such activities.
"DISABILITY" means a physical or mental incapacity that substantially
prevents the Executive from performing his duties hereunder and that has
continued for at least 180 days and can reasonably be expected to continue
indefinitely. Any dispute as to whether or not the Executive is disabled
within the meaning of the preceding sentence shall be resolved by a physician
reasonably satisfactory to the Executive and the Company, and the
determination of such physician shall be final and binding upon both the
Executive and the Company.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules thereunder.
"FAIR MARKET VALUE" of a share of Common Stock means such fair market
value determined in accordance with the terms of the 1993 Plan.
"FINAL MEASUREMENT DATE" means the earliest of:
<PAGE>
(i) the date that the Option to purchase 3,000,000 shares of
Common Stock provided for in the Offer Letter vests in full (including
full vesting pursuant to Section 4 above);
(ii) the date following a termination of the Executive's employment
with the Company (including termination due to death or Disability, but
excluding termination of the Executive's employment by the Company for
Cause or resignation by the Executive from his employment with the
Company other than for Good Reason), as of which the Executive's vested
Options are fully exercised or expire in accordance with their term;
(iii) the effective date of the Executive's termination or
resignation of employment with Company (for any reason) following a
Change in Control, or, if earlier, the second anniversary of the
Effective Date if a Change in Control has occurred before such second
anniversary;
PROVIDED, HOWEVER, that if the shares issuable upon exercise of any
Options awarded to the Executive prior to the date specified in clause
(i), (ii) or (iii) above, as applicable, and vested as of such date
would not be Unrestricted Stock if the Options were exercised and the
shares were issued as of such date, then the Final Measurement Date
shall be the earliest date after the date specified in clause (i), (ii)
or (iii) above, as applicable, as of which such shares, if issued, would
be Unrestricted Stock.
"FIRST MEASUREMENT DATE" means the earlier of:
(i) the second anniversary of the Effective Date; or
(ii) the date following a termination of the Executive's employment
with the Company (including termination due to death or Disability, but
excluding termination of the Executive's employment by the Company for
Cause or resignation by the Executive from his employment with the
Company other than for Good Reason) as of which the Executive's vested
Options are either fully exercised or expire in accordance with their
terms,
PROVIDED, HOWEVER, that if the shares issuable upon exercise of any
Options awarded to the Executive prior to the date specified in clause
(i) or (ii) above, as applicable, and vested as of such date would not
be Unrestricted Stock if the Options were exercised and the shares were
issued as of such date, then the First Measurement Date shall be the
earliest date after the date specified in clause (i) or (ii) above, as
applicable, as of which such shares, if issued, would be Unrestricted
Stock.
<PAGE>
"GOOD REASON" for the Executive's resignation of his employment with
the Company means the occurrence of any of the following events:
(i) the assignment to the Executive of any duties or the
significant reduction of the Executive's duties, either of which is
inconsistent with the Executive's position as Chief Executive Officer of
the Company, or the removal of the Executive from or failure to re-elect
the Executive as Chief Executive Officer of the Company or as a member
of the Board, PROVIDED, HOWEVER, that the election of a non-executive
Chairman of the Board, or the appointment of a person other than the
Executive as President of the Company, shall not constitute Good Reason
as long as (A) the Executive remains the most highly compensated
executive officer of the Company and (B) any such President reports to
the Executive;
(ii) the failure of the Company to increase the Executive's base
salary each year by an amount which equals at least one-half, on a
percentage basis, of the average annual percentage increase, if any, in
base salary for all officers of the Company (and any successor of the
Company) during the prior two full calendar years;
(iii) the taking of any action by the Company which would
materially and adversely affect the Executive's participation in any
plan, program or policy generally applicable to executives or employees
of the Company or any successor of the Company; or
(iv) the failure of the Company to obtain the assumption of this
Agreement by any successor as contemplated by Section 6(h) hereof.
Unless the Executive provides written notification of his intention to
resign within 90 business days after the Executive knows or has reason to
know of the occurrence of any such event, the Executive shall be deemed to
have consented thereto and such event shall no longer constitute Good
Reason for purposes of this Agreement. If the Executive provides such
written notice to the Company, the Company shall have 20 business days
from the date of receipt of such notice to effect a cure of the event
described therein (which cure shall be retroactive with respect to any
monetary matter) and, upon cure thereof by the Company to the reasonable
satisfaction of the Executive, such event shall no longer constitute Good
Reason for purposes of this Agreement.
"IN-THE-MONEY VALUE" means:
(i) with respect to any Option (or portion thereof) that has been
exercised on or prior to a Measurement Date, the product of (A) the
amount, if any, by which the Fair Market Value of a share of Common
Stock on the date of exercise exceeds the per share exercise price of
the Option, multiplied by (B) the number of shares as to which the
Option was exercised;
<PAGE>
(ii) with respect to any Option (or portion thereof) that has not
been exercised as a Measurement Date, the product of (A) the amount, if
any, by which the Average Fair Market Value of a share of Common Stock
as of the relevant Measurement Date exceeds the per share exercise price
of such Option, multiplied by (B) the number of shares of Common Stock
subject to such Option (or unexercised portion thereof);
(iii) with respect to any restricted stock or other stock award
that has been sold on or prior to a Measurement Date, the product of (A)
the Fair Market Value of a share of Common Stock on the date of sale
multiplied by (B) the number of shares sold; and
(iv) with respect to any restricted stock or other stock award
that has not been sold on or prior to a Measurement Date, the product of
(A) the Average Fair Market Value of a share of Common Stock as of the
relevant Measurement Date multiplied by (B) the number of shares that
remain included in or subject to such award.
"MEASUREMENT DATE" means each of the First Measurement Date and the
Final Measurement Date.
"OPTIONS" means stock options to purchase shares of the Company's common
stock awarded to the Executive under the 1993 Plan or any other plan or
program of the Company.
"SHORTFALL AMOUNT" means the excess, if any, determined as of a
Measurement Date, of (i) $10 million over (ii) the aggregate In-the-Money
Value of all Options and restricted stock or stock units that have been
awarded to the Executive by the Company, and have vested, on or prior to the
Measurement Date. In no event shall the Shortfall Amount be greater than $10
million or less than zero. The Company shall be responsible for calculating
the Shortfall Amount.
"UNRESTRICTED STOCK" means shares of Common Stock owned by the Executive
the sale or other disposition of which is not restricted (i) under any
trading policy of the Company applicable to the Executive, including any
policy designed to restrict trading by the Company's officers during periods
when the Company is or may be in possession of material undisclosed
information, or (ii) as a condition to the qualification of a transaction
involving the Company as a "pooling of interests" for accounting purposes.
Shares of Common Stock owned by the Executive will not fail to be considered
Unrestricted Stock solely by virtue of any volume limitations on the
Executive's ability to sell or dispose of such shares imposed under the
Securities Act of 1933, as amended, and the rules thereunder.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
effective as of the day and year first written above.
SILICON GRAPHICS, INC.
By: /s/ William M. Kelly
--------------------------------------------
Name: William M. Kelly
Title: Senior Vice President
EXECUTIVE
/s/ Richard E. Belluzo
--------------------------------------------
Address: 927 Wyndemere
Boise, Idaho 83902
<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, 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> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 432,557
<SECURITIES> 197,754
<RECEIVABLES> 743,769
<ALLOWANCES> 21,464
<INVENTORY> 521,696
<CURRENT-ASSETS> 2,121,588
<PP&E> 945,859
<DEPRECIATION> 427,017
<TOTAL-ASSETS> 3,148,075
<CURRENT-LIABILITIES> 901,189
<BONDS> 368,618
0
16,998
<COMMON> 168
<OTHER-SE> 1,821,122
<TOTAL-LIABILITY-AND-EQUITY> 3,148,075
<SALES> 1,317,796
<TOTAL-REVENUES> 1,618,758
<CGS> 744,879
<TOTAL-COSTS> 916,914
<OTHER-EXPENSES> 235,844
<LOSS-PROVISION> 1,800
<INTEREST-EXPENSE> 11,815
<INCOME-PRETAX> (116,905)
<INCOME-TAX> 29,888
<INCOME-CONTINUING> (87,017)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (87,017)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
