<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, 1998.
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 29, 1999 there were 187,604,253
shares of Common Stock outstanding.
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<PAGE>
SILICON GRAPHICS, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
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............. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk .. 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................ 19
Item 6. Exhibits and Reports on Form 8-K............................. 19
Signatures .......................................................... 20
Index to Exhibits ................................................... 21
</TABLE>
TRADEMARKS USED IN THIS FORM 10-Q: Silicon Graphics, OCTANE and Onyx are
registered trademarks and O2, Origin, Onyx2, Silicon Graphics 320 and Silicon
Graphics 540 are trademarks of Silicon Graphics, Inc. CRAY is a registered
trademark of Cray Research, LLC. MIPS is a registered trademark of MIPS
Technologies, Inc. UNIX is a registered trademark in the United States and
other countries, licensed exclusively through X/Open Company Ltd. Windows NT
is a registered trademark of Microsoft Corporation. Intel is a registered
trademark of Intel Corporation.
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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,
1998 1998 (1)
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 435,040 $ 506,639
Short-term marketable investments................................. 262,296 230,081
Accounts receivable, net.......................................... 465,952 665,420
Inventories....................................................... 254,668 322,823
Prepaid expenses and other current assets......................... 355,433 340,409
----------- -----------
Total current assets.......................................... 1,773,389 2,065,372
Other marketable investments........................................... 10,017 --
Restricted investments................................................. 53,211 --
Property and equipment, net............................................ 436,606 445,420
Other assets........................................................... 508,411 453,914
----------- -----------
$ 2,781,634 $ 2,964,706
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 151,027 $ 215,260
Other current liabilities......................................... 817,469 881,412
----------- -----------
Total current liabilities..................................... 968,496 1,096,672
Long-term debt and other............................................... 402,318 403,522
Stockholders' equity:
Preferred stock................................................... 16,998 16,998
Common stock and additional paid-in capital....................... 1,422,083 1,407,108
Retained earnings (accumulated deficit)........................... (8,604) 65,415
Treasury stock.................................................... (28,460) (25,976)
Accumulated other comprehensive income............................ 8,803 967
----------- -----------
Total stockholders' equity.................................... 1,410,820 1,464,512
----------- -----------
$ 2,781,634 $ 2,964,706
----------- -----------
----------- -----------
</TABLE>
(1) The balance sheet at June 30, 1998 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,
--------------------------- ----------------------------
1998 1997 1998 1997
---- ----- ---- ----
<S> <C> <C> <C> <C>
Product and other revenue............................ $ 516,053 $ 697,100 $ 973,037 $ 1,317,796
Service revenue...................................... 168,770 153,665 328,142 300,962
----------- ------------ ------------- -------------
Total revenue................................... 684,823 850,765 1,301,179 1,618,758
Costs and expenses:
Cost of product and other revenue............... 292,672 393,219 576,861 744,879
Cost of service revenue......................... 102,301 85,772 196,852 172,035
Research and development........................ 97,179 117,113 199,317 233,467
Selling, general and administrative............. 222,005 251,262 454,933 512,683
Other operating expense (1)..................... (8,000) 52,729 (8,000) 71,830
----------- ------------ ------------- -------------
Total costs and expenses.................... 706,157 900,095 1,419,963 1,734,894
----------- ------------ ------------- -------------
Operating loss ...................................... (21,334) (49,330) (118,784) (116,136)
Gain on sale of a portion of SGI interest in MIPS (2) -- -- 53,963 --
Interest and other income (expense), net............. (3,524) 1,538 (6,233) (769)
----------- ------------ ------------- -------------
Loss before income taxes............................. (24,858) (47,792) (71,054) (116,905)
Income tax benefit................................... (4,517) (16,313) (7,047) (29,888)
----------- ------------ ------------- -------------
Net loss............................................. (20,341) (31,479) (64,007) (87,017)
Preferred stock dividend requirement................. (131) (131) (262) (262)
----------- ------------ ------------- -------------
Net loss available to common stockholders............ $ (20,472) $ (31,610) $ (64,269) $ (87,279)
----------- ------------ ------------- -------------
----------- ------------ ------------- -------------
Net loss per common share - basic and diluted........ $ (0.11) $ (0.17) $ (0.34) $ (0.47)
----------- ------------ ------------- -------------
----------- ------------ ------------- -------------
Common shares outstanding - basic and diluted........ 186,417 187,874 186,373 185,017
----------- ------------ ------------- -------------
----------- ------------ ------------- -------------
</TABLE>
(1) Amount represents a change in previously estimated restructuring costs in
the three- and six-month periods ended December 31, 1998. Amount includes
an estimated restructuring charge of $53 million in the three- and
six-month periods ended December 31, 1997 as well as a $17 million
write-off of acquired in-process technology in the six-month period ended
December 31, 1997.
(2) Relates to the initial public offering of a minority interest in the
Company's subsidiary, MIPS Technologies, Inc. ("MIPS").
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE FINANCIAL STATEMENTS.
-4-
<PAGE>
SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended December 31,
-----------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................... $ (64,007) $ (87,017)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization..................................... 114,219 154,314
Write-off of acquired in-process technology....................... -- 16,900
Gain on sale of a portion of SGI interest in MIPS................. (53,963) --
Other............................................................. 28,850 1,504
Changes in operating assets and liabilities:
Accounts receivable............................................. 199,468 410,170
Inventories..................................................... 60,868 86,876
Accounts payable................................................ (64,477) (97,946)
Other assets and liabilities.................................... (113,686) (38,998)
--------- ---------
Total adjustments............................................. 171,279 532,820
--------- ---------
Net cash provided by operating activities......................... 107,272 445,803
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................ (82,961) (89,258)
Proceeds from sale of a portion of SGI interest in MIPS............. 53,963 --
Increase in other assets............................................ (51,093) (71,738)
Purchases of restricted investments................................. (106,418) --
Proceeds from the maturities of restricted investments.............. 53,207 --
Available-for-sale investments:
Purchases......................................................... (250,212) (77,518)
Sales............................................................. 107,740 3,000
Maturities........................................................ 100,531 --
--------- ---------
Net cash used in investing activities............................. (175,243) (235,514)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt.................................................... 4,935 10,822
Payments of debt principal.......................................... (10,703) (55,319)
Sale of SGI common stock............................................ 21,874 65,707
Repurchase of SGI common stock...................................... (35,344) (25,902)
Sale of MIPS common stock........................................... 15,872 --
Cash dividends - preferred stock.................................... (262) (262)
--------- ---------
Net cash used in financing activities............................. (3,628) (4,954)
--------- ---------
Net (decrease) increase in cash and cash equivalents................ (71,599) 205,335
Cash and cash equivalents at beginning of period.................... 506,639 227,222
--------- ---------
Cash and cash equivalents at end of period.......................... $ 435,040 $ 432,557
--------- ---------
--------- ---------
</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 and MIPS, a majority owned subsidiary, 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, 1998. Certain
amounts for the prior year have been reclassified to conform to current year
presentation.
2. SALE OF INTEREST IN MIPS TECHNOLOGIES, INC.
The public offering of a 14.8% interest in the Company's subsidiary, MIPS,
closed on July 6, 1998. Proceeds, net of issuance costs, to the Company and MIPS
were $54 million and $16 million, respectively. The accompanying condensed
consolidated financial statements include the operations of MIPS on a fully
consolidated basis. The publicly held minority interest in the earnings of MIPS
for the second quarter ($0.6 million) and first six months of fiscal 1999 ($1.1
million) is included in interest and other income (expense), net in the
condensed consolidated statement of operations. The publicly held minority
interest in the net assets of MIPS ($3.3 million) is included in long-term debt
and other in the condensed consolidated balance sheet.
On January 14, 1999, the Company announced its intention to undertake a
recapitalization of MIPS. The recapitalization plan is intended to permit a
multi-step divestiture of the Company's ownership interest in MIPS, with the
divestiture currently expected to be complete by September 30, 2000, subject to
market and other conditions, including obtaining a favorable tax ruling as to
the tax-free status of the ultimate divestiture. The reduction of the Company's
equity position in MIPS is expected to occur through secondary market sales and
other transactions. See "Risks That Affect Our Business."
3. INVENTORIES.
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998
----------------- -------------
<S> <C> <C>
Components and subassemblies $ 9,691 $114,139
Work-in-process 110,992 74,961
Finished goods 50,209 47,917
Demonstration systems 83,776 85,806
-------- --------
$254,668 $322,823
-------- --------
-------- --------
</TABLE>
4. RESTRICTED INVESTMENTS.
Restricted investments consist of long-term investments pledged as collateral
against letters of credit and an equity forward purchase arrangement. Restricted
investments are held in the Company's name by major financial institutions.
-6-
<PAGE>
5. PROPERTY AND EQUIPMENT.
(in thousands)
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998
----------------- -------------
<S> <C> <C>
Property and equipment, at cost $ 854,819 $ 865,926
Accumulated depreciation and amortization (418,213) (420,506)
--------- ---------
Property and equipment, net $ 436,606 $ 445,420
--------- ---------
--------- ---------
</TABLE>
6. SHORT-TERM BORROWINGS.
Effective November 5, 1998, the Company elected to terminate its commitment for
an unsecured $250 million revolving credit facility. This facility was unused in
fiscal 1999, 1998 and 1997.
7. RESTRUCTURING CHARGES.
In the second quarter of fiscal 1998, the Company announced and began to
implement a restructuring program aimed at bringing its expenses more in line
with revenue levels and restoring long-term profitability to the Company. The
process of developing this program continued during the balance of fiscal 1998
and included a reevaluation of the Company's core competencies, technology
roadmap and business model, as well as development of its fiscal 1999 operating
plan. The Company's restructuring activity in fiscal 1998 consisted primarily of
eliminating approximately 1,700 positions, approximately 1,300 of which were
eliminated as of December 31, 1998, writing down certain operating assets,
vacating certain leased facilities and canceling certain contracts. Through
December 31, 1998, these actions have resulted in aggregate charges of $144
million, excluding the adjustment noted below, of which approximately $80
million have used or will use cash, and $64 million were non-cash charges. The
Company expects that the remaining $23 million accrued balance at December 31,
1998 will result in cash expenditures of approximately $20 million over the next
six months and $3 million will be funded from working capital.
At December 31, 1998, the Company lowered its estimate of the total costs
associated with restructuring activity and recorded an adjustment of $8 million.
The adjustment primarily reflected lower than estimated severance and related
charges attributable to higher than expected attrition, as well as lower per
person costs. To a lesser extent, estimated costs of contract cancellations and
operating asset reserves were also adjusted.
The following table depicts the restructuring activity during the first six
months of fiscal 1999:
<TABLE>
<CAPTION>
Balance at Adjustments: Balance at
Category June 30, Expenditures Increase/ December 31,
1998 Cash Non-cash (Decrease) 1998
- -------------------------------- ---------- ---------- ---------- ---------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Severance and related charges $ 49,403 $ (23,351) $ (184) $ (12,000) $ 13,868
Operating asset reserves 4,220 -- (6,422) 5,416 3,214
Canceled contracts 2,055 (139) -- (1,916) --
Vacated facilities 7,274 (2,478) (203) -- 4,593
Other 894 (317) -- 500 1,077
---------- ---------- ---------- ---------- ------------
$ 63,846 $ (26,285) $ (6,809) $ (8,000) $ 22,752
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
</TABLE>
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<PAGE>
8. EARNINGS PER SHARE.
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------------------------------
(in thousands, except per share amounts) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss $(20,341) $(31,479) $(64,007) $(87,017)
Less preferred stock dividends (131) (131) (262) (262)
-------- -------- -------- --------
Net loss available to common stockholders $(20,472) $(31,610) $(64,269) $(87,279)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average shares
outstanding--basic and diluted 186,417 187,874 186,373 185,017
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per share - basic and diluted $ (0.11) $ (0.17) $ (0.34) $ (0.47)
-------- -------- -------- --------
-------- -------- -------- --------
Potentially dilutive securities excluded from
computations because they are anti-dilutive 10,691 10,787 10,219 14,601
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
9. COMPREHENSIVE INCOME.
The Company has adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS 130") as of the first quarter of fiscal
1999. SFAS 130 establishes new standards for the reporting and display of
comprehensive income and its components, however it has no impact on the
Company's consolidated financial position or results of operations.
The components of comprehensive income, net of tax, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------------------------------
(in thousands) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss $(20,341) $(31,479) $(64,007) $(87,017)
Change in unrealized gain on
available-for-sale investments 11 115 88 426
Foreign currency translation adjustments (1,966) (2,927) 7,748 (10,845)
-------- -------- -------- --------
Comprehensive income $(22,296) $(34,291) $(56,171) $(97,436)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The components of accumulated other comprehensive income, net of tax, are as
follows:
<TABLE>
<CAPTION>
December 31, June 30,
(in thousands) 1998 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Unrealized gain (loss) on investments $ 18 $ (70)
Foreign currency translation adjustments 8,785 1,037
------ ------
Accumulated other comprehensive income $8,803 $ 967
------ ------
------ ------
</TABLE>
10. STOCK REPURCHASE PROGRAM.
The Company's board of directors has authorized the repurchase of up to 22.5
million shares of its common stock in the open market or in private
transactions. The Company has entered into a series of transactions to effect
the repurchase of its common stock. Pursuant to this authorization, the Company
has repurchased approximately 10.3 million shares of its common stock in the
open market, of which 3.2 million shares were repurchased during the first six
months of fiscal 1999. In addition, the Company is
-8-
<PAGE>
committed to purchase approximately 6.0 million shares of common stock
pursuant to a forward purchase arrangement with an independent third party.
Under this forward purchase arrangement, the purchase price will be paid in
the next three years at a pre-determined price based on the third-party
acquisition cost. The timing and method of payment (net-share or full physical
settlement) is at the discretion of the Company. Included in the 6 million
shares of common stock under the forward purchase arrangement were sold put
obligations covering approximately 1.8 million shares at an average exercise
price of $13.17 that expired and were exercised in the second quarter of
fiscal 1999. Repurchased shares are available for use under the Company's
employee stock plans and for other corporate purposes.
11. CONTINGENCIES.
The Company is defending the lawsuits described below. The Company believes that
it has good defenses to the claims in each of these lawsuits and is defending
each of them vigorously.
The Company is defending putative securities class action lawsuits filed in the
U.S. District Court for the Northern District of California (the "Northern
District") and in California Superior Court for the County of Santa Clara in
December 1997 and January 1998 alleging that the Company and certain of its
officers made material misrepresentations and omissions during the period from
July to October 1997.
The Company is also defending a securities class action lawsuit filed in January
1996 in the Northern District of California alleging that the Company and
certain of its officers and directors made material misrepresentations and
omissions during the period from September to December 1995. The lawsuit was
dismissed with prejudice by the District Court in May 1996. The plaintiffs'
appeal to the U.S. Court of Appeals for the Ninth Circuit is pending.
The Company is also defending a securities class action lawsuit involving MIPS
Computer Systems, Inc., ("MCSI") which the Company acquired in June 1992. The
MCSI case, which was filed in 1992 in the Northern District of California,
alleges that MCSI and certain of its officers and directors made material
misrepresentations and omissions during the period from January to October of
1991. The parties to this case reached an agreement to settle the case and
signed a memorandum of understanding in December 1998; a Stipulation of
Settlement will be presented to the Court shortly. The settlement is subject to
final approval of the Court.
The Company also is defending a securities class action lawsuit involving Alias
Research Inc., which the Company acquired in June 1995. The Alias case, which
was filed in 1991 in the U.S. District Court for the District of Connecticut,
alleges that Alias and certain of its former officers and directors made
material misrepresentations and omissions during the period from May 1991 to
April 1992. In October 1997, the defendants' motion to dismiss the amended
complaint was granted. The plaintiffs' appeal to the U.S. Court of Appeals for
the Second Circuit is pending.
The Company routinely receives communications from third parties asserting
patent or other rights covering the Company's products and technologies. Based
upon the Company's evaluation, it may take no action or it may seek to obtain a
license. There can be no assurance in any given case that a license will be
available on terms the Company considers reasonable, or that litigation will not
ensue.
Management is not aware of any pending disputes, including those described
above, that would be likely to have a material adverse effect on the Company's
financial condition, results of operations or liquidity. However, management's
evaluation of the likely impact of these pending disputes could change in the
future.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
This Quarterly Report on Form 10-Q includes forward-looking statements regarding
the Company's business, objectives, financial condition and future performance.
These forward-looking statements include, among others, statements relating to
expected levels of revenue, gross margin, operating expense, and future
profitability, the benefits expected to result from the transition of our
business from declining markets to growth markets, headcount reductions,
conversion to the Euro, year 2000 issues and legal proceedings. We have based
these forward-looking statements on our current expectations about future
events.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those expressed or implied
in such forward looking statements. Such risks and uncertainties include, among
other things: adverse changes in general economic or business conditions;
adverse changes in the specific markets for the Company's products, including
expected rates of growth and decline in the Company's current markets; adverse
business conditions; changes in customer order patterns; heightened competition,
reflecting rapid technological advances and constantly improving
price/performance, which may result in significant discounting and lower gross
margins; continued success in technological advancements and new product
introduction, including development and successful introduction of strategic
products for specific markets; inability to effectively implement the Company's
desktop and server strategy, including the development of appropriate
distribution, marketing and customer support models; risks related to dependence
on the Company's partners and suppliers; risks related to foreign operations
(including the downturn of economic trends, unfavorable currency movements, and
export compliance issues); risks associated with year 2000 requirements; risks
associated with implementation of the Company's new business practices,
processes and information systems; litigation involving intellectual property or
other issues; and other factors including those listed under the heading "Risks
That Affect Our Business."
We undertake no obligation to publicly update or revise any forward looking
statements, whether as a result of new information, future or otherwise.
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 December 31, Ended December 31,
------------------------ -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Product and other revenue......................... 75.4% 81.9% 74.8% 81.4%
Service revenue................................... 24.6 18.1 25.2 18.6
----- ----- ----- -----
Total revenue..................................... 100.0% 100.0% 100.0% 100.0%
Gross margin...................................... 42.3 43.7 40.5 43.4
Research and development.......................... 14.1 13.8 15.3 14.4
Selling, general and administrative............... 32.4 29.5 35.0 31.7
Other operating expense........................... (1.2) 6.2 (0.6) 4.4
----- ----- ----- -----
Operating loss.................................... (3.1) (5.8) (9.1) (7.2)
Interest and other income (expense), net.......... (0.5) 0.2 3.7 --
----- ----- ----- -----
Loss before income taxes.......................... (3.6) (5.6) (5.4) (7.2)
Income tax benefit................................ (0.6) (1.9) (0.5) (1.8)
----- ----- ----- -----
Net loss.......................................... (3.0)% (3.7)% (4.9)% (5.4)%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
- ------------------------------------------------------------------------------
-10-
<PAGE>
REVENUE BY GEOGRAPHY
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Six Months
Ended December 31, Year Ended December 31, Year
--------------------------- /Year ------------------------- /Year
($ in millions) 1998 1997 Change 1998 1997 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Americas $ 365 $ 446 (18)% $ 691 $ 869 (20)%
Europe 212 259 (18)% 396 450 (12)%
Rest of World (1) 108 146 (26)% 214 300 (29)%
-------- -------- ------- -------
Total revenue $ 685 $ 851 (20)% $ 1,301 $ 1,619 (20)%
-------- -------- ------- -------
-------- -------- ------- -------
</TABLE>
REVENUE BY GEOGRAPHY
- -------------------------------------------------------------------------------
(as a percentage of total revenue)
<TABLE>
<CAPTION>
Three Months Six Months
Ended December 31, Ended December 31,
--------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Americas 53% 53% 53% 54%
Europe 31% 30% 30% 28%
Rest of World (1) 16% 17% 17% 18%
</TABLE>
(1) "Rest of World" includes principally Japan and the Asia-Pacific region
REVENUE BY PRODUCT LINE
- -------------------------------------------------------------------------------
(as a percentage of product revenue, excluding other revenue)
<TABLE>
<CAPTION>
Three Months Six Months
Ended December 31, Ended December 31,
------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Servers (primarily from the CRAY-Registered Trademark-
and Origin-Registered Trademark- families) 52% 52% 53% 51%
Graphics systems (primarily from the O2-TM-,
Octane-Registered Trademark- and Onyx2-TM-
families) 48% 48% 47% 49%
</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 and professional services revenue.
Revenue for both the second quarter and first six months of fiscal 1999
declined 20% compared with the corresponding periods of fiscal 1998. Product
and other revenue for the second quarter of fiscal 1999 declined compared
with the corresponding period of fiscal 1998, primarily due to strong
competition in the shrinking UNIX-Registered Trademark- workstation market as
well as a weakening vector supercomputer market, offset in part by growth in
the Company's high-end graphics business. Product and other revenue for the
first six months of fiscal 1999 declined compared with the corresponding
period of fiscal 1998 reflecting a decline across all product lines and
regions primarily within the UNIX workstation and vector supercomputer
markets. Scalable server product revenue declined to a much lesser degree
than UNIX workstation and vector supercomputer product revenue and increased
in the Americas and Europe for both the second quarter and first six months
of fiscal 1999 compared with the corresponding periods of fiscal 1998.
Service revenue increased for both the second quarter and first six months of
fiscal 1999 compared with the corresponding periods of fiscal 1998 reflecting
increased demand across all regions, particularly in the Americas and Europe.
The increase in service revenue is primarily due to growth of the Company's
-11-
<PAGE>
professional services business coupled with a slight increase in revenue
generated from support and maintenance.
The Company believes that the decline 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 revenue come from growing markets
including the market for scalable servers, such as the Origin family, and
Windows NT-Registered Trademark- based workstations, such as its Visual
Workstations introduced in January 1999. See "Risks That Affect Our Business."
The Company's consolidated backlog at December 31, 1998 was $366 million,
compared with backlog of $317 million at September 30, 1998.
GROSS MARGIN. Cost of product and other revenue includes costs related to
product shipments comprising materials, labor, overhead and other direct or
allocated costs involved in their manufacture or delivery. Cost of service
revenue includes all costs incurred in the support and maintenance of the
Company's products, as well as costs to deliver professional services.
Gross margin of 42.3% and 40.5% for the second quarter and first six months of
fiscal 1999, respectively, declined compared with gross margin of 43.7% and
43.4%, respectively, for the corresponding periods of fiscal 1998. This decline
is primarily due to competitive pricing pressures noted across all product lines
and proportionately higher service revenue, offset in part by favorable foreign
currency effects year over year. The Company believes it will continue to
experience margin pressure, particularly in its supercomputer and desktop
product lines. In particular, the Visual Workstations will compete directly in
the high-end of the personal computer marketplace in which gross margins are
typically well below the average gross margin levels that the Company has
historically recorded. See "Risks That Affect Our Business."
OPERATING EXPENSE (EXCLUDING OTHER OPERATING EXPENSE). In absolute dollars,
operating expense for the second quarter and first six months of fiscal 1999
declined 13% and 12%, respectively, compared with the corresponding periods a
year ago, but increased as a percentage of total revenue from 43.3% to 46.6%
and from 46.1% to 50.3%, respectively. The decrease in absolute dollars
resulted from comparatively lower headcount of approximately 1,000 positions
and other expense control measures. As a percentage of total revenue,
operating expense increased principally due to the decrease in revenue.
OTHER OPERATING EXPENSE. Other operating expense for the second quarter and
first six months of fiscal 1999 represents a change in previously estimated
restructuring costs. For the second quarter and first six months of fiscal 1998
other operating expense includes an estimated restructuring charge of $53
million. Also included in the first six months of fiscal 1998 is a $17 million
charge for acquired in-process technology recorded in connection with the
acquisition of ParaGraph and $2 million of merger-related expense. For more
information regarding the Company's restructuring activity, see Note 7 of the
Notes to Condensed Consolidated Financial Statements (Unaudited) included in
Part I of this Quarterly Report.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other income
(expense), net for the second quarter of fiscal 1999 was ($3.5) million
compared with $1.5 million for the second quarter of fiscal 1998. The year
over year change primarily reflects an increase in foreign exchange option
premium costs and a settlement of the securities class action lawsuit that
SGI was defending as a successor in interest to MIPS Computer Systems, Inc.
(MCSI). Increases in expense were offset in part by a reduction in costs
associated with the Company's economic hedging program and a favorable impact
resulting from the Company's balance sheet hedging program. Interest and
other income (expense), net for the first six months of fiscal 1999 was $47.7
million compared with ($0.8) million for the first six months of fiscal 1998.
The year over year change primarily reflects a $54 million gain on the sale
of a portion of the Company's interest in MIPS, higher interest income
attributable to higher invested cash balances, a reduction in costs
associated with the Company's economic hedging program and a favorable impact
resulting from the Company's balance sheet hedging program. These favorable
impacts were partially offset by an increase in foreign exchange option
premium costs, the write-off of an investment and settlement of the MCSI
lawsuit.
-12-
<PAGE>
TAXES. The Company's effective tax benefit rate for the first six months of
fiscal 1999 was 23%, excluding the impact of the $54 million gain on the sale of
a portion of its interest in MIPS in the first quarter of fiscal 1999 and an $8
million change in previously estimated restructuring costs in the second quarter
of fiscal 1999, which were tax effected at 38%. The Company's effective tax
benefit rate for the first six months of fiscal 1998 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 fiscal 1998 and 1999 benefit rates, excluding the impact of the MIPS gain
and change in estimated restructuring costs in fiscal 1999 and the in-process
technology and restructuring charges in fiscal 1998, differ from the federal
statutory rate primarily due to foreign losses for which no benefit has been
recognized.
At December 31, 1998, the Company had net deferred tax assets of $541 million.
Realization of the majority of the net deferred tax assets is dependent on the
Company's ability to generate approximately $1 billion of future taxable income.
Management believes that it is more likely than not that the assets will be
realized based on forecasted income. However, there can be no assurance that the
Company will meet its expectations of future income. Management will evaluate
the realizability of the deferred tax assets quarterly and assess the need for
additional valuation allowances.
FINANCIAL CONDITION
At December 31, 1998, cash and cash equivalents and marketable and restricted
investments totaled $761 million, up from $737 million at June 30, 1998.
Included in the December 31, 1998 balance is approximately $53 million of
restricted investments that serve as collateral for letters of credit and an
equity forward purchase arrangement. Operating activities generated $107
million during the first six months of fiscal 1999 compared with $446 million
during the first six months of fiscal 1998. Despite the net loss for the
first six months of fiscal 1999, cash flow from operating activities was
positive principally due to a decrease in accounts receivable, due in part to
shorter collection cycles, and a reduction in inventory levels due to
improved inventory management, including outsourcing of certain manufacturing
activities. Investing activities, other than changes in the Company's
available-for-sale and restricted investments, consumed $80 million in cash
during the first six months of fiscal 1999, principally for the acquisition
of capital equipment and spare parts and an investment in a computer graphics
technology company. The use of cash for investing activities was offset, in
part, by proceeds from the sale of a portion of the Company's interest in
MIPS. The principal financing activities during the first six months of
fiscal 1999 included the use of $35 million to repurchase shares of the
Company's common stock, offset by proceeds from employee stock purchase plan
issuances, employee stock option exercises and proceeds from the public
offering of MIPS common stock.
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 7 of the Notes to Condensed
Consolidated Financial Statements (Unaudited) included in Part I of this
Quarterly Report. Restructuring charges have been, and will be funded, through
current working capital.
On January 14, 1999, the Company announced its intention to undertake a
recapitalization of MIPS. The recapitalization plan is intended to permit a
multi-step divestiture of the Company's ownership interest in MIPS with the
divestiture expected to be complete by September 30, 2000, subject to market
and other conditions, including the receipt of a ruling from the IRS
confirming the tax-free status of the ultimate distribution. The reduction of
the Company's equity position in MIPS is expected to occur through secondary
market sales and other transactions. For more information, see "Risks That
Affect Our Business."
At December 31, 1998, the Company's principal sources of liquidity included cash
and cash equivalents and marketable investments of $707 million. 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. As a result of the Company's
strong cash position throughout fiscal 1999, it terminated its $250 million
revolving credit facility in November 1998. 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.
-13-
<PAGE>
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 supercomputers -- have declined over
the past year, and the Company believes that these declines represent
long-term trends. The Company's goal is to transition an increasing
proportion of its revenues to growing markets, including Intel-Registered
Trademark--based workstations and servers and UNIX based scalable servers
such as the Company's Origin server product family. The Company also has
announced a product roadmap that will, over the next several years, merge the
Company's vector supercomputer and scalable server families and ultimately
transition the Company's products to the Intel microprocessor architecture.
This is a long-term transition, and although some benefits are currently
being realized it could take until well into fiscal 2000 or beyond before the
Company has achieved its desired business model. The Company's ability to
achieve its revenue objectives over the next several quarters will largely
depend on the extent to which growth in the Origin family and Windows NT
Visual Workstation products compensates for the expected decline in the other
market sectors.
DESKTOP SYSTEM STRATEGY. The Company has announced a family of desktop
systems, the Silicon Graphics 320-Registered Trademark- and 540-Registered
Trademark- Visual Workstations, based upon Intel microprocessors and the
Windows NT operating system. The Silicon Graphics 320 system began commercial
shipments in February 1999, with the Silicon Graphics 540 system scheduled
for introduction in the June quarter. There is no assurance that they will
achieve the desired levels of market acceptance, will be available in
sufficient quantities to meet demand or will account for significant revenue
in the latter half of fiscal 1999.
Success in this market segment requires that the Company adapt to very
different requirements: high volume, lower margins; managing an outsourced
model for manufacturing, distribution, and support; and marketing to higher
volume segments in which the Company has not historically participated. The
Company will depend on a combination of its existing channels and on
newly-established channel relationships to distribute its products in this
market segment, with accompanying uncertainty as to how long it will take
these new channels to ramp to desired volumes. The Company is also investing
in a significant marketing and advertising campaign for the new products, the
results of which will not be immediately apparent. The Company will also be
required to maintain and extend its customer relationships through a complex
product transition and to support a product line which includes multiple
operating systems.
SERVER STRATEGY. Sustaining growth in the Company's scalable server business is
an important element of its strategic plans for the next several years.
Sustained growth will require, among other things, adapting to a longer sales
cycle and the need to deliver more complete solutions, establishing a presence
in emerging enterprise markets in which the Company has not traditionally
participated, working effectively with independent software providers to ensure
that important applications for the market segments targeted by the Company are
available on the Company's platform, and ultimately, managing a successful and
timely transition to the Intel architecture.
The Company is also engaged in a transition from its traditional business of
supporting its own proprietary UNIX operating systems, IRIX and UNICOS, to
supporting additional operating systems such as Windows NT and Linux. The
Company believes that this strategy will position it favorably in growth
markets, including the market for 32-bit Intel-based servers. A successful
transition to this model will require the Company to make effective resource
allocation choices and successfully manage a complex set of support and
strategic relationships.
EXPENSE REDUCTION PROGRAM. The Company's success in reducing its operating
expenses significantly in the first half of fiscal 1999 must be maintained
through the balance of the fiscal year. While the Company's objective is to
reduce its costs in ways that will not have a material impact on revenue
levels, there can be no assurance that this will be achieved.
-14-
<PAGE>
DEPENDENCE ON PARTNERS AND SUPPLIERS. The Company's business has always
involved close collaboration with partners and suppliers. However, many
elements of the Company's current business strategy, including the
introduction of Intel-based Windows NT workstations, the longer-term
transition to the Intel architecture, additional outsourcing of
manufacturing, and establishing significant new distribution channels will
increase the Company's dependence on Microsoft, Intel and other partners, and
on its manufacturing partners and other component suppliers. The Company's
business could be adversely affected, for example, if Intel or Microsoft fail
to meet product release schedules, if new channels do not ramp to desired
levels or if unanticipated quality issues arise with products from these
suppliers.
PERIOD TO PERIOD FLUCTUATIONS. The Company's operating results may fluctuate for
a number of reasons. Delivery cycles are typically short, other than for
supercomputer and certain large-scale server products. Well over half of each
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 geographic
concentrations, the mix of product and service revenue, and the mix of server
and desktop product revenue including 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. Although these trends are expected to continue in
fiscal 1999, they are expected to be mitigated to some extent in the third
quarter by the introduction of the Visual Workstation line.
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 and related information
technology. The goals of these programs include more predictable operational
performance, lower operating expenses, 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 to 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 market highly differentiated,
technologically complex and innovative products. Product transitions are a
recurring part of the Company's business. 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 teams, internal and
external manufacturing teams, outside suppliers of key components such as
semiconductor and storage products and outsourced manufacturing partners. 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 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 during the
same quarter.
-15-
<PAGE>
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 and excess inventories of older products and components. In
addition, some customers may delay purchasing existing products in
anticipation of new product introductions.
YEAR 2000 COMPLIANCE. Many computer systems and applications experience
problems handling dates beyond the year 1999 and will need to be modified
before the year 2000 in order to remain functional. As for many other
companies, the year 2000 computer issue poses a potential risk for the
Company as a user of information systems in the operation of its business, as
a supplier of computer systems and related software, including operating
system software, to customers, and as a customer of other organizations whose
operations may be affected by Year 2000 compliance issues.
The Company has completed an assessment of its core business information
systems, many of which are provided by outside suppliers, for year 2000
readiness and is extending that review to include a wide variety of other
information systems and related business processes used in its operations. The
Company plans to have changes to critical systems implemented by the third
quarter of calendar 1999 to allow time for testing. Most of the Company's
mission critical applications are believed to be year 2000 compliant, including
the Company's Oracle information system which was recently upgraded to the most
recent version. Although its assessment is ongoing, the Company currently
believes that resolving these matters will not have a material adverse effect on
its financial condition or results of operations.
The Company is implementing a program to support customer efforts to achieve
year 2000 compliance. This program includes encouraging customers and
independent software vendors to adopt the latest update to its IRIX operating
system, which the Company believes is year 2000 compliant, and additional
customer support procedures. The Company also has made available software
upgrades for some earlier releases of its IRIX operating system. The Company
believes that the hardware systems it expects to support beyond 1999, when
running on compliant operating systems, will be year 2000 compliant. The
Company's older products may require upgrade or replacement to become year
2000 compliant. There can be no assurance that the Company's current products
do not contain undetected errors or defects associated with year 2000
functions that may result in material costs to the Company. The Company
believes that it generally is not legally responsible for costs incurred by
customers to achieve their year 2000 compliance. However, the Company may
experience increasing customer satisfaction costs relating to these issues,
including potential litigation expenses, over the next few years.
The Company is also assessing the possible effect on its operations of the
year 2000 readiness of critical suppliers of products and services. These
include not just suppliers of components but also the Company's outsourcing
partners in manufacturing and support and even suppliers of basic utilities.
The Company's reliance on its key suppliers, and therefore on the proper
functioning of their information systems and software, is increasing, and
there can be no assurance that another company's failure to address year 2000
issues could not have an adverse effect on the Company.
Certain of the costs associated with the Company's internal Year 2000
compliance effort (exclusive of any potential costs related to any customer
or other claim) cannot effectively be isolated from other operating expenses,
since investing in new systems is both an ordinary cost of doing business and
a means to year 2000 compliance. Our current estimates indicate the total
costs to insure year 2000 compliance will not be material. The Company
believes that it is unlikely to experience a material adverse impact on its
financial condition or results of operations due to year 2000 compliance
issues. However, since the assessment process is ongoing, year 2000
complications are not fully known, and potential liability issues are not
clear, the full potential impact of the year 2000 on the Company is not known
at this time. The information regarding year 2000 issues provided in this
Form 10-Q is based on the Company's current assessment of ongoing activities
and is subject to change as the Company continuously monitors these
activities. The Company is currently evaluating the need for contingency
plans associated with potential year 2000 problems.
The Year 2000 disclosure set forth above is a "year 2000 statement" as defined
in the Year 2000 Information and Readiness Disclosure Act of 1998 (the "Year
2000 Act") and, to the extent the disclosure related to year 2000 processing of
the Company or to products or services offered by the Company, is also a "year
2000 readiness disclosure" as defined in the Year 2000 Act.
INVESTMENT IN MIPS SUBSIDIARY. The value of the Company's interest in its
MIPS Technologies, Inc. subsidiary is determined principally by factors
outside the Company's control and may fluctuate significantly from time to
time. There is no assurance that the Company's interest in MIPS will increase
in value or maintain its current level. The Company's ability to realize the
value of this interest through a series of divestiture transactions over time
is also subject to a number of conditions outside of the Company's control,
including the receipt of a favorable ruling from the IRS as to the tax-free
status of the ultimate divestiture. There can be no assurance that the
Company will be successful in fully realizing the value of the MIPS interest
on a tax and market efficient basis.
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
-16-
<PAGE>
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 during 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.
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. A significant earthquake could materially affect operating results.
The Company is not insured for most losses and business interruptions of this
kind.
EURO CONVERSION. As with many multinational companies operating in Europe,
Silicon Graphics is affected by the conversion of 11 European currencies into
the euro beginning in January 1999. Based on its preliminary assessment, the
Company does not believe the conversion will have a material impact on the
competitiveness of its products in Europe, where there already exists
substantial price transparency, or increase the likelihood of contract
cancellations. The Company also believes its current accounting systems will
accommodate the euro conversion with minimal intervention and does not expect
to experience material adverse tax consequences as a result of the
conversion. The convergence of currencies into the euro is expected to reduce
the Company's overall currency risk and simplify the Company's currency risk
management process, including its use of derivatives to manage that risk. The
costs of addressing the euro conversion are not expected to be material and
will be charged to operations as incurred.
MARKET RISK. In the normal course of business, the financial position of the
Company is routinely subjected to a variety of risks, including market risk
associated with interest rate movements and currency rate movements on non-U.S.
dollar denominated assets and liabilities, as well as collectibility of accounts
receivable. The Company regularly assesses these risks and has established
policies and business practices to protect against the adverse effects of these
and other potential exposures. As a result, the Company does not anticipate
material losses in these areas.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required under this Item 3 is included in the section above
entitled Market Risk.
-17-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is defending a securities class action lawsuit involving MIPS
Computer Systems, Inc., ("MCSI") which the Company acquired in June 1992. The
MCSI case, which was filed in 1992 in the Northern District of California,
alleges that MCSI and certain of its officers and directors made material
misrepresentations and omissions during the period from January to October of
1991. The parties to this case reached an agreement to settle the case and
signed a memorandum of understanding in December 1998; a Stipulation of
Settlement will be presented to the Court shortly. The settlement is subject to
final approval of the Court.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 12, 1999 SILICON GRAPHICS, INC.
a Delaware corporation
By: Steven J. Gomo
-------------------------------------------
Steven J. Gomo
Senior Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
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<PAGE>
SILICON GRAPHICS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
-20-
<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, 1998, 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-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 435,040
<SECURITIES> 262,296
<RECEIVABLES> 485,235
<ALLOWANCES> 19,283
<INVENTORY> 254,668
<CURRENT-ASSETS> 1,773,389
<PP&E> 854,819
<DEPRECIATION> 418,213
<TOTAL-ASSETS> 2,781,634
<CURRENT-LIABILITIES> 968,496
<BONDS> 373,268
0
16,998
<COMMON> 171
<OTHER-SE> 1,393,651
<TOTAL-LIABILITY-AND-EQUITY> 2,781,634
<SALES> 973,037
<TOTAL-REVENUES> 1,301,179
<CGS> 576,861
<TOTAL-COSTS> 773,712
<OTHER-EXPENSES> 199,317
<LOSS-PROVISION> 1,891
<INTEREST-EXPENSE> 11,894
<INCOME-PRETAX> (71,054)
<INCOME-TAX> 7,047
<INCOME-CONTINUING> (64,007)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (64,007)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
