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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the fiscal year ended June 30, 1999.
[___] 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 Number)
1600 Amphitheatre Parkway, Mountain View, California 94043-1351
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (650) 960-1980
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Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
------------------- ON WHICH REGISTERED:
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Common Stock, $0.001 par value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
5 1/4% Senior Convertible Notes New York Stock Exchange
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, based upon the closing sale price of the
Common Stock on September 1, 1999 on the New York Stock Exchange as reported
in The Wall Street Journal, was approximately $1,605 million. Shares of
voting stock held by each executive officer and director and by each person
who owns 5% or more of any class of registrant's voting stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
AS OF SEPTEMBER 1, 1999, THE REGISTRANT HAD OUTSTANDING 182,872,109 SHARES
OF COMMON STOCK.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for registrant's Annual Meeting of
Stockholders to be held October 27, 1999 are incorporated by reference into
Part III, and parts of the registrant's annual report to stockholders for the
fiscal year ended June 30, 1999 are incorporated by reference into Parts I,
II and IV of this Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Silicon Graphics is a leader in high-performance computing. The Company's
broad range of visual computing systems deliver advanced 3D graphics and
computing capabilities for engineering and creative professionals.
SGI-TM- servers and supercomputers are the market leaders in technical
computing applications, with a growing presence in strategic business
analysis, internet data center and media serving applications.
The Company's Alias|Wavefront subsidiary markets applications software
targeted at engineering and creative professionals in the digital content
creation and manufacturing sectors. The Company's MIPS Technologies, Inc.
subsidiary designs and licenses RISC processor intellectual property and core
technology for the digital consumer and high-end control-oriented embedded
markets.
PRODUCTS
The Company's computer systems range from desktop workstations to servers
and supercomputers. Most of these systems are designed around MIPS-Registered
Trademark- RISC microprocessors developed by the Company and the
IRIX-Registered Trademark- operating system, which is the Company's enhanced
version of the UNIX-Registered Trademark- operating system. Over the next
several years, the Company plans to introduce new generations of its products
based on the Intel-Registered Trademark- microprocessor architecture and the
Linux-TM- and Windows NT-Registered Trademark- operating systems.
VISUAL COMPUTING PRODUCTS
Silicon Graphics desktop workstations combine key elements of workgroup
collaboration, interactive media and computing at a range of prices and
performance. Systems in this family can be used for tasks as diverse as
manipulating 3D models for computer-aided design (CAD), crunching numbers for
chemistry and geographic information systems applications, or functioning as
a tool for video editing, animation rendering, technical publishing, World
Wide Web and intranet authoring and serving, and software development.
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DESKTOP SYSTEMS The Company offers the 02-Registered Trademark- and
Octane-Registered Trademark- families of desktop workstations based on the
MIPS microprocessor architecture and the IRIX operating system, and in the
second half of fiscal 1999, introduced the Visual Workstation family of
desktop workstations based on the Intel microprocessor architecture and the
Windows NT operating system. The O2 family of entry-level desktop
workstations features advanced 3D graphics and imaging, real-time video
capability and interactive and professional quality graphics, audio and
imaging capabilities. The O2 workstation has significant appeal in markets
such as mechanical CAD, chemistry, color publishing, film and video, software
development, education and media authoring. The Octane family of single and
dual processor workstations is designed to provide the strongest graphics and
computational capability available in the desktop category, for applications
such as 3D solids modeling, mechanical CAD, digital prototyping, 3D
visualization, animation, architectural design and professional audio and
video production. The Visual Workstation family is designed to provide key
functionality for the digital content creation and graphics enthusiast
markets.
ADVANCED GRAPHICS SYSTEMS The Onyx2-TM- family of graphics supercomputers
uses multiple microprocessors and sophisticated graphics subsystems to handle
the most demanding visual computing tasks. Graphics subsystems available with
these servers include the Onyx2Reality-TM- and InfiniteReality-Registered
Trademark- graphics subsystems. The Onyx2 family is well-suited for
applications such as computational chemistry, oil and gas research, molecular
modeling, global weather modeling, structural dynamics, fluid dynamics, image
processing, visual simulation, medical imaging and chemistry, interactive
entertainment and digital film and video production.
ALIAS/WAVEFRONT The Company's Alias/Wavefront subsidiary supplies
modeling and animation application software used by creative professionals in
the entertainment, industrial design and visualization and graphic design
markets. Its industry-leading products run on the Windows NT and IRIX
operating systems and include the Maya-Registered Trademark- family of 3D
entertainment products, StudioPaint 3D-TM-, and the Alias Studio-TM- and
AutoStudio-TM- industrial design and visualization products. Alias/Wavefront
is based in Toronto, Ontario with sales offices across North America, Europe
and Asia and worldwide distribution.
SERVERS AND SUPERCOMPUTERS
ORIGIN200 The Origin-TM-200 is a deskside server employing from one to
four processors. The Origin200 server is designed for departmental and other
workgroup serving applications as well as Web serving.
ORIGIN2000 The Origin-TM-2000 family of high-performance servers is based
on the Company's innovative cache coherent non-uniform memory access (ccNUMA)
architecture, which offers the ability to scale from as few as four to as
many as hundreds of processors while maintaining almost linear performance
per processor. This "pay as you go" flexibility is highly attractive to
customers because it allows them to buy what they need today, add as needed
while protecting their investment, and redeploy when conditions change. Key
applications in the technical and scientific markets include finite element
analysis (to determine the impact of elements like stress and temperature),
quantum chemistry calculation, seismic analysis and computational fluid
dynamics. The Origin2000 line is also targeted at certain enterprise segments
that have bandwidth and computational requirements similar to those of the
technical market. These "technical enterprise" markets include strategic
business analysis (data mining to analyze and organize database information),
internet data centers and digital asset management.
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SGI1000 FAMILY In August 1999, the Company introduced a new family of
server products, the SGI-TM-1000 server family. This server family utilizes
32-bit Intel microprocessors and will include projects ranging from a
two-microprocessor rack-optimized server, to a four-microprocessor workgroup
and applications server, to powerful eight-microprocessor database servers.
SGI1400 The SGI-TM-1400M and the SGI-TM-1400L are the first products in
the new SGI1000 server family. These servers use four microprocessors and
ship with either Microsoft-Registered Trademark- Windows NT or Linux as their
operating system.
The CRAY T3E-TM- high scalable supercomputing systems employ a highly
parallel architecture ranging from 16 to as many as 2,048 processors for a
broad range of scientific and industrial applications as diverse as petroleum
exploration, aerospace engineering and defense applications.
VECTOR SYSTEMS The Cray T90-TM- series of supercomputers delivers
maximum performance for vectorized supercomputing applications. The large
memory bandwidth of T90 systems make them ideal for problems involving huge
amounts of data, such as weather and climate modeling and large-scale auto
engineering. The Cray SV1-TM- series introduced in August 1998 uses CMOS
technology to deliver scalable supercomputing for vector applications,
suitable for use by customers in manufacturing, government, and science and
research for new product design, research, weather forecasting, national
security and other critical applications. In August 1999, the Company
announced its intention to establish arrangements to transition its
Cray-branded line of supercomputers to a strategic partner that will assume
the further development and distribution of this product line.
MIPS RISC MICROPROCESSORS
Many of the Company's system products are based on the MIPS RISC
microprocessor architecture designed by the Company and its subsidiary MIPS
Technologies, Inc. ("MTI"). The MIPS RISC microprocessor designs incorporate
a general purpose architecture and instruction set designed for high
performance over a wide range of applications. The MIPS RISC microprocessor
designs make efficient use of instruction "pipelining" techniques and
proprietary compilers, allowing significant performance gains to be realized
by optimizing the tradeoff between compiler and microprocessor functions. The
versatility of the MIPS RISC architecture makes it suitable for computer
applications from entry-level desktop systems up to supercomputers. However,
the Company's computers represent only a small percentage of the worldwide
consumption of MIPS RISC microprocessors.
MIPS RISC microprocessors are also used in a wide variety of noncomputer
applications, including disk drives, printers and copiers and, increasingly,
in consumer electronics products such as video game systems, set-top boxes,
digital cameras, and handheld computing devices running the Microsoft Windows
CE operating system. In 1998, the Company organized MTI as an independent
company focused on technology development and licensing for the digital
consumer and embedded markets. As a result of the initial public offering of
MTI shares in July 1998, and a secondary offering in May 1999, Silicon
Graphics now owns about 65% of MTI. Silicon Graphics continues to develop
MIPS RISC microprocessors for its own computer systems as part of its
computer systems organization.
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APPLICATIONS SOFTWARE
Because the Company has historically developed only a very limited set of
applications software, its customers must either develop or license from a
third party the software necessary to address their needs. The Company
maintains active programs to encourage independent software development for
its systems, including training, technology support and cooperative
marketing. The Company believes that there are currently over 2,600
registered application software programs offered for use on its systems.
MARKETING, SALES AND DISTRIBUTION
The Company sells its system products through its own direct sales force
and through several indirect channels. In fiscal 1999 direct sales accounted
for approximately half of the Company's product revenues. The direct sales
and support organization operates throughout the United States and in all
significant international markets. The Company serves smaller international
markets through distributors.
The principal indirect channels through which the Company operates are
the following:
- VARS, or value added resellers, are software companies that develop
or customize their proprietary software specifically for use with
the special graphics hardware of the Company's workstations. VARs
purchase workstations from the Company or its North American
distributor, incorporate their applications software and resell the
systems to end-users.
- VADS, or value added dealers, are typically direct sales
organizations that sell primarily into a single vertical market and
incorporate appropriate specialized third-party software with the
Company's hardware for sale to their customers.
- SYSTEMS INTEGRATORS include Silicon Graphics systems in much larger
systems customized for use by the federal government and large
commercial clients.
Many of the Company's resellers are served through Access Graphics, an
independent company that functions as a master reseller of the Company's
system products.
Information with respect to international operations and export sales may
be found in Note 16 to the Consolidated Financial Statements incorporated by
reference in Part II below. See also "Risks That Affect Our Business" below.
Although no customer accounted for 10% or more of the Company's total
revenues for fiscal 1999, 1998 or 1997, a significant reduction or delay in
sales to major customers could adversely affect the Company's operating results
CUSTOMER SERVICE AND SUPPORT
The Company believes that the quality and reliability of its system
products and the ongoing support of such products are important elements of
its competitive strategy. The Company's
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customer service organization includes field service engineers, field product
and applications specialists, product support engineers, training specialists
and administrative support personnel. In addition, the Company provides
customer education through regularly scheduled courses in system software
administration, applications programming and hardware maintenance. The
Company provides local customer support from its regional sales and service
offices located in North America, Western Europe and the Pacific Rim, with
spare parts inventory stored at each location. International distributors
provide training and support for products sold by them.
The Company typically provides a standard "return to factory" hardware
warranty against defects in materials and workmanship for periods of up to
one year.
PROFESSIONAL SERVICES
The Company believes that its future success, particularly in the server
sector, will depend in part on its ability to offer a wider variety of
solutions-oriented services, including consulting, custom engineering and
systems integration services. The Company's efforts to date in this area have
been small in scale and have not materially contributed to revenues. However,
the Company expects over time to increase its investment in professional
services.
RESEARCH AND DEVELOPMENT
The Company's research and development program is directed principally
toward maintaining and enhancing the Company's competitive position through
incorporating the latest advances in microprocessor, hardware, software and
networking technologies. This effort is focused specifically on developing
and enhancing its computing architectures, graphics subsystems, compiler
software, operating system, applications software and development tools.
Simultaneously, the Company seeks to develop new ways in which to increase
product reliability, reduce manufacturing costs and improve product
development lead times.
As the evolution to industry-standard instead of proprietary components
continues, the Company's ability to focus its research and development
investments in areas where it has specific competencies for innovation will
become increasingly important. There are no assurances that the Company will
be able to sufficiently focus its development efforts or that its investments
will yield sufficient differentiation to achieve and sustain a competitive
advantage.
During fiscal 1999, 1998 and 1997, the Company spent approximately $380
million, $459 million, and $479 million, respectively, on research and
development. Those amounts represented 13.8%, 14.8%, and 13.1%, respectively,
of revenues. The Company is committed to continuing innovation and
differentiation and as a result will most likely continue to make research
and development investments that are above average for the computer industry
as a percentage of revenues.
MANUFACTURING
The Company's manufacturing operations primarily involve assembling high
level subassemblies and systems and testing major purchased subassemblies.
Products are subjected to substantial environmental stress and electronic
testing prior to shipment to customers.
The Company primarily manufactures and ships its products from its
facilities in Chippewa Falls, Wisconsin and near Neuchatel, Switzerland. Both
of these facilities focus on servers, advanced graphics systems and
supercomputers; the Company plans to transition the manufacture of its desktop
systems to contract manufacturing partners during calendar 1999.
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The Company continually evaluates the allocation of manufacturing
activities among the Company's own operations and those of suppliers and
subcontractors. This allocation may be affected by fluctuations in the volume
of business, geopolitical, economic and technological developments and other
factors. The Company is actively outsourcing significant manufacturing
activities to companies that are able to manufacture at a lower cost.
Most of the Company's products incorporate components that are available
from only one or limited sources. Key components include application specific
integrated circuits ("ASICs"), storage products, especially RAID-based
products, and certain memory products. The Company's present strategy is to
move toward components that are readily available from a greater number of
sources; however, such a transition may take a period of time to complete.
Reliance on single or limited source vendors involves several risks,
including the possibility of a shortage of certain key components that meet
the Company's product specifications. Risks also include long lead times,
reduced control over delivery schedules, and the possibility of charges for
excess and obsolete inventory.
The Company also has single sources for certain peripherals,
communications controllers and power supplies, and the monitors and plastic
cabinets used across the Company's system products. The Company believes
that, in most of these cases, alternative sources of supply could be
developed over a period of time. However, a reduction or interruption in
supply or a significant increase in the price of one or more single or
limited source components would, at least in the short term, adversely affect
the Company's operating results.
Many of the Company's suppliers are located outside the United States,
especially in Japan. The prices of parts from these suppliers have been and
may be affected significantly by such factors as protectionist measures and
changes in currency exchange rates between the United States and other
countries. In addition, changes in the availability of certain memory chips
(DRAMs, SRAMs and VRAMs) have caused, and in the future may cause,
significant changes in their prices.
COMPETITION
The computer industry is highly competitive and is characterized by rapid
technological advances in both hardware and software development. These
advances result in frequent new product introductions, short product life
cycles and increased new product capabilities, typically representing
significant price/performance improvements. The principal competitive factors
in the Company's market are product features, price/performance, networking
capabilities, product quality and reliability, ease of use, capabilities of
the system software, availability of applications software, customer support,
product availability, corporate reputation and price. The strong competition
faced throughout the Company's product line can result in significant
discounting from list price.
The Company's principal competition has historically come from other
workstation and computer system manufacturers and, to a lesser extent, from
graphics subsystem and terminal vendors and graphics integrated circuit
manufacturers. The principal workstation and computer manufacturers that
compete in the Company's markets are Compaq, Dell Computer, Hewlett Packard,
IBM and Sun Microsystems. The Company is facing increasing competition at the
lowest end of the workstation market from systems based on personal computer
technologies such as the Windows NT operating system, Intel microprocessors
and graphics acceleration cards.
In the high end of the supercomputer market, the Company faces
competition from IBM as well as from NEC, Hitachi and Fujitsu.
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PROPRIETARY RIGHTS AND LICENSES
The Company has been granted or has applications pending for a
significant number of U.S. patents, and will continue to seek patent coverage
for its inventions in both the United States and foreign countries. The
Company also has applied for and holds various trademark registrations in the
United States and in selected foreign countries. The Company will continue to
seek protection for its inventions, trademarks, maskworks and copyrights
where appropriate.
As is customary in its industry, the Company licenses from third parties
a wide range of software for its internal use and for the use of its
customers. The Company licenses the UNIX operating system on a non-exclusive
basis from Novell, Inc., and sublicenses it to its customers.
The Company's ability to compete may be affected by its ability to
protect proprietary information and to obtain necessary licenses on
commercially reasonable terms. The extent to which U.S. and international
intellectual property laws protect the Company's products, and the
enforceability of end-user license agreements, have not been fully
determined, and the computer industry has seen a substantial increase in
litigation with respect to intellectual property matters. Such litigation or
changes in the interpretation of intellectual property laws could expand or
reduce the extent to which the Company or its competitors are able to protect
their intellectual property or require changes in the design of products
which could have an adverse impact on the Company. The Company has several
intellectual property lawsuits pending against it today. There can be no
assurance that the Company will not be made a party to significant litigation
regarding intellectual property matters in the future. See "Legal
Proceedings."
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. One of the principal market sectors in which the
Company competes -- supercomputers -- has declined over the past few
years, and the Company believes that this decline represents a long-term
trend. The Company's goal is to generate an increasing proportion of its
revenue from growing markets, including Intel-based servers and UNIX-based
scalable servers such as its Origin server product family. The Company has
announced a product roadmap that will, over the next five years, shift its
products to the Intel microprocessor architecture. To further accelerate this
transition, the Company announced in August 1999 its intention to establish
arrangements to transition its Visual Workstation line of Windows NT-based
workstations and its Cray-branded line of supercomputers to strategic
partners who will assume the further development and distribution of these
product lines. The result of these alliances and planned restructured
operations will be a smaller revenue base and workforce in fiscal 2000, with
the goal of returning to sustainable profitability. 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 in fiscal 2000 will largely depend on the successful
implementation of these alliances and related restructuring activities in
early fiscal 2000 with minimal disruption, and on growth in the server
business. There is no assurance that the Company will successfully complete
the strategic alliances and related restructuring activities required to
achieve its fiscal 2000 objectives.
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
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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.
EXPENSE REDUCTION PROGRAM. During fiscal 1999, the Company reduced its
operating expenses by about $240 million from the level of fiscal 1998
operating expenses. In August 1999, the Company announced and began to
implement a restructuring program aimed at bringing its expenses more in line
with expected revenue levels resulting from its refocused business operations
and restoring long-term profitability. As part of this effort, the Company
expects, through the anticipated transfer of businesses to partners, the
elimination of positions and managed hiring, to end fiscal 2000 with about
1/3 fewer employees than was the case at the end of fiscal 1999. These steps,
and generally tighter operating expense controls, are part of an overall
program to reduce the Company's expense structure by approximately $300
million in fiscal 2000. While the objective is to reduce the Company's costs
in ways that will not have a material impact on revenue levels, there is no
assurance that this will be achieved.
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
longer-term transition to the Intel architecture and additional outsourcing
of manufacturing, will increase the Company's dependence on 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
fails to meet product release schedules, or if unanticipated quality issues
arise with products from 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.
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 has undertaken 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
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. In the past year the Company
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has seen the number of turns of inventory increase significantly and obtained
improved efficiencies which have decreased the costs of goods sold. Continued
implemention of 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. 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 both as a user of information systems in the operation of its
business and as a supplier of computer systems and related software,
including operating system software, to customers.
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 Company's recently released IRIX
6.5 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. The Company believes that it
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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 this issues 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. 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 our 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 ensure year 2000 compliance. The Company's 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
herein is based on the Company's current assessment of ongoing activities and
is subject to change as the Company monitors these activities. The Company is
currently developing appropriate contingency plans for potential year 2000
problems.
The Year 2000 disclosure set forth above is "year 2000 readiness
disclosure" as defined in the Year 2000 Information and Readiness Disclosure
Act of 1998.
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. A portion of the Company's business requires security
clearances from the United States government. The Company is presently
discussing appropriate measures to maintain its clearances in light of the
fact that Mr. Robert Bishop, who was appointed as Chief Executive Officer in
the fall of 1999, is not a United States citizen. Any disruption or
limitations in the Company's ability to do business with the United States
government could have an adverse impact on the Company.
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
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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 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.
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.
For purposes of specific risk analysis, the Company uses sensitivity
analysis to determine the impacts that market risk exposures may have on the
fair values of the Company's debt and financial instruments. The financial
instruments included in the sensitivity analysis consist of all of the
Company's cash and cash equivalents, marketable investments, short-term and
long-term debt and all derivative financial instruments. Currency forward
contracts and currency options constitute the Company's portfolio of
derivative financial instruments.
To perform sensitivity analysis, the Company assesses the risk of loss in
fair values from the impact of hypothetical changes in interest rates and
foreign currency exchange rates on market sensitive instruments. The market
values for interest risk are computed based on the present value of future
cash flows as impacted by the changes in rates attributable to the market
risk being measured. The discount rates used for the present value
computations were selected based on market interest rates in effect at June
30, 1999 and 1998. The market values for foreign exchange risk are computed
based on spot rates in effect at June 30, 1999 and 1998. The market values
that result from these computations are compared to the market values of
these financial instruments at
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June 30, 1999 and 1998. The differences in this comparison are the
hypothetical gains or losses associated with each type of risk.
The results of the sensitivity analysis at June 30,1999 and 1998 are as
follows:
Interest Rate Risk:. A percentage point decrease in the level of interest
rates with all other variables held constant would result in a decrease in
the aggregate fair value of our financial instruments by $14 million at both
June 30, 1999 and 1998. A percentage point increase in the level of interest
rates with all other variables held constant would result in an increase in
the aggregate fair value of our financial instruments by $13 million and $12
million, respectively.
Foreign Currency Exchange Rate Risk: A 10% decrease in levels of foreign
currency exchange rates, 20% for Asian currencies, against the U.S. dollar
with all other variables held constant would result in an increase in the
fair values of our financial instruments by $8 million at June 30,1999, and a
decrease in the fair values of our financial instruments by $14 million at
June 30, 1998. A 10% increase in levels of foreign currency exchange rates,
20% for Asian currencies, would result in a decrease in the fair values of
our financial instruments by $3 million at June 30, 1999, and an increase in
the fair values of our financial instruments by $12 million at June 30, 1998.
The change in the relative sensitivity of the fair market value of foreign
currency exchange rates in fiscal 1999 compared with fiscal 1998 is primarily
driven by the volume of systems shipped and billed in U.S. dollars by our
Swiss manufacturing subsidiary which operates in local functional currency.
EMPLOYEES
As of June 30, 1999, the Company had approximately 9,191 full-time
employees, as compared to approximately 10,286 at June 30, 1998. During
fiscal 2000, the Company expects the number of employees to be reduced by
about 1/3 in order to bring the Company down to the appropriate size for the
forecasted revenue and income. The Company's future success will depend, in
part, on its ability to continue to attract, retain and motivate highly
qualified technical, marketing and management personnel, who are in great
demand. The Company has never had a work stoppage, and no employees are
represented by a labor union. The Company has workers' councils where
required by European Union or other applicable laws. The Company believes
that its employee relations are good.
CORPORATE DATA
The Company was originally incorporated as a California corporation
in November 1981, and reincorporated as a Delaware corporation in January
1990.
ITEM 2. PROPERTIES
The Company believes that, while it currently has or is developing
sufficient facilities to conduct its operations during fiscal 1999, it will
continue to acquire both leased and owned facilities throughout the world as
its business requires. The Company leases sales, service and administrative
offices worldwide and has its principal corporate and manufacturing
facilities in the following locations:
CALIFORNIA The Company's corporate offices and its primary research
and development operations are located in Mountain View, California, where
the Company leases or owns a total of about 1,668,000 square feet. These
facilities include a ten-building campus facility of about 727,000 square
feet, leased by the Company through the years 2000 to 2005; a four-building,
518,000 square foot campus located on 22 acres of leased land in the same
area; and a sales headquarters building comprising approximately 126,000
square feet and located on 7.5 acres owned by the Company near its Mountain
View headquarters. The Company also leases six other buildings near its
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Mountain View headquarters, comprising approximately 306,000 square feet. The
Company is currently developing a general purpose office facility of about
400,000 square feet on leased land in the same area; this new facility will
replace the ten-building campus facility as those buildings go off lease.
MINNESOTA AND WISCONSIN The Company also owns manufacturing, research and
development and service facilities of about 595,000 square feet in Chippewa
Falls, Wisconsin. In March of 1999, the Company sold its research and
development, sales and administrative facilities of about 495,000 square feet
in Eagan, Minnesota, to Wam!Net. The sale to Wam!Net included a lease-back of
325,796 square feet of the facility for a period of five years. The sale also
included an investment by the Company in Wam!Net and a preferred provider
agreement whereby Wam!Net and the Company agreed to purchase hardware,
software and service from each other over a four-year period beginning
January 1, 1999.
SWITZERLAND The Company's European manufacturing and support center near
Neuchatel, Switzerland is located in a facility owned by the Company,
consisting of about 170,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
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. On July 2,
1999, the U.S. Court of Appeals for the Ninth Circuit upheld the dismissal.
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. In April of 1999, the U.S. Court
of Appeals for the Second Circuit reversed the dismissal and remanded the
case to the U.S. District Court for the District of Connecticut. The U.S.
Court of Appeals denied defendants' petition for rehearing en banc.
The Company has settled 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,
alleged 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 in
December 1998, the terms of which were reflected in a Stipulation of
Settlement filed with the Court in January 1999. Under the settlement
agreement, the defendants have agreed to establish a $15 million escrow fund
that shall be administered to pay the representative plaintiffs' costs and
attorneys' fees, to notify and certify members of the class and to pay the
claims of the class members. The settlement amount was largely covered by
insurance. The settlement agreement
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provides for release of all parties' claims in connection with the class
action and is subject to final approval of the Court.
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.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of September
1999 are as follows:
<TABLE>
<CAPTION>
NAME EXECUTIVE
---- AGE POSITION AND PRINCIPAL OCCUPATION OFFICER
--- --------------------------------- SINCE
---------
<S> <C> <C> <C>
Robert R. Bishop 56 Chairman, Chief Executive Officer and Director 1991
Kurt Akeley 41 Senior Vice President and Chief Technology Officer 1999
Kenneth L. Coleman 56 Senior Vice President, Global Sales, Service & Marketing 1987
Steven J. Gomo 47 Senior Vice President, Chief Financial Officer 1998
William M. Kelly 45 Senior Vice President, Corporate Operations and Secretary 1994
John R. Vrolyk 47 Senior Vice President, Computer Systems Business Unit 1998
Sandra M. Escher 39 Vice President and General Counsel 1999
Betsy Rafael 38 Vice President, Corporate Controller 1998
</TABLE>
Executive officers of the Company are elected annually by the Board
of Directors and serve at the Board's discretion. There are no family
relationships among any directors, nominees for director or executive
officers of the Company.
Except as set forth below, all of the officers have been associated with
the Company in their present positions for more than five years.
Mr. Bishop was appointed Chairman and Chief Executive Officer of
the Company in the fall of 1999. From July 1995 to February 1999, he was the
Chairman of the Board of Silicon Graphics World Trade Corporation. Prior to
July 1995, Mr. Bishop served as President of Silicon Graphics World Trade
Corporation, a position he had held since July 1986.
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<PAGE>
Mr. Akeley was appointed Senior Vice President, Chief Technology Officer
in September 1999. Mr. Akeley co-founded the Company in 1982 and has been
Vice President and Chief Engineer since 1990.
Mr. Coleman was appointed Senior Vice President, Global Sales, Service
and Marketing in June of 1999. Between 1997 and 1999, he was Senior Vice
President, Customer and Professional Services From 1987 to 1997 he served as
Senior Vice President, Administration of the Company.
Mr. Gomo joined the Company in February 1998 as Senior Vice President and
Chief Financial Officer. Prior to that, he was employed by the
Hewlett-Packard Company serving most recently as the General Manager of its
InkJet Manufacturing Operations.
Mr. Kelly assumed his current responsibilities in 1997 and served as
acting Chief Financial Officer from May 1997 to February 1998. He joined the
Company in 1994 as Vice President, Business Development, General Counsel and
Secretary. During 1996, Mr. Kelly also served as Senior Vice President,
Silicon Interactive Group. Prior to joining the Company, Mr. Kelly had
practiced law since 1978 with the firm of Shearman & Sterling, most recently
as co-managing partner of that firm's San Francisco office.
Mr. Vrolyk was appointed Senior Vice President, Computer Systems Business
Unit in October 1998. He joined the Company in April 1997 as Vice
President/General Manager of the Light Client Division and in January 1998
became the Vice President/General Manager of the Server and Supercomputer
Business. Prior to joining the Company, he was Vice President/General Manager
of the DDS Workgroup and Impact Group at Xerox Corporation.
Ms. Escher was appointed Vice President and General Counsel in April
1999. She joined the Company in July 1993 as Securities Counsel and served as
the Director of Corporate Legal Services between September 1996 and April 1999.
Ms. Rafael became Vice President, Corporate Controller in May 1998.
She joined the Company in November 1994 and served in a variety of capacities
in the North American field organization. Prior to joining the Company, Ms.
Rafael was employed by Sun Microsystems in the SunService Division.
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<PAGE>
PART II
With the exception of the information specifically incorporated by
reference from the Company's 1999 Annual Report to Stockholders (the "1999
Annual Report") in Parts I, II and IV of this Form 10-K, the 1999 Annual
Report is not to be deemed filed as part of this Report.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this Item is incorporated by reference to the
section entitled "Price Range of Common Stock" on page 12 of the Company's
1999 Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to the
section entitled "Selected Consolidated Financial Data" on page 10 of the
Company's 1999 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item is incorporated by reference to the
section entitled "Management's Discussion and Analysis" on pages 13 through
22 of the Company's 1999 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is incorporated by reference to the
section entitled "Management's Discussion and Analysis - Risks That Affect
Our Business - Market Risk" on pages 21 and 22 of the Company's 1999 Annual
Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to the
consolidated financial statements and notes thereto and to the section
entitled "Quarterly Data" on pages 23 through 44 and 11 of the Company's 1999
Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
Certain information required by Part III is omitted from this Report in
that the Company has filed its definitive proxy statement pursuant to
Regulation 14A (the "1999 Proxy Statement") not later than 120 days after the
end of the fiscal year covered by this Report, and certain information
included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item
is incorporated by reference to the information set forth in the 1999 Proxy
Statement on pages 3 and 4 under the heading "Proposal No. 1 Election of
Directors - Directors and Nominee for Director."
The information concerning executive officers and family relationships
required by this Item is incorporated by reference to the section in Part I
hereof entitled "Executive Officers of the Registrant."
The information concerning compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, required by this Item is
incorporated by reference to information set forth on pages 12 and 13 of the
1999 Proxy Statement under the heading "Executive Officer Compensation
- -Compliance with Section 16(a) of the Exchange Act."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
information set forth in the 1999 Proxy Statement on pages 5 and 6 under the
headings "Proposal No. 1 - Election of Directors - Compensation Committee
Interlocks and Insider Participation" and "- Director Compensation"; on pages
11 and 12 under the headings "Executive Officer Compensation - Summary
Compensation Table", "- Option Grants in Fiscal 1999" and "Option Exercises
in Fiscal Year 1999 and Fiscal Year-End Option Values"; on pages 9 and 10
under the heading "Report of the Compensation and Human Resources Committee
of the Board of Directors"; and on page 14 under the heading "Company Stock
Price Performance Graph".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
information set forth in the 1999 Proxy Statement on pages 1 and 2 under the
headings "Information Concerning Solicitation and Voting - Record Date and
Principal Share Ownership" and "- Voting and Solicitation" and on page 8
under the heading "Other Information - Security Ownership of Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
information set forth in the 1999 Proxy Statement on page 13 under the
heading "Certain Transactions."
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. FINANCIAL STATEMENTS. The following consolidated financial
statements and supplementary information of Silicon Graphics, Inc., and
Report of Ernst & Young LLP, Independent Auditors are incorporated by
reference to pages 11 and 23 through 45 of the Registrant's 1999 Annual
Report:
Consolidated Statements of Operations - Years Ended June 30, 19989
1998 and 1997
Consolidated Balance Sheets - June 30, 1999 and 1998
Consolidated Statements of Cash Flows - Years Ended June 30, 1999,
1998 and 1997
Consolidated Statements of Stockholders' Equity - Years Ended June
30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Report of Independent Auditors
SUPPLEMENTARY INFORMATION
Quarterly Data (Unaudited)
2. FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedule of Silicon Graphics, Inc. is filed as part of this Report and should
be read in conjunction with the Consolidated Financial Statements of Silicon
Graphics, Inc.
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION PAGE
<S> <C> <C>
II Valuation and Qualifying Accounts S-1
</TABLE>
Schedules not listed above have been omitted because they are not applicable
or are not required or the information required to be set forth therein is
included in the consolidated financial statements or notes thereto.
3. EXHIBITS. The following Exhibits are filed as part of, or
incorporated by reference into, this Report:
<TABLE>
<S> <C>
3.1.1(9) Restated Certificate of Incorporation of the Company.
3.1.2(13) Certificate of Designation of the Series E Preferred Stock
filed June 13, 1995.
3.2(16) Bylaws of the Company, as amended.
4.1(5) Amended and Restated Preferred Shares Rights Agreement,
dated as of May 6, 1992 between the Company and The First
National Bank of Boston, including the Certificate of
Designation of Rights, Preferences and Privileges of Series
B Participating Preferred Stock, the form of Rights
Certificate and the Summary of Rights attached thereto as
Exhibits A, B, and C respectively.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
4.2(10) First Amendment to Rights Agreement dated as of May 2, 1995
between the Company and The First National Bank of Boston.
4.3(16) Indenture dated February 1, 1986 between Cray Research,
Inc. and Manufacturers Hanover Trust Company, as Trustee.
4.4(16) First Supplemental Indenture dated June 30, 1996 between
the Company, Cray Research, Inc., and Chemical Bank
(formerly Manufacturers Hanover Trust Company).
4.5(20) Indenture dated as of September 1, 1997 between the Company
and State Street Bank and Trust Company of California,
N.A., as Trustee.
9.1(13) Voting and Exchange Trust Agreement between the Company and
Montreal Trust Company of Canada dated June 15, 1995.
10.1(1) Software Agreement dated as of January 4, 1986, as
supplemented June 6, 1986, and Sublicensing Agreement dated
as of June 9, 1986 between the Company and AT&T Information
Systems Inc.
10.2(2) Software License Agreement dated January 24, 1986, between
the Company and AT&T Information Systems Inc.
10.3(3) Stock Purchase Agreement dated March 2, 1990 among the
Company, NKK Corporation and NKK U.S.A. Corporation.
10.4(6) Exchange Agreement dated August 14, 1992 among the Company,
NKK Corporation and NKK U.S.A. Corporation.
10.5(6) Form of Indemnification Agreement entered into between the
Company and its directors, executive officers and certain
other agents.
10.6(6) Form of Indemnification Agreement entered into between the
Company and its directors, executive officers and certain
other agents. (Revised)
10.8(22) Form of Agreement entered into by the Company with its
executive officers, dated as of November 14, 1997.
10.9(21)* Promissory Note dated June 18, 1997 issued to the Company
by William M. Kelly.
10.10(19)* 1984 Incentive Stock Option Plan, as amended, and amended
form of Incentive Stock Option Agreement.
10.11(9)* Directors' Stock Option Plan and form of Stock Option
Agreement as amended as of October 31, 1994.
10.12(6)* 1985 Stock Incentive Program.
10.13(6)* 1986 Incentive Stock Option Plan, as amended, and amended
forms of Incentive Stock Option Agreement and Nonstatutory
Stock Option Agreement.
10.16(7)* 1993 Long-Term Incentive Stock Plan and form of stock
option agreement.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
10.17(14)* 1996 Supplemental Non-Executive Equity Incentive Plan and
form of stock option agreement, as amended
10.18(17)* Employee Stock Purchase Plan, as amended as of October 30,
1996.
10.19(23)* 1998 Employee Stock Purchase Plan
10.20(8)* Non-Qualified Deferred Compensation Plan dated as of
September 9, 1994.
10.21(19)* Addendum to the Non-Qualified Deferred Compensation Plan.
10.22(11)* Alias Research Inc.'s 1988 Employee Share Ownership Plan
Option Agreement.
10.23(11)* Alias Research Inc.'s 1989 Employee Share Ownership Plan
Option Agreement.
10.24(11)* Alias Research Inc.'s 1990 Employee Share Ownership Plan
and standard forms of Option Agreements.
10.25(11)* Alias Research Inc.'s 1994 Stock Plan and standard forms of
Option Agreements.
10.26(12)* Wavefront Technologies, Inc. 1990 Stock Option Plan with
standard form of Option Agreement.
10.27(15)* Cray Research, Inc. 1989 Non-Employee Directors' Stock
Option Plan and form of stock option agreement.
13.1 Excerpts from Annual Report for the year ended June 30,
1999.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
</TABLE>
- -----------
* This exhibit is a management contract or compensatory plan required to
be filed as an exhibit to this Form 10-K pursuant to Item 14(c).
<TABLE>
<S> <C>
(1) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-1 (No. 33-8892), which became effective October 29,
1986.
(2) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-1 (No. 33-12863), which became effective March 31,
1987.
(3) Incorporated by reference to exhibits to the Company's Current
Report on Form 8-K dated March 16, 1990.
(4) Incorporated by reference to exhibits to the Company's Post-Effective
Amendment to Registration Statement on Form S-8 (No. 33-16529), which
became effective June 18, 1990.
(5) Incorporated by reference to exhibits to the Company's Quarterly Report
on Form 10-Q for the period ended March 31, 1992.
(6) Incorporated by reference to exhibits to the Company's Annual Report
on Form 10-K for the year ended June 30, 1992.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
(7) Incorporated by reference to exhibits to the Company's Quarterly Report
on Form 10-Q for the period ended September 30, 1993.
(8) Incorporated by reference to exhibits to the Company's Annual Report
on Form 10-K for the year ended June 30, 1994.
(9) Incorporated by reference to exhibits to the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1994.
(10) Incorporated by reference to exhibits to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1995.
(11) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-8 (No. 33-60215), which became effective June
14, 1995.
(12) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-8 (No. 33-60213), which became effective June
14, 1995.
(13) Incorporated by reference to exhibits to the Company's Annual Report
on Form 10-K for the year ended June 30, 1995.
(14) Incorporated by reference to exhibits to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1996.
(15) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-8 (No. 333-06403), which became effective June
20, 1996.
(16) Incorporated by reference to exhibits to the Company's Annual Report
on Form 10-K for the period ended June 30, 1996, as amended.
(17) Incorporated by reference to exhibits to the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1996.
(18) Incorporated by reference to exhibits to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1997.
(19) Incorporated by reference to exhibits to the Company's Annual Report
on Form 10-K for the year ended June 30, 1991.
(20) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-4 (No. 333-32379), which became effective August
7, 1997.
(21) Incorporated by reference to exhibits to the Company's Annual Report
on Form 10-K for the year ended June 30, 1997.
(22) Incorporated by reference to exhibits to the Company's Quarterly
Report on Form 10-Q for the period ended December 31, 1997.
(23) Incorporated by reference to exhibits to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1999.
(b) REPORTS ON FORM 8-K.
No Current Reports on Form 8-K were filed during the quarter ended
June 30, 1999.
</TABLE>
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<PAGE>
TRADEMARKS USED IN THE FORM 10-K
Silicon Graphics, InfiniteReality, IRIX, O2, Octane and Onyx are
registered trademarks, Onyx2, Onyx2Reality, Origin, and SGI are trademarks,
of Silicon Graphics, Inc. MIPS is a registered trademark of MIPS
Technologies, Inc. used under license by Silicon Graphics, Inc. Cray is a
registered trademark and Cray T3E, Cray T90 and Cray SV1 are trademarks of
Cray Research, L.L.C. Alias is a registered trademark, and Alias/Wavefront,
Alias Studio, Alias StudioPaint 3D and Alias AutoStudio are trademarks, of
Alias/Wavefront, a division of Silicon Graphics Limited. Maya is a registered
trademark of Silicon Graphics, Inc., and exclusively used by Alias/Wavefront,
a division of Silicon Grpahics Limited.
UNIX is a registered trademark licensed exclusively through X/Open
Company Limited. Microsoft, Windows and Windows NT are registered trademarks
of Microsoft Corporation. Intel is a registered trademark of Intel Corp.
Linux is a trademark of Linus Torvalds in the U.S. and other countries.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: September 27, 1999 SILICON GRAPHICS, INC.
By: /S/ ROBERT R. BISHOP
------------------------------
Robert R. Bishop
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ ROBERT R. BISHOP Chairman, Chief Executive Officer and September 27, 1999
- --------------------------
Robert R. Bishop Director (Principal Executive Officer)
/S/ STEVEN J. GOMO Senior Vice President, Finance and Chief September 27, 1999
- -------------------------- Financial Officer (Principal Financial
Steven J. Gomo and Accounting Officer)
/S/ C. RICHARD KRAMLICH Director September 27, 1999
- --------------------------
C. Richard Kramlich
/S/ ROBERT A. LUTZ Director September 27, 1999
- --------------------------
Robert A. Lutz
/S/ JAMES A. MCDIVITT Director September 27, 1999
- --------------------------
James A. McDivitt
/S/ LUCILLE SHAPIRO, PH.D. Director September 27 1999
- --------------------------
Lucille Shapiro, Ph.D.
/S/ ROBERT B. SHAPIRO Director September 27, 1999
- --------------------------
Robert B. Shapiro
</TABLE>
-23-
<PAGE>
Schedule II
SILICON GRAPHICS, INC.
Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Additions Deductions
-------------------------- --------------
Balance at Charged to Balance at
Beginning Costs and Write-offs/ End of
DESCRIPTION of Period Expenses Other Other Period
------------- -------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1997
Accounts receivable allowance $ 23,767 $ 8,427 $ 0 $ (8,138) $ 24,056
Warranty reserve $ 18,946 $ 26,361 $ 0 $ (27,358) $ 17,949
Deferred tax asset allowance $ 60,819 $ 8,228 $ 0 $ 0 $ 69,047
Year ended June 30, 1998
Accounts receivable allowance $ 24,056 $ 622 $ 0 $ (7,215) $ 17,463
Warranty reserve $ 17,949 $ 42,110 $ 0 $ (27,327) $ 32,732
Deferred tax asset allowance $ 69,047 $ 62,528 $ 10,600(1) $ (51,470)(2) $ 90,705
Year ended June 30, 1999
Accounts receivable allowance $ 17,463 $ 351 $ 0 $ (2,407) $ 15,407
Warranty Reserve $ 32,732 $ 36,111 $ 9,945(3) $ (40,168) $ 38,620
Deferred tax asset allowance $ 90,705 $ 13,511 $ 11,439(1) $ (10,291) $105,364
</TABLE>
(1) Reserve of paid-in capital benefits relate to stock option activity
(2) Reduction in valuation allowance resulting in an adjustment to purchased
intangibles from the Cray acquisition.
(3) Reclassification from other accrual accounts
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended June 30
------------------------------------------------------------------
(in thousands, except per share amounts) 1999 1998 1997 1996(3) 1995
<S> <C> <C> <C> <C> <C>
Operating Data:
Total revenue $2,748,957 $3,100,610 $3,662,601 $2,921,316 $2,228,268
Costs and expenses:
Cost of revenue 1,603,250 1,963,551 2,022,546 1,482,439 1,032,059
Research and development 380,346 459,188 479,101 353,461 247,678
Selling, general and administrative 907,612 1,068,429 1,038,313 807,830 619,259
Other operating expense(1) (15,107) 205,543 10,757 103,193 22,000
------------------------------------------------------------------
Operating (loss) income (127,144) (596,101) 111,884 174,393 307,272
Interest and other income
(expense), net(2) 252,865 (818) (13,694) 14,395 9,447
------------------------------------------------------------------
Income (loss) before income taxes 125,721 (596,919) 98,190 188,788 316,719
Net income (loss) 53,829 (459,627) 78,551 115,037 224,856
Net income (loss) per share:
Basic $ 0.29 $ (2.47) $ 0.44 $ 0.70 $ 1.44
Diluted $ 0.28 $ (2.47) $ 0.43 $ 0.65 $ 1.26
Shares used in the calculation of
net income (loss) per share:
Basic 186,374 186,149 175,548 162,658 156,437
Diluted 189,427 186,149 182,637 175,790 182,837
Balance Sheet Data:
Cash, cash equivalents and
marketable and restricted
investments $ 782,369 $ 736,720 $ 374,292 $ 456,937 $ 780,012
Working capital 869,980 968,700 1,229,388 994,817 889,371
Total assets 2,788,257 2,964,706 3,344,592 3,158,246 2,206,619
Long-term debt and other 387,005 403,522 419,144 381,490 287,267
Stockholders' equity 1,424,199 1,464,512 1,839,242 1,675,318 1,346,170
Statistical Data:
Number of employees 9,191 10,286 10,930 10,485 6,308
Long-term debt and other/
total capitalization 21% 22% 19% 19% 18%
------------------------------------------------------------------
</TABLE>
(1) Fiscal 1999 amount includes a change in previously estimated
restructuring charges ($14 million). Fiscal 1998 amount includes
restructuring charges ($144 million), a charge for long-lived asset
impairment ($47 million) and a write-off of acquired in-process
technology ($17 million). Fiscal 1997 amount represents merger-related
expenses. Fiscal 1996 amount includes write-off of acquired in-process
technology ($98 million) and merger-related expenses. Fiscal 1995 amount
represents merger-related expenses.
(2) Fiscal 1999 amount includes a $273 million gain on the sale of a portion
of SGI's interest in MIPS.
(3) Amounts reflect the April 2, 1996 acquisition of Cray which was accounted
for as a purchase.
10
<PAGE>
QUARTERLY DATA
<TABLE>
<CAPTION>
Fiscal 1999 (unaudited)
---------------------------------------------------
(in thousands, except per share amounts) June 30 March 31 Dec. 31 Sept. 30
<S> <C> <C> <C> <C>
Total revenue $ 828,603 $ 619,175 $ 684,823 $ 616,356
Costs and expenses:
Cost of revenue 469,901 359,636 394,973 378,740
Research and development 87,698 93,331 97,179 102,138
Selling, general and administrative 237,105 215,574 222,005 232,928
Other operating expense(1) (1,107) (6,000) (8,000) --
---------------------------------------------------
Operating income (loss) 35,006 (43,366) (21,334) (97,450)
Interest and other income (expense), net(2) 212,493 (7,358) (3,524) 51,254
---------------------------------------------------
Income (loss) before income taxes 247,499 (50,724) (24,858) (46,196)
Net income (loss) 157,793 (39,957) (20,341) (43,666)
Net income (loss) per share:
Basic $ 0.85 $ (0.21) $ (0.11) $ (0.24)
Diluted $ 0.81 $ (0.21) $ (0.11) $ (0.24)
Shares used in the calculation of net income
(loss) per share:
Basic 186,197 186,685 186,417 186,329
Diluted 196,839 186,685 186,417 186,329
---------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1998 (unaudited)
---------------------------------------------------
(in thousands, except per share amounts) June 30 March 31 Dec. 31 Sept. 30
<S> <C> <C> <C> <C>
Total revenue $ 773,561 $ 708,291 $ 850,765 $ 767,993
Costs and expenses:
Cost of revenue 542,355 504,282 478,991 437,923
Research and development 113,746 111,975 117,113 116,354
Selling, general and administrative 304,829 250,917 251,262 261,421
Other operating expense(3) 90,320 43,393 52,729 19,101
---------------------------------------------------
Operating loss (277,689) (202,276) (49,330) (66,806)
Interest and other income (expense), net 218 (267) 1,538 (2,307)
---------------------------------------------------
Loss before income taxes (277,471) (202,543) (47,792) (69,113)
Net loss (220,041) (152,569) (31,479) (55,538)
Net loss per share--basic and diluted $ (1.17) $ (0.81) $ (0.17) $ (0.31)
Shares used in the calculation of net loss
per share--basic and diluted 187,472 187,643 187,874 182,160
---------------------------------------------------
</TABLE>
(1) Amounts include a change in previously estimated restructuring charges of
$8 million in the second quarter and $6 million in the third quarter.
(2) Amounts include a gain on the sale of a portion of SGI's interest in MIPS of
$54 million in the first quarter and $219 million in the fourth quarter.
(3) Amounts include a $17 million write-off of acquired in-process technology in
the first quarter; restructuring charges of $53 million, $44 million and
$47 million in the second, third and fourth quarters, respectively; and a
$47 million charge for long-lived asset impairment in the fourth quarter.
11
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol of SGI. The following table sets forth, for the periods indicated, the
high, low, and close prices for the Common Stock as reported on the NYSE.
Price Range of Common Stock
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
-------------------------------------------------------------------------------------
Low High Close Low High Close
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 9.06 $ 15.00 $ 9.38 $ 15.00 $ 30.19 $ 26.25
Second Quarter 7.38 13.94 12.88 11.56 27.50 12.44
Third Quarter 13.13 20.88 16.69 10.94 16.19 13.94
Fourth Quarter 11.69 16.63 16.38 11.06 16.38 12.13
-------------------------------------------------------------------------------------
</TABLE>
SGI had 8,445 stockholders of record as of June 30, 1999. We have not paid
any dividends on our common stock. We currently intend to retain earnings for
use in our business and do not anticipate paying cash dividends to common
stockholders.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
THIS ANNUAL REPORT INCLUDES FORWARD-LOOKING STATEMENTS REGARDING OUR 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, 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 OUR PRODUCTS,
INCLUDING EXPECTED RATES OF GROWTH AND DECLINE IN OUR 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 PROFIT 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
OUR SERVER STRATEGY; RISKS RELATED TO DEPENDENCE ON OUR 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; 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 CHANGES OCCUR AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE. THE MATTERS ADDRESSED IN THIS DISCUSSION, WITH THE
EXCEPTION OF THE HISTORICAL INFORMATION PRESENTED, ARE FORWARD-LOOKING
STATEMENTS INVOLVING RISKS AND UNCERTAINTIES, INCLUDING YEAR 2000 COMPLIANCE
AND OTHER RISKS DISCUSSED UNDER THE HEADING "RISKS THAT AFFECT OUR BUSINESS"
AND ELSEWHERE IN THIS REPORT. OUR ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY
FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
INTRODUCTION
The following tables and discussion present certain financial information on
a comparative basis. Our fiscal 1998 results reflect certain charges
attributable to our decision to restructure the business. This decision
followed a reevaluation of our core competencies, technology roadmap and
business model in an effort to bring our expenses more in line with current
revenue levels and restore long-term profitability to SGI. The fiscal 1999
information reflects the results of the restructuring activities we initiated
in fiscal 1998. As we exited fiscal 1999, we concluded that the actions we
had initiated in fiscal 1998 and continued in fiscal 1999 were not sufficient
to deliver the growth and profitability we believe necessary to sustain our
business. The discussion that follows is limited to a discussion of the
historical results of operations and financial condition. See "Risks That
Affect Our Business--Business Transition" for further discussion of our plans
for fiscal 2000 and the future.
13
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended June 30
----------------------------------------
<S> <C> <C> <C>
$ in millions 1999 1998 1997
Total revenue $ 2,749 $ 3,101 $ 3,663
Cost of revenue 1,603 1,964 2,023
----------------------------------------
Gross profit 1,146 1,137 1,640
Gross profit margin 41.7% 36.7% 44.8%
Total operating expenses 1,273 1,733 1,528
----------------------------------------
Operating (loss) income (127) (596) 112
Other income (expense) 253 (1) (14)
----------------------------------------
Income (loss) before income taxes 126 (597) 98
----------------------------------------
Net income (loss) $ 54 $ (460) $ 79
----------------------------------------
Net income (loss) per share-basic $ 0.29 $ (2.47) $ 0.44
----------------------------------------
Net income (loss) per share-diluted $ 0.28 $ (2.47) $ 0.43
----------------------------------------
----------------------------------------
</TABLE>
REVENUE
The following discussion of revenue is based on the results of our reportable
segments as described in Note 16, "Segment Information." Total revenue is
principally derived from three reportable segments: Servers, Visual
Workstations and Global Services, which were determined based on factors such
as customer base, homogeneity of products, technology, delivery channels and
other factors.
Total revenue in fiscal 1999 decreased $352 million or 11% compared with
fiscal 1998 and fiscal 1998 revenue decreased $562 million or 15% compared
with fiscal 1997. These decreases reflect the continuing trends in the
declining vector supercomputer and UNIX-Registration Trademark- workstation
markets which are part of our Server and Visual Workstation segments,
respectively. Decreases were offset in part by growth in our Global Services
segment.
The following table presents the percentage of total revenue by reportable
segment as presented in our performance management system.
<TABLE>
<CAPTION>
Years ended June 30
------------------------------------------
<S> <C> <C> <C>
$ in millions 1999 1998 1997
Servers $ 1,218 $ 1,417 $ 1,795
% of total revenue 44% 46% 49%
Visual Workstations $ 647 $ 865 $ 1,112
% of total revenue 24% 28% 30%
Global Services $ 682 $ 630 $ 571
% of total revenue 25% 20% 16%
Other $ 201 $ 188 $ 184
% of total revenue 7% 6% 5%
------------------------------------------
</TABLE>
Fiscal 1999 Server revenue decreased $199 million or 14% compared with fiscal
1998 and fiscal 1998 Server revenue decreased $378 million or 21% compared
with fiscal 1997. Although our fiscal 1999 Origin-TM- brand scalable server
business returned to growth in fiscal 1999, our vector supercomputer business
declined significantly in both fiscal 1999 and 1998. As we exited fiscal
1999, the vector supercomputer product business represented less than 10% of
total revenue. Our Onyx-Registration Trademark- supercomputer revenue
declined in each of fiscal 1999 and 1998, but the rate of decline slowed in
fiscal 1999 to 6% compared with 24% in fiscal 1998.
Fiscal 1999 Visual Workstation revenue decreased $218 million or 25% compared
with fiscal 1998 and fiscal 1998 Visual Workstation revenue decreased $247
million or 22% compared with fiscal 1997. These decreases reflect the effects
of strong competition in the shrinking UNIX workstation market and, in fiscal
1999, the disappointing sales performance of our visual
14
<PAGE>
workstations based on the Windows NT-Registration Trademark- operating system
introduced in the second half of the fiscal year. See "Risks That Affect Our
Business--Business Transition."
Global Services revenue is comprised of hardware and software support and
maintenance, professional services and remanufactured systems sales. Fiscal
1999 Global Services revenue increased $52 million or 8% compared with fiscal
1998 and fiscal 1998 Global Services revenue increased $59 million or 10%
compared with fiscal 1997. Growth in Global Services revenue reflects the
impact of our investment in our professional services business, as well as
increases in the level of our remanufactured systems business.
Other revenue is principally comprised of our operating units that are not
reportable segments, including the product and service revenue of our
software subsidiary, Alias|Wavefront, and MIPS, our majority-owned subsidiary
that develops and markets microprocessors and related intellectual property.
Total revenue by geographic area for fiscal 1999, 1998 and 1997 was as
follows (in millions):
<TABLE>
<CAPTION>
---------------------------------------
Area 1999 1998 1997
<S> <C> <C> <C>
Americas $ 1,536 $ 1,729 $ 2,072
Europe 754 831 936
Rest of World 459 541 655
---------------------------------------
Total revenue $ 2,749 $ 3,101 $ 3,663
---------------------------------------
---------------------------------------
</TABLE>
Geographic revenue as a percentage of total revenue for fiscal 1999, 1998 and
1997 was as follows:
<TABLE>
<CAPTION>
--------------------------------------
Area 1999 1998 1997
<S> <C> <C> <C>
Americas 56% 56% 57%
Europe 27% 27% 26%
Rest of World 17% 17% 17%
--------------------------------------
</TABLE>
The product revenue decreases we have experienced over the past three years
have been widespread as illustrated by the fact that our geographic revenue
mix remained relatively consistent during that period.
Our consolidated backlog at June 30, 1999 was $376 million, up from $360
million at June 30, 1998, primarily reflecting momentum in our Origin and
Onyx businesses.
GROSS PROFIT MARGIN
Cost of product and other revenue includes costs related to product
shipments, including materials, labor, overhead and other direct or allocated
costs involved in their manufacture or delivery. Costs associated with
non-recurring engineering revenue are included in research and development
expense. Cost of service revenue includes all costs incurred in the support
and maintenance of our products, as well as costs to deliver professional
services.
Our overall gross profit margin increased to 41.7% in fiscal 1999 compared
with 36.7% in fiscal 1998 and our fiscal 1998 gross profit margin declined
compared with our fiscal 1997 gross profit margin of 44.8%. Gross profit
margin for fiscal 1998 included a number of non-recurring charges related to
refocusing our supercomputer product roadmap, as well as a write-down of
excess spares. Without those charges, our fiscal 1998 gross profit margin
would have been 41.3%. Our gross profit margin over the past three years
reflects decreased volumes and continuing pricing pressures in both the
Server and Visual Workstation segments, as well as in our Global Services
business. We have been able to partially mitigate these effects by
consolidation and outsourcing of certain manufacturing operations and
continued improvements in manufacturing efficiencies and procurement
practices.
15
<PAGE>
We believe we will continue to experience margin pressure in fiscal 2000,
particularly in our Server segment due to competitive pricing pressures as well
as our introduction of lower margin products based on industry standard
components. See "Risks That Affect Our Business." We expect UNIX workstation
margins to remain fairly stable.
OPERATING EXPENSES
<TABLE>
<CAPTION>
$ in millions 1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Research and development $ 380 $ 459 $ 479
% of total revenue 13.8% 14.8% 13.1%
Selling, general and administrative $ 908 $ 1,068 $ 1,038
% of total revenue 33.0% 34.5% 28.3%
Other $ (15) $ 206 $ 11
% of total revenue (0.5%) 6.6% 0.3%
-------------------------------------------
</TABLE>
Our total fiscal 1999 operating expenses decreased $460 million compared with
fiscal 1998 and fiscal 1998 operating expense increased $205 million compared
with fiscal 1997. Fiscal 1998 operating expenses included $206 million of
restructuring, long-lived asset impairment and merger-related charges.
As we exited fiscal 1998, we expected our restructuring plans would result in
the elimination of approximately 1,000 positions in fiscal 1999 and would reduce
operating expense by at least $200 million. We believe those actions have
reduced our operating expense run rate by approximately $240 million.
RESEARCH AND DEVELOPMENT Research and development spending decreased $79
million or 17% in fiscal 1999 compared with fiscal 1998 and $20 million or 4%
in fiscal 1998 compared with fiscal 1997. The fiscal 1999 decrease reflects
reductions in investments in vector supercomputer and UNIX workstation
development. These decreases were offset somewhat by increased investments in
scalable server and Windows NT-based visual workstation development. We
expect research and development spending in fiscal 2000 to decline compared
with fiscal 1999 and to be focused on new scalable server product
development. See "Risks That Affect Our Business--Expense Reduction Program."
SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative
expenses decreased $160 million or 15% compared with fiscal 1998, following a
$30 million increase in fiscal 1998 compared with fiscal 1997. The fiscal
1999 decrease reflects the impact of the restructuring actions taken in
fiscal 1998, as well as lower selling commissions due to lower revenue,
reduced outside consulting and business process re-engineering costs,
continued focus on productivity and general expense controls. Marketing
expense decreased significantly as well, particularly in corporate and vector
supercomputer programs. Fiscal 1999 selling, general and administrative
expenses include a number of charges that we do not expect to recur,
including a $16 million write-down of certain capitalized internal
use-software deemed obsolete as a result of changes in strategic direction.
The fiscal 1998 selling, general and administrative expenses increase
reflects primarily costs associated with outside consulting, business process
re-engineering, and an increase in marketing and advertising costs. The
fiscal 1998 increase was somewhat offset by lower selling commissions. We
expect selling, general and administrative expenses in fiscal 2000 to decline
compared with the fiscal 1999 as a result of the actions described in "Risks
That Affect Our Business--Expense Reduction Program."
OTHER OPERATING EXPENSE Other operating expense for fiscal 1999 includes $14
million of adjustments to the restructuring costs we estimated at the end of
fiscal 1998. Other operating expense for fiscal 1998 consists of restructuring
charges of $144 million, a charge for impairment of long-lived assets of $47
million and merger-related expenses of $15 million. Other operating expense for
fiscal 1997 relates to the Cray acquisition and consists principally of costs
associated with the integration of SGI and Cray information systems, accounting
processes and human resource activities.
INTEREST AND OTHER
INTEREST EXPENSE Interest expense has remained relatively flat over the last
three years. We do not expect a significant change in the level of interest
expense in fiscal 2000.
16
<PAGE>
INTEREST INCOME AND OTHER, NET Interest income and other, net includes interest
income on our cash investments, gains and losses on other investments, the
minority interest in the earnings of MIPS and other non-operating items.
Interest income and other, net for fiscal 1999 decreased $21 million from fiscal
1998 and increased $13 million in fiscal 1998 from fiscal 1997. Interest income
on our cash investments has increased from $22 million in fiscal 1997 to $37
million in fiscal 1998 and to $40 million in fiscal 1999 due to significantly
higher cash balances. The decrease in interest and other income, net in fiscal
1999 was due to the write-down of investments in certain technology companies,
the minority interest in MIPS earnings and other non-operating items. We do not
expect a significant change in the level of interest income on our cash
investments in fiscal 2000.
PROVISION FOR (BENEFIT FROM) INCOME TAXES The effective tax benefit rate for
fiscal 1999 was 23%, excluding the impact of the MIPS gain and a change in
previously estimated restructuring costs, which were tax effected at 38%. The
effective tax benefit rate for fiscal 1998 was 23% and the effective tax
provision rate for fiscal 1997 was 20%. The fiscal 1999 benefit rate differs
from the federal statutory rate primarily due to foreign losses for which no
benefit has been recognized. The fiscal 1998 benefit rate differs from the
federal statutory rate primarily due to foreign losses for which no benefit has
been recognized, the write-off of acquired in-process technology and goodwill
for which there was no tax benefit, and the establishment of reserves for
certain deferred tax assets not expected to be realized. The 1997 provision rate
differs from the federal statutory rate primarily due to U.S. Federal research
tax credits, earnings in low tax jurisdictions, and foreign sales corporation
benefits, offset partially by foreign losses for which no benefit was recorded.
At June 30, 1999, we had gross deferred tax assets arising from deductible
temporary differences, tax losses and tax credits of $594 million. A valuation
allowance of $105 million and deferred tax liability of $38 million offset the
gross deferred tax assets. Realization of the net deferred tax assets is
dependent on our ability to generate approximately $900 million of future
taxable income. We believe that it is more likely than not that the assets will
be realized based on forecasted income, including income from the planned
divestiture of our interest in MIPS. However, there can be no assurance that we
will achieve our expectations of future income. Therefore, on a quarterly basis,
we will evaluate the realizability of the deferred tax assets and assess the
need for additional valuation allowances.
We have not provided for U.S. federal income taxes on undistributed earnings of
foreign subsidiaries, which we intend to permanently reinvest in those
operations. The cumulative income tax benefit attributable to these permanently
reinvested earnings is estimated to be $85 million at June 30, 1999.
IMPACT OF CURRENCY
Because a significant portion of our revenue is from sales outside the United
States, and many key components are produced outside the United States, our
financial results can be significantly affected by changes in foreign currency
exchange rates or weak economic conditions in the foreign markets in which we
distribute our products. However, over the most recent three fiscal years,
changes in foreign currency exchange rates have not had a material impact on our
results of operations.
FINANCIAL CONDITION
Our financial condition continued to improve during fiscal 1999. This
improvement is primarily due to continued focus on asset management,
particularly management of inventories and accounts receivable. At June 30,
1999, cash and cash equivalents and marketable and restricted investments
totaled $782 million compared with $737 million at June 30, 1998. Included in
the June 30, 1999 balance is approximately $94 million of restricted investments
that serve as collateral for letters of credit and an equity forward purchase
agreement.
Operating activities generated $145 million in cash for fiscal 1999, compared
with $643 million in fiscal 1998 and $170 million in fiscal 1997. To present
cash flows from operating activities, net income (loss) for each of the past
three years had to be adjusted for certain significant items that did not either
provide or use cash. Fiscal 1999 net income is adjusted to remove the impact of
the $273 million gain on the sale of a portion of our interest in MIPS stock
that is reflected as a cash flow from investing activities and $27 million in
non-cash charges for the write-off of investments in certain technology
companies. Fiscal 1998 net loss is adjusted for a $47 million non-cash charge
for long-lived asset impairment, a $32 million non-cash charge for the write-off
of purchased intangibles and goodwill resulting from the disposal of ParaGraph
International Inc. ("ParaGraph"), and a $30 million non-cash charge for the
write-down of excess spares. These and other non-deductible
17
<PAGE>
charges resulted in significant deferred tax benefit provisions that did not
provide cash. Fiscal 1997 net income is adjusted for a $42 million non-cash
charge for amortization of the write-up of acquired Cray inventories and
service contracts and a $4 million non-cash charge for the write-off of an
investment in a software company.
Our focus on asset management that resulted in significant reductions in
accounts receivable and inventories in fiscal 1998, continued into 1999
generating $195 million in cash.
Aside from operations, the most significant transactions affecting our cash
position in fiscal 1999 were the initial and secondary public offerings of
shares of our subsidiary, MIPS. On a consolidated basis those offerings raised a
total of $290 million, of which $273 million represented the proceeds from the
sales of portions of our ownership interest in MIPS, and which is presented in
investing activities. The remaining $18 million represented the proceeds from
newly issued MIPS shares and is included in financing activities.
Investing activities, other than changes in our marketable and restricted
investments and the MIPS transactions, consumed $261 million in cash during
fiscal 1999. We used $35 million to fund a portion of our investment in Wam!Net,
Inc., with the remainder used principally for the acquisition of capital
equipment and spare parts. Investing activities, other than changes in our
marketable investments, consumed $269 million in cash during fiscal 1998 and
$301 million during fiscal 1997, principally for capital equipment and spare
parts. On August 4, 1999, pursuant to one of our lease agreements, as amended,
we exercised our option to purchase five buildings on our Mountain View campus.
The purchase is expected to close in September 1999 at a cost of approximately
$125 million and will be paid in cash.
Financing activities over the past three years have included the issuance of
common stock under employee stock purchase and option plans and repurchases of
common stock. Our board of directors has authorized the repurchase of up to 27.5
million shares of common stock to mitigate the dilutive effect of the stock
plans. Since commencement of this repurchase program we have repurchased 19.3
million shares of common stock at a cost of $311 million. We utilize equity
instrument contracts to facilitate the repurchase of common stock and at June
30, 1999, we have outstanding commitments to buy an aggregate of 6.0 million
shares of common stock under our equity forward purchase arrangement. At June
30, 1999, approximately 2.2 million shares remain available for purchase under
this program.
The volume of our borrowing activity has decreased over the past three years
corresponding with our strengthened cash position. As a result of our strong
cash position, we terminated our $250 million revolving credit facility in
November 1998.
At June 30, 1999, our principal sources of liquidity included cash, cash
equivalents and marketable investments of $688 million. We believe that these
principal sources of liquidity, along with cash generated from operations, the
expected proceeds from future MIPS offerings, and other resources available to
us, should be adequate to fund our projected cash flow needs. At June 30, 1999,
we own approximately 67% of the total outstanding shares of Class A and Class B
Common Stock of MIPS. We currently intend to dispose of our remaining interest
in MIPS in one or more transactions through public or private offerings. We
expect our divestiture of MIPS to be completed in the first half of fiscal 2001,
subject to market and other conditions.
We believe that the level of financial resources is an important competitive
factor in the computer industry and, accordingly, we may elect to raise
additional capital through debt or equity financing in anticipation of future
needs.
RISKS THAT AFFECT OUR BUSINESS
SGI operates in a rapidly changing environment that involves a number of risks,
some of which are beyond our control. This discussion highlights some of these
risks.
BUSINESS TRANSITION Two of the principal market sectors in which we
compete--UNIX workstations and vector supercomputers--have declined over the
past few years, and we believe that these declines represent long-term
trends. Our goal is to generate an increasing proportion of our revenue from
growing markets, including Intel-based servers and UNIX-based scalable
servers such as our Origin server product family. We have announced a product
roadmap that will, over the next several years, ultimately shift our products
to the Intel microprocessor architecture. To further accelerate this
transition, we announced in August 1999 our intention to establish
arrangements to transition our Visual Workstation line of Windows NT-based
workstations and our Cray-Registration Trademark- branded line of vector
supercomputers to strategic partners who will assume the further development
and distribution of these product lines. The result of these alliances and
planned restructured operations will be a smaller revenue base and workforce
in fiscal 2000, with the goal of returning to sustainable profitability. This
is a long-term
18
<PAGE>
transition, and although some benefits are currently being realized, it could
take until well into fiscal 2000 or beyond before we have achieved our
desired business model. Our ability to achieve our revenue objectives in
fiscal 2000 will largely depend on the successful implementation of these
alliances and related restructuring activities in early fiscal 2000 with
minimal disruption, and on growth in the server business. There is no
assurance that we will successfully complete the strategic alliances and
related restrucuring activities required to achieve our fiscal 2000
objectives.
SERVER STRATEGY Sustained growth in our scalable server business is an
important element of our strategic plan 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 we have not traditionally participated,
working effectively with independent software providers to ensure that
important applications for the market segments targeted by us are available
on the SGI platform, and ultimately, managing a successful and timely
transition to the Intel architecture.
We are also engaged in a transition from our traditional business of
supporting IRIX-Registration Trademark-, our own proprietary UNIX operating
systems, to supporting operating systems such as Linux-Registration
Trademark- and Windows NT. We believe that this strategy will position us
favorably in growth markets, including the market for 32-bit
Intel-Registration Trademark- processor-based servers and for broadband
Internet servers. A successful transition to this model will require us to
make effective resource allocation choices and successfully manage a complex
set of support and strategic relationships, particularly with respect to open
source technologies.
DEPENDENCE ON PARTNERS AND SUPPLIERS Our business has always involved close
collaboration with partners and suppliers. However, many elements of our current
business strategy, including an increasing emphasis on Linux and other open
source technologies, a collaborative relationship with NVIDIA for graphics
technologies, the introduction of Intel processor-based IA-32 servers and the
longer-term transition to the Intel architecture, additional outsourcing of
manufacturing and services, and establishing significant new distribution
channels will increase our dependence on Microsoft, Intel and other partners,
and on our manufacturing partners and other component suppliers. Our 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.
EXPENSE REDUCTION PROGRAM During fiscal 1999, we reduced our operating expenses
by about $240 million from the level of fiscal 1998 operating expenses. In
August 1999, we announced and began to implement a restructuring program aimed
at bringing our expenses more in line with expected revenue levels resulting
from our refocused business operations and restoring long-term profitability to
the Company. As part of this effort, we expect, through the anticipated transfer
of businesses to partners, the elimination of positions and managed hiring, to
end fiscal 2000 with about 1/3 fewer employees than was the case at the end of
fiscal 1999. These steps, and generally tighter operating expense controls, are
part of an overall program to reduce our expense structure by approximately $300
million in fiscal 2000. While our objective is to reduce our costs in ways that
will not have a material impact on revenue levels, there is no assurance that
this will be achieved.
PERIOD TO PERIOD FLUCTUATIONS Our 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 we plan our 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 SGI or our
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 visual workstation product revenue including the mix of configurations
within these product categories.
Our results have followed a seasonal pattern, with stronger sequential growth in
the second and fourth fiscal quarters, reflecting the buying patterns of our
customers.
19
<PAGE>
Our 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 our
stock price. The stock price may also be affected by broader market trends
unrelated to our performance.
PRODUCT DEVELOPMENT AND INTRODUCTION Our continued success depends on our
ability to develop and rapidly bring to market highly differentiated,
technologically complex and innovative products. Product transitions are a
recurring part of our 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 our new products to fail to
meet specifications or to miss the aggressive timetables that we establish.
There is no assurance that acceptance of our new systems will not be affected by
delays in this process.
Short product life cycles place a premium on our ability to manage the
transition to new products. We often announce new products in the early part of
a quarter while the product is in the final stages of development, and seek to
manufacture and ship the product in volume during the same quarter. Our 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 SGI 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.
We have completed an assessment of our core business information systems, many
of which are provided by outside suppliers, for year 2000 readiness and are
extending that review to include a wide variety of other information systems and
related business processes used in our operations. We plan to have changes to
critical systems implemented by the third quarter of calendar 1999 to allow time
for testing. Most of our mission critical applications are believed to be year
2000 compliant, including the Oracle information system which was recently
upgraded to the most recent version. Although our assessment is ongoing, we
currently believe that resolving these matters will not have a material adverse
effect on our financial condition or results of operations.
We are 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 updates to our IRIX and
UNICOS-Registration Trademark- operating systems, which we believe are year
2000 compliant, and additional customer support procedures. We also have made
available software upgrades for some earlier releases of the IRIX operating
system. We believe that the majority of the hardware systems we expect to
support beyond 1999, when running on compliant operating systems, will be
year 2000 compliant. Our older products may require upgrade or replacement to
become year 2000 compliant. There is no assurance that our current products
do not contain undetected errors or defects associated with year 2000
functions that may result in material costs to remediate. We believe that we
generally are not legally responsible for costs incurred by customers to
achieve their year 2000 compliance. However, we may experience increasing
customer satisfaction costs relating to these issues, including potential
litigation expenses, over the next few years.
We are also assessing the possible effect on our operations of the year 2000
readiness of critical suppliers of products and services. These include not just
suppliers of components but also our outsourcing partners in manufacturing
support and even suppliers of basic utilities. Our reliance on our 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 us.
Certain of the costs associated with our 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 ensure year
2000 compliance. Our current estimates indicate the total
20
<PAGE>
costs to insure year 2000 compliance will not be material. We believe that we
are unlikely to experience a material adverse impact on our 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 us is not known at this time. The
information regarding year 2000 issues provided in this Annual Report is
based on our current assessment of ongoing activities and is subject to
change as we continuously monitor these activities. We are currently
developing appropriate contingency plans for potential year 2000 problems.
The Year 2000 disclosure set forth above is "year 2000 readiness disclosure" as
defined in the Year 2000 Information and Readiness Disclosure Act of 1998.
INVESTMENT IN MIPS SUBSIDIARY The value of our interest in MIPS Technologies,
Inc. is determined principally by factors outside our control, including overall
equity market conditions and may fluctuate significantly from time to time.
There can be no assurance that we will be successful in fully realizing the
value of the MIPS interest on a market efficient basis.
EXPORT REGULATION Our sales to foreign customers are subject to export
regulations. Sales of many of the our high-end products require clearance and
export licenses from the U.S. Department of Commerce under these regulations.
The Departments of Commerce and Justice are currently conducting civil and
criminal investigations into SGI's compliance with the export regulations in
connection with the sale of several computer systems to a customer in Russia
during fiscal 1997. We believe that these matters will be resolved without a
significant adverse effect on our business. However, there is no assurance that
these matters will not have an unforeseen outcome that could impair the conduct
of our business.
Our 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 our products.
COMPETITION The computer industry is highly competitive, with rapid
technological advances and constantly improving price/performance. Most of our
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 our revenue is derived
from sales to the U.S. government, either directly by us 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.
INTELLECTUAL PROPERTY We routinely receive communications from third parties
asserting patent or other rights covering our products and technologies. Based
upon our evaluation, we may take no action or may seek to obtain a license. In
any given case there is a risk that a license will not be available on terms
that we consider reasonable, or that litigation will ensue. We expect that, as
the number of hardware and software patents issued continues to increase, and as
competition in the markets we address intensifies, the volume of these
intellectual property claims will also increase.
EMPLOYEES Our success depends on our ability to continue to attract, retain and
motivate highly qualified technical, marketing and management personnel, who are
in great demand. The current uncertainties surrounding SGI's business prospects
have increased the challenges of retaining world-class talent.
BUSINESS DISRUPTION Our corporate headquarters, including most of our research
and development operations are located in the Silicon Valley area of Northern
California, a region known for seismic activity. A significant earthquake could
materially affect operating results. We are not insured for most losses and
business interruptions of this kind.
MARKET RISK In the normal course of business, our financial position 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. We regularly assess these risks and have established policies and
business practices to protect against the adverse effects of these and other
potential exposures. As a result, we do not anticipate material losses in these
areas.
21
<PAGE>
For purposes of specific risk analysis, we use sensitivity analysis to determine
the impact that market risk exposures may have on the fair values of our debt
and financial instruments. The financial instruments included in the sensitivity
analysis consist of all of our cash and cash equivalents, marketable
investments, short-term and long-term debt and all derivative financial
instruments. Currency forward contracts and currency options constitute our
portfolio of derivative financial instruments.
To perform sensitivity analysis, we assess the risk of loss in fair values from
the impact of hypothetical changes in interest rates and foreign currency
exchange rates on market sensitive instruments. We compute the market values for
interest risk based on the present value of future cash flows as impacted by the
changes in rates attributable to the market risk being measured. We selected the
discount rates used for the present value computations based on market interest
exchange rates in effect at June 30, 1999 and 1998. We computed the market
values for foreign exchange risk based on spot rates in effect at June 30, 1999
and 1998. The market values that result from these computations are compared to
the market values of these financial instruments at June 30, 1999 and 1998. The
differences in this comparison are the hypothetical gains or losses associated
with each type of risk.
The results of the sensitivity analysis at June 30, 1999 and 1998 are as
follows:
Interest Rate Risk: A percentage point decrease in the level of interest rates
with all other variables held constant would result in a decrease in the
aggregate fair values of our financial instruments by $14 million at both June
30, 1999 and 1998. A percentage point increase in the level of interest rates
with all other variables held constant would result in an increase in the
aggregate fair values of our financial instruments by $13 million and $12
million, respectively.
Foreign Currency Exchange Rate Risk: A 10% decrease in levels of foreign
currency exchange rates, 20% for Asian currencies, against the U.S. dollar with
all other variables held constant would result in an increase in the fair values
of our financial instruments by $8 million at June 30, 1999, and a decrease in
the fair values of our financial instruments by $14 million at June 30, 1998. A
10% increase in levels of foreign currency exchange rates, 20% for Asian
currencies, would result in a decrease in the fair values of our financial
instruments by $3 million at June 30, 1999, and an increase in fair values of
our financial instruments by $12 million at June 30, 1998. The change in the
relative sensitivity of the fair market value of foreign currency exchange rates
in fiscal 1999 compared with fiscal 1998 is primarily driven by the volume of
systems shipped and billed in U.S. dollars by our Swiss manufacturing subsidiary
which operates in local functional currency.
22
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended June 30
-------------------------------------------
(In thousands, except per share amounts) 1999 1998 1997
<S> <C> <C> <C>
Revenue:
Product and other revenue $2,090,194 $2,489,983 $3,086,791
Service revenue 658,763 610,627 575,810
-------------------------------------------
Total revenue 2,748,957 3,100,610 3,662,601
Costs and Expenses:
Cost of product and other revenue 1,202,562 1,580,647 1,697,277
Cost of service revenue 400,688 382,904 325,269
Research and development 380,346 459,188 479,101
Selling, general and administrative 907,612 1,068,429 1,038,313
Other operating expense (15,107) 205,543 10,757
-------------------------------------------
Total costs and expenses 2,876,101 3,696,711 3,550,717
Operating (loss) income (127,144) (596,101) 111,884
Gain on sale of a portion of SGI interest in MIPS 272,503 -- --
Interest expense (22,562) (24,665) (24,836)
Interest income and other, net 2,924 23,847 11,142
-------------------------------------------
Income (loss) before income taxes 125,721 (596,919) 98,190
Provision for (benefit from) income taxes 71,892 (137,292) 19,639
-------------------------------------------
Net income (loss) $ 53,829 $(459,627) $ 78,551
-------------------------------------------
Net income (loss) per share:
Basic $ 0.29 $ (2.47) $ 0.44
-------------------------------------------
Diluted $ 0.28 $ (2.47) $ 0.43
-------------------------------------------
Shares used in the calculation of net income (loss) per share:
Basic 186,374 186,149 175,548
Diluted 189,427 186,149 182,637
-------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
At June 30
------------------------------
(DOLLARS IN THOUSANDS) 1999 1998
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 571,117 $ 506,639
Short-term marketable investments 117,026 230,081
Accounts receivable, net of allowance for doubtful accounts of
$15,407 in 1999; $17,463 in 1998 582,383 665,420
Inventories 195,181 322,823
Deferred tax assets 243,867 240,838
Prepaid expenses and other current assets 137,459 99,571
------------------------------
Total current assets 1,847,033 2,065,372
Restricted investments 94,226 --
Property and equipment, net of accumulated depreciation and amortization 380,768 445,420
Net long-term deferred tax assets 126,562 189,806
Other assets 339,668 264,108
------------------------------
$2,788,257 $2,964,706
------------------------------
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable 192,974 215,260
Accrued compensation 104,362 160,609
Other current liabilities 365,736 386,477
Deferred revenue 308,281 329,525
Current portion of long-term debt 5,700 4,801
------------------------------
Total current liabilities 977,053 1,096,672
Long-term debt and other 387,005 403,522
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value: issuable in series,
2,000,000 shares authorized; shares issued and outstanding: 17,500 16,998 16,998
Common stock, $.001 par value, and additional paid-in capital;
500,000,000 shares authorized; shares issued: 189,555,187 in 1999;
189,519,187 in 1998; 1,421,028 1,407,108
Retained earnings 92,449 65,415
Treasury stock, at cost: 7,010,263 shares in 1999; 1,995,797 shares in 1998 (104,633) (25,976)
Accumulated other comprehensive income (1,643) 967
------------------------------
Total stockholders' equity 1,424,199 1,464,512
------------------------------
$2,788,257 $2,964,706
------------------------------
------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended June 30
----------------------------------------
(In thousands) 1999 1998 1997
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 53,829 $(459,627) $ 78,551
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 221,508 314,581 354,319
Gain on sale of a portion of SGI interest in MIPS (272,503) -- --
Write-off of acquired in-process technology -- 16,900 --
Changes in deferred tax assets and liabilities 60,067 (162,540) (18,918)
Other 54,640 171,608 4,690
Changes in operating assets and liabilities:
Accounts receivable 83,036 467,055 (152,773)
Inventories 111,908 264,226 (211,013)
Accounts payable (22,529) (44,257) (2,236)
Other assets and liabilities (144,592) 75,432 117,614
----------------------------------------
Total adjustments 91,535 1,103,005 91,683
----------------------------------------
Net cash provided by operating activities 145,364 643,378 170,234
Cash Flows From Investing Activities:
Available-for-sale investments:
Purchases (396,807) (230,368) (6,036)
Sales 207,740 43,000 16,162
Maturities 314,718 104,485 44,274
Purchases of restricted investments (219,579) -- --
Proceeds from the maturities of restricted investments 113,893 -- --
Proceeds from sale of a portion of SGI interest in MIPS 272,503 -- --
Capital expenditures (147,516) (195,137) (214,989)
Increase in other assets (113,611) (73,805) (86,359)
----------------------------------------
Net cash provided by (used in) investing activities 31,341 (351,825) (246,948)
Cash Flows From Financing Activities:
Issuance of debt 7,461 18,735 123,807
Payments of debt principal (25,918) (62,838) (153,730)
Sale of SGI common stock 61,527 95,241 77,304
Repurchase of SGI common stock (172,426) (62,749) --
Sale of MIPS common stock 17,654 -- --
Cash dividends-preferred stock (525) (525) (525)
----------------------------------------
Net cash (used in) provided by financing activities (112,227) (12,136) 46,856
----------------------------------------
Net increase (decrease) in cash and cash equivalents 64,478 279,417 (29,858)
Cash and cash equivalents at beginning of year 506,639 227,222 257,080
----------------------------------------
Cash and cash equivalents at end of year $ 571,117 $ 506,639 $ 227,222
----------------------------------------
----------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Three years ended June 30, 1999
------------------------------------------
Common Stock
Preferred and Additional Retained
(In thousands) Stock Paid-In Capital Earnings
<S> <C> <C> <C>
Balance, June 30, 1996 $ 16,998 $ 1,172,960 $ 461,311
Components of comprehensive income:
Net income -- -- 78,551
Currency translation adjustment -- -- --
Change in unrealized loss on available-for-sale investments, net of tax -- -- --
Total comprehensive income
Common stock issued under employee plans including related tax benefits (6,623
shares) -- 90,225 --
Convertible preferred stock, Series A preferred dividends -- -- (525)
Issuance of treasury stock under employee plans (36 shares) -- -- (2,099)
------------------------------------------
Balance, June 30, 1997 16,998 1,263,185 537,238
Components of comprehensive loss:
Net loss -- -- (459,627)
Currency translation adjustment -- -- --
Change in unrealized loss on available-for-sale investments, net of tax -- -- --
Total comprehensive loss
Common stock issued under employee plans including related tax benefits (7,551
shares) -- 95,194 --
Common stock issued for ParaGraph acquisition (2,935 shares) -- 48,729 --
Convertible preferred stock, Series A preferred dividends -- -- (525)
Purchase (4,700 shares) and issuance (2,704 shares) of treasury stock under
employee plans--net -- -- (11,671)
------------------------------------------
Balance, June 30, 1998 16,998 1,407,108 65,415
Components of comprehensive income:
Net income -- -- 53,829
Currency translation adjustment -- -- --
Change in unrealized loss on available-for-sale investments, net of tax -- -- --
Total comprehensive income
Common stock issued under employee plans including related tax benefits (36
shares) -- 794 --
Convertible preferred stock, Series A preferred dividends -- -- (525)
Purchase (12,112 shares) and issuance (7,097 shares) of treasury stock under
employee plans--net -- -- (29,744)
Common stock issued by MIPS -- 16,600 --
Other -- (3,474) 3,474
------------------------------------------
Balance, June 30, 1999 $ 16,998 $ 1,421,028 $ 92,449
------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
<TABLE>
<CAPTION>
Three years ended June 30, 1999
--------------------------------------------
Accumulated
Other Total
Treasury Comprehensive Stockholders'
(In thousands) Stock Income Equity
<S> <C> <C> <C>
Balance, June 30, 1996 $ (867) $ 24,916 $ 1,675,318
Components of comprehensive income:
Net income -- -- 78,551
Currency translation adjustment -- (4,303) (4,303)
Change in unrealized loss on available-for-sale investments, net of tax -- 1,208 1,208
-----------
Total comprehensive income 75,456
Common stock issued under employee plans including related tax benefits (6,623
shares) -- -- 90,225
Convertible preferred stock, Series A preferred dividends -- -- (525)
Issuance of treasury stock under employee plans (36 shares) 867 -- (1,232)
-----------------------------------------
Balance, June 30, 1997 -- 21,821 1,839,242
Components of comprehensive loss:
Net loss -- -- (459,627)
Currency translation adjustment -- (21,416) (21,416)
Change in unrealized loss on available-for-sale investments, net of tax -- 562 562
-----------
Total comprehensive loss (480,481)
Common stock issued under employee plans including related tax benefits (7,551
shares) -- -- 95,194
Common stock issued for ParaGraph acquisition (2,935 shares) -- -- 48,729
Convertible preferred stock, Series A preferred dividends -- -- (525)
Purchase (4,700 shares) and issuance (2,704 shares) of treasury stock under
employee plans--net (25,976) -- (37,647)
-----------------------------------------
Balance, June 30, 1998 (25,976) 967 1,464,512
Components of comprehensive income:
Net income -- -- 53,829
Currency translation adjustment -- (2,562) (2,562)
Change in unrealized loss on available-for-sale investments, net of tax -- (48) (48)
-----------
Total comprehensive income 51,219
Common stock issued under employee plans including related tax benefits (36 shares) -- -- 794
Convertible preferred stock, Series A preferred dividends -- -- (525)
Purchase (12,112 shares) and issuance (7,097 shares) of treasury stock under
employee plans--net (78,657) -- (108,401)
Common stock issued by MIPS -- -- 16,600
Other -- -- --
-----------------------------------------
Balance, June 30, 1999 $(104,633) $ (1,643) $1,424,199
-----------------------------------------
-----------------------------------------
</TABLE>
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS
Silicon Graphics, Inc. ("SGI") is a leader in high-performance computing. SGI's
broad range of workstations and graphics servers deliver advanced 3D graphics
and computing capabilities for engineering and creative professionals. Our
highly scalable servers also have a growing presence in the enterprise market,
with a particular emphasis on Internet, large corporate data and
telecommunications applications. Our products are manufactured in Wisconsin and
Switzerland. We distribute our products through our direct sales force, as well
as through indirect channels including resellers and distributors. Product and
other revenue consists primarily of revenue from computer system and software
product shipments, as well as the sale of software distribution rights, system
leasing, technology licensing agreements and non-recurring engineering
contracts. Service revenue results from customer support and maintenance
contracts, as well as from delivery of professional services.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of SGI and our wholly-and majority-owned subsidiaries.
FOREIGN CURRENCY TRANSLATION We translate the assets and liabilities of our
foreign subsidiaries stated in local functional currencies to U.S. dollars at
the rates of exchange in effect at the end of the period. Revenues and expenses
are translated using rates of exchange in effect during the period. Gains and
losses from currency translation are included in stockholders' equity. Currency
transaction gains or losses are recognized in interest income and other, net
and, net of hedging gains or losses, have not been significant to our operating
results in any period.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
CASH EQUIVALENTS AND MARKETABLE AND RESTRICTED INVESTMENTS Cash equivalents
consist of high quality money market instruments with maturities of 90 days or
less at the date of purchase. Short-term marketable investments and restricted
investments consist of both high quality money market instruments and high
quality debt securities with maturities of one year or less, and are stated at
fair value. Other marketable investments consist primarily of high quality debt
securities with maturities greater than one year and less than two years, and
are stated at fair value. At June 30, 1999 and 1998, our cash equivalents and
marketable investments are all classified as available-for-sale. At June 30,
1999, our restricted investments are classified as available-for-sale but are
pledged as collateral against letters of credit and an equity forward purchase
arrangement. Restricted investments are held in SGI's name by major financial
institutions.
The cost of securities when sold is based upon specific identification. We
include realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities in interest income and
other, net. We include unrealized gains and losses (net of tax) on securities
classified as available-for-sale in stockholders' equity.
FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying values of short-term debt and
cash equivalents approximate fair value due to the short period of time to
maturity. Fair values of marketable and restricted investments, long-term debt,
and foreign exchange forward contracts are based on quoted market prices or
pricing models using current market rates.
DERIVATIVE FINANCIAL INSTRUMENTS We use derivatives to moderate the financial
market risks of our business operations. We use derivative products to hedge the
foreign currency market exposures underlying certain assets and liabilities and
commitments related to customer transactions. Our accounting policies for these
instruments are based on our designation of such instruments as hedging
transactions. We designate an instrument as a hedge based in part on its
effectiveness in risk reduction and one-to-one matching of derivative
instruments to underlying transactions. We defer gains and losses on currency
forward contracts that hedge firmly committed customer transactions and on
currency purchased options that hedge probable anticipated, but not firmly
committed, customer transactions and we recognize them in revenue in the same
period that the underlying transactions are settled. Gains and losses on
currency forward contracts that hedge existing assets and liabilities are
recognized in interest and other income, net, in the same period as losses and
gains on the underlying transactions are recognized and generally offset. Gains
and losses on any derivatives not meeting the above criteria would be recognized
in income in the current period.
28
<PAGE>
EQUITY INSTRUMENTS INDEXED TO SGI'S COMMON STOCK We record the proceeds
received from the sale of equity instruments and amounts paid upon the
purchase of equity instruments as a component of stockholders' equity.
Subsequent changes in the fair value of the equity instrument contracts are
not recognized because we have the ability to determine whether the contracts
are settled in cash or stock. If the contracts are ultimately settled in
cash, the amount of cash paid or received is recorded as a component of
stockholders' equity.
INVENTORIES Manufacturing inventories are stated at the lower of cost
(first-in, first-out) or market. Demonstration systems are stated at cost
less depreciation generally based on an eighteen-month life.
PROPERTY AND EQUIPMENT Property and equipment is stated at cost, and
depreciation is computed using the straight-line method. Useful lives of two to
six years are used for machinery and equipment and furniture and fixtures;
leasehold improvements are amortized over the shorter of their useful lives or
the term of the lease. Our buildings are depreciated over twenty-five to forty
years and improvements over eight to fifteen years.
OTHER ASSETS Included in other assets are spare parts that are generally
amortized on a straight-line basis over the course of their respective lives
ranging from two to five years and investments in certain technology companies
that are not publicly traded and are carried at the lower of cost or market
value. Also included in other assets is goodwill associated with the fiscal 1991
acquisition of Silicon Graphics World Trade Corporation which is amortized on a
straight-line basis over a period of twenty years.
REVENUE RECOGNITION We generally recognize product revenue when we ship the
product to the customer and we have no additional significant performance
obligations. Sales of certain high performance systems may be made on the basis
of contracts that include acceptance criteria. In these instances, we recognize
revenue upon acceptance by the customer or independent distributor, or in the
case of a conversion from lease to purchase, at the time of the customer's
election to convert.
We recognize operating system software fees when we ship the product, provided
that we have no additional significant performance obligations. We recognize
application software fees when we have delivered the product, provided that we
have no additional significant performance obligations.
We generally recognize royalty revenue, under technology agreements, in the
quarter in which we receive a report from a licensee detailing the shipments of
products incorporating our intellectual property components. We recognize
engineering services, which are generally performed on a best efforts basis, as
revenue when we have completed the defined milestones and the milestone payment
is probable of collection.
Revenue related to future commitments under service contracts is deferred and
recognized ratably over the related contract term.
PRODUCT WARRANTY We provide at the time of sale for the estimated cost to
warrant our products against defects in materials and workmanship for a period
of up to one year on UNIX systems and up to three years on NT systems.
ADVERTISING COSTS We account for advertising costs as expense in the period in
which they are incurred. Advertising expense for the years ended June 30, 1999,
1998 and 1997 was $49 million, $56 million and $43 million, respectively.
PER SHARE DATA Basic earnings per share is based on the weighted effect of all
common shares issued and outstanding, and is calculated by dividing net income
available to common stockholders by the weighted average shares outstanding
during the period. Diluted earnings per share is calculated by dividing net
income available to common stockholders, adjusted for the effect, if any, from
assumed conversion of all potentially dilutive common shares outstanding, by the
weighted average number of common shares used in the basic earnings per share
calculation plus the number of common shares that would be issued assuming
conversion of all potentially dilutive common shares outstanding.
STOCK-BASED COMPENSATION We account for stock-based employee compensation
arrangements under the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, ("APB 25") and related interpretations.
29
<PAGE>
ACCOUNTING CHANGES We implemented new accounting standards in fiscal 1999. The
adoption of these standards did not have a material effect on our financial
position or results of operations.
Beginning with the first quarter of fiscal 1999, we adopted Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"). SFAS 130 establishes new standards for the reporting and display of
comprehensive income and its components. The disclosures required by SFAS 130
are presented in the Consolidated Statement of Stockholders' Equity and in
Note 14, "Comprehensive Income."
Effective June 30, 1999, we adopted Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"). SFAS 131 requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operation and major customers. See Note 16, "Segment Information" for further
information.
Effective July 1, 1998, we adopted the American Institute of Certified Public
Accountants Statement of Position (SOP) 97-2, Software Revenue Recognition,
which supersedes SOP 91-1. SOP 97-2, as amended by SOP 98-4, and modified by
SOP 98-9, provides guidance on revenue recognition for software transactions.
It requires deferral of some or all of the revenue related to a specific
contract depending on the existence of vendor specific objective evidence of
fair value and the ability to allocate the total fee to all elements within
the contract. The portion of the fee identified to an element is recognized
as revenue when all of the revenue recognition criteria have been met for
that element.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activity ("SFAS 133").
In June 1999, SFAS 133 was amended by Statement No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133 ("SFAS 137"). SFAS 137 is required to be
adopted in all fiscal quarters of all fiscal years beginning after June 15,
2000. The Statement will require us to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges of underlying
transactions must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value
of derivatives will either be offset against the change in fair value of the
hedged assets, liabilities or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will
be immediately recognized in earnings. We do not expect the adoption to have
a material impact on our consolidated financial position, results of
operations or cash flows.
During fiscal 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. The statement requires the capitalization of
internal use computer software costs if certain criteria are met. The
capitalized cost will be amortized on a straight-line basis over the useful
life of the software. We will adopt the statement as of July 1, 1999. The
adoption of the statement is not expected to have a material impact on our
financial statements.
RECLASSIFICATIONS We have reclassified certain prior year amounts on the
Consolidated Balance Sheets, Consolidated Statements of Cash Flows and Notes to
Consolidated Financial Statements to conform to the current year presentation.
NOTE 3. OTHER OPERATING EXPENSE
Other operating expense is as follows (in thousands):
<TABLE>
<CAPTION>
----------------------------------
YEARS ENDED JUNE 30
----------------------------------
1999 1998 1997
<S> <C> <C> <C>
Write-off of acquired in-process technology and other
merger-related expenses $ (1,107) $ 14,905 $10,757
Restructuring (14,000) 143,998 --
Charge for impairment of long-lived assets -- 46,640 --
----------------------------------
$ (15,107) $ 205,543 $10,757
----------------------------------
----------------------------------
</TABLE>
30
<PAGE>
WRITE-OFF OF ACQUIRED IN-PROCESS TECHNOLOGY AND OTHER MERGER-RELATED EXPENSES
The 1999 amount represents an adjustment to previously estimated merger-related
expenses. The 1998 amount includes a $17 million charge for acquired in-process
technology from the $50 million acquisition of Paragraph, which was accounted
for using the purchase method, partially offset by adjustments to previously
estimated merger-related expenses. The 1997 amount consists of merger-related
expenses. Merger-related expenses consist principally of costs associated with
the integration of SGI and Cray information systems, accounting processes and
marketing and human resources activities.
RESTRUCTURING In the second quarter of fiscal 1998, we announced and began to
implement a restructuring program aimed at bringing our expenses more in line
with the current revenue levels and restoring long-term profitability to SGI.
SGI's restructuring program was broad-based and covered virtually all aspects of
our products, operations and processes. The process of developing this program
continued during the balance of fiscal 1998 and included a reevaluation of our
core competencies, technology roadmap and business model, as well as development
of our fiscal 1999 operating plan. Our restructuring activity resulted in the
elimination of approximately 1,400 positions, writing down certain operating
assets, vacating certain leased facilities and canceling certain contracts.
These actions resulted in aggregate charges of $144 million (before the effect
of the adjustment noted below), of which approximately $75 million have used or
will use cash, and $69 million of which were non-cash charges. The operating
asset write-down includes a $32 million charge taken in the third quarter of
fiscal 1998 to write down purchased intangibles and goodwill associated with the
September 1997 acquisition of ParaGraph which was taken following the evaluation
of our core competencies and technology roadmap. We expect that the remaining $8
million accrued balance at June 30, 1999 will result primarily in cash
expenditures and will be financed through current working capital. We believe
the savings resulting from the restructuring activities, as well as generally
tighter operating expense controls, contributed to a reduction in operating
expense levels by approximately $240 million in fiscal 1999.
During fiscal 1999, we revised downward by $14 million, our estimate of the
total costs associated with the program described above. The adjustment
primarily reflects lower than estimated severance and related charges
attributable to higher than expected attrition, as well as lower per person
costs. To a lesser extent, we also adjusted estimated costs of contract
cancellations, operating asset write-downs and exiting certain facilities.
The following table depicts the restructuring activity in fiscal 1998 and 1999
(in thousands):
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Total Fiscal 1999
Fiscal 1998 Adjustments:
Restructuring Increase/ Expenditures Balance at
Category Charges (Decrease) Cash Non-Cash June 30, 1999
<S> <C> <C> <C> <C> <C>
Severance and related charges $ 83,962 $ (15,500) $ (57,188) $ (6,056) $ 5,218
Operating asset write-down 37,780 4,216 -- (41,996) --
Canceled contracts 4,675 (1,916) (324) (2,435) --
Vacated facilities 8,960 (1,300) (6,408) (203) 1,049
Other 8,621 500 (4,104) (2,851) 2,166
-----------------------------------------------------------------
$ 143,998 $ (14,000) $ (68,024) $ (53,541) $ 8,433
-----------------------------------------------------------------
-----------------------------------------------------------------
</TABLE>
CHARGE FOR IMPAIRMENT OF LONG-LIVED ASSETS As a result of the processes
described above, we also found it necessary to downsize our vector
supercomputer business, necessitating an evaluation of the ongoing value of
the associated plant and equipment and intangible assets. Based on this
evaluation, we determined that assets (principally a specific-use
manufacturing facility; supercomputers used in product design, support and
manufacturing and other machinery and equipment) with a carrying amount of
$50 million were impaired and wrote them down by $47 million to their fair
value. Fair value was principally based on estimated exchange and resale
value.
31
<PAGE>
NOTE 4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted income
(loss) per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
-----------------------------------
Years Ended June 30
-----------------------------------
1999 1998 1997
<S> <C> <C> <C>
Net income (loss) $ 53,829 $(459,627) $ 78,551
Less preferred stock dividends (525) (525) (525)
-----------------------------------
Net income (loss) available to common stockholders $ 53,304 $(460,152) $ 78,026
-----------------------------------
Weighted average shares outstanding--basic 186,374 186,149 175,548
Employee stock options and restricted shares 3,053 -- 7,089
-----------------------------------
Weighted average shares outstanding--diluted 189,427 186,149 182,637
-----------------------------------
Net income (loss) per share:
Basic $ 0.29 $ (2.47) $ 0.44
-----------------------------------
Diluted $ 0.28 $ (2.47) $ 0.43
-----------------------------------
Potentially dilutive securities excluded from computations
because they are anti-dilutive 8,843 12,187 9,144
-----------------------------------
-----------------------------------
</TABLE>
NOTE 5. FINANCIAL INSTRUMENTS
CASH EQUIVALENTS AND MARKETABLE AND RESTRICTED INVESTMENTS The following table
summarizes by major security type the fair value of SGI's cash equivalents and
marketable and restricted investments at June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
-----------------------
1999 1998
<S> <C> <C>
U.S. commercial paper $ 253,227 $ 296,789
Certificates of deposit and time deposits 143,080 93,590
Money market funds 128,600 17,800
Corporate notes and bonds 64,480 --
Repurchase agreements 40,000 36,000
U.S. government securities 26,217 151,933
Money market preferreds -- 40,000
Other 4,323 --
-----------------------
Total 659,927 636,112
Less amounts classified as cash equivalents (448,675) (406,031)
-----------------------
Total marketable and restricted investments $ 211,252 $ 230,081
-----------------------
-----------------------
</TABLE>
At June 30, 1999 and 1998, the amortized cost of cash equivalents and marketable
and restricted investments approximates fair value. Gross unrealized gains and
losses were not significant in fiscal 1999 or 1998. Gross realized gains and
losses on sales of available-for-sale securities were not significant in fiscal
1999, 1998 or 1997.
FINANCIAL INSTRUMENTS WITH DERIVATIVE RISK (OFF-BALANCE SHEET) The notional
principal amounts of our currency forward contracts at June 30, 1999 and 1998
were $3 million and $103 million, respectively. There were no currency options
outstanding at June 30, 1999. The notional principal amount of our currency
options at June 30, 1998 was $79 million. The notional principal amounts for
off-balance-sheet instruments provide one measure of the transaction volume
outstanding at year end, and do not represent the amount of our exposure to
credit loss or market risk. Credit risk is our gross exposure to potential
accounting loss on currency forward contracts if all counterparties failed to
perform as agreed at the contracted rates and contracts had to be replaced at
rates prevailing at each respective date.
32
<PAGE>
We transact business in various foreign currencies, including the major European
currencies and the Japanese yen. We have established revenue and balance sheet
hedging programs to protect against reductions in value and volatility of future
cash flows caused by changes in foreign exchange rates. We use derivatives in
the form of currency forward contracts and currency options in our programs. All
currency forward contracts related to recorded transactions expire within one
year. All currency forward contracts related to firmly committed customer
transactions expire within two and one-half years. All currency forward
contracts related to anticipated transactions expire within six months. Deferred
gains and losses on contracts related to firmly committed transactions and
anticipated transactions were not significant in fiscal 1999, 1998 or 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and estimated fair
values of SGI's financial instruments at June 30, 1999 and 1998 are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
-------------------------------------------------
1999 1998
-------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 571,120 $ 571,120 $ 506,639 $ 506,639
Marketable and restricted investments 211,252 211,252 230,081 230,081
Debt instruments 360,670 329,065 371,261 331,525
Currency forward contracts 2,181 2,790 (3,577) (822)
Currency options -- -- 592 163
-------------------------------------------------
</TABLE>
NOTE 6. CONCENTRATION OF CREDIT AND OTHER RISKS
CREDIT RISK Financial instruments that potentially subject SGI to concentration
of credit risk consist principally of cash investments, currency forward
contracts and trade receivables. We place our investments and transact our
currency forward contracts with high-credit-quality counterparties and, by
policy, limit the amount of credit exposure to any one counterparty, and
generally do not require collateral. The credit risk on receivables due from
counterparties related to currency forward contracts is immaterial at June 30,
1999 and 1998. We perform ongoing credit evaluations of our customers and,
except in connection with the sales of supercomputers, generally do not require
collateral. We maintain reserves for potential credit losses and such losses
have been within our expectations.
PRODUCTION Most of our products incorporate certain components that are
available from only one or from a limited number of suppliers. Many of these
components are custom designed and manufactured, with lead times from order to
delivery that can exceed 90 days. Shortages of various essential materials could
occur due to interruption of supply or increased demand in the industry. In
addition, we increasingly outsource certain aspects of our production, including
the entire Windows NT-based workstation product line, to third parties. If we
were unable to procure certain such components or sustain our outsourced
production capacity, it could affect our ability to meet demand for our products
which would have an adverse effect upon our results.
INTERNATIONAL OPERATIONS We derive approximately half of our revenue from sales
outside the United States. In addition, many key components are produced outside
the United States. Therefore, our results could be negatively affected by such
factors as changes in foreign currency exchange rates, trade protection
measures, longer accounts receivable collection patterns, and changes in
regional or worldwide economic or political conditions. The risks of our
international operations are mitigated in part by our foreign exchange hedging
program and by the extent to which our sales and manufacturing activities are
geographically distributed.
Our sales to foreign customers also are subject to export regulations, with
sales of most of our high-end products requiring clearance and export licenses
from the U.S. Department of Commerce. Our export sales would be adversely
affected if such regulations were tightened, or if they are not modified over
time to reflect the increasing performance of our products. The Departments of
Commerce and Justice are currently conducting civil and criminal investigations
into SGI's compliance with the export regulations in connection with the sale of
several computer systems to a customer in Russia during fiscal 1997.
33
<PAGE>
We believe that these matters will be resolved without a significant adverse
effect on our business. However, if our export privileges were limited or
denied, our results would be adversely affected.
NOTE 7. INVENTORIES
Inventories at June 30, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
----------------------
1999 1998
<S> <C> <C>
Components and subassemblies $ 19,988 $ 114,139
Work-in-process 71,406 74,961
Finished goods 41,694 47,917
Demonstration systems 62,093 85,806
----------------------
Total inventories $ 195,181 $ 322,823
----------------------
</TABLE>
NOTE 8. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1999 and 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
------------------------
1999 1998
<S> <C> <C>
Land and buildings $ 94,630 $ 123,437
Machinery and equipment 639,166 644,144
Furniture and fixtures 117,418 118,602
Leasehold improvements 129,605 126,106
----------- ----------
980,819 1,012,289
Accumulated depreciation and amortization (600,051) (566,869)
----------- ----------
Net property and equipment $ 380,768 $ 445,420
----------- ----------
</TABLE>
NOTE 9. OTHER ASSETS
Other assets at June 30, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
----------------------
1999 1998
<S> <C> <C>
Spare parts $ 157,539 $ 146,024
Investments 82,561 1,418
Software licenses, goodwill and other 99,568 116,666
---------- ---------
$ 339,668 $ 264,108
---------- ---------
</TABLE>
Included in investments at June 30, 1999, is our investment in Wam!Net Inc.
(WNI). In March 1999, we entered into a series of agreements with WNI, a
private company providing digital networking service that integrates
high-speed digital file transfer with high-bandwidth data applications
intended to improve production workflow in time-sensitive, data-critical
industries such as the graphics arts, entertainment and medical imaging.
Pursuant to those agreements, we acquired a minority interest in WNI
preferred stock in exchange for $35 million in cash and title to our campus
facility in Eagan, Minnesota, valued at $38 million. We are accounting for
this investment using the cost method. The two companies also have entered
into preferred provider arrangements whereby WNI and SGI each agreed to
purchase hardware, software and service from each other over a four-year
period beginning January 1, 1999.
34
<PAGE>
NOTE 10. LONG-TERM DEBT
Long-term debt at June 30, 1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
----------------------
1999 1998
<S> <C> <C>
Senior Convertible Notes due September 2004 at 5.25% $ 230,591 $ 230,591
Zero Coupon Convertible Subordinated Debentures due
November 2013 at 4.15%, net of unamortized discount of $3,313 in 1998 -- 3,777
Convertible Subordinated Debentures due February 2011 at 6.125%,
net of unamortized discount of $12,651 ($16,154 in 1998) 54,674 65,846
Swiss Franc mortgage due June 2017 at 3.79% (3.77% in 1998),
which resets quarterly 18,116 19,893
Japanese Yen fixed rate loan due December 2001 at 2.06% 49,493 42,005
Other 7,797 9,149
----------- ----------
360,671 371,261
Less amounts due within one year (5,700) (4,801)
----------- ----------
Amounts due after one year $ 354,971 $ 366,460
----------- ----------
</TABLE>
In November 1993, we issued Zero Coupon Convertible Subordinated Debentures (the
"Zero Coupon Debentures") with an ultimate maturity amount of $455 million. In
September 1997, we completed an offer to exchange our newly registered Senior
Convertible Notes (the "Senior Notes") for up to all of our existing Zero Coupon
Debentures. The Senior Notes are convertible into shares of common stock at a
conversion price equal to $36.25 per share. The Senior Notes are redeemable at
our option, beginning in 2002, at varying prices based on the year of
redemption. The Senior Notes are redeemable at the holder's option in the event
of the sale of all, or substantially all, of our common stock for consideration
other than common stock traded on a U.S. exchange or approved for quotation on
the Nasdaq National Market. We redeemed all remaining unexchanged Zero Coupon
Debentures in fiscal 1999.
In connection with the Cray acquisition, SGI assumed the Cray Convertible
Subordinated Debentures. These debentures are convertible into SGI's common
stock at a conversion price of $78 per share at any time prior to maturity and
may be redeemed at our option at a price of 100%. Prior to our acquisition of
Cray, Cray repurchased a portion of the debentures with a face value of $33
million. The repurchase satisfied the first six required annual sinking fund
payments of $6 million originally scheduled for the years 1997 through 2002. In
fiscal 1999 we repurchased another portion of the debentures with a face value
of $15 million. This repurchase satisfied the next two required annual sinking
fund payments of $6 million originally scheduled for the years 2003 through
2004. Remaining annual sinking fund payments of $6 million each are scheduled
from 2005 to 2010 with a final maturity payment of $35 million in 2011.
Principal maturities of long-term debt at June 30, 1999 are as follows (in
millions): 2000 - $6; 2001 - $4; 2002 - $52; 2003 - $1; 2004 - $.3 and $298,
thereafter.
35
<PAGE>
NOTE 11. LEASING ARRANGEMENTS AS LESSOR
We have entered into certain lease arrangements which are accounted for as
sales. The net investment in sales-type leases at June 30, 1999 and 1998 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
-----------------------
1999 1998
<S> <C> <C>
Total minimum lease payments receivable $ 10,457 $ 1,284
Less unearned interest income (1,091) (47)
---------- ----------
Net investment in sales-type leases 9,366 1,237
Less current portion (2,847) (1,113)
----------- ----------
Long-term portion $ 6,519 $ 124
----------- ----------
</TABLE>
Future minimum lease rents on noncancelable sales-type lease agreements at
June 30, 1999 are as follows (in millions): 2000 - $4; 2001 - $3; 2002 - $2
and 2003 - $1.
NOTE 12. LEASING ARRANGEMENTS AS LESSEE
We lease certain of our facilities and some of our equipment under
non-cancelable operating lease arrangements.
Future minimum annual lease payments under operating leases, net of subleases
and rental income, at June 30, 1999 are as follows (in millions): 2000 - $63;
2001 - $48; 2002 - $38; 2003 - $23; 2004 - $18 and $194, thereafter.
Aggregate operating lease rent expense in fiscal 1999, 1998 and 1997 was (in
millions): $71, $77 and $71, respectively.
NOTE 13. STOCKHOLDERS' EQUITY
PREFERRED STOCK TRANSACTIONS NKK Corporation ("NKK") owns 17,500 shares of
Series A convertible preferred stock (see Note 18). The preferred stock pays
a 3% cumulative annual dividend, has preference upon liquidation in the
amount of the purchase price and has aggregate voting rights equivalent to
1,400,000 shares of common stock. The preferred stock is convertible into our
common stock at certain times at the then-current price of the common stock.
The preferred stock is perpetual, but is subject to redemption at our option
at certain times if the market price of the common stock is below $8.75 per
share.
STOCK AWARD PLANS We have various stock award plans which provide for the
grant of incentive and nonstatutory stock options and the issuance of
restricted stock to employees and certain other persons who provide
consulting or advisory services to SGI. We grant incentive stock options at
not less than the fair market value on the date of grant; the board of
directors determines the prices of nonstatutory stock option grants and
restricted stock. Under the plans, options and restricted stock generally
vest over a fifty-month period from the date of grant.
In addition, we have a Directors' Stock Option Plan which allows for the
grant of nonstatutory stock options to nonemployee directors at not less than
the fair market value at the date of grant. Eligible directors are granted an
option to purchase 30,000 shares of common stock on the date of their initial
election as a director. On November 1 of each year, each eligible director is
granted an option to purchase an additional 10,000 shares of common stock.
These options generally vest in installments over a four-year period. At June
30, 1999, 876,200 shares were available for future option grants under the
Directors' Stock Option Plan.
In July 1998, we effected an option exchange program to allow employees
(excluding senior executives) to exchange their out-of-the-money options for
new options at a more favorable exercise price. The new options have an
exercise price of $11.125, the fair value on the date the exchange was
announced, vest over the longer of two years or the original vesting schedule
and could not be exercised prior to January 1999. As a result of the program,
options to purchase approximately 12,800,000 shares with a weighted average
exercise price of $19.70 were exchanged for new options.
At June 30, 1999, 1998 and 1997, there were 18,437,793, 10,832,173, and
10,749,128 unused shares, respectively, available for grant, and there were
820,625, 580,316 and 303,620 shares of restricted stock, respectively,
subject to repurchase.
36
<PAGE>
Activity under all of the stock award plans was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------------------
Number of Weighted Number of Weighted Number of Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1 34,394,843 $ 16.59 34,753,548 $ 16.92 38,056,701 $ 19.53
Options granted 20,013,148 $ 12.14 11,536,447 $ 13.18 18,817,420 $ 20.49
Options exercised (3,151,195) $ 8.05 (6,146,202) $ 8.93 (3,703,246) $ 10.47
Options forfeited (12,803,398) $ 19.70 (5,748,950) $ 19.86 (4,862,813) $ 26.98
Options canceled (7,838,056) $ 17.15 -- $ -- (13,554,514) $ 27.37
-----------------------------------------------------------------------
Balance at June 30 30,615,342 $13.15 34,394,843 $ 16.59 34,753,548 $ 16.92
-----------------------------------------------------------------------
Exercisable at June 30 13,286,532 $13.86 17,337,552 $ 17.12 18,346,324 $ 13.72
-----------------------------------------------------------------------
</TABLE>
Additional information about options outstanding at June 30, 1999 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Number of Exercise Contractual Number of Exercise
Price Range Shares Price Life (years) Shares Price
<S> <C> <C> <C> <C> <C>
$ 0.96 - $ 10.00 2,070,419 $ 7.02 2.5 1,869,276 $ 6.84
$ 10.19 - $ 11.25 14,498,029 $ 11.13 6.7 5,761,399 $11.14
$ 11.31 - $ 15.00 11,071,730 $ 13.74 8.5 3,093,467 $13.25
$ 15.06 - $ 42.50 2,975,164 $ 25.06 6.0 2,562,390 $25.86
------------------------- -------------------------
30,615,342 $ 13.15 13,286,532 $13.86
------------------------- -------------------------
</TABLE>
Stock Purchase Plan We have an employee stock purchase plan under which eligible
employees may purchase stock at 85% of the lower of the closing prices for the
stock at the beginning of a twenty four-month offering period or the end of each
six-month purchase period. The purchase periods generally begin in May and
November. Purchases are limited to 10% of each employee's compensation. At June
30, 1999, we had issued 22,174,495 shares under the plan and we have reserved
2,885,505 shares for future issuance.
Grant Date Fair Values The weighted average estimated fair value of employee
stock options granted at grant date market prices during fiscal 1999, 1998 and
1997 was $5.18, $6.32 and $5.94 per share, respectively. The weighted average
exercise price of employee stock options granted at grant date market prices
during fiscal 1999, 1998 and 1997 was $12.14, $13.20 and $20.56 per share,
respectively. There were no employee stock options granted at below grant date
market prices during fiscal 1999. The weighted average estimated fair value of
employee stock options granted at below grant date market prices during fiscal
1998 and 1997 was $10.92, and $13.54 per share, respectively. The weighted
average exercise price of employee stock options granted at below grant date
market prices during fiscal 1998 and 1997 was $8.91 and $12.56 per share,
respectively. The weighted average fair value of restricted stock granted during
fiscal 1999, 1998 and 1997 was $12.51, $20.79 and $18.93 per share,
respectively. The weighted average estimated fair value of shares granted under
the Stock Purchase Plan during fiscal 1999, 1998 and 1997 was $4.97, $5.81 and
$7.06 per share, respectively.
37
<PAGE>
We estimated the weighted average fair value of options granted at the date
of grant using a Black-Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
Employee Stock Options Stock Purchase Plan Shares
--------------------------------------------------------------------------
Years ended June 30 1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Expected life (in years) 1.9 2.3 2.7 0.5 0.5 0.5
Risk-free interest rate 5.26% 5.58% 6.38% 4.97% 5.68% 5.45%
Volatility 0.71 0.61 0.50 0.56 0.76 0.57
Dividend yield 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
--------------------------------------------------------------------------
</TABLE>
PRO FORMA INFORMATION We have elected to follow APB 25 in accounting for our
employee stock options. Under APB 25, we recognize no compensation expense in
our financial statements except in connection with the grant of restricted
stock for nominal consideration and unless the exercise price of our employee
stock options is less than the market price of the underlying stock on the
grant date. Total compensation expense recognized in our financial statements
for stock-based awards under APB 25 for fiscal 1999, 1998 and 1997 was $5
million, $13 million and $5 million, respectively.
We determined the following pro forma information regarding net income and
earnings per share as if we had accounted for our employee stock options and
employee stock purchase plan under the fair value method prescribed by SFAS
123. For purposes of pro forma disclosures, the estimated fair value of the
stock awards is amortized to expense over the vesting periods. The pro forma
information is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Years ended June 30
------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Pro forma net loss $ (13,696) $ (538,260) $ (14)
Pro forma net loss per share:
Basic $ (0.08) $ (2.89) $ --
Diluted $ (0.08) $ (2.89) $ --
------------------------------------
</TABLE>
STOCKHOLDER RIGHTS PLAN We have a stockholder rights plan which provides
existing stockholders with the right to purchase one one-thousandth (0.001)
preferred share for each share of common stock held in the event of certain
changes in SGI's ownership. The rights plan may serve as a deterrent to
certain abusive takeover tactics which are not in the best interests of
stockholders.
STOCK REPURCHASE PROGRAM Our board of directors has authorized a program to
repurchase up to 27,500,000 shares of our common stock in open market or in
private transactions, option or other forward transactions and other
potential methods. We have repurchased 19,264,500 shares of common stock at a
cost of $311 million since commencement of the repurchase program. We utilize
equity instrument contracts to facilitate our repurchase of common stock. At
June 30, 1999, we have outstanding commitments to buy an aggregate of
6,000,000 shares of common stock under our equity forward purchase
arrangement, including obligations that were transferred from previous sold
put contracts. Under this arrangement, the purchase price will be paid within
the next two and a half years at a pre-determined price based on the
third-party's acquisition cost. The timing and method of payment (net-share
or full physical settlement) is at our discretion. The purchase commitment
under the equity forward is secured in part by collateral, reflected in our
financial statements as restricted investments. Repurchased shares are
available for use under our employee stock plans and for other corporate
purposes. At June 30, 1999, approximately 2,235,500 shares remained
uncommitted and available for our use under this stock repurchase program.
COMMON SHARES RESERVED We have reserved in the aggregate 60,328,957 shares of
common stock issuable upon conversion of the Senior Notes and Convertible
Subordinated Debentures, as well as shares issuable under our stock award and
purchase plans.
38
<PAGE>
NOTE 14. COMPREHENSIVE INCOME
The components of accumulated other comprehensive income (loss), net of tax, are
as follows (in thousands):
<TABLE>
<CAPTION>
Years ended June 30
--------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Unrealized loss on available-for-sale investments $ (118) $ (70) $ (632)
Foreign currency translation adjustments (1,525) 1,037 22,453
--------------------------------------
Accumulated other comprehensive (loss) income $ (1,643) $ 967 $ 21,821
--------------------------------------
--------------------------------------
</TABLE>
NOTE 15. INCOME TAXES
The components of income (loss) before income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
Years ended June 30
--------------------------------------
1999 1998 1997
<S> <C> <C> <C>
United States $ 10,699 $(601,962) $ 84,508
International 115,022 5,043 13,682
--------------------------------------
$ 125,721 $(596,919) $ 98,190
--------------------------------------
--------------------------------------
</TABLE>
The provision for (benefit from) income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
Years ended June 30
---------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Federal:
Current $ (44,972) $ 26,346 $ 11,153
Deferred 58,618 (185,555) 18,897
State:
Current 93 25,488 20,771
Deferred 5,455 (31,762) (17,796)
Foreign:
Current 38,244 12,727 6,633
Deferred 14,454 15,464 (20,019)
---------------------------------------
$ 71,892 $ (137,292) $ 19,639
---------------------------------------
---------------------------------------
</TABLE>
The provision for (benefit from) income taxes reconciles to the amounts
computed by applying the statutory federal rate to income (loss) before
income taxes as follows (in thousands):
<TABLE>
<CAPTION>
Years ended June 30
----------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Tax at U.S. federal statutory rate $ 44,003 $(208,922) $ 34,366
State taxes, net of federal tax benefit 3,606 (4,078) 1,934
Earnings subject to foreign taxes at lower rates -- -- (16,599)
Income of Foreign Sales Corporation not subject to U.S. tax -- -- (6,170)
Acquired in-process technology and non-deductible goodwill -- 16,800 --
Research and experimentation credits -- (670) (7,748)
Net operating loss with no tax benefit 14,705 43,606 9,140
Foreign tax credits with no tax benefit 4,020 13,355 --
Other 5,558 2,617 4,716
----------------------------------------
Provision for (benefit from) income taxes $ 71,892 $(137,292) $ 19,639
----------------------------------------
----------------------------------------
</TABLE>
39
<PAGE>
We have made no provision for residual federal taxes on approximately $242
million of accumulated undistributed earnings of certain of our foreign
subsidiaries since it is our intention to permanently invest such earnings in
foreign operations. We have been granted exemptions from tax on income from
certain manufacturing operations located outside the U.S. for years through
2007. We estimate the cumulative income tax benefits attributable to the tax
status of this subsidiary to be $85 million at June 30, 1999.
The tax effects of temporary differences and carryforwards that give rise to
significant portions of deferred tax assets and liabilities at June 30, 1999
and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
-----------------------
1999 1998
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 191,145 $103,705
General business credit carryforwards 63,000 53,449
Foreign tax credit carryforwards 15,413 33,677
Depreciation 49,226 40,435
Capitalized research expenses 33,661 32,768
Inventory valuation 93,070 143,428
Intercompany profit elimination 18,284 64,283
Reserves not currently deductible 39,441 67,907
Other 90,725 103,655
-----------------------
Subtotal 593,965 643,307
Valuation allowance (105,364) (90,705)
-----------------------
Total deferred tax assets 488,601 552,602
Deferred tax liabilities:
Foreign taxes on unremitted foreign earnings, net of related U.S. tax liability 38,191 14,784
Other -- 8,881
-----------------------
Total deferred tax liabilities 38,191 23,665
Total $ 450,410 $528,937
-----------------------
-----------------------
</TABLE>
At June 30, 1999, we had gross deferred tax assets arising from deductible
temporary differences, tax losses, and tax credits of $594 million. The gross
deferred tax assets are offset by a valuation allowance of $105 million and
deferred tax liabilities of $38 million. The valuation allowance of $105
million includes $22 million attributable to benefits of stock option
deductions, which, if recognized, will be allocated directly to paid-in
capital. Realization of the majority of the net deferred tax assets is
dependent on our ability to generate approximately $900 million of future
taxable income. We believe that it is more likely than not that the assets
will be realized based on forecasted income, including income from the
planned divestiture of our interest in MIPS. However, there can be no
assurance that we will meet our expectations of future income. On a quarterly
basis, we will evaluate the realizability of the deferred tax assets and
assess the need for additional valuation allowances.
At June 30, 1999, we had United States federal and foreign jurisdictional net
operating loss carryforwards of approximately $382 million and $147 million,
respectively. The federal losses will begin expiring in fiscal year 2007 and
the foreign losses will begin expiring in fiscal year 2000. At June 30, 1999,
we also had general business credit carryovers of approximately $46 million
for United States federal tax purposes, which will begin expiring in fiscal
year 2000.
NOTE 16. SEGMENT INFORMATION
SGI is a market leader in technical computing, offering powerful servers,
supercomputers and visual workstations. We have three reportable segments:
Servers, Visual Workstations and Global Services. Reportable segments are
determined based on several factors including customer base, homogeneity of
products, technology, delivery channels and other factors. The Visual
Workstations segment has two operating units and the Server segment has three
operating units. Each operating unit has a vice president or senior vice
president that reports directly to the Chief Executive Officer. The CEO
evaluates performance and allocates resources to each of these operating
units based on profit or loss from operations before interest and taxes. The
CEO has been identified as the Chief Operating Decision Maker as defined by
SFAS 131.
40
<PAGE>
The Server segment's products include the Onyx2-TM- family of graphics
supercomputers, the Origin-TM-200 family of servers, the Origin-TM-2000
family of high-performance servers and the Cray supercomputers. Our servers
are high-performance multi-purpose computers designed to be the market
leaders in technical computing applications, empowering insight in key
industries such as manufacturing, government, entertainment, communications,
energy, science and education. Our servers also have a growing presence in
the commercial market with an emphasis on strategic business analysis,
internet applications and digital media serving. In addition, our servers are
used as storage management servers for managing very large data repositories
that contain company critical information. These products are distributed
through our direct sales force, as well as through indirect channels
including resellers and distributors.
The Visual Workstation segment's products include the Silicon Graphics-R- 320
and Silicon Graphics-R- 540 visual workstations based upon the Intel
microprocessor and the Windows NT operating system and the O2-R- and
Octane-R- visual workstations based upon the MIPS-R- microprocessor and the
IRIX operating system. The Company's visual workstations are used in a
variety of applications including computer-aided design, medical imaging, 3D
animation, broadcast, modeling and simulation. These products are distributed
through the Company's direct sales force, as well as through indirect
channels including resellers and distributors.
The Global Services segment supports our computer hardware and software
products and provides professional services to help customers realize the
full value of their information technology investments. Our professional
services organization provides technology consulting, education,
communication and entertainment services.
In addition to the aforementioned reportable segments, the sales and
marketing, manufacturing, finance and administration groups also report to
the CEO. Expenses of these groups are allocated to the operating units and
are included in the results reported. The revenue and related expenses of our
wholly-owned software subsidiary Alias|Wavefront and our majority-owned
subsidiary MIPS, a designer of high-performance processors and related
intellectual property, as well as certain corporate-level operating expenses
are not allocated to operating units and are included in "Other" in the
reconciliation of reported revenue and operating profit.
We do not identify or allocate assets or depreciation by operating segment,
nor does the CEO evaluate segments on these criteria. Operating units do not
sell product to each other, and accordingly, there is no inter-segment
revenue to be reported. The accounting policies for segment reporting are the
same as those described in Note 2, "Summary of Significant Accounting
Policies."
Information on reportable segments is as follows (in thousands):
<TABLE>
<CAPTION>
Years ended June 30
------------------------------------
Visual Global
Servers Workstations Services
<S> <C> <C> <C>
1999:
Revenue from external customers $1,217,965 $ 647,182 $ 682,362
Segment profit (loss) $ (44,790) $ (235,895) $ 113,915
Significant noncash item:
Asset valuation adjustments $ -- $ (16,000) $ --
------------------------------------
1998:
Revenue from external customers $1,417,487 $ 865,005 $ 630,416
Segment profit (loss) $ (215,562) $ (155,961) $ 39,952
Significant noncash items:
Asset valuation adjustments $ -- $ (18,800) $ --
Write-off of excess spares $ -- $ -- $ (30,000)
Vector supercomputer inventory and warranty-related charges $ (98,500) $ -- $ (15,700)
------------------------------------
1997:
Revenue from external customers $1,795,206 $ 1,111,810 $ 571,141
Segment profit $ 17,966 $ 63,895 $ 104,613
------------------------------------
</TABLE>
41
<PAGE>
Reconciliation to SGI as reported (in thousands):
<TABLE>
<CAPTION>
Years ended June 30
------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Revenue:
Total reportable segments $2,547,509 $2,912,908 $3,478,157
Other 201,448 187,702 184,444
------------------------------------
Total SGI consolidated $2,748,957 $3,100,610 $3,662,601
------------------------------------
Operating profit (loss):
Total reportable segments $(166,770) $(331,571) $ 186,474
Other 24,519 (58,987) (21,368)
Restructuring 14,000 (143,998) --
Write-off of acquired in-process technology
and other merger-related expenses 1,107 (14,905) (10,757)
Write-down of impaired long-lived assets -- (46,640) --
Amortization of write-up of acquired Cray
inventory and service contracts -- -- (42,465)
------------------------------------
Total SGI consolidated $(127,144) $(596,101) $ 111,884
------------------------------------
------------------------------------
</TABLE>
No single customer represented 10% or more of our total revenue.
Geographic revenue for the three years ended June 30, 1999 is based on the
location of the customer. Long-lived assets include all non-current assets
except long-term restricted and marketable investments and net long-term
deferred tax assets.
Geographic information is as follows (in thousands):
<TABLE>
<CAPTION>
Revenue Long-lived Assets
---------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Americas $1,535,729 $1,728,680 $2,071,709 $ 370,981 $ 376,358 $ 570,652
Europe 753,904 830,819 936,184 301,088 288,995 242,847
Rest of World 459,324 541,111 654,708 48,367 44,175 49,042
---------------------------------------------------------------------------
Total $2,748,957 $3,100,610 $3,662,601 $ 720,436 $ 709,528 $ 862,541
---------------------------------------------------------------------------
---------------------------------------------------------------------------
</TABLE>
NOTE 17. BENEFIT PLANS
401(k) RETIREMENT SAVINGS PLAN We provide a 401(k) investment plan covering
substantially all of our U.S. employees. The plan provides for a minimum 25%
Company match of an employee's contribution up to a specified limit, but allows
for a larger matching subject to certain regulatory limitations. Our matching
contributions for fiscal 1999, 1998 and 1997, were $6 million, $7 million and
$11 million, respectively.
DEFERRED COMPENSATION PLAN We have a Non-Qualified Deferred Compensation Plan
that allows eligible executives and directors to defer a portion of their
compensation. The deferred compensation, together with Company matching amounts
and accumulated earnings, is accrued but unfunded. Such deferred compensation is
distributable in cash and at June 30, 1999 and 1998, amounted to approximately
$5 million and $6 million, respectively. A participant may elect to receive such
deferred amounts in one payment or in annual installments no sooner than two
years following each annual election. Participant contributions are always 100%
vested and our matching contributions vest as directed by the board of
directors. There have been no matching contributions to date.
NOTE 18. RELATED PARTY TRANSACTIONS
We have from time to time engaged in significant transactions with related
parties in the ordinary course of business. Related parties include: Northrop
Grumman in fiscal 1999, and Northrop Grumman Corporation and Chrysler
Corporation in fiscal 1998 and 1997, as a director of both Northrop Grumman and
Chrysler became a member of our board of directors in fiscal 1996; and NKK
through its indirect ownership of 100% of Series A Convertible Preferred Stock
(see Note 13).
42
<PAGE>
Total revenue for the years ended June 30, 1999, 1998 and 1997 included, in the
aggregate, sales to related parties in the amount of $49 million, $87 million
and $60 million, respectively. Purchases and aggregate amounts receivable from
and amounts payable to such related parties were immaterial at June 30, 1999,
1998 and 1997.
NOTE 19. CONSOLIDATED STATEMENT OF CASH FLOWS
Other adjustments to reconcile net income (loss) to net cash provided by
operating activities include the write-off of long-lived assets, the write-off
of purchased intangibles and goodwill and accruals of compensation expense
related to employee stock awards. The effect of exchange rate changes on cash
balances is not material for any of the periods presented.
Supplemental disclosures of cash flow information (in thousands):
<TABLE>
<CAPTION>
Years ended June 30
---------------------------------
1999 1998 1997
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 21,000 $14,100 $10,200
Income taxes, net of refunds (42,000) 9,200 29,000
---------------------------------
</TABLE>
Supplemental schedule of noncash investing and financing activities (in
thousands):
<TABLE>
<CAPTION>
Years ended June 30
---------------------------------
1999 1998 1997
<S> <C> <C> <C>
Tax benefit from stock options $ 906 $ 11,700 $ 6,300
Capital lease financings 2,800 6,300 --
Exchange of property and equipment for minority
interest investment in Wam!Net 37,600 -- --
Exchange of Senior Notes for Zero Coupon Debentures -- 230,600 --
---------------------------------
</TABLE>
NOTE 20. CONTINGENCIES
We are defending the lawsuits described below. We believe we have good defenses
to the claims in each of these lawsuits and we are defending each of them
vigorously.
We are defending putative securities class action lawsuits filed in the U.S.
District Court for the Northern District of California and in California
Superior Court for the County of Santa Clara in December 1997 and January 1998
alleging that SGI and certain of its officers made material misrepresentations
and omissions during the period from July to October 1997.
We are also defending a securities class action lawsuit filed in January 1996
in the Northern District of California alleging that SGI 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. On July 2, 1999, the U.S. Court
of Appeals for the Ninth Circuit upheld the dismissal.
We are also defending a securities class action lawsuit involving Alias
Research Inc., which we 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. In April 1999, the U.S. Court of Appeals for the
Second Circuit reversed the dismissal and remanded the case to the U.S.
District Court for the District of Connecticut. The U.S. Court of Appeals has
denied defendants' petition for rehearing en banc.
We have settled a securities class action lawsuit involving MIPS Computer
Systems, Inc., ("MCSI") which we acquired in June 1992. The MCSI case, which was
filed in 1992 in the Northern District of California, alleged 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 in December 1998, the terms of
which were reflected in a
43
<PAGE>
Stipulation of Settlement filed with the Court in January 1999. Under the
settlement agreement, the defendants have agreed to establish a $15 million
escrow fund that shall be administered to pay the representative plaintiffs'
costs and attorneys fees, to notify and certify members of the class and to
pay the claims of class members. The settlement amount was largely covered by
insurance. The settlement agreement provides for release of all parties'
claims in connection with the class action and is subject to final approval
of the Court.
We routinely receive communications from third parties asserting patent or other
rights covering our products and technologies. Based upon our evaluation, we may
take no action or we may seek to obtain a license. There can be no assurance in
any given case that a license will be available on terms we consider reasonable,
or that litigation will not ensue.
We are not aware of any pending disputes, including those described above, that
would be likely to have a material adverse effect on SGI's financial condition,
results of operations or liquidity. However, our evaluation of the likely impact
of these pending disputes could change in the future.
NOTE 21. SALE OF INTEREST IN MIPS TECHNOLOGIES, INC.
On July 6, 1998, we closed an initial public offering of the common stock of our
subsidiary, MIPS Technologies, Inc. ("MIPS"), a company formed by SGI that
designs and develops RISC based microprocessor intellectual property for
imbedded systems applications targeting the emerging market for digital consumer
products. The offering consisted of SGI's sale of 4,250,000 shares of MIPS
common stock for net proceeds of approximately $54 million and MIPS sale of
1,250,000 shares of MIPS common stock for net proceeds to MIPS of approximately
$16 million.
In April 1999, the outstanding common stock of MIPS was recapitalized into Class
A and Class B Common Stock to permit a multi-step divestiture of SGI's ownership
interest in MIPS. In May 1999, SGI and MIPS closed a secondary public offering
of $6,680,241 shares of the Class A Common Stock of MIPS owned by SGI for net
proceeds of approximately $219 million. Following the secondary offering, there
were 37,292,286 shares of MIPS common stock outstanding and we retained an
approximately 67% ownership interest in MIPS. We have accounted for the MIPS
transaction in accordance with APB 18, the Equity Method of Accounting for
Investments in Common Stock, and the Securities and Exchange Commission's Staff
Accounting Bulletin Topic 5:H. For the offerings of MIPS shares held by us, we
included the excess of the net proceeds over the carrying value of those shares,
or $273 million, in income in our consolidated statement of operations. For the
offering of newly issued MIPS shares, the net proceeds of $16 million are
included in additional paid-in capital in our consolidated balance sheet. We
will continue to consolidate the results of MIPS' operations for so long as we
retain a greater than 50% ownership interest in MIPS.
We currently intend to dispose of our remaining interest in MIPS in one or more
transactions through public or private offerings. We expect our divestiture of
our interest in MIPS to be completed in the first half of fiscal 2001 subject to
market and other conditions.
NOTE 22. SUBSEQUENT EVENTS (UNAUDITED)
On August 4, 1999, pursuant to one of our lease agreements, as amended, we
exercised our option to purchase five buildings on our Mountain View campus. The
total purchase price will be approximately $125 million. We expect the purchase
to close in September 1999. As a result of this transaction, the future minimum
lease payments disclosed in Note 12 will be reduced by the following amounts (in
millions): 2000 -$7; 2001 - $8 and 2002 - $9.
On August 10, 1999, we announced our plans to realign our business through a
series of strategic alliances and restructuring actions. In particular, we
announced our intentions to establish arrangements to transition our Windows
NT-based line of visual workstations and our Cray-branded line of vector
supercomputers to strategic partners who will assume the further development and
distribution of these products lines. The result of these and other strategic
alliances along with related reductions in marketing, sales and administrative
personnel will be a smaller revenue base and workforce reduction of 1,000 to
1,500 in fiscal 2000. Further workforce reductions will occur as we transfer
businesses to strategic partners.
44
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF SILICON GRAPHICS, INC.
We have audited the accompanying consolidated balance sheets of Silicon
Graphics, Inc. as of June 30, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Silicon Graphics,
Inc. at June 30, 1999 and 1998, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended June 30,
1999, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
July 20, 1999
45
<PAGE>
Exhibit 21.1
SILICON GRAPHICS, INC. SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION
---- ---------------
<S> <C>
Alias/Wavefront, Inc. California
ParaGraph International, Inc. California
WTI Developments, Inc. California
Cray Research, LLC Delaware
Cray Asia/Pacific, Inc. Delaware
Cray Financial Corporation Delaware
Cray Research (America Latina) Ltd. Delaware
Cray Research (Eastern Europe) Ltd. Delaware
Cray Research (India) Ltd. Delaware
Cray Research International, Inc. Delaware
MIPS Technologies, Inc. Delaware
Silicon Graphics Real Estate, Inc. Delaware
Silicon Graphics World Trade Corporation Delaware
Silicon Studio, Inc. Delaware
Silicon Graphics S.A. Argentina
Silicon Graphics Pty Limited Australia
Silicon Graphics Computer Systems Ges.m.b.H. Austria
Silicon Graphics International Inc. Barbados
Silicon Graphics S.A./N.V. Belgium
Alias/Wavefront N.V. Belgium
Silicon Graphics Comercio e Servicos Limitada Brazil
Cray Research (Canada) Inc. Canada
Silicon Graphics Limited Canada
Silicon Graphics S. A. Chile
Silicon Graphics spolecnost s rucerum omezenym Czech Republic
Silicon Graphics A/S Denmark
Silicon Graphics OY Finland
Silicon Graphics France
Alias/Wavefront S.A. France
Silicon Graphics GmbH Germany
Alias/Wavefront GmbH Germany
Silicon Graphics A.E. Greece
Silicon Graphics Limited Hong Kong
Silicon Graphics Kft. Hungary
Silicon Graphics Systems (India) Ltd India
Cray Research (Israel) Ltd. Israel
Silicon Graphics Computer Systems Limited Israel
Alias/Wavefront Srl Italy
Silicon Graphics S.p.A. Italy
Cray Foreign Sales Corporation, Ltd. Jamaica
Alias/Wavefront K.K. Japan
SGI Japan Limited. Japan
<PAGE>
JURISDICTION OF
NAME INCORPORATION
---- ---------------
Korea Silicon Graphics Ltd. South Korea
Silicon Graphics Sdn. Bhd. Malaysia
Silicon Graphics S.A. de C.V. Mexico
Silicon Graphics B.V. Netherlands
Silicon Graphics Europe Trade B.V. Netherlands
Silicon Graphics World Trade B.V. Netherlands
Silicon Graphics Limited New Zealand
Silicon Graphics A/S Norway
Silicon Graphics Computer Engineering and Technology People's Republic of China
(China) Co. Ltd.
Cray-S.G.-Sistemas Informatico, Sociedada Unipessoal, LDA Portugal
Silicon Graphics LLC Russia
Silicon Graphics Pte. Limited Singapore
Silicon Graphics (Pty) Limited South Africa
Silicon Graphics, S.A. Spain
Silicon Graphics AB Sweden
Silicon Graphics S.A. Switzerland
Silicon Graphics Manufacturing S.A. Switzerland
Silicon Graphics Limited Taiwan
Silicon Graphics Bilbisayar Sistemleri Anonim Siket Turkey
Alias/Wavefront Limited United Kingdom
Silicon Graphics Limited United Kingdom
Silicon Graphics Manufacturing Finance Limited Jersey Channel Islands
Silicon Graphics S.A. Venezuela
</TABLE>
-2-
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Silicon Graphics, Inc. of our report dated July 20, 1999 included in
the 1999 Annual Report to Stockholders of Silicon Graphics, Inc. Our audits
also included the consolidated financial statement schedule of Silicon
Graphics, Inc. listed in item 14(a)2. This schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 File Nos. 33-11703, 33-16529, 33-18717, 33-26003,
33-34919, 33-38536, 33-40879, 33-44305, 33-44333, 33-48890, 33-59098,
33-65190, 33-50999, 33-51275, 33-56017, 33-60213, 33-60215, 333-01211,
333-06403, 333-08651, 333-15977, 333-40849 and 333-76445) pertaining to the
Employee Stock Purchase Plan 1982 Stock Option Plan; 1984 Incentive Stock
Option Plan, 1985 Stock Incentive Program; 1986 Incentive Stock Option Plan;
1987 Stock Option Plan, 1998 Employee Stock Purchase Plan; 1993 Long-Term
Incentive Stock Plan; WaveFront Technologies, Inc. 1990 Stock Option Plan;
Alias Research, Inc. 1998 Employee Share Ownership Plan, 1989 Employee Share
Ownership Plan, 1990 Employee Share Ownership Plan, 1994 Stock Plan; Amended
and Restated 1996 Supplemental Non-Executive Equity Incentive Plan; 1989
Non-Employee Directors' Stock Option Plan; Cray Research, Inc. Amended and
Restated 1989 Employee Benefit Stock Plan; Directors' Stock Option Plan of
our report dated July 20, 1999 with respect to the consolidated financial
statements of Silicon Graphics, Inc. incorporated herein by reference and of
our report included in the preceding paragraph with respect to the financial
statement schedule included in the Annual Report (Form 10-K) for the year
ended June 30, 1999.
/s/ Ernst & Young LLP
Palo Alto, California
September 27, 1999
-24-
<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-K FOR THE
PERIOD ENDING JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 571,117
<SECURITIES> 117,026
<RECEIVABLES> 597,790
<ALLOWANCES> 15,407
<INVENTORY> 195,181
<CURRENT-ASSETS> 1,847,033
<PP&E> 980,819
<DEPRECIATION> 600,051
<TOTAL-ASSETS> 2,788,257
<CURRENT-LIABILITIES> 977,053
<BONDS> 354,971
0
16,998
<COMMON> 171
<OTHER-SE> 1,407,030
<TOTAL-LIABILITY-AND-EQUITY> 2,788,257
<SALES> 2,090,194
<TOTAL-REVENUES> 2,748,957
<CGS> 1,202,562
<TOTAL-COSTS> 1,603,250
<OTHER-EXPENSES> 365,239
<LOSS-PROVISION> 369
<INTEREST-EXPENSE> 22,562
<INCOME-PRETAX> 125,721
<INCOME-TAX> 71,892
<INCOME-CONTINUING> 53,829
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53,829
<EPS-BASIC> .29
<EPS-DILUTED> .28
<FN>
</FN>
</TABLE>
