<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
- - ---
Exchange Act of 1934. For the quarterly period ended DECEMBER 31, 1999.
or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from to
COMMISSION FILE NUMBER 1-10441
SILICON GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2789662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 AMPHITHEATRE PKWY., MOUNTAIN VIEW, CALIFORNIA 94043-1351
(Address of principal executive offices) (Zip Code)
(650) 960-1980
(Registrant's telephone number, including area code)
------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
- ---
As of January 28, 2000 there were 184,191,059 shares of Common Stock
outstanding.
<PAGE>
SILICON GRAPHICS, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets.................................................................. 3
Condensed Consolidated Statements of Operations........................................................ 4
Condensed Consolidated Statements of Cash Flows........................................................ 5
Notes to Condensed Consolidated Financial Statements................................................... 6
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition...................................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk .............................................20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................... 21
Item 6. Exhibits and Reports on Form 8-K...................................................................... 21
Signatures ................................................................................................... 22
Index to Exhibits ..............................................................................................23
</TABLE>
TRADEMARKS USED IN THIS FORM 10-Q: Silicon Graphics, Octane, Onyx, O2, IRIX and
Onyx2 are registered trademarks and SGI and Origin are trademarks of Silicon
Graphics, Inc. Cray is a registered trademark and Cray T90 is a trademark of
Cray Research, LLC. MIPS is a registered trademark of MIPS Technologies, Inc.
used under license by Silicon Graphics, Inc. UNIX is a registered trademark in
the United States and other countries, licensed exclusively through X/Open
Company Ltd. Windows NT is a registered trademark of Microsoft Corporation.
Intel is a registered trademark of Intel Corporation. Linux is a registered
trademark of Linus Torvalds used by permission.
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999 (1)
---- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 357,037 $ 571,117
Short-term marketable investments................................. 126,126 117,026
Accounts receivable, net.......................................... 420,387 582,383
Inventories....................................................... 210,001 195,181
Prepaid expenses and other current assets......................... 370,667 381,326
----------- ------------
Total current assets.......................................... 1,484,218 1,847,033
Restricted investments................................................. 125,302 94,226
Property and equipment, net............................................ 474,412 380,768
Other assets........................................................... 820,470 466,230
----------- ------------
$ 2,904,402 $ 2,788,257
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 176,794 $ 192,974
Other current liabilities......................................... 845,923 784,079
----------- ------------
Total current liabilities..................................... 1,022,717 977,053
Long-term debt and other............................................... 381,164 387,005
Stockholders' equity:
Preferred stock................................................... 16,998 16,998
Common stock and additional paid-in capital....................... 1,433,569 1,421,028
Retained earnings (accumulated deficit)........................... (127,907) 92,449
Treasury stock.................................................... (86,363) (104,633)
Accumulated other comprehensive income............................ 264,224 (1,643)
----------- ------------
Total stockholders' equity.................................... 1,500,521 1,424,199
----------- ------------
$ 2,904,402 $ 2,788,257
=========== ============
</TABLE>
(1) The balance sheet at June 30, 1999 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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<PAGE>
SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
Ended December 31, Ended December 31,
---------------------------- -----------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Product and other revenue............................ $ 478,246 $ 516,053 $ 903,247 $ 973,037
Service revenue...................................... 169,947 168,770 330,149 328,142
----------- ----------- ------------- -------------
Total revenue................................... 648,193 684,823 1,233,396 1,301,179
Costs and expenses:
Cost of product and other revenue............... 267,161 292,672 579,339 576,861
Cost of service revenue......................... 122,510 102,301 251,595 196,852
Research and development........................ 78,607 97,179 163,957 199,317
Selling, general and administrative............. 183,487 222,005 411,847 454,933
Other operating expense (1)..................... (16,000) (8,000) 128,538 (8,000)
----------- ----------- ------------- -------------
Total costs and expenses.................... 635,765 706,157 1,535,276 1,419,963
----------- ----------- ------------- -------------
Operating income (loss) ............................. 12,428 (21,334) (301,880) (118,784)
Gain on sale of a portion of SGI interest in MIPS (2) -- -- -- 53,963
Interest and other income (expense), net............. 2,165 (3,524) (1,854) (6,233)
----------- ----------- ------------- -------------
Income (loss) before income taxes.................... 14,594 (24,858) (303,734) (71,054)
Income tax provision (benefit)....................... 5,513 (4,517) (99,914) (7,047)
----------- ----------- ------------- -------------
Net income (loss).................................... 9,081 (20,341) (203,820) (64,007)
Preferred stock dividend requirement................. (131) (131) (262) (262)
----------- ----------- ------------- -------------
Net income (loss) available to common stockholders... $ 8,950 $ (20,472) $ (204,082) $ (64,269)
=========== =========== ============= =============
Net income (loss) per common share - basic and diluted $ 0.05 $ (0.11) $ (1.12) $ (0.34)
=========== =========== ============= =============
Common shares outstanding - basic................... 182,789 186,417 182,357 186,373
=========== =========== ============= =============
Common shares outstanding - diluted.................. 183,143 186,417 182,357 186,373
=========== =========== ============= =============
</TABLE>
(1) Amount represents a change in previously estimated restructuring costs in
the three-month period ended December 31, 1999 and a net charge for
estimated restructuring costs in the six-month period ended December 31,
1999. Amount represents a change in previously estimated restructuring
costs in the three- and six-month periods ended December 31, 1998.
(2) Relates to the initial public offering of a minority interest in the
Company's subsidiary, MIPS Technologies, Inc. ("MIPS").
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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<PAGE>
SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended December 31,
------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................... $ (203,820) $ (64,007)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization..................................... 96,320 114,219
Gain on sale of a portion of SGI interest in MIPS................. -- (53,963)
Restructuring..................................................... 128,538 (8,000)
Other............................................................. (97,053) 28,850
Changes in operating assets and liabilities:
Accounts receivable............................................. 161,996 199,468
Inventories..................................................... (22,082) 60,868
Accounts payable................................................ (16,180) (64,477)
Other assets and liabilities.................................... (27,406) (105,686)
----------- ------------
Total adjustments............................................. 224,133 171,279
----------- ------------
Net cash provided by operating activities......................... 20,313 107,272
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................... (195,397) (82,961)
Proceeds from sale of a portion of SGI interest in MIPS................ -- 53,963
Increase in other assets............................................... 2,046 (51,093)
Restricted investments
Purchases ........................................................... (184,602) (106,418)
Maturities........................................................... 153,526 53,207
Available-for-sale investments:
Purchases............................................................ (41,620) (250,212)
Sales................................................................ -- 107,740
Maturities........................................................... 32,573 100,531
---------- ------------
Net cash used in investing activities............................. (233,474) (175,243)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt....................................................... -- 4,935
Payments of debt principal............................................. (11,668) (10,703)
Sale of SGI common stock............................................... 35,431 21,874
Repurchase of SGI common stock......................................... (24,420) (35,344)
Sale of MIPS common stock.............................................. -- 15,872
Cash dividends - preferred stock....................................... (262) (262)
----------- -----------
Net cash used in financing activities............................. (919) (3,628)
----------- -----------
Net decrease in cash and cash equivalents.............................. (214,080) (71,599)
Cash and cash equivalents at beginning of period....................... 571,117 506,639
----------- -----------
Cash and cash equivalents at end of period............................. $ 357,037 $ 435,040
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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SILICON GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS.
The consolidated financial statements include the accounts of SGI and our
wholly- and majority-owned subsidiaries. The unaudited results of operations for
the interim periods shown herein are not necessarily indicative of operating
results for the entire fiscal year. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position, results of operations and cash flows for all
periods presented have been made. The unaudited condensed consolidated financial
statements included in this Form 10-Q should be read in conjunction with the
audited consolidated financial statements and notes thereto for the fiscal year
ended June 30, 1999. Certain amounts for the prior year have been reclassified
to conform to current year presentation.
2. INVENTORIES.
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 JUNE 30, 1999
----------------- -------------
<S> <C> <C>
Components and subassemblies $ 40,883 $ 19,988
Work-in-process 84,549 71,406
Finished goods 33,188 41,694
Demonstration systems 51,381 62,093
----------- ----------
$ 210,001 $ 195,181
=========== ==========
</TABLE>
3. RESTRICTED INVESTMENTS.
Restricted investments consist of long-term investments pledged as collateral
against letters of credit and an equity forward purchase arrangement. Restricted
investments are held in the Company's name by major financial institutions.
4. PROPERTY AND EQUIPMENT.
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 JUNE 30, 1999
----------------- -------------
<S> <C> <C>
Property and equipment, at cost $ 1,103,823 $ 980,819
Accumulated depreciation and amortization (629,411) (600,051)
--------- ----------
Property and equipment, net $ 474,412 $ 380,768
========= =========
</TABLE>
5. OTHER ASSETS.
Included in other assets at December 31, 1999, is our investment in VA Linux
Systems, Inc. ("VA Linux") carried at a market value of $268 million. SGI
currently holds 1.3 million shares of VA Linux Common Stock that are subject
to a short-term lock-up. The carrying value of our investment is subject to
fluctuation based on the market value of the VA Linux stock price at our
reporting date. The unrealized gain on this investment is included as a
component of comprehensive income.
6. RESTRUCTURING AND RELATED CHARGES.
In the second quarter of fiscal 1998, we announced and began to implement a
broad-based restructuring program that covered virtually all aspects of our
products, operations and processes. During the first six months of fiscal
2000, there were no changes in estimated restructuring costs associated with
the fiscal 1998 actions and we paid approximately $1 million in severance and
related costs associated with the fiscal 1998 actions.
During the first quarter of fiscal 2000, we announced and began to implement
restructuring actions that resulted in aggregate charges of $145 million. The
charges included $66 million for the elimination of approximately 1,100
positions across essentially all of our functions and locations. We also
recorded operating asset write downs of $26.6 million for fixed assets and
evaluation units anticipated, prepaid license agreements and other
intangible assets associated with the anticipated end of life of our
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<PAGE>
Silicon Graphics-Registered Trademark- 320 and 540 visual workstations and
certain high-end graphics development projects that were canceled. Third
party contract cancellation charges associated with the above actions totaled
$8.5 million. Our plan also required vacating approximately 1,500,000 square
feet of leased sales and administrative facilities throughout the world, with
lease terms expiring through fiscal 2004. We estimated this action would
require ongoing lease payments of $26 million until subleases could be
arranged, abandoning $11 million of leasehold improvements and other fixed
assets and incurring $7 million in exit costs, including costs to restore
facilities to original condition.
During the second quarter of fiscal 2000, we lowered our estimate of the
total costs associated with the fiscal 2000 restructuring activities and
recorded an adjustment of $16 million. The adjustment primarily reflects
lower than estimated facilities closure costs due to negotiating better than
anticipated sublease arrangements. The adjustment also reflects lower than
estimated severance and related charges attributable to higher than expected
attrition and lower per person costs. Our revised estimate of the number of
involuntary employee terminations associated with the fiscal 2000
restructuring activity is 900. As of December 31, 1999, approximately 750 of
the estimated 900 positions have been eliminated. All severance payments and
related charges, which consist primarily of expected payroll taxes, extended
medical benefits, statutory legal obligations and outplacement services, are
expected to be paid by June 30, 2000. Estimated costs of contract
cancellations were also adjusted due to favorable settlements. The remaining
facilities related accrual balance of $22 million at December 31, 1999 will
result in cash expenditures through fiscal 2004.
The following table depicts the restructuring activity during the first six
months of fiscal 2000:
<TABLE>
<CAPTION>
Category Balance at Expenditures Adjustments Balance at
(in thousands) June 30, 1999 Additions Cash Non-cash Increase/(Decrease) Dec. 31, 1999
- - ---------------------------- ------------- ---------- ----------- ----------- ------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Severance & related charges $ 5,218 $ 65,820 $ (47,085) $ -- $ (1,844) $ 22,109
Operating aset write-downs -- 26,584 -- (26,584) -- --
Canceled contracts -- 8,468 (4,570) -- (3,898) --
Vacated facilities 1,049 43,666 (3,049) (11,157) (8,730) 21,779
Other 2,166 -- 339 -- (1,528) 977
------------- ---------- ----------- ----------- ------------------- -------------
$ 8,433 $144,538 $(54,365) $(37,741) $ (16,000) $ 44,865
</TABLE>
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<PAGE>
7. EARNINGS PER SHARE.
The following table sets forth the computation of basic and diluted income
(loss) per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------------- -------------------------------
(in thousands, except per share amounts) 1999 1998 1999 1998
- - ------------------------------------------------------ ---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) $ 9,081 $ (20,341) $ (203,820) $ (64,007)
Less preferred stock dividends (131) (131) (262) (262)
------------- ------------ ----------- -----------
Net income (loss) available to common stockholders $ 8,950 $ (20,472) $ (204,082) $ (64,269)
============= ============ =========== ===========
Weighted average shares outstanding--basic 182,789 186,417 182,357 186,373
Employee stock options and restricted shares 354 -- -- --
------------- ------------ ----------- -----------
Weighted average shares outstanding--diluted 183,143 186,417 182,357 186,373
============= ============ =========== ===========
Net income (loss) per share - basic and diluted $ 0.05 $ (0.11) $ (1.12) $ (0.34)
============= ============ =========== ===========
Potentially dilutive securities excluded from
computations because they are anti-dilutive 8,578 10,691 10,856 10,219
============= ============ =========== ===========
</TABLE>
8. COMPREHENSIVE INCOME.
The components of comprehensive income, net of tax, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------- ------------------------------
(in thousands) 1999 1998 1999 1998
- - ---------------------------------------------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) $ 9,081 $ (20,341) $ (203,820) $ (64,007)
Change in unrealized gain on available-for-sale
investments 262,628 11 262,718 88
Change in unrealized gain on derivative instruments
designated and qualifying as cash flow hedges (1,095) -- (488) --
Foreign currency translation adjustments (6,374) (1,966) 3,636 7,748
------------- ------------- ----- ---------
Comprehensive income $ 264,240 $ (22,296) $ 62,046 $ (56,171)
============= ============= =========== ==========
</TABLE>
The components of accumulated other comprehensive income (loss), net of tax,
are as follows:
<TABLE>
<CAPTION>
September 30, June 30,
(in thousands) 1999 1999
- - ---------------------------------------------------------------------- ----------------- ---------------
<S> <C> <C>
Unrealized gain (loss) on available-for-sale investments $ 262,601 $ (118)
Unrealized gain (loss) on derivative instruments designated
and qualifying as cash flow hedges (488) --
Foreign currency translation adjustments 2,111 (1,525)
---------- ---------
Accumulated other comprehensive income (loss) $ 264,224 $ (1,643)
========== =========
</TABLE>
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<PAGE>
9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.
ACCOUNTING POLICY - On July 1, 1999, we adopted Statement of Financial
Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"). SFAS 133 requires the recognition of all derivatives on
the balance sheet at fair value. Derivatives that are not hedges of underlying
transactions are 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 the
derivative are offset against the change in fair value of the hedged assets,
liabilities or firm commitments through earnings or are recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's fair value is immediately recognized in
earnings.
The effectiveness test for derivatives used to hedge the underlying economic
exposure is determined by using the forward-to-forward rate comparison for
currency forward contracts which makes same-currency hedges perfectly effective.
For currency option contracts, the effectiveness is measured on an intrinsic
basis using only the current spot rate and the strike price for both the
currency option contract (either a put or call option) and the underlying
transaction. The result of this is that same-currency hedges are perfectly
effective. All time value and volatility changes are deemed ineffective and are
immediately recognized in earnings.
RISK MANAGEMENT - 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. We regularly assess risks and have
established policies and business practices to protect against the adverse
effects of these and other potential exposures. We use derivatives to moderate
the financial market risks of our business operations by hedging the foreign
currency market exposures underlying certain assets and liabilities and for
commitments related to customer transactions. We do not use derivatives for
trading purposes.
CASH FLOW HEDGES - Cash flow hedges are hedges of forecasted transactions or
of the variability of cash flows to be received or paid related to a
recognized asset or liability. We purchase currency options and currency
forward contracts generally expiring within one year as hedges of anticipated
sales that are denominated in foreign currencies. These contracts are entered
into to protect against the risk that the eventual cash flows resulting from
such transactions will be adversely affected by changes in exchange rates.
The net loss recognized in accumulated other comprehensive income as of
December 31, 1999 was $0.5 million. The effect on earnings for the six month
period ended December 31, 1999 relating to the ineffectiveness of hedging
activities was not material. The amount in accumulated other comprehensive
income as of December 31, 1999 will be reclassified into earnings within the
next twelve months.
ACCUMULATED DERIVATIVE GAINS OR LOSSES - The following table summarizes activity
in other comprehensive income related to derivatives classified as cash flow
hedges held by us during the period from July 1, 1999 through December 31, 1999
(in thousands):
<TABLE>
<S> <C>
Cumulative effect of adopting SFAS 133 $ --
Reclassified into earnings from other
comprehensive income, net $ (377)
Changes in fair value of derivatives, net $ (111)
Accumulated derivative loss included in
other comprehensive income $ (488)
</TABLE>
10. SEGMENT INFORMATION.
SGI has 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. We evaluate performance for each of these
segments based on profit or loss from operations before interest and taxes.
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<PAGE>
In addition to the aforementioned reportable segments, expenses of the sales and
marketing, manufacturing, finance and administration 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
do we 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.
Information on reportable segments is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended December 31, Six Months Ended December,
Visual Global Visual Global
Servers Workstations Services Servers Workstations Services
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999:
Revenue from external customers $ 273,484 $ 141,320 $ 180,556 $ 488,377 $ 301,355 $ 346,640
Segment profit (loss) $ (32,488) $ 12,079 $ 434 $ (89,074) $(101,631) $ (6,112)
Significant items:
Non-recurring charges for contract
cancellations and inventory and future
support costs related to the Silicon
Graphics 320 and 540 visual workstations $ -- $ 18,000 $ (3,300) $ -- $ (47,790) $ (23,050)
Vector supercomputer warranty-related
charges $ (15,300) $ -- $ -- $ (15,300) $ -- $ --
- - ---------------------------------------------- --------- --------- --------- --------- --------- ---------
- - ---------------------------------------------- --------- --------- --------- --------- --------- ---------
1998:
Revenue from external customers $ 309,760 $ 152,240 $ 175,836 $ 568,965 $ 301,231 $ 342,904
Segment profit (loss) $ (2,770) $ (57,000) $ 30,513 $ (66,891) $(117,334) $ 55,617
Significant noncash items:
Asset valuation adjustments $ -- $ -- $ -- $ -- $ (6,000) $ --
- - ---------------------------------------------- --------- --------- --------- --------- --------- ---------
</TABLE>
Reconciliation to SGI as reported (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------------------------------------
1999 1998 1999 1998
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE:
Total reportable segments $ 595,360 $ 637,836 $ 1,136,372 $ 1,213,100
Other 52,833 46,987 97,024 88,079
=========== =========== =========== ===========
Total SGI consolidated $ 648,193 $ 684,823 $ 1,233,396 $ 1,301,179
=========== =========== =========== ===========
OPERATING PROFIT (LOSS):
Total reportable segments $ (19,975) $ (29,257) $ (196,817) $ (128,608)
Other 16,403 (77) 23,475 1,824
Restructuring 16,000 8,000 (128,538) 8,000
----------- ----------- ----------- -----------
Total SGI consolidated $ 12,428 $ (21,334) $ (301,880) $ (118,784)
=========== =========== =========== ===========
</TABLE>
11. 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
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<PAGE>
its officers made material misrepresentations and omissions during the period
from July to October 1997. The U.S. District Court is considering plaintiffs'
motion for a voluntary dismissal of the case without prejudice and defendants'
motion for partial summary judgment. Discovery is proceeding in the California
Superior Court case.
The 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, was dismissed with prejudice by
the District Court in May 1996. In July, 1999, the U.S. Court of Appeals for
the Ninth Circuit upheld the dismissal and in October 1999, the same court
declined to rehear the case. The determination of the Ninth Circuit became
final in January 2000 and the dismissal is now a final order.
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 a former officer and director 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. The case has been remanded to the
U.S. District Court and is proceeding through discovery.
The U.S. Departments of Commerce and Justice are currently conducting civil
and criminal investigations into SGI's compliance with export regulations in
connection with several export sales to Tier 3 countries. See "Risks That
Affect Our Business - Export Regulation."
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.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Quarterly Report on Form 10-Q 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, our business transition objectives, anticipated headcount
reductions, year 2000 issues and the expected impact on our business of legal
proceedings and government regulatory actions. We have based these
forward-looking statements on our current expectations about future events.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," or "continue" or the negative of such
terms or other comparable terminology. These statements are only predictions.
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; the impact
of employee attrition rates; 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
timely development and successful introduction of strategic products for
specific markets; inability to effectively implement our visual workstation
and server strategy, including the development of appropriate distribution,
marketing and customer support models; 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; risks
associated with implementation of our new business practices, processes and
information systems; litigation involving export compliance, 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 business transition,
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.
-12-
<PAGE>
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS Three Months Ended Six Months Ended
(NUMBERS MAY NOT ADD DUE TO ROUNDING) December 31, December 31,
- - ----------------------------------------------- ---------- ------------ ------------ ------------
$ in millions 1999 1998 1999 1998
- - ----------------------------------------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenue $ 648 $ 685 $ 1,233 $ 1,301
Cost of revenue 390 395 831 774
- - ----------------------------------------------- ---------- ------------ ------------ ------------
Gross profit 259 238 402 238
Gross profit margin 39.9% 42.3% 32.6% 40.5%
Total operating expenses 246 311 704 646
- - ----------------------------------------------- ---------- ------------ ------------ ------------
Operating income (loss) 12 (21) (302) (119)
Other income (expense) 2 (4) (2) 48
- - ----------------------------------------------- ---------- ------------ ------------ ------------
Income (loss) before income taxes 15 (25) (304) (71)
- - ----------------------------------------------- ---------- ------------ ------------ ------------
Net income (loss) $ 9 $ (20) $ (204) $ (64)
=============================================== ========== ============ ============ ============
Net income (loss) per share - basic and $ 0.05 $ (0.11) $(1.12) $(0.34)
diluted
=============================================== ========== ============ ============ ============
</TABLE>
REVENUE
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. The Server segment's products include the Silicon
Graphics-Registered Trademark-Onyx2-Registered Trademark-, Origin-TM-,
SGI-TM- 1000 server family and Cray-Registered Trademark- product families.
The Visual Workstation segment's products include the Silicon
Graphics-Registered Trademark- 02-Registered Trademark-, Silicon
Graphics-Registered Trademark- Octane-Registered Trademark- and Silicon
Graphics 320 and 540 visual workstations.
Revenue for both the second quarter and first six months of fiscal 2000
decreased 5% or $37 million and $68 million, respectively, compared with the
corresponding periods of fiscal 1999. These decreases reflect the continuing
decline in our UNIX workstation market which is part of our visual
workstation segment, as well as a decline in our Origin brand scalable
server and vector supercomputer businesses, which are both
part of our server segment.
The following table presents total revenue by reportable segment .
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
- - ------------------------- ------------------------- -------------------------
$ in millions 1999 1998 1999 1998
- - ------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Servers $ 273 $ 310 $ 488 $ 569
% of total revenue 42% 45% 40% 44%
Visual Workstations $ 141 $ 152 $ 301 $ 301
% of total revenue 22% 22% 24% 23%
Global Services $ 181 $ 176 $ 347 $ 343
% of total revenue 28% 26% 28% 26%
Other $ 53 $ 47 $ 97 $ 88
% of total revenue 8% 7% 8% 7%
- - ------------------------- ------------ ------------ ------------ ------------
</TABLE>
Server revenue for the second quarter and first six months of fiscal 2000
decreased $36 million, or 12%, and $81 million, or 14%, respectively,
compared with the corresponding periods of fiscal 1999. The decreases reflect
the continuing trend in the declining vector supercomputer market coupled
with lower revenue within our Origin brand scalable server business.
Modest declines in Silicon Graphics-Registered Trademark- Onyx-Registered
Trademark- server revenue were also noted during the second quarter and first
six months of fiscal 2000 compared with the corresponding periods of fiscal
1999.
Visual Workstation revenue for the second quarter of fiscal 2000 decreased $11
million or 7%, but remained relatively flat for the first six months of fiscal
2000, compared with the corresponding periods of fiscal 1999. Sales of our UNIX
workstation product continued to shrink year over year. This decline was
partially offset by better than expected sales of our Silicon Graphics 320 and
540 visual workstation systems which are being transitioned to more
industry-standard Windows NT-Registered Trademark- based products. In
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<PAGE>
light of this transition, we recorded a net charge during the first six months
of fiscal 2000 anticipating the end of life of the Silicon Graphics 320 and 540
products. See "Gross Profit Margin" and "Operating Expenses."
Global Services revenue is comprised of hardware and software support and
maintenance, professional services and remanufactured systems sales. Global
Services revenue increased slightly for both the second quarter and first six
months of fiscal 2000 primarily reflecting an increase in professional services
revenue offset by a slight decline in our traditional customer support revenue.
Other revenue is principally comprised of our operating units that are not
reportable segments, including the product and service revenue of our
applications software subsidiary, Alias|Wavefront, and MIPS Technologies, our
majority-owned subsidiary that develops and markets microprocessor-related
intellectual property.
Total revenue by geographic area was as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
- - -------------------- ---------------------- ----------------------
Area 1999 1998 1999 1998
- - -------------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Americas $345 $365 $696 $691
Europe 171 212 321 396
Rest of World 132 108 216 214
- - -------------------- ----------- ---------- ---------- -----------
Total revenue $648 $685 $1,233 $1,301
==================== =========== ========== ========== ===========
</TABLE>
Geographic revenue as a percentage of total revenue was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
- - -------------------- ---------------------- ----------------------
Area 1999 1998 1999 1998
- - -------------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Americas 53% 53% 56% 53%
Europe 26% 31% 26% 30%
Rest of World 21% 16% 18% 17%
- - -------------------- ----------- ---------- ---------- -----------
</TABLE>
As a percentage of revenue, a larger portion of our revenue is being
generated in the Americas, primarily the United States, where our UNIX
workstation business has been stable despite the shrinking market for this
product line. Sales of our Origin servers were also strong in Japan for both
the second quarter and first six months of fiscal 2000 compared with the
corresponding periods of fiscal 1999 which accounted for the slight increase
as a percentage of total revenue for the "Rest of World" geographic region.
Our consolidated backlog at December 31, 1999 was $286 million compared with
$333 million at September 30, 1999.
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.
Gross margin of 39.9% and 32.6% for the second quarter and first six months of
fiscal 2000, respectively, declined compared with gross margin of 42.3% and
40.5%, respectively, for the corresponding periods of fiscal 1999. Gross profit
margin for the second quarter and first six months of fiscal 2000 included
certain adjustments related to our Silicon Graphics 320 and 540 visual
workstations. During the first quarter of fiscal 2000 we charged cost of product
and other revenues approximately $53 million for third party manufacturing
contract cancellations and purchase commitments and $13 million for excess
product and demonstration inventory. We also charged $20 million to cost of
service revenue for future unrecoverable support costs. During the second
quarter of fiscal 2000 we sold more Silicon Graphics 320 and 540 visual
workstations than we had anticipated selling
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<PAGE>
when we provided our first quarter charges. We believe the higher than
anticipated sales had a favorable impact of approximately $18 million on
product margins. Offsetting this favorable impact on product gross margin was
a $3 million charge to service gross margin for additional unrecoverable
support costs associated with the higher than anticipated sales of Silicon
Graphics 320 and 540 visual workstations as well as an additional $15 million
charge for estimated warranty related costs associated with the Cray T90-TM-
vector supercomputer product line. Without these adjustments, our gross
profit margin for the second quarter and first six months of fiscal 2000
would have been 40.0% and 39.4%, respectively, representing a decrease of 2.3
and 1.1 percentage points, respectively, compared with the corresponding
periods of fiscal 1999. We have been able to maintain a fairly consistent
gross profit margin by consolidation and outsourcing of certain manufacturing
operations and continued improvements in manufacturing efficiencies and
procurement practices.
<TABLE>
<CAPTION>
OPERATING EXPENSE Three months ended Six months ended
(numbers may not add due to rounding) December 31, December 31,
- - ------------------------------------- ----------------------- ----------------------
$ in millions 1999 1998 1999 1998
- - ------------------------------------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Research and development $ 79 $ 97 $ 164 $ 199
% of total revenue 12.1% 14.2% 13.3% 15.3%
Selling, general and administrative $ 183 $ 222 $ 412 $ 455
% of total revenue 28.3% 32.4% 33.4% 35.0%
Other $ (16) $ (8) $ 129 $ (8)
% of total revenue (2.5%) (1.2%) 10.4% (0.6%)
- - ------------------------------------- ----------- ----------- ----------- ----------
</TABLE>
OPERATING EXPENSE (EXCLUDING OTHER OPERATING EXPENSE). Operating expense for the
second quarter and first six months of fiscal 2000 declined 18% and 12%,
respectively, in absolute dollars and, as a percentage of total revenue, from
46.7% to 40.4% and from 50.3% to 46.6%, respectively, compared with the
corresponding periods of fiscal 1999. The decrease in operating expense resulted
from comparatively lower headcount of approximately 1,500 positions and other
expense control measures, including more focused research and development
project spending and management. We do not currently expect to undertake
significant actions to further reduce our operating expenses from the second
quarter expense levels during the balance of fiscal 2000.
OTHER OPERATING EXPENSES. During the first quarter of fiscal 2000, we
announced and began to implement restructuring actions with the objective to
reduce our overall operating expense levels for fiscal 2000 by approximately
$250 million from the fiscal 1999 levels. These actions resulted in aggregate
charges of $145 million. The charges included $66 million for the elimination
of approximately 1,100 positions in essentially all of our functions and
locations. We also recorded operating asset write downs of $26.5 million for
fixed assets and evaluation units, prepaid license agreements and other
intangibles assets associated with the end of life of our Silicon Graphics
320 and 540 visual workstations and certain high-end graphics development
projects that were canceled. Third party contract cancellation charges
associated with the above actions totaled $8.5 million. Our plan also
required vacating approximately 1,500,000 square feet of leased sales and
administrative facilities throughout the world, with lease terms expiring
through fiscal 2004. We estimated this action would require ongoing lease
payments of $26 million until subleases could be arranged, abandoning $11
million of leasehold improvements and other fixed assets and incurring $7
million in exit costs, including costs to restore facilities to original
condition.
-15-
<PAGE>
During the second quarter of fiscal 2000, we lowered our estimate of the
total costs associated with the fiscal 2000 restructuring activity and
recorded an adjustment of $16 million. The adjustment primarily reflects
lower than estimated facilities closure costs due to negotiating better than
anticipated sublease arrangements. The adjustment also reflects lower than
estimated severance and related charges attributable to higher than expected
attrition and lower per person costs. Our revised estimate of the number of
involuntary employee terminations associated with the fiscal 2000
restructuring activity is 900. As of December 31, 1999, approximately 750 of
the estimated 900 positions have been eliminated. All severance payments and
related charges, which consist primarily of expected payroll taxes, extended
medical benefits, statutory legal obligations and outplacement services are
expected to be paid by June 30, 2000. Estimated costs of contract
cancellations were also adjusted due to favorable settlements. The remaining
facilities related accrual balance of $22 million at December 31, 1999 will
result in cash expenditures through fiscal 2004.
INTEREST AND OTHER
INTEREST EXPENSE Interest expense for the second quarter and first six months of
fiscal 2000 decreased 25% and 19%, respectively, compared with the corresponding
periods of fiscal 1999 principally due to a reduction in long-term borrowings of
approximately $20 million year over year.
INTEREST INCOME AND OTHER, NET Interest income and other, net includes interest
income on our cash investments, gains and losses on other investments, the 34%
minority interest in the earnings of MIPS and other non-operating items.
Interest income and other, net for the second quarter of fiscal 2000 increased
$6 million compared with the second quarter of fiscal 1999 principally due to a
favorable mark-to-market fluctuation of anticipated transactions under our
hedging program and a gain recognized on the partial retirement of debt. The
decrease in interest and other income, net for the first six months of fiscal
2000 compared with the first six months of fiscal 1999 was primarily due to a
$54 million gain on the sale of a portion of our interest in MIPS recorded in
the first quarter of fiscal 1999. We did not sell any portion of our remaining
interest in MIPS during the first six months of fiscal 2000.
TAXES. The Company's effective tax benefit rate for the first six months of
fiscal 2000 was 23%, excluding the impact of the $71 million year-to-date charge
related to the Silicon Graphics 320 and 540 visual workstation product line, the
impact of the $15 million charge related to the Cray T90 product line and the
$129 million year-to-date charge for estimated restructuring costs, which were
tax effected at 37%. The Company's effective tax benefit rate for the first six
months of fiscal 1999 was also 23%, excluding the impact of the $54 million gain
on the sale of a portion of its interest in MIPS in the first quarter of fiscal
1999 and an $8 million change in previously estimated restructuring costs in the
second quarter of fiscal 1999, which were tax effected at 38%. The fiscal 2000
and 1999 benefit rates, excluding the charges related to the Silicon Graphics
320 and 540 products, the Cray T90 product line and estimated restructuring
charges in fiscal 2000 and the impact of the MIPS gain and change in previously
estimated restructuring charges in fiscal 1999, differ from the federal
statutory rate primarily due to foreign losses for which no benefit has been
recognized.
At December 31, 1999, we had gross deferred tax assets arising from deductible
temporary differences, tax losses and tax credits of $706 million. A valuation
allowance of $118 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 $1.2 billion 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.
FINANCIAL CONDITION
At December 31, 1999, cash and cash equivalents and marketable and restricted
investments totaled $608 million, down from $782 million at June 30, 1999.
Included in the December 31, 1999 and June 30, 1999 balances are approximately
$125 million and $94 million, respectively, of restricted investments that serve
as collateral for letters of credit and an equity forward purchase arrangement.
Operating activities generated $20 million during the first six months of
fiscal 2000 compared with $107 million during the first six months of fiscal
1999. Despite the net loss for the first six months of fiscal 2000, cash flow
from operating activities was positive. The positive operating cash flow was
principally due to a decrease in accounts receivable attributable to lower
revenue levels and continued improved collections. Positive operating cash
flows were partially offset by approximately $54 million in cash payments fo-
-16-
<PAGE>
severance, contractual obligations and facilities obligations related to
restructuring activities. These activities are expected to result in future cash
outlays of approximately $45 million, the majority of which will occur over the
remainder of fiscal 2000 and will be funded through current working capital.
Cash flow from operating activities was also negatively impacted by the increase
in deferred tax assets, included in other adjustments to reconcile net loss
to net cash.
Investing activities, other than changes in our available-for-sale and
restricted investments, consumed $193 million in cash during the first six
months of fiscal 2000 compared with $80 million during the first six months of
fiscal 1999. The principal investing activity during the first six months of
fiscal 2000 was our election to exercise an option to purchase five buildings on
our Mountain View campus for approximately $125 million that had been held under
an off-balance sheet financing arrangement.
Financing activities used $1 million during the first six months of fiscal 2000
compared with $4 million during the first six months of fiscal of 1999. The
principal financing activities during the first six months of fiscal 2000
included the use of $24 million to repurchase shares of our common stock and $12
million to retire debt, offset in part by proceeds from employee stock purchase
plan issuances and employee stock option exercises.
At December 31,1999, our principal sources of liquidity included cash and
cash equivalents and marketable investments of $483 million. We believe that
these principal sources of liquidity, along with cash generated from
operations and other resources available to us, should be adequate to fund
our projected cash flow needs. 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. We are in the process of implementing strategic changes
affecting all of our major businesses. The principal changes include the
following:
WORKSTATION BUSINESS. We are managing a long-term decline in our
Unix workstation business by reducing our overall investment in this product
line while continuing to introduce new product generations based on higher
performance MIPS-Registered Trademark- microprocessors and, late in fiscal
2000, a next generation graphics architecture. We are also managing a
transition in our Intel-Registered Trademark--based workstation product line
from the unique architecture of the Silicon Graphics 320 and 540 Visual
Workstations to more industry standard architectures. Our objective in both
cases is to participate in important sectors of the market while scaling our
investment appropriately based on the opportunity presented.
SERVER BUSINESS. We have announced a product roadmap that will, over
the next five years, shift our products to the Intel microprocessor
architecture. This will include a long-term transition from our MIPS
microprocessor / IRIX-Registered Trademark- operating system family of
scalable servers to a family of Intel and Linux-Registered Trademark- based
servers. This transition will involve our supporting both product families
indefinitely in order to provide flexibility and support to our customers.
SUPERCOMPUTERS. THE VECTOR SUPERCOMPUTER MARKET, IN WHICH OUR
CRAY-BRANDED PRODUCTS COMPETE, has declined over the past few years, and we
believe that this decline represents a long-term trend. We have moved our Cray
activities into a separate business unit and are seeking partners to assume the
operation of this business.
All of these transitions are part of a long-term plan to return to growth and
sustained profitability. In the short term, however, the transitions have
created uncertainty among employees, customers and partners, which negatively
affected operations in the first half of fiscal 2000. There can be no
assurance that we will introduce the new products required for these
transitions as planned, successfully migrate our customer and partner base to
the new products or otherwise manage these transitions in a way that will
allow us to recover from the disruptions experienced in the first part of
fiscal 2000.
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<PAGE>
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. 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. Our original objective in this process was to reduce
fiscal 2000 operating expenses by about $250 million from fiscal 1999
operating levels. However, we feel that the revenue impact of the full
complement of these expense cuts could be significant and currently do not
expect to implement changes during the balance of fiscal 2000 to reduce our
operating expenses below their second quarter level. 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.
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 the longer-term transition to the Intel
architecture and additional outsourcing of manufacturing, will increase our
dependence on Intel and other partners, and on our manufacturing partners and
other component suppliers. Our 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. The competitiveness of our
system products, particularly our servers, is significantly affected by the
availability on our platform of third-party software applications that are
important to customers in our target markets. Our ability to work with our
software partners to ensure porting of these applications to our IRIX
operating system and, in the future, to Linux, is a key factor to our
business success.
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 uncertainties surrounding SGI's business prospects have
increased the challenges of retaining world-class talent and we are currently
experiencing higher rates of attrition, particularly in Mountain View,
California and in certain functions, including technical personnel. We have
initiated aggressive hiring and retention programs to attract and retain key
employees, but there is no assurance that these programs will offset our
increased rates of attrition in the near term.
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. As described above, we are currently experiencing
increased employee attrition rates in certain geographies and functions. Our
ability to successfully attract and retain key technical, marketing and
management personnel in a competitive hiring environment has a direct impact on
our ability to maintain our product development timetables.
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.
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. A little over half of
each quarter's product 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 desktop product revenue including
the mix of configurations within these product categories.
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<PAGE>
Our results have typically followed a seasonal pattern, with stronger sequential
growth in the second and fourth fiscal quarters, reflecting the buying patterns
of our customers.
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.
YEAR 2000 COMPLIANCE. As generally defined, the year 2000 issue includes not
only problems which could have arisen when we moved from 1999 to 2000, but
also includes any problems which may arise on February 29, 2000 ("Leap Day").
Leap Year occurs every four years, except for years ending in 00, in which
case it does not occur unless the year is divisible by 400. Some computer
systems and software do not recognize that the year 2000 is a Leap Year which
could create problems with date-dependent data. Although we experienced no
material problems related to the date change to January 1, 2000, in either
our suppliers or our products, the year 2000 issue remains a risk until after
February 29, 2000.
Certain of the costs associated with our internal Year 2000 compliance effort
(exclusive of any potential costs related to any customer or other claim)
could not 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 costs incurred to insure year 2000 compliance were not 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 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 Quarterly Report on Form 10-Q is based on our
current assessment of ongoing activities and is subject to change as we
continuously monitor these activities. We are currently monitoring and
implementing 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 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. A portion of
our business requires security clearances from the United States government. We
have implemented measures to maintain our clearances in light of the fact that
Mr. Robert Bishop, who was
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<PAGE>
appointed Chief Executive Officer in the fall of 1999, is not a United States
citizen. However, these arrangements are subject to customer review and approval
and periodic review by the Defense Security Service of the Department of
Defense. Any disruption or limitation in our ability to do business with the
United States government could have an adverse impact on SGI.
EXPORT REGULATION. Our sales to foreign customers are subject to export
regulations. Sales of many of 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 several export sales to Tier 3 countries. 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 outside the
United States.
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.
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.
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 assesses 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required under this Item 3 is included in the section above
entitled Market Risk.
-20-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The 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 was dismissed with prejudice by the District
Court in May 1996. In July 1999, the U.S. Court of Appeals for the Ninth
Circuit upheld the dismissal and in October 1999, the same court declined to
rehear the case. The determination of the Ninth Circuit became final in
January 2000 and the dismissal is now a final order.
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 a former officer and director 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. The case has been remanded to the
U.S. District Court and is proceeding through discovery.
The U.S. Departments of Commerce and Justice are currently conducting civil
and criminal investigations into SGI's compliance with export regulations in
connection with several export sales to Tier 3 countries. See "Risks That
Affect Our Business - Export Regulation."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None
-21-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 11, 2000 SILICON GRAPHICS, INC.
a Delaware corporation
By: Betsy Rafael
----------------------------------
Betsy Rafael
Senior Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
-22-
<PAGE>
SILICON GRAPHICS, INC.
INDEX TO EXHIBITS
Exhibit Description
- - ------- -----------
27.1 Financial Data Schedule
-23-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND
CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE
PERIOSD ENDING DECEMBER 31, 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> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 357,037
<SECURITIES> 126,126
<RECEIVABLES> 435,344
<ALLOWANCES> 14,957
<INVENTORY> 210,001
<CURRENT-ASSETS> 1,484,218
<PP&E> 1,103,823
<DEPRECIATION> 629,411
<TOTAL-ASSETS> 2,904,402
<CURRENT-LIABILITIES> 1,022,717
<BONDS> 353,115
0
16,998
<COMMON> 172
<OTHER-SE> 1,483,351
<TOTAL-LIABILITY-AND-EQUITY> 2,904,402
<SALES> 903,247
<TOTAL-REVENUES> 1,239,396
<CGS> 579,338
<TOTAL-COSTS> 830,934
<OTHER-EXPENSES> 292,495
<LOSS-PROVISION> 3,857
<INTEREST-EXPENSE> 9,623
<INCOME-PRETAX> (303,734)
<INCOME-TAX> 99,914
<INCOME-CONTINUING> (203,820)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (203,820)
<EPS-BASIC> (1.12)
<EPS-DILUTED> (1.12)
</TABLE>
