<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 MARCH 31, 2000.
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 April 28, 2000 there were 184,805,112 shares of Common Stock outstanding.
<PAGE>
SILICON GRAPHICS, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets.................................................................. 3
Condensed Consolidated Statements of Operations........................................................ 4
Condensed Consolidated Statements of Cash Flows........................................................ 5
Notes to Condensed Consolidated Financial Statements................................................... 6
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition...................................................... 13
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
Tera Computer Company. 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.
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999(1)
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 380,776 $ 571,117
Short-term marketable investments .................................... 6,288 117,026
Accounts receivable, net ............................................. 358,625 582,383
Inventories .......................................................... 184,339 195,181
Deferred tax assets .................................................. 255,659 243,867
Prepaid expenses and other current assets ............................ 130,189 137,459
----------- -----------
Total current assets ............................................. 1,315,876 1,847,033
Restricted investments .................................................... 125,304 94,226
Property and equipment, net ............................................... 472,533 380,768
Other assets .............................................................. 602,380 466,230
----------- -----------
$ 2,516,093 $ 2,788,257
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................... $ 145,980 $ 192,974
Accrued compensation ................................................. 84,683 104,362
Deferred revenue ..................................................... 314,548 308,281
Other current liabilities ............................................ 319,985 371,436
----------- -----------
Total current liabilities ........................................ 865,196 977,053
Long-term debt and other .................................................. 381,143 387,005
Stockholders' equity:
Preferred stock ...................................................... 16,998 16,998
Common stock and additional paid-in capital .......................... 1,440,534 1,421,028
Retained earnings (accumulated deficit) .............................. (154,801) 92,449
Treasury stock ....................................................... (70,493) (104,633)
Accumulated other comprehensive income (loss) ........................ 37,516 (1,643)
----------- -----------
Total stockholders' equity ....................................... 1,269,754 1,424,199
----------- -----------
$ 2,516,093 $ 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.
-3-
<PAGE>
SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31, Ended March 31,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Product and other revenue .................................. $ 400,330 $ 454,733 $ 1,303,577 $ 1,427,770
Service revenue ............................................ 163,357 164,442 493,506 492,584
----------- ----------- ----------- -----------
Total revenue ......................................... 563,687 619,175 1,797,083 1,920,354
Costs and expenses:
Cost of product and other revenue ..................... 212,159 256,740 791,498 833,601
Cost of service revenue ............................... 115,165 102,896 366,760 299,748
Research and development .............................. 69,564 93,331 233,521 292,648
Selling, general and administrative ................... 185,197 215,574 597,044 670,507
Other operating expense (1) ........................... (17,677) (6,000) 110,861 (14,000)
----------- ----------- ----------- -----------
Total costs and expenses .......................... 564,408 662,541 2,099,684 2,082,504
----------- ----------- ----------- -----------
Operating loss ............................................. (721) (43,366) (302,601) (162,150)
Loss on sale of Cray product line (2) ...................... (20,837) -- (20,837) --
Gain on sale of a portion of SGI interest in MIPS (3) ...... -- -- -- 53,963
Interest and other income (expense), net ................... (1,723) (7,358) (3,577) (13,591)
----------- ----------- ----------- -----------
Loss before income taxes ................................... (23,281) (50,724) (327,015) (121,778)
Benefit for income taxes ................................... (5,148) (10,767) (105,062) (17,814)
----------- ----------- ----------- -----------
Net loss ................................................... (18,133) (39,957) (221,953) (103,964)
Preferred stock dividend requirement ....................... (131) (131) (394) (394)
----------- ----------- ----------- -----------
Net loss available to common stockholders .................. $ (18,264) $ (40,088) $ (222,347) $ (104,358)
=========== =========== =========== ===========
Net loss per common share - basic and diluted .............. $ (0.10) $ (0.21) $ (1.22) $ (0.56)
=========== =========== =========== ===========
Common shares outstanding - basic and diluted .............. 183,826 186,685 182,847 186,477
=========== =========== =========== ===========
</TABLE>
(1) Amount represents a change in previously estimated restructuring costs in
the three-month period ended March 31, 2000 and a net charge for estimated
restructuring costs in the nine-month period ended March 31, 2000. Amount
represents a change in previously estimated restructuring costs in the
three- and nine-month periods ended March 31, 1999.
(2) Relates to the sale of the Cray product line to Tera Computer Company
[See Note 3].
(3) Relates to the initial public offering of a minority interest in the
Company's subsidiary, MIPS Technologies, Inc. ("MIPS").
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-4-
<PAGE>
SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended March 31,
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................. $(221,953) $(103,964)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization ................................... 132,758 165,994
Gain on sale of a portion of SGI interest in MIPS ............ -- (53,963)
Loss on sale of Cray product line............................. 20,837 --
Restructuring ................................................ 110,861 (14,000)
Changes in deferred tax assets................................ (142,463) (22,852)
Other ........................................................ 8,506 37,217
Changes in operating assets and liabilities (net of effects of
sale of Cray product line):
Accounts receivable ....................................... 223,758 177,321
Inventories ............................................... (22,042) 72,423
Accounts payable .......................................... (46,994) (38,971)
Other assets and liabilities .............................. (98,515) (111,721)
--------- ---------
Total adjustments ...................................... 186,706 211,448
--------- ---------
Net cash (used in) provided by operating activities .......... (35,247) 107,484
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................. (231,400) (113,462)
Proceeds from sale of a portion of SGI interest in MIPS .............. -- 53,963
Increase in other assets ............................................. (16,129) (88,102)
Restricted investments
Purchases ..................................................... (244,406) (244,186)
Maturities .................................................... 213,328 76,415
Available-for-sale investments:
Purchases ..................................................... (43,982) (341,724)
Sales ......................................................... -- 197,740
Maturities .................................................... 154,831 217,511
--------- ---------
Net cash used in investing activities ................................ (167,758) (241,845)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt ..................................................... 1,894 7,446
Payments of debt principal ........................................... (13,884) (21,858)
Sale of SGI common stock ............................................. 49,468 38,665
Repurchase of SGI common stock ....................................... (24,420) (68,042)
Sale of MIPS common stock ............................................ -- 15,872
Cash dividends - preferred stock ..................................... (394) (394)
--------- ---------
Net cash provided by (used in) financing activities ............ 12,664 (28,311)
--------- ---------
Net decrease in cash and cash equivalents ............................ (190,341) (162,672)
Cash and cash equivalents at beginning of period ..................... 571,117 506,639
--------- ---------
Cash and cash equivalents at end of period ........................... $ 380,776 $ 343,967
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-5-
<PAGE>
SILICON GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 included in our
Annual Report on Form 10-K for the fiscal year ended June 30, 1999. Certain
amounts for the prior year have been reclassified to conform to current year
presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTS.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."
SAB 101 provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements of all public registrants. Changes in our
revenue recognition policy, if any, resulting from the interpretation of SAB
101 would be reported as a change in accounting principle in the quarter
ending September 30, 2000. At the current time, we have not determined the
effect this change will have on our financial statements. However, management
believes that SAB 101, to the extent applicable to us, will not affect the
underlying strength or weakness of our business operations.
3. SALE OF CRAY PRODUCT LINE.
On March 31, 2000, we completed the sale of our Cray-Registered Trademark-
product line to Tera Computer Company ("Tera"). We received approximately $15
million in cash, a $36 million promissory note due in three equal quarterly
installments beginning June 30, 2000 and 1 million shares of unregistered
Tera common stock, valued at approximately $6.5 million at March 31, 2000. As
a result of this transaction, approximately 750 employees transferred to
Tera. In the event the promissory note is not paid in full by December 31,
2000, an additional $5 million in cash will become payable to us. Based upon
the March 31, 2000 carrying value of the Cray product line and estimated
costs and expenses expected to be incurred in connection with the
transaction, we anticipate that we will record an overall gain of
approximately $15 million from the transaction. However, the accompanying
condensed consolidated financial statements include a pre-tax loss on the
transaction of approximately $21 million because we will account for the
promissory note proceeds when the cash payments are received. The anticipated
overall gain is subject to adjustment (if any) based on the final
determination of the net asset value of the assets sold and the liabilities
assumed at March 31, 2000. Following is a summary of the assets sold and
liabilities assumed by Tera:
<TABLE>
<CAPTION>
(in millions) March 31, 2000
- ------------------------------------------------------------------------- -----------------
<S> <C>
Inventories, net $ 27.6
Property and equipment, net 9.8
Spare parts 29.0
Other assets 8.4
Product warranty and other accrued liabilities (32.4)
-----------------
$ 42.4
=================
</TABLE>
4. INVENTORIES.
<TABLE>
<CAPTION>
(in thousands): March 31, 2000 June 30, 1999
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Components and subassemblies $ 49,693 $ 19,988
Work-in-process 47,481 71,406
Finished goods 35,369 41,694
Demonstration systems 51,796 62,093
---------------- --------------
$ 184,339 $ 195,181
================ ==============
</TABLE>
-6-
<PAGE>
5. RESTRICTED INVESTMENTS.
Restricted investments consist of long-term investments pledged as collateral
against letters of credit and an equity forward purchase arrangement. Restricted
investments are held in the Company's name by major financial institutions.
6. PROPERTY AND EQUIPMENT.
<TABLE>
<CAPTION>
(in thousands) March 31, 2000 June 30, 1999
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Property and equipment, at cost $1,063,707 $ 980,819
Accumulated depreciation and amortization (591,174) (600,051)
---------------- --------------
Property and equipment, net $ 472,533 $ 380,768
================ ==============
</TABLE>
7. OTHER ASSETS.
<TABLE>
<CAPTION>
(in thousands): March 31, 2000 June 30, 1999
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net long-term deferred tax assets $ 229,640 $ 126,562
Investments 176,540 82,561
Spare parts 117,206 157,539
Software licenses, goodwill and other 78,994 99,568
---------------- --------------
$ 602,380 $ 466,230
================ ==============
</TABLE>
Included in Investments at March 31, 2000, is our investment in VA Linux
Systems, Inc. ("VA Linux") carried at a market value of $78 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.
8. 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 nine months of fiscal 2000,
we paid approximately $2 million in severance and related costs and costs to
vacate facilities associated with the fiscal 1998 actions.
We determined that the remaining accrual associated with the fiscal 1998
restructuring activities was deemed unnecessary and recorded an adjustment of
approximately $7 million. The adjustment primarily reflects lower than
estimated severance and related costs attributable to higher than expected
attrition and lower per person costs. To a lesser extent, estimated costs of
contract cancellations and to exit certain facilities were also adjusted.
During the first quarter of fiscal 2000, we announced and began to implement
restructuring actions that resulted in aggregate charges of $145 million.
These 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, prepaid license agreements and other intangible assets
associated with the anticipated end of life of our 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,
-7-
<PAGE>
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 and third quarters of fiscal 2000, we lowered our estimate
of the total costs associated with the fiscal 2000 restructuring activities
described above. As a result, a cumulative adjustment of approximately $27
million has been recorded in fiscal 2000. The adjustment primarily reflects
far more favorable settlements of lease obligations attributable to extremely
high demand for facilities in Mountain View, California. It also reflects our
new senior management's approach to structuring our field organization. The
adjustment further 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 March 31, 2000, approximately 850 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 $4
million at March 31, 2000 is expected to result in cash expenditures through
fiscal 2004.
The following table depicts the restructuring activity during the first nine
months of fiscal 2000:
<TABLE>
<CAPTION>
Category Balance at Expenditures Adjustments Balance at
(in thousands) June 30, 1999 Additions Cash Non-cash Increase/(Decrease) Mar. 31, 2000
- ---------------------------- ------------- ---------- ----------- ----------- ------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Severance & related charges $ 5,218 $ 65,820 $(53,081) $ -- $ (5,877) $ 12,080
Operating asset write-downs -- 26,584 -- (26,584) -- --
Canceled contracts -- 8,468 (4,570) -- (3,898) --
Vacated facilities 1,049 43,666 (9,662) (11,157) (19,869) 4,027
Other 2,166 -- 1,867 -- (4,033) --
------------- ---------- ----------- ----------- ------------------- -------------
$ 8,433 $144,538 $(65,446) $(37,741) $ (33,677) $ 16,107
</TABLE>
9. EARNINGS PER SHARE.
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- ----------------------
(in thousands, except per share amounts) 2000 1999 2000 1999
- ------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss $ (18,133) $ (39,957) $(221,953) $(103,964)
Less preferred stock dividends (131) (131) (394) (394)
--------- --------- --------- ---------
Net loss available to common stockholders $ (18,264) $ (40,088) $(222,347) $(104,358)
========= ========= ========= =========
Weighted average shares outstanding--basic and diluted 183,826 186,685 182,847 186,477
========= ========= ========= =========
Net loss per share - basic and diluted $ (0.10) $ (0.21) $ (1.22) $ (0.56)
========= ========= ========= =========
Potentially dilutive securities excluded from
computations because they are anti-dilutive 9,232 15,770 10,364 12,113
========= ========= ========= =========
</TABLE>
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<PAGE>
10. COMPREHENSIVE INCOME.
The components of comprehensive loss, net of tax, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- ----------------------
(in thousands, except per share amounts) 2000 1999 2000 1999
- ---------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss $ (18,133) $ (39,957) $(221,953) $(103,964)
Change in unrealized gain on available-for-sale
investments (215,621) (93) 47,097 (6)
Change in unrealized gain on derivative instruments
designated and qualifying as cash flow hedges 1,943 -- 1,455 --
Foreign currency translation adjustments (13,030) (6,725) (9,394) 1,023
--------- --------- --------- ---------
Comprehensive loss $(244,841) $ (46,775) $(182,795) $(102,947)
========= ========= ========= =========
</TABLE>
The components of accumulated other comprehensive income (loss), net of tax, are
as follows:
<TABLE>
<CAPTION>
March 31, June 30,
(in thousands) 2000 1999
- ---------------------------------------------------------------------- ----------------- ---------------
<S> <C> <C>
Unrealized gain (loss) on available-for-sale investments $ 46,980 $ (118)
Unrealized gain (loss) on derivative instruments designated
and qualifying as cash flow hedges 1,455 --
Foreign currency translation adjustments (10,919) (1,525)
-------- -------
Accumulated other comprehensive income (loss) $ 37,516 $(1,643)
======== =======
</TABLE>
11. 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 assessed based on changes in
the option's intrinsic value plus the effect of discounting. As a result, the
change in the volatility value of the contract is excluded from the assessment
of hedge effectiveness and immediately recognized in earnings. All other changes
in the value of the derivative are deferred in Other Comprehensive Income (OCI)
until the underlying transaction materializes.
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.
-9-
<PAGE>
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 gain recognized
in accumulated other comprehensive income as of March 31, 2000 was $1.5 million.
The effect on earnings for the nine-month period ended March 31, 2000 relating
to the ineffectiveness of hedging activities was not material. The amount in
accumulated other comprehensive income as of March 31, 2000 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 March 31, 2000 (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Cumulative effect of adopting SFAS 133 $ --
Reclassified into earnings from other comprehensive income, net $ 3,864
Changes in fair value of derivatives, net $(2,409)
Accumulated derivative gain included in other comprehensive
income $ 1,455
</TABLE>
12. 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.
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 March 31, Nine Months Ended March 31,
- ---------------------------------------- ------------------------------------- ------------------------------------
Visual Global Visual Global
Servers Workstations Services Servers Workstations Services
- ---------------------------------------- ------------ ------------ ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
2000:
Revenue from external customers $ 229,305 $ 108,343 $ 172,920 $ 717,682 $ 409,698 $ 519,560
Segment profit (loss) $ (45,078) $ (10,663) $ 19,342 $(134,152) $(112,294) $ 13,230
Significant items:
Non-recurring charges for contract
cancellations and inventory and
future support costs related to the
Silicon Graphics 320 and 540 visual
workstations $ -- $ 2,537 $ 2,100 $ -- $ (45,253) $ (20,950)
Supercomputer warranty-related
charges $ -- $ -- $ -- $ -- $ -- $ (15,300)
- ---------------------------------------- --------- --------- --------- --------- --------- ---------
- ---------------------------------------- --------- --------- --------- --------- --------- ---------
1999:
Revenue from external customers $ 234,368 $ 153,426 $ 171,042 $ 803,333 $ 454,657 $ 513,946
Segment profit (loss) $ (35,293) $ (57,723) $ 28,925 $(102,184) $(175,057) $ 84,542
Significant noncash items:
Asset valuation adjustments $ -- $ -- $ -- $ -- $ (6,000) $ --
- ---------------------------------------- --------- --------- --------- --------- --------- ---------
</TABLE>
-10-
<PAGE>
Reconciliation to SGI as reported (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- --------------------------
2000 1999 2000 1999
- ---------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Total reportable segments $ 510,568 $ 558,836 $ 1,646,940 $ 1,771,936
Other 53,119 60,339 150,143 148,418
----------- ----------- ----------- -----------
Total SGI consolidated $ 563,687 $ 619,175 $ 1,797,083 $ 1,920,354
=========== =========== =========== ===========
OPERATING LOSS:
Total reportable segments $ (36,399) $ (64,091) $ (233,216) $ (192,699)
Other 18,001 14,725 41,476 16,549
Restructuring 17,677 6,000 (110,861) 14,000
----------- ----------- ----------- -----------
Total SGI consolidated $ (721) $ (43,366) $ (302,601) $ (162,150)
=========== =========== =========== ===========
</TABLE>
13. 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. 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 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,"
"potential" 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
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 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.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS Three Months Ended Nine Months Ended
(NUMBERS MAY NOT ADD DUE TO ROUNDING) March 31, March 31,
- ----------------------------------------------- ----------------------- -------------------------
$ in millions 2000 1999 2000 1999
- ----------------------------------------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenue $ 564 $ 619 $ 1,797 $ 1,920
Cost of revenue 327 360 1,158 1,133
- ----------------------------------------------- ---------- ------------ ------------ ------------
Gross profit 236 260 639 787
Gross profit margin 41.9% 41.9% 35.5% 41.0%
Total operating expenses 237 303 941 949
- ----------------------------------------------- ---------- ------------ ------------ ------------
Operating loss (1) (43) (303) (162)
Other income (expense) (22) (7) (24) 40
- ----------------------------------------------- ---------- ------------ ------------ ------------
Loss before income taxes (23) (51) (327) (122)
- ----------------------------------------------- ---------- ------------ ------------ ------------
Net loss $ (18) $ (40) $ (222) $ (104)
- ----------------------------------------------- ---------- ------------ ------------ ------------
Net loss per share - basic and diluted $ (0.10) $ (0.21) $ (1.22) $ (0.56)
- ----------------------------------------------- ---------- ------------ ------------ ------------
</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
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<PAGE>
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 the third quarter and first nine months of fiscal 2000 decreased
9% and 6%, respectively, or $55 million and $123 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 supercomputer businesses, which are both part of our
server segment.
The following table presents total revenue by reportable segment.
<TABLE>
<CAPTION>
(numbers may not add due Three Months Ended Nine Months Ended
to rounding) March 31, March 31,
- ------------------------- ------------------------- -------------------------
$ in millions 2000 1999 2000 1999
- ------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Servers $ 229 $ 234 $ 718 $ 803
% of total revenue 41% 38% 40% 42%
Visual Workstations $ 108 $ 154 $ 410 $ 455
% of total revenue 19% 25% 23% 23%
Global Services $ 173 $ 171 $ 519 $ 514
% of total revenue 31% 27% 29% 27%
Other $ 53 $ 60 $ 150 $ 148
% of total revenue 9% 10% 8% 8%
- ------------------------- ------------ ------------ ------------ ------------
</TABLE>
Server revenue for the third quarter and first nine months of fiscal 2000
decreased $5 million, or 2%, and $86 million, or 11%, respectively, compared
with the corresponding periods of fiscal 1999. The decrease primarily
reflects lower revenue within our Origin brand scalable server business due
to a mature product line that is scheduled to be replaced in early fiscal
2001, coupled with the continuing trend in the declining supercomputer
market. We believe both our Origin and Onyx server revenue were adversely
impacted by manufacturing process issues that delayed delivery of our R12000
400 megahertz processors. We are now receiving shipments of these processors.
For the first nine months of fiscal 2000, the Cray product line, including
product and service revenue, represented less than 10% of total revenue. On
March 31, 2000, SGI completed a sale of its Cray product line. Modest
declines in Silicon Graphics-Registered Trademark- Onyx-Registered Trademark-
server revenue were also noted during the third quarter and first nine months
of fiscal 2000 compared with the corresponding periods of fiscal 1999.
Visual Workstation revenue for the third quarter and first nine months of
fiscal 2000 decreased $45 million, or 29%, and $45 million, or 10%,
respectively, compared with the corresponding periods of fiscal 1999. Sales
of our UNIX workstation products continued to shrink year over year. During
the first nine months of fiscal 2000, this decline was partially offset by
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 light of this transition, we recorded a net
charge during the first nine 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 third quarter and first nine
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.
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<PAGE>
Total revenue by geographic area was as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
- -------------------- ---------------------- ----------------------
Area 2000 1999 2000 1999
- -------------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Americas $ 306 $ 329 $ 1,002 $ 1,019
Europe 115 163 436 560
Rest of World 143 127 359 341
- -------------------- ----------- ---------- ---------- -----------
Total revenue $ 564 $ 619 $ 1,797 $ 1,920
- -------------------- ----------- ---------- ---------- -----------
</TABLE>
Geographic revenue as a percentage of total revenue was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
- -------------------- ---------------------- ----------------------
Area 2000 1999 2000 1999
- -------------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Americas 54% 53% 56% 53%
Europe 21% 26% 24% 29%
Rest of World 25% 21% 20% 18%
- -------------------- ----------- ---------- ---------- -----------
</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 relatively stable despite the shrinking market
for this product line. In addition, European revenue has suffered a
disproportionate decline in fiscal 2000 compared with the other geographic
regions. Sales of our Origin servers were also strong in Japan for both the
third quarter and first nine 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.
Excluding the Cray product line, our consolidated backlog at March 31, 2000
was $240 million compared with $247 million at December 31, 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 remained at 41.9% for the third quarter of both fiscal 2000 and
fiscal 1999, though it declined to 35.5% for the first nine months of fiscal
2000 compared with 41.0% for corresponding period of fiscal 1999. Gross
profit margin for the third quarter and first nine months of fiscal 2000
included certain adjustments related to our Silicon Graphics 320 and 540
visual workstations. Product gross profit margin for the first nine months of
fiscal 2000 reflects charges of approximately $45 million for third party
manufacturing contract cancellations and purchase commitments and for excess
product and demonstration inventory related to our Silicon Graphics 320 and
540 visual workstations. During the first nine months of fiscal 2000, we also
charged $21 million to cost of service revenue for future unrecoverable
visual workstation support costs. In addition, we recorded a $15 million
charge to cost of service revenue for estimated warranty related costs
associated with the Cray T90 supercomputer product line. Without these
adjustments, our gross profit margin for the first nine months of fiscal 2000
would have been 40.1%, representing a decrease of 0.9 percentage points,
compared with the corresponding period of fiscal 1999. In addition, in the
third quarter of fiscal 2000, product gross margin was favorably impacted by
an unusually rich mix of high margin Cray sales and by business derived from
certain government programs. Going forward, we expect overall gross margin to
be approximately 40%.
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<PAGE>
<TABLE>
<CAPTION>
OPERATING EXPENSE Three months ended Nine months ended
(NUMBERS MAY NOT ADD DUE TO ROUNDING) March 31, March 31,
- -------------------------------------- --------------------- ---------------------
$ in millions 2000 1999 2000 1999
- -------------------------------------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Research and development $ 70 $ 93 $ 234 $ 293
% of total revenue 12.3% 15.1% 13.0% 15.2%
Selling, general and administrative $ 185 $ 216 $ 597 $ 671
% of total revenue 32.9% 34.8% 33.2% 34.9%
Other $ (18) $ (6) $ 111 $ (14)
% of total revenue (3.1)% (1.0)% 6.2% (0.7)%
- -------------------------------------- --------- ---------- ----------- ----------
</TABLE>
OPERATING EXPENSE (EXCLUDING OTHER OPERATING EXPENSE). Operating expense for the
third quarter and the first nine months of fiscal 2000 declined 18% and 14%,
respectively, in absolute dollars and, as a percentage of total revenue, from
49.9% to 45.2% and from 50.2% to 46.2%, respectively, compared with the
corresponding periods of fiscal 1999. The decrease in operating expense resulted
from comparatively lower headcount of approximately 1,900 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 third
quarter expense levels during the balance of fiscal 2000.
OTHER OPERATING EXPENSE. 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. These 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 included 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 and third quarters of fiscal 2000, we lowered our estimate
of the total costs associated with the fiscal 2000 restructuring activities
described above. As a result, a cumulative adjustment of approximately $27
million has been recorded in fiscal 2000. The adjustment primarily reflects
far more favorable settlements of lease obligations attributable to extremely
high demand for facilities in Mountain View, California. It also reflects our
new senior management's approach to structuring our field organization. The
adjustment further 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 March 31, 2000, approximately 850 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 $4
million at March 31, 2000 is expected to result in cash expenditures through
fiscal 2004.
During the third quarter of fiscal 2000, we also determined that the
remaining accrual associated with the fiscal 1998 restructuring activities
was deemed unnecessary and recorded an adjustment of approximately $7
million. The adjustment primarily reflects lower than estimated severance and
related costs attributable to higher than expected attrition and lower per
person costs. To a lesser extent, estimated costs of contract cancellations
and to exit certain facilities were also adjusted.
INTEREST AND OTHER
INTEREST EXPENSE. Interest expense for the third quarter and first nine months
of fiscal 2000 decreased 27% and 22%, respectively, compared with the
corresponding periods of fiscal 1999 principally due to a reduction in long-term
borrowings of approximately $12 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 35% minority interest in the earnings of MIPS and other
non-operating items. Interest income and other, net for the third quarter of
fiscal 2000 decreased $15 million compared with the third quarter of fiscal
1999. This year over year change is primarily attributable to a $21 million
loss on the sale of the Cray product line recorded in the third quarter of
fiscal 2000, offset in part by a $10 million partial write-off of an
investment recorded in the third quarter of fiscal 1999 that did not recur in
fiscal 2000. The $69 million decrease in interest and other income, net for
the first nine months of fiscal 2000 compared
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<PAGE>
with the first nine 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, as well as to factors described above in the
quarterly comparison. We did not sell any portion of our remaining interest
in MIPS during the first nine months of fiscal 2000.
TAXES. The Company's effective tax benefit rate for the first nine months of
fiscal 2000 was 23%, excluding the impact of the $66 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, the $111 million year-to-date charge for estimated restructuring costs
and the $21 million loss on the sale of the Cray product line, which were tax
effected at 37%. The Company's effective tax benefit rate for the first nine
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 a $14 million year-to-date change in previously estimated
restructuring costs, 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, the estimated restructuring charges
and the loss on the sale of the Cray product line in fiscal 2000 and the
impact of the MIPS gain and change in previously estimated restructuring and
merger charges in fiscal 1999, differ from the federal statutory rate
primarily due to foreign losses for which no benefit has been recognized.
At March 31, 2000, we had gross deferred tax assets arising from deductible
temporary differences, tax losses and tax credits of $714 million. A
valuation allowance of $121 million and a deferred tax liability of $66
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 taxable 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 taxable income.
Moreover, if we determine to divest our interest in MIPS through a tax-free
spin-off, we would expect to take a significant charge to reflect the
additional valuation allowance required for substantially all of the net
deferred tax assets. 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 March 31, 2000, cash and cash equivalents and marketable and restricted
investments totaled $512 million, down from $782 million at June 30, 1999.
Included in the March 31, 2000 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 used $35 million during the first nine months of fiscal
2000 compared with providing $107 million during the first nine months of
fiscal 1999. The negative operating cash flow was partially due to
approximately $65 million in cash payments for severance, contractual
obligations and facilities obligations related to restructuring activities.
These activities are expected to result in future cash outlays of
approximately $16 million, the majority of which will occur over the
remainder of fiscal 2000 and will be funded through current working capital.
Cash flow from operations was also negatively impacted by the non-cash
increase in deferred tax assets, included in other adjustments to reconcile
net loss to net cash used in operating activities. Negative operating cash
flows were partially offset by a decrease in accounts receivable attributable
to lower revenue levels and continued improved collections.
Investing activities, other than changes in our available-for-sale and
restricted investments, consumed $248 million in cash during the first nine
months of fiscal 2000 compared with $148 million during the first nine months of
fiscal 1999. The principal investing activity during the first nine 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. Investing activity during the first
nine months of fiscal 1999 included the acquisition of capital equipment and
spare parts, a portion of the investment in WAM!NET Inc. and an investment in a
computer graphics technology company. This use of cash was partially offset by
proceeds from the sale of a portion of our interest in MIPS.
Financing activities provided $13 million during the first nine months of fiscal
2000 compared with using $28 million during the first nine months of fiscal of
1999. The principal financing activities during the first nine months of fiscal
2000 included the proceeds from employee stock purchase plan issuances and
employee stock option exercises offset in part by the use of $24 million to
repurchase shares of our common stock and $11 million to retire debt and $3
million to repay debt.
At March 31, 2000, our principal sources of liquidity included cash and cash
equivalents and marketable investments of $387 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
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<PAGE>
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. In
the short-term, we expect to introduce in the summer of calendar 2000, a new
generation of MIPS/IRIX servers, the anticipation of which could adversely
affect revenue in the fourth quarter of fiscal 2000.
SUPERCOMPUTERS. On March 31, 2000 SGI completed the sale of its Cray
product line. To ensure a smooth transition, SGI, in accordance with a
transition service agreement, will provide certain accounting services and
operational and support activities for a period of time expected to last no
longer than through September 30, 2000. In addition, pursuant to a services
contract agreement, SGI will provide the services under the existing service
contracts pertaining to the Cray product line sold, generally until such
contracts expire or are renewed. This arrangement is expected to continue
through March 31, 2001.
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 have
negatively affected operations to date during 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 this uncertainty.
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 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 third
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
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<PAGE>
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 significant rates of attrition, particularly in
Mountain View, California and in certain functions, including at the senior
executive level and among our technical personnel. Our chief financial
officer resigned in May, 2000 to pursue another opportunity. We have
initiated aggressive hiring and retention programs to attract and retain key
executives and employees, but there is no assurance that these programs will
succeed.
PRODUCT DEVELOPMENT AND INTRODUCTION. Our continued success depends on our
ability to develop and rapidly bring to market 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.
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.
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.
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<PAGE>
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
our CEO, Mr. Robert Bishop, 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 with the U.S. government or our
sales 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.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. 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."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
A current report on Form 8-K dated March 31, 2000 was filed with the
Securities and Exchange Commission (the "SEC") to report under Item 2
of that Form the completion of the sale of SGI's Cray product line to
Tera Computer Company.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 12, 2000 SILICON GRAPHICS, INC.
a Delaware corporation
By: Ron Curtola Jr.
----------------------------------
Ron Curtola Jr.
Vice President and Corporate
Controller (Principal
Accounting Officer)
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<PAGE>
SILICON GRAPHICS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
-22-
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND
CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE
PERIOD ENDING MARCH 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 380,776
<SECURITIES> 6,288
<RECEIVABLES> 371,456
<ALLOWANCES> 12,831
<INVENTORY> 184,339
<CURRENT-ASSETS> 1,315,876
<PP&E> 1,063,707
<DEPRECIATION> 591,174
<TOTAL-ASSETS> 2,516,093
<CURRENT-LIABILITIES> 865,196
<BONDS> 349,933
0
16,998
<COMMON> 173
<OTHER-SE> 1,252,583
<TOTAL-LIABILITY-AND-EQUITY> 2,516,093
<SALES> 1,303,577
<TOTAL-REVENUES> 1,797,083
<CGS> 791,498
<TOTAL-COSTS> 1,158,258
<OTHER-EXPENSES> 344,382
<LOSS-PROVISION> 2,367
<INTEREST-EXPENSE> 13,885
<INCOME-PRETAX> (327,015)
<INCOME-TAX> 105,062
<INCOME-CONTINUING> (221,953)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (221,953)
<EPS-BASIC> (1.22)
<EPS-DILUTED> (1.22)
</TABLE>
