-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LPkw4FS+ra1WBY7xNGyZ7OMMwcyy3MiwdgU4u6MYJzB2i8Vpmv0bLigaue7HEVkZ ffqYN29Kx02N+aOocLUBhA== 0000912057-96-026437.txt : 19961118 0000912057-96-026437.hdr.sgml : 19961118 ACCESSION NUMBER: 0000912057-96-026437 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SILICON GRAPHICS INC /CA/ CENTRAL INDEX KEY: 0000802301 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 942789662 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10441 FILM NUMBER: 96664925 BUSINESS ADDRESS: STREET 1: 2011 N SHORELINE BLVD P O BOX 7311 STREET 2: MS 6U-710 CITY: MOUNTAIN VIEW STATE: CA ZIP: 94039-7311 BUSINESS PHONE: 4159601980 MAIL ADDRESS: STREET 1: 2011 N SHORELINE BLVD STREET 2: POST OFFICE BOX 7311 MS 6U-710 CITY: MOUNTAIN VIEW STATE: CA ZIP: 94039-7311 10-Q 1 10-Q 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 SEPTEMBER 30, 1996. or - --- Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from to . Commission File Number 1-10441 SILICON GRAPHICS, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-2789662 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2011 N. SHORELINE BOULEVARD, MOUNTAIN VIEW, CALIFORNIA 94043-1389 (Address of principal executive offices) (Zip Code) (415) 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 OCTOBER 31, 1996 THERE WERE 174,930,157 SHARES OF COMMON STOCK OUTSTANDING. SILICON GRAPHICS, INC. QUARTERLY REPORT ON FORM 10-Q TABLE OF CONTENTS Page No. PART I - FINANCIAL INFORMATION -------- Item 1. Financial Statements (Unaudited): Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 7 PART II - OTHER INFORMATION Item 1. Legal Proceedings 16 Item 4. Submission of Matters to a Vote of Security Holders. 16 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 Index to Exhibits 19 TRADEMARKS USED IN THIS FORM 10-Q: Silicon Graphics, CHALLENGE and Onyx are registered trademarks and O2, Origin, Onyx2, Indigo, Indigo2 and POWER CHALLENGE are trademarks of Silicon Graphics, Inc. Indy is a registered trademark used under license in the United States, and owned by Silicon Graphics, Inc. in other countries worldwide. MIPS is a registered trademark and R10000 is a trademark of MIPS Technologies, Inc. Cray is a registered trademark and Cray T3E and Cray T90 are trademarks of Cray Research, Inc. UNIX is a registered trademark of Novell, Inc. in the United States and other countries, licensed exclusively through X/Open Company Ltd. -2- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SILICON GRAPHICS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) September 30, June 30, ASSETS 1996 1996(1) ------------- ---------- (unaudited) Current assets: Cash and cash equivalents $ 245,781 $ 257,080 Short-term marketable investments 46,546 38,316 Accounts receivable, net 821,921 978,874 Inventories 524,632 520,045 Deferred tax assets 188,365 198,239 Prepaid expenses and other current assets 109,868 103,701 ------------- ---------- Total current assets 1,937,113 2,096,255 Other marketable investments 145,782 161,541 Property and equipment, at cost 835,332 825,359 Accumulated depreciation and amortization (370,814) (360,480) ------------- ---------- Net property and equipment 464,518 464,879 Other assets 412,204 435,571 ------------- ---------- $2,959,617 $3,158,246 ------------- ---------- ------------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts and notes payable $ 242,471 $ 397,838 Other current liabilities 698,611 703,600 ------------- ---------- Total current liabilities 941,082 1,101,438 Long-term debt and other 349,659 381,490 Stockholders' equity: Preferred stock 16,998 16,998 Common stock 173 173 Additional paid-in capital. 1,187,127 1,172,787 Retained earnings 439,067 461,311 Accumulated translation adjustment and other 25,511 24,049 ------------- ---------- Total stockholders' equity 1,668,876 1,675,318 ------------- ---------- $2,959,617 $3,158,246 ------------- ---------- ------------- ---------- (1) The balance sheet at June 30, 1996 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- SILICON GRAPHICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (In thousands except per share amounts) Three Months Ended September 30, ------------------------------- 1996(1) 1995 -------- -------- Product and other revenue $623,413 $524,729 Service revenue 142,189 70,550 -------- -------- Total revenue 765,602 595,279 Costs and expenses: Cost of product and other revenue 372,960 234,666 Cost of service revenue 77,735 37,945 Research and development 108,279 72,743 Selling, general and administrative 232,167 172,189 Merger-related expenses 2,834 714 -------- -------- Total costs and expenses 793,975 518,257 -------- -------- Operating (loss) income (28,373) 77,022 Interest and other (expense) income, net (818) 6,341 -------- -------- (Loss) Income before income taxes (29,191) 83,363 (Benefit) Provision for income taxes (7,590) 25,006 -------- -------- Net (loss) income (21,601) 58,357 Preferred stock dividend requirement (131) --- -------- -------- Net (loss) income available to common stockholders $(21,732) $ 58,357 -------- -------- -------- -------- Net (loss) income per common share $ (0.13) $ 0.33 -------- -------- -------- -------- Common shares and common share equivalents used in the calculation of net (loss) income per common share 172,974 179,236 -------- -------- -------- -------- (1) Amounts reflect the operations of Cray Research, acquired by the Company in April 1996. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. -4- SILICON GRAPHICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (In thousands)
Three Months Ended September 30, -------------------------------- 1996(1) 1995 ------------ ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (21,601) $ 58,357 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 85,652 33,873 Other (6,458) (8,932) Changes in operating assets and liabilities: Accounts receivable 156,953 34,081 Inventories (19,776) (21,370) Accounts payable (18,649) (20,330) Other assets and liabilities (12,334) (12,829) ------------ ----------------- Total adjustments 185,388 (4,493) ------------ ----------------- Net cash provided by operating activities 163,787 62,850 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (45,589) (52,816) Increase in other assets (22,930) (49,972) Available-for-sale investments: Purchases (484) (299,230) Sales 29 362,698 Maturities 8,237 1,000 ------------ ----------------- Net cash used in investing activities (60,737) (38,320) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of debt 11,625 918 Payments of debt principal (138,487) (3,313) Sale of common stock 12,513 11,879 ------------ ----------------- Net cash (used in) provided by financing activities (114,349) 9,484 ------------ ----------------- Net increase in cash and cash equivalents (11,299) 34,014 Cash and cash equivalents at beginning of period 257,080 307,875 ------------ ----------------- Cash and cash equivalents at end of period $245,781 $341,889 ------------ ----------------- ------------ -----------------
(1) Amounts reflect the operations of Cray Research, acquired by the Company in April 1996. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. -5- SILICON GRAPHICS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. CONSOLIDATED FINANCIAL STATEMENTS. During the fourth quarter of fiscal 1996, Silicon Graphics acquired Cray Research in a business combination accounted for under the purchase method. The operating results of Cray Research were consolidated with those of the Company beginning April 2, 1996. Therefore, the unaudited results of operations and cash flows for fiscal 1997 include the results of the Cray Research business, while the fiscal 1996 results of operations and cash flows do not. 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, 1996. Certain amounts for the prior year have been reclassified to conform to current year presentation. 2. INVENTORIES. Inventories consist of (in thousands): September 30, 1996 June 30, 1996 ------------------ ------------- Components and subassemblies $134,040 $199,441 Work-in-process 260,252 177,744 Finished goods 63,197 74,997 Marketing 67,143 67,863 ------------------ ------------- Total inventories $524,632 $520,045 ------------------ ------------- ------------------ ------------- 3. CONTINGENCIES. The Company is defending a securities class action lawsuit and a derivative suit filed in U.S. District Court for the Northern District of California in January and March, 1996. In September 1996, the District Court dismissed the securities class action, while allowing plaintiffs one opportunity to amend their complaint, and dismissed the derivative action with prejudice. In October 1996, the plaintiffs in the securities class action filed an amended complaint alleging that the Company and certain of its officers and directors made material misrepresentations and omissions during the period from September to December 1995. The Company believes it has good defenses to the claims alleged in these lawsuits and is defending itself vigorously against these actions. See Item 1 - Part II for additional information. -6- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. The matters addressed in this discussion, with the exception of the historical information presented, are forward looking statements involving risks and uncertainties, including the risks discussed under the heading, "Risks That Affect Our Business." The following tables and discussion present certain financial information on a comparative basis. During the fourth quarter of fiscal 1996, Silicon Graphics acquired Cray Research in a business combination accounted for under the purchase method. The operating results of Cray Research were consolidated with those of the Company beginning April 2, 1996. The Company believes it most meaningful if certain current fiscal year results (revenue, gross margin and operating expenses other than merger-related expense) are compared with pro forma combined fiscal 1996 results. The pro forma fiscal 1996 results combine the Silicon Graphics and Cray Research operations for the respective fiscal periods, excluding the results of the Cray Research Business Systems Division which was sold at the end of fiscal 1996. Certain fiscal 1996 Cray Research amounts have also been reclassified to conform to the current year presentation. YEAR-TO-YEAR COMPARISONS OPERATING ITEMS AS A PERCENTAGE OF TOTAL REVENUE - ------------------------------------------------------------------------------- (PERCENTAGES MAY NOT ADD DUE TO ROUNDING) Three Months Pro Forma Three Ended Months September 30, Ended September 30, --------------- ------------------- 1996 1995 1995 ------- ------ -------- Product and other revenue 81.4% 88.1% 84.0% Service revenue 18.6 11.9 16.0 ------- ------ -------- Total revenue 100.0% 100.0% 100.0% Gross margin 41.1(1) 54.2 50.4 Research and development 14.1 12.2 12.8 expense Selling, general and 30.3 28.9 28.0 administrative expense Merger-related expense 0.4 0.1 ------- ------ Operating (loss) income (3.7) 12.9 Interest and other (expense) income, net (0.1) 1.1 ------- ------ (Loss) Income before income (3.8) 14.0 taxes (Benefit) Provision for income taxes (1.0) 4.2 ------- ------ Net (loss) income (2.8)% 9.8% ------- ------ ------- ------ - ---------- (1) 44.9% before charges for the MIPS R10000-TM- microprocessor replacement program and Cray purchase accounting. -7- REVENUES BY GEOGRAPHY (PRO FORMA COMBINED IN FISCAL 1996) - -------------------------------------------------------------- Three Months Ended September 30, --------------------------------- Year/Year 1996 1995 (Pro Forma) Increase (Decrease) ------------ ----------------- ------------------- (in millions) United States $428 $380 13% Europe 179 208 (14)% Rest of World 159 170 (6)% ------------ ----------------- Total revenue $766 $758 1% ------------ ----------------- ------------ ----------------- Three Months Ended September 30, 1996 1995 (Pro Forma) ------------------- ---------------- (as a percentage of total revenue) United States 56% 50% Europe 23% 27% Rest of World 21% 23% REVENUE BY PRODUCT LINE (PRO FORMA COMBINED IN FISCAL 1996) - ------------------------------------------------------------------- Three Months Ended September 30, 1996 1995 (Pro Forma) ----- --------------- (as a percentage of product revenue, excluding other revenue) High-end products (primarily from the POWER CHALLENGE-TM-, CHALLENGE-Registered Trademark-, Onyx-Registered Trademark- and Cray-Registered Trademark- families) 58% 51% Desktop products (primarily from the Indy-Registered Trademark- and Indigo2-TM- families) 42% 49% - -------------------------------------------------------------------- REVENUE. The Company's product and other revenues are derived primarily from shipment of computer system products, with subsystem and software revenue, license fees, and non-recurring engineering (NRE) contract payments comprising the remainder. Service revenue is comprised of hardware and software support and maintenance. The Company's revenue of $766 million for the first quarter of fiscal 1997 was essentially flat compared with the pro forma combined revenue of $758 million for the first quarter of fiscal 1996. Product revenue for Cray systems increased as compared with the same quarter a year ago, while product revenue for Silicon Graphics desktop products decreased. The geographic mix for Silicon Graphics systems was essentially unchanged as compared with the same quarter a year ago, while a much higher proportion of revenue for Cray systems was derived from U.S. customers. The Company's revenue growth was affected by several factors, including product transition issues. In October 1996, the Company introduced its new Origin-TM-, Onyx2-TM- and O2-TM- product families, based on significantly new architectures. Revenue growth also was affected by a problem in the manufacturing fabrication process for the R10000 microprocessor which the Company believes affected customers' willingness to purchase new systems until the problem was resolved. The Company and NEC, the principal manufacturer for the R10000 microprocessor, have corrected this problem and the Company has initiated a board replacement program for -8- customers with potentially affected systems. All geographies were affected by these factors. Currency changes also depressed international revenue growth rates. GROSS MARGIN. Gross margin of 41.1% for the first quarter of fiscal 1997 decreased significantly compared with pro forma combined gross margin of 50.4% for the first quarter of fiscal 1996. Without the R10000 microprocessor replacement program and purchase accounting charges described below, proforma gross margin for the first quarter of fiscal 1997 would have been 44.9%. The decrease from the same quarter a year ago is primarily attributable to lower than expected revenue, competitive pricing pressures and the Cray Research purchase accounting and other charges taken in the current period. Because purchase accounting requires that purchased work-in-process and finished goods inventories be written up to fair value at the time of the acquisition, gross margins in subsequent periods are adversely affected until the purchased inventories are sold to customers. The effect of the write-up was to reduce the first quarter of fiscal 1997 gross margin by approximately $17 million. The Company expects that the continuing effect of the sell-through of this inventory will reduce gross margins by an aggregate of approximately $21 million during the remainder of fiscal 1997. Likewise, purchase accounting does not allow recognition of the gross profit on acquired service contracts. The effect of this was to reduce first quarter gross margin by approximately $2 million. The effect on gross margins during the remainder of fiscal 1997 will be approximately $4 million. The Company also took a charge of approximately $10 million for the estimated cost of the program to replace the R10000 microprocessor boards as noted above. In addition, the first quarter of fiscal 1997 gross margin was adversely affected by the need to provide higher than normal inventory reserves as a result of product transitions. Gross margins in fiscal 1997 are expected to be lower than in fiscal 1996. A significant reason for this expected decline is the impact of the Cray Research business which has in recent years had lower product and service gross margins than the Silicon Graphics business. The Company expects over time to achieve synergies and implement other changes that will moderate but not eliminate the impact of these differences in Cray Research's business on the combined organization. While the Company expects gross margins to increase gradually over the remainder of fiscal 1997, as new product cost structures improve during the transition to full production volumes, the Company also believes gross margins will continue to be affected by aggressive pricing. In addition, the Company believes that its new O2 desktop workstations will be purchased by some customers who otherwise would purchase the higher-margin Indigo2 family of workstations. The Company is unable to predict the extent of this customer substitution. OPERATING EXPENSE. The Company has for many years developed its annual operating plans based on target ranges for operating expense as a percentage of total revenue. These target ranges reflect the Company's beliefs about the levels of research and development necessary to develop leading-edge products for its markets, the levels of sales and marketing expenses appropriate to support its channels of distribution and the appropriate levels of general and administrative spending. Because the Company plans its operating expenses, many of which are relatively fixed in the short term, on expected revenue, even a relatively small revenue shortfall may cause a period's results to be substantially below expectations. This was reflected in the Company's operating expense for the first quarter of fiscal 1997, which was significantly higher as a percentage of revenue than the same quarter a year ago and than the target ranges, principally due to lower than expected revenue. Merger-related expenses in fiscal 1997 relate to the Cray Research acquisition and consist principally of costs associated with integration of Silicon Graphics and Cray Research information systems, accounting processes and marketing and human resource activities. The Company expects to incur an additional $12 million to $22 million of similar merger-related expenses during the remainder of fiscal 1997. OPERATING MARGIN. The Company expects operating margins for at least the next two quarters to be significantly below the level of the last few fiscal years in part as the result of the acquisition of Cray Research, which has had much lower gross margins historically than Silicon Graphics. Although the Company expects to achieve revenue synergies from the joint marketing and sale of Silicon Graphics and Cray systems and to achieve expense synergies, these synergies will not be fully realized for several quarters or even longer. -9- OTHER OPERATING RESULTS. Interest and other (expense) income, net for the first quarter of fiscal 1997 was $(0.8) million compared with $6.3 million for the first quarter of fiscal 1996. The decrease reflects the much smaller invested cash balances following the Cray Research acquisition, as well as the additional interest expense on the 6.125% debentures assumed in the acquisition. TAXES. The Company's combined federal, state and foreign effective income tax rate for the first quarter of fiscal 1997 was 26%. The tax rate for the same period of fiscal 1996 was 30%. The lower effective tax rate is attributable to the reinstated research tax credit and to proportionately higher earnings in low tax jurisdictions. No provision for residual federal taxes has been made on accumulated undistributed earnings of certain of the Company's foreign subsidiaries since it is the Company's intention to permanently invest such earnings in foreign operations. As a result of the acquisition by Silicon Graphics, Cray Research experienced a "change in ownership" as defined under Section 382 of the Internal Revenue Code and is subject to certain limitations on the utilization of its pre-acquisition net operating loss and tax credit carryforwards. The Company has provided a valuation allowance to offset the deferred tax asset relating to foreign tax credits that may expire prior to utilization due to this annual limitation. The valuation allowance for deferred tax assets of approximately $60.8 million will be applied to reduce the noncurrent intangible assets related to the acquisition of Cray Research if future tax benefits are subsequently realized. FINANCIAL CONDITION At September 30, 1996, cash and cash equivalents and short- and long-term marketable investments totaled $438 million, down from $457 million at June 30, 1996. Operating activities generated $164 million in the first quarter of fiscal 1997 compared with $63 million in the first quarter of fiscal 1996. Despite the loss in the first quarter of fiscal 1997, cash flow from operating activities was positive principally due to a significant decrease in accounts receivable as well as charges that did not use cash, including $19 million of amortization of the write-up of acquired Cray Research inventories and service contracts. Investing activities, other than changes in the Company's marketable investments, consumed $69 million in cash during the first quarter of fiscal 1997, principally for the acquisition of capital equipment. The principal financing activity during the first quarter of fiscal 1997 was the repayment of $137 million in short-term borrowings. The employee stock plans continue to be an additional source of cash. As of September 30, 1996, the Company's principal sources of liquidity included cash and cash equivalents and marketable investments of $438 million and up to $250 million available under its three-year revolving credit facility. In connection with the acquisition of Cray Research, the Company recorded an accrual for costs of exiting facilities and streamlining duplicative administrative activities. During the first quarter of fiscal 1997, cash outlays for these activities were approximately $6 million. The Company anticipates that cash outlays during the remainder of fiscal 1997 for exit activities will be approximately $29 million. The Company's cash and marketable investments, along with the credit facility, cash generated from operations and other resources available to the Company, should be adequate to fund the Company's projected cash flow needs. The Company believes that the level of financial resources is an important competitive factor in the computer industry, and accordingly, may elect to raise additional capital through debt or equity financing in anticipation of future needs. RISKS THAT AFFECT OUR BUSINESS Silicon Graphics operates in a rapidly changing environment that involves a number of risks, some of which are beyond the Company's control. The following discussion highlights some of these risks. -10- PERIOD TO PERIOD FLUCTUATIONS The Company's operating results may fluctuate for a number of reasons. Other than in the Cray Research business, the Company has short delivery cycles and as a result generally does not have a large order backlog, which makes the forecasting of revenue inherently uncertain. This uncertainty is compounded because each quarter's revenue results predominantly from orders booked and shipped during the third month, and disproportionately in the latter half of that month. Because the Company plans its operating expenses, many of which are relatively fixed in the short term, on expected revenue, even a relatively small revenue shortfall may cause a period's results to be substantially below expectations. Such a revenue shortfall could arise from any number of factors, including lower than expected demand, supply constraints, delays in the availability of new products, transit interruptions, overall economic conditions or natural disasters. The timing of customer acceptance of large Cray systems may also have a significant effect on periodic operating results. Margins are heavily influenced by mix considerations, including geographical mix, the mix of service and non-recurring engineering revenue, the mix of high-end and desktop products and application software, as well as the mix of configurations within these product categories. The Company's results have followed a seasonal pattern, with stronger sequential growth in the second and fourth fiscal quarters, reflecting the buying patterns of the Company's customers. Sales of Cray Research systems generally reflect sequential growth from quarter-to-quarter through the calendar year. The Company's stock price, like that of other technology companies, is subject to significant volatility. If revenue or earnings in any quarter fail to meet the investment community's expectations, there could be an immediate impact on the Company's stock price. The stock price may also be affected by broader market trends unrelated to the Company's performance. PRODUCT DEVELOPMENT AND INTRODUCTION The Company's continued success depends on its ability to develop and rapidly bring to volume production highly differentiated, technologically complex and innovative products. In October 1996, the Company introduced the new Origin, Onyx2 and O2 product families, replacing a substantial portion of its product line. Product transitions are a recurring part of the Company's business cycle. A number of risks are inherent in this process. The development of new technology and products is increasingly complex and uncertain, which increases the risk of delays. The introduction of a new computer system requires close collaboration and continued technological advancement involving multiple hardware and software design and manufacturing teams within the Company as well as teams at outside suppliers of key components such as semiconductor and storage products. The failure of any one of these elements could cause the Company's new products to fail to meet specifications or to miss the aggressive timetables that the Company establishes. As the variety and complexity of the Company's product families increase, the process of planning production and inventory levels also becomes more difficult. In addition, the extent to which a new product gains rapid acceptance is strongly affected by the availability of key software applications optimized for the new systems. Although most of the key applications for the Company's new systems are expected to be available in the second quarter, there is no assurance that acceptance of the Company's new systems will not be affected by delays in this process. Short product life cycles place a premium on the Company's ability to manage the transition from current products to new products. The Company often announces new products in the early part of a quarter, while the product is in the final stages of development, and seeks to manufacture and ship the product in volume in the same quarter. In the case of the Cray Research product line, new products are generally announced well in advance of availability, due to the longer sales cycle for these systems. The Company's results could be adversely affected by such factors as development delays, quality or yield problems experienced by suppliers, variations in product costs, delays in customer purchases of existing products in anticipation of the introduction of new products, and excess inventories of older products and components. The operating results for the quarter ended September 30, 1996 are attributable, at least in part, to customer anticipation of the new high-end and desktop products introduced by the Company in October 1996. COMPETITION The computer industry is highly competitive, with rapid technological advances and constantly improving price/performance. As most of the segments in which the Company operates -11- continue to grow faster than the industry as a whole, the Company is experiencing an increase in competition, and it expects this trend to continue. This competition comes not only from the Company's traditional UNIX workstation rivals and Cray's traditional supercomputing competitors, but also from new sources including the personal computer industry. In particular, during fiscal 1996 the Company experienced increasing competition at the lowest end of its business from workstations based upon the Intel Pentium microprocessor, Microsoft's Windows NT operating system, and a variety of 3-D graphics acceleration cards. Many of the Company's competitors have substantially greater technical, marketing and financial resources and, in some segments, a larger installed base of customers and a wider range of available applications software. Competition may result in significant discounting and lower gross margins. VOLUME STRATEGY The Company believes that its long-term success is dependent on achieving substantial increases in unit volumes over the next several years. The Company's Silicon Desktop Group has the charter of implementing a comprehensive strategy for increasing volumes of desktop products, including new product development, greater emphasis on lower-cost manufacturing and the strengthening of indirect distribution channels. Risks associated with this strategy include: - increased direct competition with the personal computer industry, portions of which have been seeking to move upmarket to compete with low-end workstations (see "Competition"); - the impact of lower gross margins, to the extent not mitigated by savings in distribution costs and other operating expenses; and - the extent to which the Company is able to adapt its manufacturing and service philosophies to the demands of higher volumes and lower costs. In particular, the Company believes that its new O2 desktop workstations will be purchased by some customers who otherwise would purchase the higher-margin Indigo2 family of workstations. The Company is unable to predict the extent of this customer substitution. ACQUISITION OF CRAY RESEARCH The acquisition of Cray Research will require, among other things, integration of the Cray Research organization, business infrastructure and product offerings with those of the Company in a way that enhances the performance of the combined business. The challenges posed by the acquisition include the management of a business with a different approach to product design, manufacturing and sales and service, the development of a consolidated product road map from a number of incompatible products and the integration of several geographically separated research and development centers. The success of this process will be significantly influenced by the Company's ability to retain key management, sales, and research and development personnel. The integration process will also require the dedication of management resources, which may temporarily distract attention from the day-to- day business of the Company. -12- There are several other aspects of Cray Research's business that are different from the Company's current business and may affect the operations of the combined business: - Government agencies and research institutions represent a major customer group for Cray Research products. As a result of the acquisition, a greater percentage of the Company's revenue will be derived from sales to such customers, whose purchasing decisions may be adversely affected by reductions or changes in government spending. - International sales of Cray Research's products are more likely to be subject to export licensing constraints than international sales of the Company's current products. - Cray Research derives most of its revenue from the sale of a small number of large systems, which generally have a longer sales cycle. Revenue for these systems is recognized at customer acceptance rather than upon shipment. Cray Research's results for any period are significantly influenced by the number and mix of systems accepted and whether a system is sold or leased. Changes affecting even a small number of systems can have significant financial implications. - At September 30, 1996, the combined Company's backlog was $473 million, representing orders scheduled to ship during fiscal 1997. This backlog primarily consists of orders for Cray T90-TM- and T3E-TM- systems, which only recently had their first commercial shipments. IMPACT OF GOVERNMENT CUSTOMERS A significant portion of the Company's revenue is derived from sales to the U.S. government, either directly by the Company or through system integrators and other resellers. This proportion will increase as the result of the Cray Research acquisition. 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. GLOBAL FINANCIAL MARKET RISKS The Company's business and financial results are affected by fluctuations in world financial markets, including foreign currency exchange rates and interest rates. The Company's hedging policy attempts to mitigate some of these risks, based on management's best judgment of the appropriate tradeoffs among risk, opportunity and expense. The Company regularly reviews its overall hedging policies, and it continually monitors its hedging activities to ensure that they are consistent with policy and appropriate and effective in light of changing market conditions. Management may as part of this review determine at any time to change its hedging policies. However, it is important to recognize that the Company's risk management activities are not comprehensive, and that there can be no assurance that these programs will offset more than a portion of the adverse financial impact resulting from unfavorable movements in either foreign exchange or interest rates. Because a significant portion of the Company's revenue is from sales outside the United States, and many key components are produced outside the United States, the Company's results can be significantly affected by changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. The Company is primarily exposed to changes in exchange rates on the Swiss franc, British pound, Japanese yen, German mark and French franc. When the U.S. dollar strengthens against these currencies, the value (as expressed in U.S. dollars) of non-U.S. dollar-based sales and costs decrease. The opposite happens when the U.S. dollar weakens. Because the Company is a net receiver of currencies other than the U.S. dollar, it benefits from a weaker dollar and is adversely affected by a stronger dollar relative to major currencies worldwide. Accordingly, a strengthening of the U.S. dollar tends to affect negatively the Company's revenue and gross margins. To mitigate the short-term impact of fluctuating currency exchange rates on the Company's non-U.S. dollar-based sales and intercompany receivables, the Company regularly hedges certain of these net exposures. Historically, the Company has not sought to hedge future revenues. However, as a result of the Cray Research acquisition, the Company is continuing Cray Research's policy of entering into foreign exchange forward contracts that hedge firmly committed Cray Research backlog. Currently, these hedges -13- extend through December 1999. In addition, beginning in October 1996, the Company commenced hedging a portion of anticipated quarterly revenues from international operations using purchased foreign currency options. The Company also utilizes foreign currency forward contracts to hedge net non-U.S. dollar monetary assets and liabilities. The Company has generally not hedged capital expenditures, investments in subsidiaries or inventory purchases. However, because the Company procures inventory and its international operations incur expenses in local currencies, the financial effects of fluctuations in the U.S. dollar values of non-U.S. dollar-based transactions frequently mitigate or tend to offset each other on a consolidated basis. The Company's interest income and expense is most sensitive to fluctuations in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on the Company's cash equivalents and marketable investments as well as interest paid on its borrowings. To mitigate the impact of fluctuations in U.S. interest rates, the Company has entered into an interest rate swap transaction intended to better match the Company's fixed rate interest expense on its zero coupon convertible subordinated debentures with the floating-rate interest income on its cash equivalents and marketable investments. The swap expires in November 1996. The Company is constantly evaluating its interest risk management strategy. OTHER RISKS OF INTERNATIONAL OPERATIONS The Company's results could also be negatively affected by such factors as changes in trade protection measures, longer accounts receivable collection patterns, or natural disasters. The Company's sales to foreign customers also are subject to export regulations, with sales of some of the Company's high-end products requiring clearance and export licenses from the U.S. Department of Commerce. The Company's export sales would be adversely affected if such regulations were tightened, or if they are not modified over time to reflect the increasing performance of the Company's products. MANAGEMENT INFORMATION SYSTEMS The Company replaced its United States information management system in the third quarter of fiscal 1996 with a comprehensive system used to manage the entire revenue cycle, including order administration, billing and collection, as well as manufacturing and finance. The Company expects that the system will provide operational efficiencies and support future growth. However, as the system has been in operation for a relatively short period, there remains a risk of functional or performance difficulties, particularly if the system is extended to the Cray Research business and to the Company's international operations. DEVELOPMENT AND ACCEPTANCE OF MIPS RISC ARCHITECTURE Most of the Company's system products incorporate microprocessors based upon the Company's MIPS RISC microprocessor architecture. The Company licenses the manufacturing and distribution rights to these microprocessors to selected semiconductor manufacturing companies. The Company believes that the continued development and broad acceptance of the MIPS architecture are critical to its future success. INTELLECTUAL PROPERTY The Company routinely receives communications from third parties asserting patent or other rights covering the Company's products and technologies. Based upon the Company's evaluation, it may take no action or it may seek to obtain a license. In any given case there is a risk that a license will not be available on terms that the Company considers reasonable, or that litigation will ensue. The Company currently has patent infringement lawsuits pending against it. The Company expects that, as the number of hardware and software patents issued continues to increase, and as the Company's business grows, the volume of these intellectual property claims will also increase. EMPLOYEES The Company's future success depends in part on its ability to continue to attract, retain and motivate highly qualified technical, marketing and management personnel, who are in great demand. -14- BUSINESS DISRUPTION The Company's corporate headquarters, including most of its research and development operations and manufacturing facilities, are located in the Silicon Valley area of Northern California, a region known for seismic activity. Operating results could be materially affected by a significant earthquake. The Company is predominantly self-insured for losses and business interruptions of this kind. -15- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is defending a securities class action lawsuit (DEANNA BRODY, ET. AL. V. EDWARD R. MCCRACKEN, ET. AL.) and a derivative suit (EDMUND J. JANAS V. EDWARD R. MCCRACKEN, ET. AL.) filed in U.S. District Court for the Northern District of California in January and March 1996. In September 1996, the District Court dismissed the securities class action, while allowing plaintiffs one opportunity to amend their complaint, and dismissed the derivative action with prejudice. On October 18, 1996, the plaintiffs in the securities class action filed an amended complaint alleging that the Company and certain of its officers and directors violated various federal securities laws and California statutes through material misrepresentations and omissions made during the period from September 13 to December 29, 1995. The Company believes it has good defenses to the claims alleged in these lawsuits and is defending itself vigorously against these actions. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company held its Annual Meeting of Stockholders on October 30, 1996. Proxies for the meeting were solicited pursuant to Regulation 14A. (b) The Company's Board of Directors is divided into three classes, with directors in each class serving for three-year terms. Accordingly, not all Directors are elected at each Annual Meeting of Stockholders. C. Richard Kramlich, Edward R. McCracken, Lucille Shapiro and Robert B. Shapiro were re-elected as Directors at the meeting. The Directors whose terms of office continued after the meeting are Robert R. Bishop, Allen F. Jacobson, Robert A. Lutz, James A. McDivitt and James G. Treybig. (c) The matters described below were voted on at the Annual Meeting of Stockholders, and the number of votes cast with respect to each matter and, with respect to the election of directors, for each nominee, were as indicated. 1. To elect four Class I Directors of the Company to serve for a three- year term. C. RICHARD KRAMLICH: For: 148,694,422 Withheld: 886,249 EDWARD R. MCCRACKEN: For: 148,666,662 Withheld: 914,009 LUCILLE SHAPIRO: For: 148,507,334 Withheld: 1,073,337 ROBERT B. SHAPIRO: For: 148,525,293 Withheld: 1,055,378 2. To approve an amendment increasing the number of shares of Common Stock available for issuance under the Company's Employee Stock Purchase Plan by 8,000,000 shares. For: 98,412,498 Against: 5,494,594 Abstain: 488,875 -16- 3. To approve an amendment increasing the number of shares of Common Stock available for issuance under the Company's Directors' Stock Option Plan by 800,000 shares. For: 79,663,863 Against: 23,838,017 Abstain: 894,037 4. To ratify the appointment of Ernst & Young LLP, as independent auditors of the Company for the fiscal year ending June 30, 1997. For: 148,730,537 Against: 350,612 Abstain: 499,522 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.16 Employee Stock Purchase Plan, as amended as of October 30, 1996. 11.1 Statement of Computation of Per Share Earnings. 27.1 Financial Data Schedule. -17- 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: November 13, 1996 SILICON GRAPHICS, INC. a Delaware corporation By: Stanley J. Meresman ----------------------------- Stanley J. Meresman Senior Vice President, Finance and Chief Financial Officer (Principal Financial Officer) By: Dennis P. McBride ----------------------------- Dennis P. McBride Vice President, Controller (Principal Accounting Officer) -18- SILICON GRAPHICS, INC. INDEX TO EXHIBITS Exhibit Description - -------- ------------ 10.16 Employee Stock Purchase Plan, as amended as of October 30, 1996 11.1 Statement of Computation of Per Share Earnings 27.1 Financial Data Schedule -19- EX-10.6 2 EXHIBIT 10.6 SILICON GRAPHICS, INC. EMPLOYEE STOCK PURCHASE PLAN (Amended and Restated as of October 30, 1996) The following constitutes the provisions of the Employee Stock Purchase Plan (herein called the "Plan") of Silicon Graphics, Inc. (herein called the "Company"). 1. PURPOSE. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through payroll deductions. It is the intention of the Company that the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986. The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. DEFINITIONS. (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Common Stock" means the Common Stock, $0.001 par value, of the Company. (d) "Compensation" means base pay, plus any amounts attributable to overtime, shift premium, incentive compensation, bonuses and commissions (exclusive of "spot bonuses" and any other such item specifically directed for all Employees by the Board or its committee). (e) "Continuous Status as an Employee" shall mean the absence of any interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of a leave of absence agreed to in writing by the Company, provided that such leave is for a period of not more than 90 days or re-employment upon the expiration of such leave is guaranteed by contract or statute. (f) "Designated Subsidiaries" means the Subsidiaries which have been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "Employee" means any person, including an officer, who is customarily employed for at least twenty (20) hours per week and more than five (5) months in a calendar year by the Company or one of its Designated Subsidiaries. (h) "Exercise Date" means the last business day of each Exercise Period in an Offering Period. (i) "Exercise Period" means a six-month period commencing on an Offering Date or on the first business day after any Exercise Date in an Offering Period. (j) "Offering Date" means the first day of each Offering Period of the Plan. (k) "Offering Period" means a period of twenty-four (24) months consisting of four six-month Exercise Periods during which options granted pursuant to the Plan may be exercised. (l) "Subsidiary" means any corporation, domestic or foreign, in which the Company owns, directly or indirectly, 50% or more of the voting shares. 3. ELIGIBILITY. (a) GENERAL RULE. Any person who is an Employee, as defined in paragraph 2, on the Offering Date of a given Offering Period shall be eligible to participate in such Offering Period under the Plan, subject to the requirements of paragraph 5(a) and the limitations imposed by Section 423(b) of the Code. (b) EXCEPTIONS. Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan if (i) immediately after the grant, such Employee (or any other person whose stock ownership would be attributed to such Employee pursuant to Section 425(d) of the Code) would own shares and/or hold outstanding options to purchase shares possessing five percent (5%) or more of the total combined voting power or value of all classes of shares of the Company or of any subsidiary of the Company, or (ii) the rate of withholding under such option would permit the employee's rights to purchase shares under all employee stock purchase plans (described in Section 423 of the Code) of the Company and its subsidiaries to accrue (i.e., become exercisable) at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) of fair market value of such shares (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. OFFERING PERIODS. The Plan shall be implemented by consecutive Offering Periods with a new Offering Period commencing on or about each May 1 and November 1. The Board of Directors of the Company shall have the power to change the duration of Offering Periods with respect to future offerings without stockholder approval, if such change is announced at least fifteen (15) days prior to the scheduled beginning of the first Offering Period to be affected. 5. PARTICIPATION. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions on the form provided -2- by the Company and filing it with the Company's payroll office not less than 15 days prior to the Offering Date of the first Offering Period with respect to which it is to be effective, unless a later time for filing the subscription agreement is set for all eligible Employees with respect to such Offering Period. Once enrolled, the Employee remains enrolled in each subsequent Offering Period of the Plan at the designated payroll deduction unless the Employee withdraws by providing the Company with a written Notice of Withdrawal or files a new subscription agreement prior to the applicable Offering Date changing the Employee's designated payroll deduction. An eligible Employee may participate in only one Offering Period at a time. (b) Payroll deductions for a participant shall commence with the first payroll following the Offering Date, or the first payroll following the date of valid filing of the subscription agreement, whichever is later, and shall end when terminated by the participant as provided in paragraph 10. 6. PAYROLL DEDUCTIONS. (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each payday during all subsequent Offering Periods at a rate not exceeding ten percent (10%), or such other rate as may be determined from time to time by the Board, of the Compensation which he or she would otherwise receive on such payday without regard to deferral elections, provided that the aggregate of such payroll deductions during any Offering Period shall not exceed ten percent (10%), or such other percentage as may be determined from time to time by the Board, of the aggregate Compensation which he or she would otherwise have received during said Offering Period. (b) All payroll deductions authorized by a participant shall be credited to his or her account under the Plan. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in paragraph 10, or may change the rate of his or her payroll deductions during an Offering Period by completing and filing with the Company a new authorization for payroll deduction, provided that the Committee or Board may, in its discretion, impose reasonable and uniform restrictions on participants' ability to change the rate of payroll deductions. The change in rate shall be effective no later than fifteen (15) days following the Company's receipt of the new authorization. A participant may decrease or increase the amount of his or her payroll deductions as of the beginning of an Offering Period by completing and filing with the Company, at least fifteen (15) days prior to the beginning of such Offering Period, a new payroll deduction authorization. (d) Notwithstanding the foregoing, to the extent necessary, but only to such extent, to comply with Section 423(b)(8) of the Code and paragraph 3(b) herein, a participant's payroll deductions may be automatically decreased to 0% at such time during any Exercise Period which is scheduled to end in the current calendar year that the -3- aggregate of all payroll deductions accumulated with respect to the applicable Offering Period and any other Offering Period ending within the same calendar year equals $21,250. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the next succeeding Exercise Period, unless terminated by the participant as provided in paragraph 10. 7. GRANT OF OPTION. (a) On each Offering Date, each participant shall be granted an option to purchase on each Exercise Date (at the per share option price) a number of full shares of the Company's Common Stock arrived at by dividing such participant's total payroll deductions to be accumulated prior to such Exercise Date and retained in the participant's account as of the Exercise Date by the lower of (i) eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock at the Offering Date, or (ii) eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock at the Exercise Date; provided, however, that the maximum number of shares a participant may purchase during each Offering Period shall be determined by (i) dividing $50,000 by the fair market value of a share of the Company's Common Stock on the Offering Date or (ii) if less, by the "Maximum Cap" set for such Offering Period; and provided further that such purchase shall be subject to the limitations set forth in Paragraphs 3(b) and 12 hereof. The "Maximum Cap" for each Offering Period shall be the number of shares purchasable under the Plan during that Offering Period with the maximum payroll deductions permitted by paragraph 6(e) hereof, based upon the fair market value of the Common Stock at the beginning of the Offering Period. The fair market value of a share of the Company's Common Stock shall be determined as provided in paragraph 7(b) herein. (b) The option price per share of such shares shall be the lower of: (i) eighty-five percent (85%) of the fair market value of a share of the Common Stock of the Company at the Offering Date; or (ii) eighty-five percent (85%) of the fair market value of a share of the Common Stock of the Company at the Exercise Date. The fair market value of the Company's Common Stock on said dates shall be determined by the Company's Board of Directors, based upon such factors as the Board determines relevant; provided, however, that if there is a public market for the Common Stock, the fair market value of a share of Common Stock on a given date shall be the reported bid price for the Common Stock as of such date; or, in the event that the Common Stock is listed on a national securities exchange, the fair market value of a share of Common Stock shall be the closing price on the exchange as of such date. 8. EXERCISE OF OPTION. Unless a participant withdraws from the Offering Period as provided in paragraph 10, his or her option for the purchase of shares will be exercised automatically at each Exercise Date, and the maximum number of full shares subject to option will be purchased at the applicable option price with the accumulated payroll deductions in his or her account. The shares purchased upon exercise of an option hereunder shall be deemed to be transferred to the participant on the Exercise Date. -4- During his or her lifetime, a participant's option to purchase shares hereunder is exercisable only by the participant. 9. DELIVERY. As promptly as practicable after the Exercise Date of each Offering Period, the Company shall arrange for the shares purchased upon exercise of his or her option to be electronically credited to the participant's designated brokerage account at one of the securities brokerage firms participating in the Company's direct deposit program from time to time. Any cash remaining to the credit of a participant's account under the Plan after a purchase by him or her of shares at the Exercise Date of each Offering Period which merely represents a fractional share shall be credited to the participant's account for the next subsequent Offering Period; any additional cash shall be returned to said participant. 10. WITHDRAWAL; TERMINATION OF EMPLOYMENT. (a) A participant may withdraw all, but not less than all, the payroll deductions credited to his or her account under the Plan at any time prior to an Exercise Date by giving written notice to the Company on a form provided for such purpose. If the participant withdraws from the Offering Period, all of the participant's payroll deductions credited to his or her account will be paid to the participant as soon as practicable after receipt of the notice of withdrawal and his or her option for the current Offering Period will be automatically canceled, and no further payroll deductions for the purchase of shares will be made during such Offering Period or subsequent Offering Periods, except pursuant to a new subscription agreement filed in accordance with paragraph 6 hereof. (b) Upon termination of the participant's Continuous Status as an Employee prior to an Exercise Date of an Offering Period for any reason, including retirement or death, the payroll deductions accumulated in his or her account will be returned to him or her as soon as practicable after such termination or, in the case of death, to the person or persons entitled thereto under paragraph 14, and his or her option will be automatically canceled. (c) In the event an Employee fails to remain in Continuous Status as an Employee of the Company for at least twenty (20) hours per week during an Offering Period in which the employee is a participant, he or she will be deemed to have elected to withdraw from the Plan, and the payroll deductions credited to his or her account will be returned to the participant and the option canceled. (d) A participant's withdrawal from an Offering Period will not have any effect upon his or her eligibility to participate in a succeeding Offering Period or in any similar plan which may hereafter be adopted by the Company. 11. AUTOMATIC TRANSFER TO LOW PRICE OFFERING PERIOD. In the event that the fair market value of the Company's Common Stock is lower on the first day of an Exercise Period (the "Subsequent Exercise Period") than it was on the first Offering Date -5- for that Offering Period (the "Initial Offering Period"), all Employees participating in the Plan on the first day of the Subsequent Exercise Period shall be deemed to have withdrawn from the Initial Offering Period on the first day of the Subsequent Exercise Period and to have enrolled as participants in a new Offering Period which begins on or about that day. A participant may elect to remain in the Initial Offering Period by filing a written statement declaring such election with the Company prior to the time of the automatic change to the new Offering Period. 12. INTEREST. No interest shall accrue on the payroll deductions of a participant in the Plan. 13. STOCK. (a) The maximum number of shares of the Company's Common Stock which shall be reserved for sale under the Plan shall be 20,960,000 shares, subject to adjustment upon changes in capitalization of the Company as provided in paragraph 19. The shares to be sold to participants in the Plan may be, at the election of the Company, either treasury shares or shares authorized but unissued. If the total number of shares which would otherwise be subject to options granted pursuant to paragraph 7(a) hereof on the Offering Date of an Offering Period exceeds the number of shares then available under the Plan (after deduction of all shares for which options have been exercised or are then outstanding), the Company shall make a pro rata allocation of the shares remaining available for option grant in as uniform and equitable a manner as is practicable. In such event, the Company shall give written notice of such reduction of the number of shares subject to the option to each participant affected thereby and shall return any excess funds accumulated in each participant's account as soon as practicable after the affected Exercise Date of such Offering Period. (b) The participant will have no interest or voting rights in shares covered by his or her option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan will be credited electronically to a brokerage account in the name of the participant at one of the brokerage firms participating from time to time in the Company's direct deposit program. 14. ADMINISTRATION. The Plan shall be administered by the Board of Directors of the Company or a committee (the "Committee") appointed by the Board. The administration, interpretation or application of the Plan by the Board or the Committee shall be final, conclusive and binding upon all participants. Members of the Board or the Committee who are eligible employees are permitted to participate in the Plan, provided that: (a) Members of the Board who participate in the Plan may not vote on any matter affecting the administration of the Plan or the grant of any option pursuant to the Plan. -6- (b) If a Committee is established to administer the Plan, no member of the Board who participates in the Plan may be a member of the Committee. 15. DESIGNATION OF BENEFICIARY. (a) A participant may file a written designation of a beneficiary who is to receive shares and/or cash, if any, from the participant's account under the Plan in the event of such participant's death at a time when cash or shares are held for his or her account. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant in the absence of a valid designation of a beneficiary who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant; or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may reasonably designate. 16. TRANSFERABILITY. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution, or as provided in paragraph 15 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with paragraph 10. 17. USE OF FUNDS. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 18. REPORTS. Individual accounts will be maintained for each participant in the Plan. Statements of account will be given to participating Employees as soon as practicable following each Exercise Date. Such statements will set forth the amounts of payroll deductions, the per share purchase price, the number of shares purchased and the remaining cash balance, if any. 19. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but have not yet been placed under option (collectively, the "Reserves"), as well as the price per share of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, stock dividend, -7- combination or reclassification of the Common Stock or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to option. In the event of the proposed dissolution or liquidation of the Company, the Offering Period will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each option under the Plan shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Board determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the participant shall have the right to exercise the option as to all of the optioned stock, including shares as to which the option would not otherwise be exercisable. If the Board makes an option fully exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify the participant that the option shall be fully exercisable, and the option will terminate upon the expiration of such period. The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, and in the event of the Company being consolidated with or merged into any other corporation. 20. AMENDMENT OR TERMINATION. The Board of Directors of the Company may at any time and for any reason terminate or amend the Plan. Except as provided in paragraph 19, no such termination will affect options previously granted. Except as provided in paragraph 19, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. In addition, to the extent necessary, but only to such extent, to comply with Rule 16b-3 under the Securities Exchange Act of 1934, as amended, or with Section 423 of the Code (or any successor rule or provision or any other applicable law or regulation), the Company shall obtain stockholder approval of an amendment in such a manner and to such a degree as so required. 21. NOTICES. All notices or other communications by a participant to the Company in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, -8- designated by the Company for the receipt thereof. Notices given by means of the Company's OnLine HR system will be deemed to be written notices under the Plan. 22. STOCKHOLDER APPROVAL. Continuance of the Plan shall be subject to approval by the stockholders of the Company within twelve months before or after the date the Plan is adopted. Such stockholder approval shall be obtained in the manner and degree required under the Delaware General Corporate Law. 23. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, if required by applicable securities laws, the Company may require the participant for whose account the option is being exercised to represent and warrant at the time of such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 24. TERM OF PLAN. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the stockholders of the Company as described in paragraph 22. It shall continue in effect for a term of twenty (20) years unless sooner terminated under paragraph 20. -9- EX-11.1 3 EXHIBIT 11.1 EXHIBIT 11.1 STATEMENT OF COMPUTATION OF PER SHARE EARNINGS (In thousands except per share amounts) Three Months Ended September 30, ------------------------------- 1996 1995 --------------- ---------- PRIMARY: Weighted Average Shares Outstanding: Common shares 172,974 161,354 Convertible preferred shares -- 442 Stock options -- 17,440 --------------- ---------- Total weighted average shares outstanding 172,974 179,236 --------------- ---------- --------------- ---------- (Loss) Income per Share: Net (loss) income $ (21,601) $ 58,357 Preferred stock dividend requirement (131) -- --------------- ---------- Net income available to common stockholders $ (21,732) $ 58,357 --------------- ---------- --------------- ---------- Net (loss) income per share $ (0.13) $ 0.33 --------------- ---------- --------------- ---------- FULLY DILUTED: Weighted Average Shares Outstanding: Common shares 172,974 161,354 Convertible preferred shares -- 442 Zero coupon convertible subordinated debentures -- 7,402 Stock options -- 17,440 --------------- ---------- Total weighted average shares outstanding 172,974 186,638 --------------- ---------- --------------- ---------- (Loss) Income per Share: Net (loss) income $ (21,732) $ 58,357 Add zero coupon convertible subordinated debenture interest, net of tax -- 1,341 --------------- ---------- Adjusted net (loss) income $ (21,732) $ 59,698 --------------- ---------- --------------- ---------- Net (loss) income per share $ (0.13) $ 0.32 --------------- ---------- --------------- ---------- EX-27 4 FINANCIAL DATA SCHEDULE
5 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 September 30, 1996, and is qualified in its entirety by reference to such financial statments and the notes thereto. 1,000 3-MOS JUN-30-1997 JUL-01-1996 SEP-30-1996 245781 46546 848940 27019 524632 1937113 835332 370814 2959617 941082 303642 0 16998 173 1651705 2959617 623413 765602 372960 450695 111113 14 6982 (29191) (7590) (21601) 0 0 0 (21601) (0.13) (0.13)
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